##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-K

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

For the fiscal year ended December 31, 2003
Or

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

Commission file number 0-15040

PENNROCK FINANCIAL SERVICES CORP.




(Exact name of registrant as specified in its charter)


|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|PENNSYLVANIA                             |  | 23-2400021                          
|                                         |  |                                     
|(State of incorporation)                 |  | (IRS Employer Identification Number)
|                                         |  |                                     
|1060 Main Street                         |  |                                     
|Blue Ball, Pennsylvania                  |  | 17506                               
|                                         |  |                                     
|(Address of principal executive offices) |  | (Zip code)                          

Registrants telephone number,
including area code (717) 354-4541

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per share

(Title of class)


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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]

Indicate by check mark whether the registrant is accelerated filer (as defined in Rule 12b-2 of the Exchange Act.
Yes [X] No [  ]

The aggregate market value of the shares of Common Stock of the Registrant held by non-affiliates of the
Registrant as of June 30, 2003 was $185.2 million.

As of February 13, 2004, there were 7,641,908 shares of Common Stock, Par Value $2.50 Per Share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Pertinent extracts from the Registrants definitive Proxy Statement for its 2003 Annual Stockholders Meeting to be
filed with the Securities and Exchange Commission are incorporated into Part III of this report.





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PennRock Financial Services Corp.

TABLE OF CONTENTS

|           |  |  |    |                                                                                                         |  |      |    | 
|---------- |  |  | -- | ------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|           |  |  |    |                                                                                                         |  | PAGE
|           |  |  |    |                                                                                                         |  |     
|PART I    
|           |  |  |    | Item 1. Business                                                                                        |  |      | 3  | 
|           |  |  |    | Item 2. Properties                                                                                      |  |      | 8  | 
|           |  |  |    | Item 3. Legal Proceedings                                                                               |  |      | 9  | 
|           |  |  |    | Item 3A. Executive Officers of the Registrant                                                           |  |      | 9  | 
|           |  |  |    | Item 4. Submission of Matters to a Vote of Security Holders                                             |  |      | 9  | 
|PART II   
|           |  |  |    | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                           |  |      | 10 | 
|           |  |  |    | Item 6. Selected Financial Data                                                                         |  |      | 11 | 
|           |  |  |    | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations           |  |      | 12 | 
|           |  |  |    | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                     |  |      | 29 | 
|           |  |  |    | Item 8. Financial Statements and Supplementary Data                                                     |  |      | 33 | 
|           |  |  |    | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures           |  |      | 61 | 
|           |  |  |    | Item 9A. Controls and Procedures                                                                        |  |      | 61 | 
|PART III  
|           |  |  |    | Item 10. Directors and Executive Officers of the Registrant                                             |  |      | 61 | 
|           |  |  |    | Item 11. Executive Compensation                                                                         |  |      | 61 | 
|           |  |  |    | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |  |      | 61 | 
|           |  |  |    | Item 13. Certain Relationships and Related Transactions                                                 |  |      | 61 | 
|           |  |  |    | Item 14. Principal Accountant Fees and Services                                                         |  |      | 61 | 
|PART IV   
|           |  |  |    | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  |      | 62 | 
|SIGNATURES |  |  | 64 |                                                                                                        

FORWARD LOOKING STATEMENTS

In our Annual Report, we may include certain forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, we must inform you that a variety of factors could cause PennRocks
actual results and experiences to differ materially from the anticipated
results or other expectations expressed in these forward looking statements.
Our ability to predict the results or the effect of future plans and strategies
is inherently uncertain. The risks and uncertainties that may affect the
operations, performance, development and results of PennRocks business
include:



| |  | Changes in market interest rates;                                                                   
|- |  | ----------------------------------------------------------------------------------------------------
| 
| |  | Changes in monetary and fiscal policies of the U.S. Treasury and Federal Reserve;                   
| 
| |  | Local and national economic trends and conditions;                                                  
| 
| |  | Competition for products and services among community, regional and national financial institutions;
| 
| |  | New services and product offerings by competitors;                                                  
| 
| |  | Changes in customer preferences;                                                                    
| 
| |  | Changes in technology;                                                                              
| 
| |  | Legislative and regulatory changes;                                                                 
| 
| |  | Delinquency rates on loans;                                                                         
| 
| |  | Changes in accounting principles, policies or guidelines;                                           

You should consider these factors in evaluating any forward-looking statements
and not place undue reliance on such statements.

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PennRock Financial Services Corp.

PART I

ITEM 1. BUSINESS

PennRock Financial Services Corp.

PennRock Financial Services Corp. (PennRock or the Registrant) is a
Pennsylvania business corporation organized on March 5, 1986. It became a bank
holding company when it acquired all of the common stock of Blue Ball National
Bank (the Bank) on August 1, 1986. Effective November 6, 2000, PennRock
became a financial holding company as provided by the Gramm-Leach-Bliley Act of
1999. PennRocks common stock is listed for quotation on the National Market
System of Nasdaq under the symbol PRFS.

PennRock is a financial holding company that operates through its subsidiaries
to deliver financial and related services to its customers. PennRock directly
owns 100% of the stock of one community bank and three non-bank entities.
PennRocks primary function is to direct the policies and coordinate the
financial resources of its subsidiaries as well as provide various advisory
services. PennRock primarily obtains the cash necessary to pay dividends to
stockholders from the dividends paid to it by its subsidiaries.

PennRock is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended. It is also subject to regulation by the Federal
Reserve Board and by the Pennsylvania Department of Banking.

1906 Founders, Inc.

1906 Founders, Inc., a Delaware Corporation formed on November 26, 2003 as a
wholly owned subsidiary of PennRock, owns and manages certain investment
securities.

Blue Ball National Bank

Blue Ball National Bank began operations in 1906. The Bank provides a full
range of general commercial and retail banking services to its customers,
including several types of checking and savings accounts, certificates of
deposit, and commercial, consumer and mortgage loans through 17 full service
community offices in Lancaster, Berks and Chester Counties in southeastern and
south-central Pennsylvania. The Bank also provides personal and corporate
trust and agency services to individuals, corporations and others, including
trust investment accounts, investment advisory services, mutual funds, estate
planning, and management and administration of pension and profit sharing
plans.

Commercial lending services provided by the Bank include short and medium term
loans, revolving credit loans, letters and lines of credit, real estate
mortgage and construction loans and agricultural loans. Consumer lending
services include various types of secured and unsecured loans including
installment loans, home equity loans and overdraft protection lines of credit.
Residential mortgage loans are offered in a wide variety of types including
fixed and adjustable-rate loans. The Banks underwriting guidelines conform to
Fannie Mae and Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
The Bank sells most of the conforming fixed-rate residential mortgage loans it
originates to either Fannie Mae or FHLMC in the secondary market but retains
the servicing. The Banks business is not considered seasonal.

PennRock Insurance Group, Inc.

PennRock Insurance Group, Inc. (PIGI), a Pennsylvania corporation, is a
wholly owned subsidiary of Blue Ball National Bank. PIGI is an insurance
agency organized for the sale of annuities and other types of insurance.

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PennRock Financial Services Corp.

The National Advisory Group, Inc.

PennRock acquired The National Advisory Group, Inc. (National) on March 19,
2001. National, established in 1984, is the parent company for four
corporations: National Actuarial Consultants, Ltd. which provides consulting,
actuarial and administrative services to retirement and employee benefit plans;
National Financial Advisors, Inc. which offers investment, advisory and asset
management services to retirement plan sponsors and participants, and serves as
an investment advisor to the Dresher Family of Funds; NFA Brokerage Services,
Inc. which is a mutual-funds-only broker dealer; and National Shareholder
Services, Inc. which provides transfer agency services.

Pension Consulting Services, Inc.

PennRock acquired Pension Consulting Services, Inc. (PCS) on October 31,
2002. PCS is a third party administrator of retirement plans for nearly 1,000
small to medium sized businesses and professional corporations. All operations
were relocated to Dresher, Pennsylvania and work out of the same offices as
National.

Employees

At year-end 2003, PennRock and its subsidiaries employed 349 full-time
equivalent employees.

Competition

Blue Ball National Bank originates most of its loans to, and accepts most of
its deposits from, residents and businesses located in southeastern and
south-central Pennsylvania, primarily Lancaster, Berks and Chester Counties.
The financial services industry in the Banks service area continues to be
extremely competitive, both among commercial banks and other financial service
providers such as consumer finance companies, thrifts, investment companies,
mutual funds and credit unions. Mortgage banking firms, insurance companies,
brokerage companies, financial affiliates of commercial companies, and
government agencies also provide competition for loans and other financial
services. Some of these competitors are considerably larger and have more
resources than the Bank. However, the Bank has made a significant investment
in technological resources that allows us to offer a wide variety of products
and services and enables us to be competitive with any size financial
institution.

Among the most important factors influencing the Banks ability to compete
successfully for new loans and deposits are interest rates, convenience of
office locations, and quality of service. We have attempted to differentiate
ourselves from other competitors by emphasizing the local decision making and
personalized nature of our services. In an effort to make our community
offices more convenient to our existing and potential customers, the Bank has,
on average, added one new office per year over the past ten years. We expect
to add two new community offices in 2004 and plan to add three more in 2005.

National and PCS both located in Dresher, Montgomery County, Pennsylvania,
offer asset management and retirement plan administration services throughout
southeastern Pennsylvania, New Jersey and Delaware. Numerous financial
institutions, accounting and law firms, as well as other corporations offer
similar services as those provided by National and PCS in the greater
Philadelphia metropolitan area.

PennRock is not dependent upon a single customer or a small number of
customers, the loss of which would have a materially adverse effect upon
PennRock or its subsidiaries.

Supervision and Regulation

General

PennRock is registered as a bank 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. PennRock has also made an effective
election to be treated as a financial holding company. Financial holding
companies are bank holding companies that meet certain minimum capital and
other standards and are therefore entitled to engage in financially related
activities on an expedited basis; see further discussion below. As a financial
holding company, PennRocks activities and those of its bank subsidiary are
limited to the business of banking activities closely related or incidental to
banking, and activities that have been determined by statute or the Federal
Reserve Board to be financial in nature. 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

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PennRock Financial Services Corp.

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 PennRock 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 PennRock 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 PennRock 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 has been
determined by the Federal Reserve Board to be so closely related to banking as
to be a proper incident thereto or, for financial holding companies, to be
financial in nature or incidental thereto.

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

The Bank is a national bank and a member of the Federal Reserve System, 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 Office of the Comptroller of the Currency (the OCC), and to a much lesser
extent, the Federal Reserve Board and the FDIC. The primary supervisory
authority of the Bank is the OCC, who regularly examines the Bank. The OCC has
authority to prevent a national bank from engaging in unsafe or unsound
practices in conducting its business. The 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,
limitations on the types of investments that may be made and the types of
services that may be offered. The Community Reinvestment Act requires the Bank
to help meet the credit needs of the entire community where the Bank operates,
including low and moderate income neighborhoods. The Banks rating under the
Community Reinvestment Act, assigned by the Comptroller of the Currency
pursuant to an examination of the Bank, is important in determining whether the
bank may receive approval for, or utilize certain streamlined procedures in,
applications to engage in new activities. Various consumer laws and
regulations also affect the operations of the 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.

As a subsidiary bank of a bank holding company, the Bank is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or its subsidiaries, or investments in the stock or
other securities as collateral for loans. The Federal Reserve Act and Federal
Reserve regulations also place certain limitations and reporting requirements
on extensions of credit by a bank to principal shareholders of its parent
holding company, among others, and to related interests of such principal
shareholders. In addition, such legislation and regulations may affect the
terms upon which any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.

Under the Federal Deposit Insurance Act, the OCC possesses the power to
prohibit institutions regulated by it (such as the Bank) from engaging in any
activity that would be an unsafe and unsound banking practice or would
otherwise be in violation of the law.

Under the Bank Secrecy Act, banks and other financial institutions are required
to report to the Internal Revenue Service currency transactions of more than
$10,000 or multiple transactions of which a bank is aware in any one day that
aggregate in excess of $10,000. Civil and criminal penalties are provided
under the Bank Secrecy Act for failure to file a required report, for failure
to supply information required by the Bank Secrecy Act or for filing a false or
fraudulent report.

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PennRock Financial Services Corp.

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 Bank is subject to almost identical capital requirements
adopted by the Comptrollers Office.

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). PennRock and the Bank each satisfy the
criteria to be classified as well capitalized within the meaning of
applicable regulations.

Regulatory Restrictions on Dividends

The Bank may not, under the National Bank Act, declare a dividend without
approval of the Comptroller of the Currency, unless the dividend to be declared
by the Banks Board of Directors does not exceed the total of:



| | i.  |  | the Banks net profits for the current year to date, plus                                            
| | --- |  | -----------------------------------------------------------------------------------------------------
|
| | ii. |  | its retained net profits for the preceding two current years, less
any required transfers to surplus.

In addition, the Bank can only pay dividends to the extent that its retained
net profits (including the portion transferred to surplus) exceed its bad
debts. The Federal Reserve Board, the Comptroller 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, because banks that are not
classified as well capitalized or adequately capitalized may not pay dividends.

Under these policies and subject to the restrictions applicable to the Bank,
the Bank could declare, during 2004, without prior regulatory approval,
aggregate dividends of approximately $15.5 million, plus net profits earned in
2004 to the date of such dividend declaration.

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PennRock Financial Services Corp.

FDIC Insurance Assessments

The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium schedule, the
FDIC assigns, on a semiannual basis, each depository institution to one of
three capital groups (well-capitalized, adequately capitalized or
undercapitalized) and further assigns such institution to one of three
subgroups within a capital group. The institutions subgroup assignment is
based upon the FDICs judgment of the institutions strength in light of
supervisory evaluations, including examination reports, statistical analyses
and other information relevant to measuring the risk posed by the institution.
Only institutions with:



| | i.   |  | a total capital to risk-adjusted assets ratio of 10% or greater; 
| | ---- |  | -----------------------------------------------------------------
|
| | ii.  |  | a Tier 1 capital to risk-based assets ratio of 6% or greater; and
|
| | iii. |  | a Tier 1 leverage ratio of 5% or greater,                        

are assigned to the well-capitalized group. As of December 31, 2003, the Bank
was well capitalized for purposes of calculating insurance assessments.

The Bank Insurance Fund is presently fully funded at more than the minimum
amount required by law. Accordingly, the 2004 Bank Insurance Fund assessment
rates range from zero for those institutions with the least risk, to $0.027 for
every $100 of insured deposits for institutions deemed to have the highest
risk. The Bank is in the category of institutions that presently pay nothing
for deposit insurance. The FDIC adjusts the rates every six months. The FDIC
has indicated that it is possible that all banks will again be required to pay
deposit insurance premiums in the future if the current trend of the size of
the insurance funds relative to all insured deposits continues.

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. The FDIC sets the Financing
Corporation assessment rate every quarter. The Financing Corporation
assessment for the Bank for the first quarter of 2004 is an annual rate of
$.0154 for each $100 of deposits.

New Legislation

No significant legislation in the financial services area was enacted in 2003.
The Gramm-Leach-Bliley Act, enacted in 1999, changed certain banking laws that
had been in effect since the early part of the 20th century. The most radical
changes were that the separation between banking and the securities businesses
mandated by the Glass-Steagall Act was removed, and the provisions of any state
law that prohibits affiliation between banking and insurance entities were
preempted. The provisions of federal law that preclude banking entities from
engaging in non-financially related activities, such as manufacturing, were not
changed. The Gramm-Leach-Bliley Act also contained a number of additional
provisions, including the Right to Financial Privacy Act that directly affects
banks and their customers.

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. Most 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. The Bank does not have a significant foreign business and
does not expect this Act to materially affect its operations. The Act does,
however, require 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 Sarbanes-Oxley Act was enacted in 2002. This Act is not a banking law, but
applies to all public companies, including PennRock. Sarbanes-Oxley is
designed to restore investor confidence. Sarbanes-Oxley adopts new standards
of corporate governance and imposes new requirements on the board and
management of public companies. The chief executive officer and chief
financial officer of a public company must now certify the financial statements
of the company. New definitions of independent directors have been adopted,
and new responsibilities and duties have been established for the audit and
other committees of the board. In addition, the reporting requirements for
insider stock transactions have been revised, requiring most transactions to be
reported within two business days. While complying with Sarbanes-Oxley will
result in increased costs to PennRock, the additional costs are not expected to
have a material effect on PennRock.

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PennRock Financial Services Corp.

Congress is often considering some financial industry legislation, and the
federal banking agencies routinely propose new regulations. The Comptroller of
the Currency, which is the primary regulator of the Bank, recently issued new
rules clarifying the right of the Comptroller to pre-empt state laws that
inhibit the activities of national banks. These new rules have strained
relations between state regulators and federal regulators, and may result in
new legislation being proposed. The rules do not materially affect the present
operations of the Bank.

New legislation and regulation proposed in the future may include dramatic
changes to the federal deposit insurance system. PennRock cannot predict how
any new legislation, or new rules adopted by the federal banking agencies, may
affect its business in the future.

Foreign Operations

PennRock does not depend on foreign sources for funds, nor does PennRock make
foreign loans.

Statistical Disclosure by Bank Holding Companies

The required Statistical Information for Item 1 can be found in Item 6,
Selected Financial Data, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations and Item 8, Financial
Statements and Supplementary Data, of this Annual Report.

Available Information

PennRocks internet address is www.pennrock.com. All Securities and Exchange
Commission (SEC) filings are available free of charge through our website
including annual reports on form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and Section 16 filings. These are posted on the web site
as reasonably practicable after they are electronically filed with the SEC.
Also available on this web site are documents relating to corporate governance
issues including PennRocks Code of Ethics and Nominating Committee Charter.

Financial Information about Segments

Management measures the performance and allocates the resources of PennRock as
a single segment, community banking. Therefore, we do not have any operating
segments that require additional information.

ITEM 2. PROPERTIES

PennRock Financial Services Corp.

PennRocks headquarters are located at the main office of Blue Ball National
Bank at 1060 Main Street, Blue Ball, Pennsylvania. PennRock owns no real
estate.

Blue Ball National Bank

The principal executive office and main banking office is located in Blue Ball,
Pennsylvania. An operations center, also located in Blue Ball, Pennsylvania,
accommodates the Banks data processing, accounting, human resource, credit,
and loan and deposit operations departments. These and 15 of the Banks full
service community offices are owned free and clear of any indebtedness. The
land on which seven of the branch offices are located is leased. The net book
value of the Banks premises and equipment as of December 31, 2003 is $16.3
million.

The National Advisory Group, Inc.

Nationals offices are located in Dresher, Pennsylvania. All real estate is
leased.

Pension Consulting Services, Inc.

PCSs offices are located in Dresher, Pennsylvania. All real estate is leased.

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PennRock Financial Services Corp.

ITEM 3. LEGAL PROCEEDINGS

Various legal actions or proceedings are pending involving PennRock or its
subsidiaries. Management believes that the aggregate liability or loss, if
any, will not be material.

ITEM 3A. EXECUTIVE OFFICERS OF THE REGISTRANT

The names, ages and positions of all of the executive officers of PennRock as
of February 13, 2004, are listed below, along with the positions with PennRock
and Blue Ball National Bank held by each of them during the past five years.
The Board of Directors elects officers annually.

|                  |  |     |    |                     |  |                                                                          
|----------------- |  | --- | -- | ------------------- |  | -------------------------------------------------------------------------
|                  |  |     |    |                     |  | POSITION AND EXPERIENCE                                                  
|NAME              |  | AGE |    | DURING PAST 5 YEARS
|                  |  |     |    |                    
|Norman Hahn       |  |     | 67 |                     |  | PennRock Financial Services Corp.:                                       
|                  |  |     |    |                     |  | Chairman of the Board (January 1991 to date)                             
|                  |  |     |    |                     |  | Blue Ball National Bank:                                                 
|                  |  |     |    |                     |  | Chairman of the Board (January 1991 to date)                             
|                  |  |     |    |                     |  |                                                                          
|Glenn H. Weaver   |  |     | 69 |                     |  | PennRock Financial Services Corp.:                                       
|                  |  |     |    |                     |  | President (April 1989 to date)                                           
|                  |  |     |    |                     |  |                                                                          
|Robert K. Weaver  |  |     | 55 |                     |  | PennRock Financial Services Corp.:                                       
|                  |  |     |    |                     |  | Secretary (March 1986 to date)                                           
|                  |  |     |    |                     |  | Blue Ball National Bank:                                                 
|                  |  |     |    |                     |  | Secretary (1977 to date)                                                 
|                  |  |     |    |                     |  |                                                                          
|Melvin Pankuch    |  |     | 64 |                     |  | PennRock Financial Services Corp.:                                       
|                  |  |     |    |                     |  | Executive Vice President and Chief Executive Officer
(April 1989 to date)
|                  |  |     |    |                     |  | Blue Ball National Bank:                                                 
|                  |  |     |    |                     |  | President and Chief Executive Officer (April 1988 to date)               
|                  |  |     |    |                     |  |                                                                          
|George B. Crisp   |  |     | 56 |                     |  | PennRock Financial Services Corp.:                                       
|                  |  |     |    |                     |  | Vice President and Treasurer (April 1989 to date)                        
|                  |  |     |    |                     |  | Blue Ball National Bank:                                                 
|                  |  |     |    |                     |  | Executive Vice President  Operations (April 2003 to date)               
|                  |  |     |    |                     |  | Senior Vice President  Operations (July 1993 to April 2003)             
|                  |  |     |    |                     |  | Chief Financial Officer (July 1987 to date)                              
|                  |  |     |    |                     |  |                                                                          
|Joseph C. Spada   |  |     | 53 |                     |  | Blue Ball National Bank:                                                 
|                  |  |     |    |                     |  | Executive Vice President  Banking Sales/Service (April 2003 to date)    
|                  |  |     |    |                     |  | Senior Vice President  Banking Sales/Service (July 1993 to April 2003)  
|                  |  |     |    |                     |  |                                                                          
|Michael H. Peuler |  |     | 53 |                     |  | Blue Ball National Bank:                                                 
|                  |  |     |    |                     |  | Executive Vice President  Financial Services (April 2003 to date)       
|                  |  |     |    |                     |  | Senior Vice President  Financial Services (April 1995 to April 2003)    
|                  |  |     |    |                     |  | Vice President  Financial Services (June 1993 to April 1995)            
|                  |  |     |    |                     |  | The National Advisory Group, Inc.                                        
|                  |  |     |    |                     |  | President and Chief Executive Officer (March 2001 to date)               
|                  |  |     |    |                     |  | Pension Consulting Services, Inc.                                        
|                  |  |     |    |                     |  | President and Chief Executive Officer (October 2002 to date)             

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the 4th quarter of 2003.

9



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##### 



PennRock Financial Services Corp.

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PennRocks common stock trades on the Nasdaq National Market under the symbol
PRFS. The price of PennRocks stock ranged from $21.47 to $33.49 in 2003 and
closed the year at $31.08. The price ranged from $18.15 to $29.09 in 2002 and
closed the year at $25.23. The book value per share was $12.85 as of December
31, 2003 and $11.45 as of December 31, 2002. All per share data have been
restated for 10% stock dividends paid in both 2003 and 2002. The prices listed
below are closing prices and represent the high, low and quarter ending prices
for stock trades reported during each quarter.

|               |  |      |       |     |  |     |       |          |  |         |       |           |  |   |      | 
|-------------- |  | ---- | ----- | --- |  | --- | ----- | -------- |  | ------- | ----- | --------- |  | - | ---- | 
|               |  |      |       |     |  |     |       |          |  | Quarter |       | Per Share
|               |  | High |       | Low |  | End |       | Dividend
|               |  |      |       |     |  |     |       |         
|2003           |  |      |       |     |  |     |       |          |  |         |       |           |  |   |      | 
|First quarter  |  | $    | 25.90 |     |  | $   | 21.47 |          |  | $       | 25.55 |           |  | $ | 0.18 | 
|Second quarter |  |      | 27.94 |     |  |     | 24.33 |          |  |         | 24.33 |           |  |   | 0.19 | 
|Third quarter  |  |      | 31.67 |     |  |     | 25.35 |          |  |         | 28.20 |           |  |   | 0.19 | 
|Fourth quarter |  |      | 33.49 |     |  |     | 26.98 |          |  |         | 31.08 |           |  |   | 0.20 | 
|2002           |  |      |       |     |  |     |       |          |  |         |       |           |  |   |      | 
|First quarter  |  | $    | 23.14 |     |  | $   | 18.15 |          |  | $       | 23.14 |           |  | $ | 0.16 | 
|Second quarter |  |      | 28.18 |     |  |     | 22.93 |          |  |         | 27.02 |           |  |   | 0.17 | 
|Third quarter  |  |      | 29.09 |     |  |     | 25.56 |          |  |         | 26.36 |           |  |   | 0.17 | 
|Fourth quarter |  |      | 26.96 |     |  |     | 23.95 |          |  |         | 25.23 |           |  |   | 0.18 | 

As of March 1, 2004, there were approximately 2,593 shareholders of record of
the Registrants common stock.

PennRock maintains a Dividend Reinvestment Plan for eligible shareholders who
elect to participate in the Plan. A copy of the Prospectus for this Plan may
be obtained by writing to:



| |  | Shannan B. Guthrie, Investor Relations Officer
PennRock Financial Services Corp.
P.O. Box 580
Blue Ball, PA 17506
| |  | -----------------------------------------------------------------------------------------------------------------

Copies of PennRocks Annual Report on Form 10-K, as well as all other reports
and forms filed with the Securities and Exchange Commission by PennRock, are
available without charge on the companys web site at www.pennrock.com, or by
writing to Shannan B. Guthrie, Investor Relations Officer at the address listed
directly above.

Registrar/Transfer Agent:



| |  | American Stock Transfer and Trust (800) 937-5449
59 Maiden Lane
New York, NY 10038
| |  | ----------------------------------------------------------------------------------

Nasdaq Market Makers:

As of December 31, 2003, the following firms made a market in PennRocks common stock:

|                             |  |               
|---------------------------- |  | --------------
|Boenning & Scattergood, Inc. |  | (800) 842-8928
|Ferris, Baker, Watts, Inc.   |  | (800) 638-7411
|Janney Montgomery LLC        |  | (717) 293-4100

Independent Auditors:



| |  | Simon Lever LLP
| |  | ---------------

10



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PennRock Financial Services Corp.

ITEM 6. SELECTED FINANCIAL DATA

In thousands, except share and per share data

|                                      |                             |   |           |       |      |   |           |       |      |   |           |       |  |   |           |       |  |   |           |       | 
|------------------------------------- | --------------------------- | - | --------- | ----- | ---- | - | --------- | ----- | ---- | - | --------- | ----- |  | - | --------- | ----- |  | - | --------- | ----- | 
|                                      |                             |   | 2003      |       | 2002 |   | 2001      |       | 2000 |   | 1999     
|                                      |                             |   |           |       |      |   |           |       |      |   |          
|FOR THE YEAR:                         |                             |   |           |       |      |   |           |       |      |   |           |       |  |   |           |       |  |   |           |      
|Interest income                       |                             | $ | 53,394    |       |      | $ | 57,142    |       |      | $ | 62,274    |       |  | $ | 64,234    |       |  | $ | 54,783    |      
|Interest expense                      |                             |   | 17,825    |       |      |   | 23,283    |       |      |   | 32,366    |       |  |   | 37,073    |       |  |   | 28,137    |      
|Net interest income                   |                             |   | 35,569    |       |      |   | 33,859    |       |      |   | 29,908    |       |  |   | 27,161    |       |  |   | 26,646    |      
|Provision for loan losses             |                             |   | 1,917     |       |      |   | 1,750     |       |      |   | 1,548     |       |  |   | 3,076     |       |  |   | 1,026     |      
|Non-interest income                   |                             |   | 13,750    |       |      |   | 11,144    |       |      |   | 11,030    |       |  |   | 7,315     |       |  |   | 6,159     |      
|Non-interest expense                  |                             |   | 29,678    |       |      |   | 27,447    |       |      |   | 25,282    |       |  |   | 20,280    |       |  |   | 18,566    |      
|Net income                            |                             |   | 14,000    |       |      |   | 13,226    |       |      |   | 12,067    |       |  |   | 9,546     |       |  |   | 10,710    |      
|Per share:                            |                             |   |           |       |      |   |           |       |      |   |           |       |  |   |           |       |  |   |           |      
|                                      | Net income  Basic          |   |           | 1.84  |      |   |           | 1.73  |      |   |           | 1.59  |  |   |           | 1.26  |  |   |           | 1.41  | 
|                                      | Net income  Diluted        |   |           | 1.81  |      |   |           | 1.71  |      |   |           | 1.57  |  |   |           | 1.25  |  |   |           | 1.41  | 
|                                      | Cash dividends              |   |           | 0.76  |      |   |           | 0.68  |      |   |           | 0.63  |  |   |           | 0.55  |  |   |           | 0.49  | 
|                                      | Book value as of year-end   |   |           | 12.85 |      |   |           | 11.45 |      |   |           | 10.27 |  |   |           | 9.63  |  |   |           | 7.61  | 
|                                      | Market value as of year-end |   |           | 31.08 |      |   |           | 25.23 |      |   |           | 18.38 |  |   |           | 11.02 |  |   |           | 14.07 | 
|Number of shares outstanding          |                             |   | 7,626,188 |       |      |   | 7,599,326 |       |      |   | 7,629,293 |       |  |   | 7,541,240 |       |  |   | 7,545,949 |      
|AS OF YEAR-END:                       |                             |   |           |       |      |   |           |       |      |   |           |       |  |   |           |       |  |   |           |      
|Securities                            |                             | $ | 309,189   |       |      | $ | 304,814   |       |      | $ | 303,334   |       |  | $ | 323,556   |       |  | $ | 309,462   |      
|Loans                                 |                             |   | 711,902   |       |      |   | 602,840   |       |      |   | 558,369   |       |  |   | 501,140   |       |  |   | 461,179   |      
|Earning assets                        |                             |   | 1,019,783 |       |      |   | 915,748   |       |      |   | 860,957   |       |  |   | 841,940   |       |  |   | 766,714   |      
|Total assets                          |                             |   | 1,108,740 |       |      |   | 1,008,589 |       |      |   | 948,938   |       |  |   | 910,950   |       |  |   | 842,446   |      
|Total deposits                        |                             |   | 784,042   |       |      |   | 743,262   |       |      |   | 663,694   |       |  |   | 682,994   |       |  |   | 631,415   |      
|Short-term borrowings                 |                             |   | 112,962   |       |      |   | 40,363    |       |      |   | 76,754    |       |  |   | 54,175    |       |  |   | 53,207    |      
|Long-term debt                        |                             |   | 102,000   |       |      |   | 127,000   |       |      |   | 121,000   |       |  |   | 91,000    |       |  |   | 90,000    |      
|Stockholders equity                  |                             |   | 98,007    |       |      |   | 86,978    |       |      |   | 78,404    |       |  |   | 72,598    |       |  |   | 59,233    |      
|Full-time equivalent employees        |                             |   | 349       |       |      |   | 335       |       |      |   | 321       |       |  |   | 276       |       |  |   | 271       |      
|SELECTED RATIOS:                      |                             |   |           |       |      |   |           |       |      |   |           |       |  |   |           |       |  |   |           |      
|Return on average assets              |                             |   | 1.34      | %     |      |   | 1.34      | %     |      |   | 1.34      | %     |  |   | 1.09      | %     |  |   | 1.37      | %    
|Return on average equity              |                             |   | 15.24     | %     |      |   | 15.86     | %     |      |   | 15.80     | %     |  |   | 14.93     | %     |  |   | 16.39     | %    
|Efficiency ratio                      |                             |   | 56.51     | %     |      |   | 56.91     | %     |      |   | 59.28     | %     |  |   | 55.90     | %     |  |   | 54.03     | %    
|Net interest margin (tax
equivalent)  |                             |   | 3.91      | %     |      |   | 3.98      | %     |      |   | 3.95      | %     |  |   | 3.71      | %     |  |   | 4.02      | %    
|Total capital to average assets       |                             |   | 9.09      | %     |      |   | 8.64      | %     |      |   | 9.21      | %     |  |   | 8.86      | %     |  |   | 9.01      | %    
|Total capital to risk-weighted
assets |                             |   | 11.64     | %     |      |   | 11.57     | %     |      |   | 11.71     | %     |  |   | 12.45     | %     |  |   | 12.80     | %    
|Price to earnings (x)                 |                             |   | 16.89     |       |      |   | 14.58     |       |      |   | 11.56     |       |  |   | 8.75      |       |  |   | 9.98      |      
|Market to book value (x)              |                             |   | 2.42      |       |      |   | 2.20      |       |      |   | 1.79      |       |  |   | 1.14      |       |  |   | 1.85      |      
|Allowance for loan losses to loans    |                             |   | 1.21      | %     |      |   | 1.17      | %     |      |   | 1.30      | %     |  |   | 1.19      | %     |  |   | 1.20      | %    
|Non-performing loans to loans         |                             |   | 0.22      | %     |      |   | 0.41      | %     |      |   | 0.21      | %     |  |   | 0.85      | %     |  |   | 0.43      | %    
|Dividend payout ratio                 |                             |   | 40.98     | %     |      |   | 40.49     | %     |      |   | 39.70     | %     |  |   | 43.66     | %     |  |   | 34.52     | %    

11



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PennRock Financial Services Corp.

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following section presents managements discussion and analysis of the
financial condition and results of operations of PennRock Financial Services
Corp., a bank holding company (PennRock), its subsidiaries, The National
Advisory Group, Inc. (National), Pension Consulting Services, Inc. (PCS)
and Blue Ball National Bank (the Bank), and the Banks subsidiary, PennRock
Insurance Group, Inc. (PIGI). This discussion and analysis is presented to
assist the reader in understanding and evaluating the financial condition,
results of operations and future prospects of PennRock and should be read in
conjunction with the consolidated financial statements and other financial data
presented elsewhere in this Annual Report.

PennRocks results of operations are dependent primarily on its net interest
income, which is the difference between the interest earned on its assets
(primarily its loan and securities portfolios) and its cost of funds, which
consists of the interest paid on its deposits and borrowings. PennRocks
results of operations are also affected by its provision for loan losses as
well as non-interest income, non-interest expenses and income tax expense.
Non-interest income consists of service charges and fees for services relative
to deposit accounts, investment management, retirement plan administration,
fiduciary activities and credit and debit card transactions, as well as gains
and losses from sales of investment securities, mortgage banking and income
from bank owned life insurance. Non-interest expenses consist of salaries and
benefits, occupancy and equipment expenses, advertising and marketing, data
processing, insurance, professional fees, telecommunications and other
operating expenses. Results of operations are also dependent on the dollar
volume and asset quality of PennRocks loans and investments.

The results of PennRocks operations, like those of other financial
institutions, are affected by our asset and liability management policies, as
well as factors beyond our control, such as general economic conditions and the
monetary and fiscal policies of the federal government. Lending activities are
affected by the demand for commercial and mortgage financing and other types of
loans, and are thus influenced by interest rates and other economic factors.
Deposit flows and costs of funds are influenced by yields available on
competing banking and non-banking investments and by general market rates of
interest. All per share data have been restated for 10% stock dividends paid
in both 2003 and 2002.

Overview

During 2003, PennRock recorded net income of $14.0 million, an increase of
$774,000 or 6% over 2002. Basic and diluted earnings per share for the year
were $1.84 and $1.81, respectively, as compared to $1.73 and $1.71,
respectively, for 2002. Net income was $12.1 million or $1.59 per share in
2001. Return on average assets was 1.34% in 2003, 2002 and 2001. Return on
average equity was 15.24% in 2003, 15.86% in 2002 and 15.80% in 2001.

Assets grew $100.2 million to $1.1 billion, an increase of 9.9% from 2002.
Earning assets increased $104.0 million or 11.4% during 2003, while interest
bearing liabilities grew $69.2 million or 8.8%. The average yield on earning
assets decreased 80 percentage points from 6.57% in 2002 to 5.77% in 2003. The
average yield on paying liabilities also decreased 80 percentage points from
2.99% in 2002 to 2.19% in 2003. PennRocks net interest income on a fully
taxable equivalent basis increased $1.8 million or 4.9% during 2003 and $3.2
million or 5.1% in 2002. The net interest margin was 3.91% in 2003, 3.98% in
2002 and 3.95% in 2001.

The provision for loan losses increased from $1.8 million in 2002 to $1.9
million in 2003. The provision for loan losses was $1.5 million in 2001.

Non-interest income from sources other than realized securities gains increased
$2.6 million or 24.4% in 2003 compared with an increase of $1.3 million or
13.5% in 2002 and an increase of $3.7 million or 64.4% in 2001.

Non-interest expenses increased $2.2 million or 8.1% in 2003. Non-interest
expenses increased $2.2 million or 8.6% in 2002 and $5.0 million or 24.7% in
2001.

12



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PennRock Financial Services Corp.

Critical Accounting Policies

PennRocks financial position and results of operations are impacted by
managements application of accounting policies involving judgments made to
arrive at the carrying value of certain assets. Managements greatest
challenge in implementing its policies is the need to make estimates about the
effect of matters that are inherently less than certain. For a detailed
discussion of PennRocks significant accounting policies, see Note 1: Summary
of Significant Accounting Policies in the Notes to Consolidated Financial
Statements. A material estimate that is susceptible to significant change is
the determination of the allowance for loan losses. Both the estimates of the
amount of the allowance for loan losses and the placement of loans on
non-accrual status affect the carrying amount of the loan portfolio.

The allowance for loan losses is a subjective judgment that management must
make regarding the loan portfolio, and is established and maintained at levels
that management believes are adequate to cover losses resulting from the
inability of borrowers to make required payments on loans. To estimate loan
losses, we analyze:



| | i.    |  | historical loan losses;                                                                       
| | ----- |  | ----------------------------------------------------------------------------------------------
|
| | ii.   |  | current trends in delinquencies and charge-offs;                                              
|
| | iii.  |  | plans for problem loan administration and resolution;                                         
|
| | iv.   |  | the views of regulators;                                                                      
|
| | v.    |  | changes in the size and composition of the loan portfolio;                                    
|
| | vi.   |  | peer group information;                                                                       
|
| | vii.  |  | the economic climate and direction;                                                           
|
| | viii. |  | increases or decreases in overall lending rates;                                              
|
| | ix.   |  | political conditions;                                                                         
|
| | x.    |  | legislation directly or indirectly impacting the banking industry;
and                        
|
| | xi.   |  | economic conditions affecting specific geographical areas in which
PennRock conducts business.

Where there is a question as to the impairment of a specific loan, management
obtains valuations of the property or collateral securing the loan, and current
financial information of the borrower, including financial statements, when
available. Since the calculation of appropriate loan loss allowances relies on
managements estimates and judgments relating to inherently uncertain events,
actual results may differ from these estimates. The American Institute of
Certified Public Accountants is preparing further guidance for calculating the
allowance for loan losses. Implementation of that guidance could result in an
adjustment to the allowance. For a more detailed discussion on the allowance
for loan losses, see Allowance For Loan Losses under the discussion of
Financial Condition in this Item 7 of this report and Allowance for Loan Losses
in Note 1: Summary of Significant Accounting Policies and Note 6: Allowance for
Loan Losses in the Notes to Consolidated Financial Statements.

Results of Operations

Net Interest Income

Net interest income is the amount by which interest income on loans,
investments and other earning assets exceeds interest paid on deposits,
borrowings and other interest bearing liabilities. Net interest income is the
primary source of revenue for PennRock. The amount of net interest income
earned is affected by changes in interest rates and the balances of the various
types of earning assets and interest bearing liabilities. For comparative
purposes, and throughout this discussion unless otherwise noted, net interest
income and corresponding yields are shown on a taxable equivalent basis. This
adjustment will give effect to the interest earned on tax-exempt loans and
investments by an amount equivalent to the federal income taxes, which would
have been paid if the income received on these assets were taxable at the
statutory rate of 35% for 2003 and 2002 and 34% for 2001.

Net interest income is the product of the volume of average earning assets and
the average rates earned on them, less the volume of average interest bearing
liabilities and the average rates paid on them. All yield and rate information
is calculated on an annualized basis by dividing the income or expense item for
the period by the average balance during the period. Net interest margin is
calculated by dividing net interest income by average earning assets. Interest
rate spread is the difference between yield earned on average interest earning
assets and the rate paid on average interest bearing liabilities. Table 1
presents average balances, taxable equivalent interest income and expense and
rates for PennRocks assets and liabilities for the years ended December 31,
2003, 2002 and 2001.

13



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PennRock Financial Services Corp.

Table 1  -  Average Balances, Rates and Interest Income and Expense Summary
(Taxable equivalent basis)
In thousands

|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |      |  
|------------------------------------------------------------------- | ----------------------------------- | ---- | --------- | ------- | -------- | ---- | ------ | ------ | ------- |  | -------- | ---- | ---- | - | ------- | ------- | -------- | - | ------- | ------ |  |  | ---- | ---- | ------- | - | ------- | ------- |  | - | ------ | ------ |  |  | ---- | ---- | -
|                                                                    |                                     | 2003 |           | 2002    |          | 2001
|                                                                    |                                     |      |           |         |         
|                                                                    |                                     |      | Average   |         |          |      |        |        | Average |  | Average  |      |      |   |         |         | Average  |   | Average |        |  |  |      |      | Average
|                                                                    |                                     |      | Balance   |         | Interest |      | Rate   |        | Balance |  | Interest |      | Rate |   | Balance |         | Interest |   | Rate   
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |        
|ASSETS                                                              |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Short-term investments                                              |                                     | $    | 3,982     |         |          | $    | 33     |        |         |  | 0.83     | %    |      | $ | 5,375   |         |          | $ | 100     |        |  |  | 1.86 | %    |         | $ | 8,978   |         |  | $ | 374    |        |  |  | 4.17 | %   
|Mortgages held for sale                                             |                                     |      | 7,783     |         |          |      | 516    |        |         |  | 6.63     | %    |      |   | 2,720   |         |          |   | 248     |        |  |  | 9.12 | %    |         |   | 2,347   |         |  |   | 212    |        |  |  | 9.03 | %   
|Securities available for sale:                                      |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|                                                                    | U.S. Treasury and agency            |      |           | 73,330  |          |      |        | 1,938  |         |  |          | 2.64 | %    |   |         | 81,916  |          |   |         | 5,842  |  |  |      | 7.13 | %       |   |         | 91,930  |  |   |        | 6,168  |  |  |      | 6.71 | %
|                                                                    | State and municipal                 |      |           | 15,954  |          |      |        | 1,234  |         |  |          | 7.73 | %    |   |         | 34,955  |          |   |         | 2,777  |  |  |      | 7.94 | %       |   |         | 71,731  |  |   |        | 5,703  |  |  |      | 7.95 | %
|                                                                    | Other                               |      |           | 213,340 |          |      |        | 8,807  |         |  |          | 4.13 | %    |   |         | 200,914 |          |   |         | 7,254  |  |  |      | 3.61 | %       |   |         | 135,367 |  |   |        | 8,610  |  |  |      | 6.36 | %
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|                                                                    | Total securities available
for sale |      |           | 302,624 |          |      |        | 11,979 |         |  |          | 3.96 | %    |   |         | 317,785 |          |   |         | 15,873 |  |  |      | 4.99 | %       |   |         | 299,028 |  |   |        | 20,481 |  |  |      | 6.85 | %
|Loans: (1)                                                          |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|                                                                    | Mortgage                            |      |           | 379,058 |          |      |        | 26,521 |         |  |          | 7.00 | %    |   |         | 332,256 |          |   |         | 25,687 |  |  |      | 7.73 | %       |   |         | 292,324 |  |   |        | 24,780 |  |  |      | 8.48 | %
|                                                                    | Commercial                          |      |           | 177,817 |          |      |        | 10,759 |         |  |          | 6.05 | %    |   |         | 158,603 |          |   |         | 10,858 |  |  |      | 6.85 | %       |   |         | 141,685 |  |   |        | 11,873 |  |  |      | 8.38 | %
|                                                                    | Consumer (2)                        |      |           | 88,690  |          |      |        | 5,579  |         |  |          | 6.29 | %    |   |         | 81,930  |          |   |         | 6,321  |  |  |      | 7.72 | %       |   |         | 82,816  |  |   |        | 7,281  |  |  |      | 8.79 | %
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|                                                                    | Total loans                         |      |           | 645,565 |          |      |        | 42,859 |         |  |          | 6.64 | %    |   |         | 572,789 |          |   |         | 42,866 |  |  |      | 7.48 | %       |   |         | 516,825 |  |   |        | 43,934 |  |  |      | 8.50 | %
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Total earning assets                                                |                                     |      | 959,954   |         |          |      | 55,387 |        |         |  | 5.77     | %    |      |   | 898,669 |         |          |   | 59,087  |        |  |  | 6.57 | %    |         |   | 827,178 |         |  |   | 65,001 |        |  |  | 7.86 | %   
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Other assets                                                        |                                     |      | 87,812    |         |          |      |        |        |         |  |          |      |      |   | 85,931  |         |          |   |         |        |  |  |      |      |         |   | 70,514  |         |  |   |        |        |  |  |      |     
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Total assets                                                        |                                     | $    | 1,047,766 |         |          |      |        |        |         |  | 5.29     | %    |      | $ | 984,600 |         |          |   |         |        |  |  | 6.00 | %    |         | $ | 897,692 |         |  |   |        |        |  |  | 7.24 | %   
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|LIABILITIES AND
STOCKHOLDERS EQUITY                                |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Interest bearing deposits:                                          |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|                                                                    | Demand                              |      | $         | 212,980 |          |      |        | 2,260  |         |  |          | 1.06 | %    |   | $       | 211,869 |          |   |         | 3,661  |  |  |      | 1.73 | %       |   | $       | 149,441 |  |   |        | 4,582  |  |  |      | 3.07 | %
|                                                                    | Savings                             |      |           | 86,130  |          |      |        | 714    |         |  |          | 0.83 | %    |   |         | 72,542  |          |   |         | 991    |  |  |      | 1.37 | %       |   |         | 57,548  |  |   |        | 1,064  |  |  |      | 1.85 | %
|                                                                    | Time                                |      |           | 313,027 |          |      |        | 7,944  |         |  |          | 2.54 | %    |   |         | 317,432 |          |   |         | 10,505 |  |  |      | 3.31 | %       |   |         | 357,190 |  |   |        | 18,366 |  |  |      | 5.14 | %
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|                                                                    | Total interest bearing
deposits     |      |           | 612,137 |          |      |        | 10,918 |         |  |          | 1.78 | %    |   |         | 601,843 |          |   |         | 15,157 |  |  |      | 2.52 | %       |   |         | 564,179 |  |   |        | 24,012 |  |  |      | 4.26 | %
|Short-term borrowings                                               |                                     |      | 90,245    |         |          |      | 1,033  |        |         |  | 1.14     | %    |      |   | 53,710  |         |          |   | 796     |        |  |  | 1.48 | %    |         |   | 38,094  |         |  |   | 1,304  |        |  |  | 3.42 | %   
|Long-term debt                                                      |                                     |      | 112,411   |         |          |      | 5,874  |        |         |  | 5.23     | %    |      |   | 123,663 |         |          |   | 7,330   |        |  |  | 5.93 | %    |         |   | 114,342 |         |  |   | 7,050  |        |  |  | 6.17 | %   
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Total interest bearing liabilities                                  |                                     |      | 814,793   |         |          |      | 17,825 |        |         |  | 2.19     | %    |      |   | 779,216 |         |          |   | 23,283  |        |  |  | 2.99 | %    |         |   | 716,615 |         |  |   | 32,366 |        |  |  | 4.52 | %   
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Non-interest bearing
demand deposits                                |                                     |      | 129,284   |         |          |      |        |        |         |  |          |      |      |   | 110,808 |         |          |   |         |        |  |  |      |      |         |   | 94,990  |         |  |   |        |        |  |  |      |     
|Other liabilities                                                   |                                     |      | 11,821    |         |          |      |        |        |         |  |          |      |      |   | 11,210  |         |          |   |         |        |  |  |      |      |         |   | 9,692   |         |  |   |        |        |  |  |      |     
|Stockholders equity                                                |                                     |      | 91,868    |         |          |      |        |        |         |  |          |      |      |   | 83,366  |         |          |   |         |        |  |  |      |      |         |   | 76,395  |         |  |   |        |        |  |  |      |     
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Total liabilities and
stockholders equity                          |                                     | $    | 1,047,766 |         |          |      |        |        |         |  | 1.70     | %    |      | $ | 984,600 |         |          |   |         |        |  |  | 2.36 | %    |         | $ | 897,692 |         |  |   |        |        |  |  | 3.61 | %   
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Excess of interest earning
assets over interest bearing
liabilities |                                     | $    | 145,161   |         |          |      |        |        |         |  |          |      |      | $ | 119,453 |         |          |   |         |        |  |  |      |      |         | $ | 110,563 |         |  |   |        |        |  |  |      |     
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Net interest income                                                 |                                     |      |           |         |          | $    | 37,562 |        |         |  |          |      |      |   |         |         |          | $ | 35,804  |        |  |  |      |      |         |   |         |         |  | $ | 32,635 |        |  |  |      |     
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Interest rate spread                                                |                                     |      |           |         |          |      |        |        |         |  | 3.58     | %    |      |   |         |         |          |   |         |        |  |  | 3.58 | %    |         |   |         |         |  |   |        |        |  |  | 3.34 | %   
|Effect of non-interest
bearing funds                                |                                     |      |           |         |          |      |        |        |         |  | 0.33     | %    |      |   |         |         |          |   |         |        |  |  | 0.40 | %    |         |   |         |         |  |   |        |        |  |  | 0.61 | %   
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     
|Net interest margin                                                 |                                     |      |           |         |          |      |        |        |         |  | 3.91     | %    |      |   |         |         |          |   |         |        |  |  | 3.98 | %    |         |   |         |         |  |   |        |        |  |  | 3.95 | %   
|                                                                    |                                     |      |           |         |          |      |        |        |         |  |          |      |      |   |         |         |          |   |         |        |  |  |      |      |         |   |         |         |  |   |        |        |  |  |      |     



| | (1) |  | Interest income on loans includes fees of $2,143,000 in 2003,
$1,619,000 in 2002 and $1,598,000 in 2001. Average loan balances
exclude non-accrual loans.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Consumer loans outstanding net of unearned income.                                                                                                       

14



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PennRock Financial Services Corp.

Table 2 presents the adjustment required to convert net interest income to net
interest income on a fully taxable equivalent basis for the years ended
December 31, 2003, 2002 and 2001.

Table 2  -  Net Interest Income
In thousands

|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                               |  | 2003 |        | 2002 |  | 2001
|                                               |  |      |        |      |  |     
|Total interest income                          |  | $    | 53,394 |      |  | $    | 57,142 |  |  | $ | 62,274 | 
|Total interest expense                         |  |      | 17,825 |      |  |      | 23,283 |  |  |   | 32,366 | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Net interest income                            |  |      | 35,569 |      |  |      | 33,859 |  |  |   | 29,908 | 
|Tax equivalent adjustment                      |  |      | 1,993  |      |  |      | 1,945  |  |  |   | 2,727  | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 
|Net interest income (fully taxable equivalent) |  | $    | 37,562 |      |  | $    | 35,804 |  |  | $ | 32,635 | 
|                                               |  |      |        |      |  |      |        |  |  |   |        | 

The amount of non-taxable interest earned determines the size of tax equivalent
adjustment necessary to convert net interest income into fully taxable
equivalent net interest income. The sources of non-taxable interest income for
PennRock are from interest earned on municipal bonds, dividends from Fannie Mae
and Federal Home Loan Mortgage Corporation (FHLMC) preferred stock and, to a
smaller degree, from loans which qualify for tax-exempt status. The dividends
earned on Fannie Mae and FHLMC preferred stock are 70% tax-free. The large
decline in the tax equivalent adjustment in 2002 reflects a drop in municipal
bonds held in the Banks available for sale portfolio. In 2001, the average
balance of municipal bonds owned by the Bank was $71.7 million while the
average balance was $35.0 million in 2002.

Changes in interest rates as well as changes in average balances (or volumes)
of earning assets and paying liabilities have an impact on the amount of net
interest income earned and the net interest margins realized by PennRock from
year-to-year. By isolating the effect that changes in rates have on net
interest income from the effect of changes in volume, we can analyze the degree
that each influences the change in net interest income and net interest
margins. Table 3 analyzes the changes in the volume and rate components of net
interest income.

Table 3  -  Volume and Rate Analysis of Changes in Interest Income
(Taxable equivalent basis)
In thousands

|                    |                                  |                         |                |       |                |    |               |        |        |   |       |        |        |   |       |        |   |    |       |         |   |   |       |        |  
|------------------- | -------------------------------- | ----------------------- | -------------- | ----- | -------------- | -- | ------------- | ------ | ------ | - | ----- | ------ | ------ | - | ----- | ------ | - | -- | ----- | ------- | - | - | ----- | ------ | -
|                    |                                  | Year Ended December 31,
|                    |                                  |                        
|                    |                                  |                         | 2003 over 2002 |       | 2002 over 2001
|                    |                                  |                         |                |       |               
|                    |                                  |                         | Change due to  |       |                |    | Change due to |        |       
|                    |                                  |                         |                |       | Total          |    |               |        | Total 
|                    |                                  |                         | Volume         |       | Rate           |    | Change        |        | Volume |   | Rate  |        | Change
|                    |                                  |                         |                |       |                |    |               |        |        |   |       |        |       
|Interest earned on: |                                  |                         |                |       |                |    |               |        |        |   |       |        |        |   |       |        |   |    |       |         |   |   |       |       
|                    | Short-term investments           |                         | ($             | 26    | )              |    | ($            | 41     | )      |   | ($    | 67     | )      |   | ($    | 150    | ) |    | ($    | 124     | ) |   | ($    | 274    | )
|                    | Mortgages held for sale          |                         |                | 462   |                |    |               | (194   | )      |   |       | 268    |        |   |       | 34     |   |    |       | 2       |   |   |       | 36     |  
|                    | Securities                       |                         |                | (758  | )              |    |               | (3,136 | )      |   |       | (3,894 | )      |   |       | 1,285  |   |    |       | (5,893  | ) |   |       | (4,608 | )
|                    | Loans                            |                         |                | 5,447 |                |    |               | (5,454 | )      |   |       | (7     | )      |   |       | 4,757  |   |    |       | (5,825  | ) |   |       | (1,068 | )
|                    |                                  |                         |                |       |                |    |               |        |        |   |       |        |        |   |       |        |   |    |       |         |   |   |       |       
|                    | Total interest income            |                         |                | 5,125 |                |    |               | (8,825 | )      |   |       | (3,700 | )      |   |       | 5,926  |   |    |       | (11,840 | ) |   |       | (5,914 | )
|                    |                                  |                         |                |       |                |    |               |        |        |   |       |        |        |   |       |        |   |    |       |         |   |   |       |       
|Interest paid on:   |                                  |                         |                |       |                |    |               |        |        |   |       |        |        |   |       |        |   |    |       |         |   |   |       |       
|                    | Interest bearing demand deposits |                         |                | 19    |                |    |               | (1,420 | )      |   |       | (1,401 | )      |   |       | 1,914  |   |    |       | (2,835  | ) |   |       | (921   | )
|                    | Savings deposits                 |                         |                | 186   |                |    |               | (463   | )      |   |       | (277   | )      |   |       | 277    |   |    |       | (350    | ) |   |       | (73    | )
|                    | Time deposits                    |                         |                | (146  | )              |    |               | (2,415 | )      |   |       | (2,561 | )      |   |       | (2,044 | ) |    |       | (5,817  | ) |   |       | (7,861 | )
|                    | Short-term borrowings            |                         |                | 541   |                |    |               | (304   | )      |   |       | 237    |        |   |       | 535    |   |    |       | (1,043  | ) |   |       | (508   | )
|                    | Long-term debt                   |                         |                | (667  | )              |    |               | (789   | )      |   |       | (1,456 | )      |   |       | 575    |   |    |       | (295    | ) |   |       | 280    |  
|                    |                                  |                         |                |       |                |    |               |        |        |   |       |        |        |   |       |        |   |    |       |         |   |   |       |       
|                    | Total interest expense           |                         |                | (67   | )              |    |               | (5,391 | )      |   |       | (5,458 | )      |   |       | 1,257  |   |    |       | (10,340 | ) |   |       | (9,083 | )
|                    |                                  |                         |                |       |                |    |               |        |        |   |       |        |        |   |       |        |   |    |       |         |   |   |       |       
|Net interest income |                                  | $                       | 5,192          |       |                | ($ | 3,434         | )      |        | $ | 1,758 |        |        | $ | 4,669 |        |   | ($ | 1,500 | )       |   | $ | 3,169 |       
|                    |                                  |                         |                |       |                |    |               |        |        |   |       |        |        |   |       |        |   |    |       |         |   |   |       |       

2003 over 2002:

The average balance of interest-earning assets grew $61.3 million in 2003 over
2002 while the average yield declined 80 percentage points. The volume
increase generated $5.1 million of additional interest income which was more
than offset by the rate decline which reduced interest income by $8.8 million.
Total interest income declined by $3.7 million.

15



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PennRock Financial Services Corp.

The average balance of interest bearing liabilities increased $35.6 million in
2003 over 2002 while the average cost of funds declined by 80 percentage
points. The change in interest expense relative to the increase in interest
bearing liabilities actually declined by $67,000 due to the change in the
various components of the liabilities. Average balance increases of $51.2
million were realized in demand and savings deposits and in short-term
borrowings with a combined weighted-average interest rate of 1.03% which caused
interest expense to increase $746,000. Declines were realized in time deposits
and long-term debt of $25.7 million with a combined weighted-average interest
rate of 3.25% which caused interest expense to decrease $813,000. So even
though the average balance of interest bearing liabilities increased in 2003,
because the declining instruments had a substantially higher weighted average
rate, interest expense relative to volume increases decreased. The 80
percentage point decline in weighted average rates caused interest expense to
decrease by $5.4 million.

Since overall interest expense declined by more than interest income, net
interest income increased by $1.8 million in 2003.

2002 over 2001:

The average balance of interest-earning assets grew $71.5 million in 2002 over
2001 while the average balance of interest-bearing liabilities grew $62.6
million. The increase in average interest-earning assets generated $5.9
million of additional interest income while the increase in average
interest-bearing liabilities generated only $1.2 million of additional interest
expense, resulting in an increase of $4.7 million of net interest income due to
changes in volumes.

Another factor that contributed to the change in our net interest income was
the change in interest rates. The average rate earned on earning assets
declined 129 percentage points which caused interest income to decline $11.8
million in 2002. The average rate paid on interest bearing liabilities
declined 153 percentage points which caused interest expense to decline $10.3
million. Since interest income declined by more than interest expense, net
interest income declined by $1.5 million due to changes in interest rates.

Another method of analyzing the change in net interest income is to examine the
changes between interest rate spread and the net interest margin on earning
assets. The interest rate spread as shown in Table 4 is the difference between
the average rate earned on earning assets and the average rate paid on interest
bearing liabilities. The net interest margin takes into account the benefit
derived from assets funded by interest free sources such as non-interest
bearing demand deposits and capital.

Table 4  -  Interest Rate Spread
and Net Interest Margin on Earning Assets
(Taxable equivalent basis)

In thousands

|                                                  |  |          |         |      |  |          |      |      |  |          |         |      |  |  |      |   |  |   |         |  |  |  |      |  
|------------------------------------------------- |  | -------- | ------- | ---- |  | -------- | ---- | ---- |  | -------- | ------- | ---- |  |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                                  |  |          |         |      |  |          |      |      |  |          |         |      |  |  |      |   |  |   |         |  |  |  |      |  
|                                                  |  | 2003     |         | 2002 |  | 2001    
|                                                  |  |          |         |      |  |         
|                                                  |  | Average  |         |      |  | Average  |      |      |  | Average  |         |     
|                                                  |  | Balances |         | Rate |  | Balances |      | Rate |  | Balances |         | Rate
|                                                  |  |          |         |      |  |          |      |      |  |          |         |     
|Earning assets                                    |  | $        | 959,954 |      |  |          | 5.77 | %    |  | $        | 898,669 |      |  |  | 6.57 | % |  | $ | 827,178 |  |  |  | 7.86 | %
|                                                  |  |          |         |      |  |          |      |      |  |          |         |      |  |  |      |   |  |   |         |  |  |  |      |  
|Interest bearing
liabilities                      |  | $        | 814,793 |      |  |          | 2.19 | %    |  | $        | 779,216 |      |  |  | 2.99 | % |  | $ | 716,615 |  |  |  | 4.52 | %
|                                                  |  |          |         |      |  |          |      |      |  |          |         |      |  |  |      |   |  |   |         |  |  |  |      |  
|Interest rate spread                              |  |          |         |      |  |          | 3.58 | %    |  |          |         |      |  |  | 3.58 | % |  |   |         |  |  |  | 3.34 | %
|Interest free sources used
to fund earning assets |  |          | 145,161 |      |  |          | 0.33 | %    |  |          | 119,453 |      |  |  | 0.40 | % |  |   | 110,563 |  |  |  | 0.61 | %
|                                                  |  |          |         |      |  |          |      |      |  |          |         |      |  |  |      |   |  |   |         |  |  |  |      |  
|Total sources of funds                            |  | $        | 959,954 |      |  |          |      |      |  | $        | 898,669 |      |  |  |      |   |  | $ | 827,178 |  |  |  |      |  
|                                                  |  |          |         |      |  |          |      |      |  |          |         |      |  |  |      |   |  |   |         |  |  |  |      |  
|Net interest margin                               |  |          |         |      |  |          | 3.91 | %    |  |          |         |      |  |  | 3.98 | % |  |   |         |  |  |  | 3.95 | %
|                                                  |  |          |         |      |  |          |      |      |  |          |         |      |  |  |      |   |  |   |         |  |  |  |      |  

The interest rate spread was unchanged at 3.58% in 2003 while the net interest
margin decreased 7 percentage points. The yield on earning assets declined 80
percentage points. The yield on securities available for sale declined 103
percentage points while loan yields declined 84 percentage points. The rate
paid on interest bearing deposits declined 74 percentage points not only due to
lower deposit rates but also because of a shift of balances from higher cost
time deposits to lower cost interest bearing demand and savings deposits. The
average cost of borrowed funds declined 117 percentage points in 2003. The
average rate paid on total interest bearing liabilities declined 80 percentage
points.

16



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PennRock Financial Services Corp.

The interest rate spread increased 24 percentage points while the net interest
margin increased 3 percentage points in 2002. The yield on earning assets
declined 129 percentage points. The yield on securities available for sale
declined 186 basis points while loan yields declined 102 percentage points.
The rate paid on interest bearing deposits declined 174 basis points not only
due to lower deposit rates but also because of a shift of balances from higher
cost time deposits to lower cost interest bearing demand and savings deposits.
The average cost of borrowed funds declined 90 percentage points in 2002. The
average rate paid on total interest bearing liabilities declined 153 percentage
points.

Although PennRock has realized net interest income increases over the past
three years, this has been the result of interest expense declining more than
interest income. Funding costs have, however, dropped as low as they are
likely to go unless the Federal Reserve lowers interest rates even further.
Fortunately, yields on earning assets are also stabilizing. The volume of loan
refinancing has declined substantially from levels experienced in 2003 while
yields on securities are expected to improve due to slower prepayment speeds on
mortgage-backed securities.

Provision for Loan Losses

The amount of provision for loan losses that was charged against earnings was
$1.9 million in 2003 compared with $1.8 million in 2002 and $1.5 million in
2001. We review the adequacy of the allowance in light of past loan loss
experience, current economic conditions, size and characteristics of the loan
portfolio, volume of non-performing and delinquent loans and other relevant
information. Net charge-offs were $349,000 in 2003, $1.9 million in 2002 and
$259,000 in 2001.

Non-Interest Income

PennRock generates non-interest income in connection with fees charged on
deposits and other products, asset management and trust services, retirement
plan administration fees, sales of securities through the implementation of
managements asset/liability policy, increases in the cash surrender value of
bank-owned life insurance, sale and servicing of mortgage loans, and merchant,
ATM and debit card fees.

Table 5  Non-Interest Income

Table 5 indicates changes in the major categories of non-interest income for
the three years ended December 31, 2003, 2002 and 2001.
In thousands

|                                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |      |        |  |  |   |        |   |  |  |       |    |  |   |        | 
|------------------------------------------------------------- |  | --------- | ------ | --------- |  | ---------- | ----- | ---- |  | ------ | ----- | ---------- |  | ---- | ------ |  |  | - | ------ | - |  |  | ----- | -- |  | - | ------ | 
|                                                              |  | 2003/2002 |        | 2002/2001
|                                                              |  |           |        |          
|                                                              |  |           |        |           |  | Increase   |       |      |  |        |       | Increase   |  |      |        | 
|                                                              |  |           |        |           |  | (Decrease) |       |      |  |        |       | (Decrease) |  |      |        | 
|                                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |      |        | 
|                                                              |  | 2003      |        | Amount    |  | %          |       | 2002 |  | Amount |       | %          |  | 2001
|                                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |     
|Service charges on deposit
accounts                           |  | $         | 3,320  |           |  | $          | 469   |      |  |        | 16.5  | %          |  | $    | 2,851  |  |  | $ | 307    |   |  |  | 12.1  | %  |  | $ | 2,544  | 
|Other service charges and fees                                |  |           | 354    |           |  |            | 46    |      |  |        | 14.9  | %          |  |      | 308    |  |  |   | 22     |   |  |  | 7.7   | %  |  |   | 286    | 
|Fiduciary activities                                          |  |           | 1,538  |           |  |            | 16    |      |  |        | 1.1   | %          |  |      | 1,522  |  |  |   | 30     |   |  |  | 2.0   | %  |  |   | 1,492  | 
|Investment management and
benefit plan administration         |  |           | 3,466  |           |  |            | 894   |      |  |        | 34.8  | %          |  |      | 2,572  |  |  |   | 582    |   |  |  | 29.2  | %  |  |   | 1,990  | 
|Net realized gains on sales of
available for sale securities  |  |           | 349    |           |  |            | (20   | )    |  |        | (5.4  | %)         |  |      | 369    |  |  |   | (1,168 | ) |  |  | (76.0 | %) |  |   | 1,537  | 
|Mortgage banking                                              |  |           | 1,219  |           |  |            | 706   |      |  |        | 137.6 | %          |  |      | 513    |  |  |   | 13     |   |  |  | 2.6   | %  |  |   | 500    | 
|Increase in cash surrender value
of bank owned life insurance |  |           | 1,170  |           |  |            | (73   | )    |  |        | (5.9  | %)         |  |      | 1,243  |  |  |   | 228    |   |  |  | 22.5  | %  |  |   | 1,015  | 
|Other                                                         |  |           | 2,334  |           |  |            | 568   |      |  |        | 32.2  | %          |  |      | 1,766  |  |  |   | 100    |   |  |  | 6.0   | %  |  |   | 1,666  | 
|                                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |      |        |  |  |   |        |   |  |  |       |    |  |   |        | 
|Total                                                         |  | $         | 13,750 |           |  | $          | 2,606 |      |  |        | 23.4  | %          |  | $    | 11,144 |  |  | $ | 114    |   |  |  | 1.0   | %  |  | $ | 11,030 | 
|                                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |      |        |  |  |   |        |   |  |  |       |    |  |   |        | 

Total non-interest income increased $2.6 million or 23.4% in 2003 and by
$114,000 or 1.0% in 2002. Excluding net security gains, non-interest income
increased $2.6 million or 24.4% in 2003 compared with a $1.3 million or 13.5%
increase in 2002. The increases in investment management and benefit plan
administration fees reflect the acquisitions of National in 2001 and PCS in
2002. The increase in mortgage banking income is due to a large increase in
the volume of residential mortgage refinancing experienced in 2003 as a result
of historically low mortgage rates.

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PennRock Financial Services Corp.

Net security gains of $349,000 million in 2003 consist of a $371,000 gain on
debt securities and a $22,000 loss on equity securities. Net security gains
totaled $369,000 in 2002 and $1.5 million in 2001. Securities gains and losses
in all three years were attributable to management of PennRocks equity
portfolio and to the sale of other securities for the purpose of adding
liquidity, to control interest rate risk and to achieve other objectives
resulting from the active management of PennRocks balance sheet.

In May 1999, the Bank purchased $15 million of Bank Owned Life Insurance
(BOLI). In August 2001, the Bank purchased an additional $8 million of BOLI.
The Banks total investment in BOLI as of December 31, 2003 was $27.6 million
and $26.5 million as of December 31, 2002. The income from BOLI represents the
increase in the cash surrender value of life insurance contracts and is
intended to partially offset the costs of the Banks employee benefit plans
including group life, disability and health insurance. Income from BOLI
totaled $1.2 million in 2003 and 2002 and $1.0 million in 2001.

Non-Interest Expense

Table 6 provides a comparison for each category of non-interest expense for the
years ending December 31, 2003, 2002 and 2001.

Table 6 -  Non-Interest Expense
In thousands

|                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |      |        |  |  |   |       |   |  |  |      |    |  |   |        | 
|--------------------------------------------- |  | --------- | ------ | --------- |  | ---------- | ----- | ---- |  | ------ | ----- | ---------- |  | ---- | ------ |  |  | - | ----- | - |  |  | ---- | -- |  | - | ------ | 
|                                              |  | 2003/2002 |        | 2002/2001
|                                              |  |           |        |          
|                                              |  |           |        |           |  | Increase   |       |      |  |        |       | Increase   |  |      |        | 
|                                              |  |           |        |           |  | (Decrease) |       |      |  |        |       | (Decrease) |  |      |        | 
|                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |      |        | 
|                                              |  | 2003      |        | Amount    |  | %          |       | 2002 |  | Amount |       | %          |  | 2001
|                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |     
|Salaries and employee benefits                |  | $         | 18,096 |           |  | $          | 1,949 |      |  |        | 12.1  | %          |  | $    | 16,147 |  |  | $ | 929   |   |  |  | 6.1  | %  |  | $ | 15,218 | 
|Occupancy, net                                |  |           | 2,044  |           |  |            | 240   |      |  |        | 13.3  | %          |  |      | 1,804  |  |  |   | 234   |   |  |  | 14.9 | %  |  |   | 1,570  | 
|Equipment, depreciation and
service           |  |           | 1,333  |           |  |            | (56   | )    |  |        | (4.0  | %)         |  |      | 1,389  |  |  |   | 30    |   |  |  | 2.2  | %  |  |   | 1,359  | 
|Advertising and marketing                     |  |           | 982    |           |  |            | (16   | )    |  |        | (1.6  | %)         |  |      | 998    |  |  |   | 43    |   |  |  | 4.5  | %  |  |   | 955    | 
|Computer program amortization
and maintenance |  |           | 930    |           |  |            | (134  | )    |  |        | (12.6 | %)         |  |      | 1,064  |  |  |   | (12   | ) |  |  | (1.1 | %) |  |   | 1,076  | 
|Other                                         |  |           | 6,293  |           |  |            | 248   |      |  |        | 4.1   | %          |  |      | 6,045  |  |  |   | 941   |   |  |  | 18.4 | %  |  |   | 5,104  | 
|                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |      |        |  |  |   |       |   |  |  |      |    |  |   |        | 
|Total                                         |  | $         | 29,678 |           |  | $          | 2,231 |      |  |        | 8.1   | %          |  | $    | 27,447 |  |  | $ | 2,165 |   |  |  | 8.6  | %  |  | $ | 25,282 | 
|                                              |  |           |        |           |  |            |       |      |  |        |       |            |  |      |        |  |  |   |       |   |  |  |      |    |  |   |        | 

Total non-interest expense for 2003 increased $2.2 million or 8.1%. Salaries
and employee benefits increased $1.9 million or 12.1% in 2003. The number of
full-time equivalent employees increased by 14, from 335 in 2002 to 349 by
year-end 2003. The increase in salaries and benefits is also due in part to
larger than normal incentive bonuses paid to lenders and others on the sales
team who generated a net increase in loans of $109.0 million or 18.1%. All
other non-interest expenses increased a net $282,000 or 2.50% in 2003.
Included in this category are legal, consulting and other professional fees,
supplies, liability insurance, fees for outsourced services and shares tax
expense.

Total non-interest expense for 2002 increased $2.2 million or 8.6%. Salaries
and employee benefits increased $929,000 or 6.1% in 2002. The number of
full-time equivalent employees increased by 14, from 321 in 2001 to 335 by
year-end 2002. Of this increase, 12 full-time equivalent employees came with
the acquisition of PCS on October 31, 2002. Other non-interest expenses
increased $941,000 or 18.4% in 2002.

The ratio of average assets (in millions) per employee was $2.80 in 2001, $2.94
in 2002 and $3.00 in 2003. The average salary and benefit expense per employee
was $47,000 in 2001, $48,000 in 2002 and $52,000 in 2003. The efficiency ratio
was 59.28% in 2001, 56.91% in 2002 and 56.51% in 2003.

18



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PennRock Financial Services Corp.

Provision for Income Taxes

Income tax expense totaled $3.7 million in 2003, $2.6 million in 2002 and $2.0
million in 2001. The statutory federal tax rate was 35% in 2003 and 2002 and
34% in 2001. PennRocks effective tax rate was 21.0% in 2003 compared to 16.3%
in 2002 and 14.5% in 2001. The primary reason for changes in the effective tax
rate is due to the change in the amount of tax-exempt income earned during the
year and to the amount of tax credits available from low-income housing and
rehabilitation projects in which the Bank becomes involved from time-to-time.
For a more comprehensive analysis of income tax expense, refer to Note 12:
Income Taxes in the Notes to Consolidated Financial Statements.

PennRock accounts for income taxes under the liability method as specified by
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
Accounting for Income Taxes. Under the liability method, a deferred tax
asset or liability is determined based on the enacted tax rates which will be
in effect when the differences between the financial statement carrying amounts
and tax basis of existing assets and liabilities are expected to be reported in
PennRocks income tax returns. The deferred tax provision for the year is
equal to the net change in the deferred tax asset and liability accounts from
the beginning to the end of the year. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the enactment
date. The principal types of accounts that result in differences between
assets and liabilities for financial statement and tax return purposes are the
allowance for loan losses, accumulated depreciation of fixed assets and
discounts on investment securities.

Financial Condition

Sources and Uses of Funds

Table 7 examines PennRocks financial condition in terms of its sources and
uses of funds. Average funding uses increased $61.3 million or 6.8% in 2003
compared with an increase of $71.5 million or 8.6% in 2002.

Table 7 -  Sources and Uses of Funds
In thousands

|                 |                                  |      |         |         |                     |      |         |         |                     |  |         |       |    |  |         |         |  |  |    |         |   |  |  |       |    |  |   |         | 
|---------------- | -------------------------------- | ---- | ------- | ------- | ------------------- | ---- | ------- | ------- | ------------------- |  | ------- | ----- | -- |  | ------- | ------- |  |  | -- | ------- | - |  |  | ----- | -- |  | - | ------- | 
|                 |                                  | 2003 |         | 2002    |                     | 2001
|                 |                                  |      |         |         |                     |     
|                 |                                  |      |         |         | Increase (Decrease) |      |         |         | Increase (Decrease) |  |        
|                 |                                  |      | Average |         |                     |      | Average |         |                     |  | Average
|                 |                                  |      | Balance |         | Amount              |      | %       |         | Balance             |  | Amount  |       | %  |  | Balance
|                 |                                  |      |         |         |                     |      |         |         |                     |  |         |       |    |  |        
|Funding uses:    |                                  |      |         |         |                     |      |         |         |                     |  |         |       |    |  |         |         |  |  |    |         |   |  |  |       |    |  |   |        
|                 | Short-term
investments           |      | $       | 3,982   |                     |      | ($      | 1,393   | )                   |  |         | (25.9 | %) |  | $       | 5,375   |  |  | ($ | 3,603   | ) |  |  | (40.1 | %) |  | $ | 8,978   | 
|                 | Mortgages held for
sale          |      |         | 7,783   |                     |      |         | 5,063   |                     |  |         | 186.1 | %  |  |         | 2,720   |  |  |    | 373     |   |  |  | 15.9  | %  |  |   | 2,347   | 
|                 | Securities available
for sale    |      |         | 302,624 |                     |      |         | (15,161 | )                   |  |         | (4.8  | %) |  |         | 317,785 |  |  |    | 18,757  |   |  |  | 6.3   | %  |  |   | 299,028 | 
|                 | Loans                            |      |         | 645,565 |                     |      |         | 72,776  |                     |  |         | 12.7  | %  |  |         | 572,789 |  |  |    | 55,964  |   |  |  | 10.8  | %  |  |   | 516,825 | 
|                 |                                  |      |         |         |                     |      |         |         |                     |  |         |       |    |  |         |         |  |  |    |         |   |  |  |       |    |  |   |        
|                 | Total uses                       |      | $       | 959,954 |                     |      | $       | 61,285  |                     |  |         | 6.8   | %  |  | $       | 898,669 |  |  | $  | 71,491  |   |  |  | 8.6   | %  |  | $ | 827,178 | 
|                 |                                  |      |         |         |                     |      |         |         |                     |  |         |       |    |  |         |         |  |  |    |         |   |  |  |       |    |  |   |        
|Funding sources: |                                  |      |         |         |                     |      |         |         |                     |  |         |       |    |  |         |         |  |  |    |         |   |  |  |       |    |  |   |        
|                 | Interest-bearing
demand deposits |      | $       | 212,980 |                     |      | $       | 1,111   |                     |  |         | 0.5   | %  |  | $       | 211,869 |  |  | $  | 62,428  |   |  |  | 41.8  | %  |  | $ | 149,441 | 
|                 | Savings deposits                 |      |         | 86,130  |                     |      |         | 13,588  |                     |  |         | 18.7  | %  |  |         | 72,542  |  |  |    | 14,994  |   |  |  | 26.1  | %  |  |   | 57,548  | 
|                 | Time deposits                    |      |         | 313,027 |                     |      |         | (4,405  | )                   |  |         | (1.4  | %) |  |         | 317,432 |  |  |    | (39,758 | ) |  |  | (11.1 | %) |  |   | 357,190 | 
|                 | Short-term
borrowings            |      |         | 90,245  |                     |      |         | 36,535  |                     |  |         | 68.0  | %  |  |         | 53,710  |  |  |    | 15,616  |   |  |  | 41.0  | %  |  |   | 38,094  | 
|                 | Long-term debt                   |      |         | 112,411 |                     |      |         | (11,252 | )                   |  |         | (9.1  | %) |  |         | 123,663 |  |  |    | 9,321   |   |  |  | 8.2   | %  |  |   | 114,342 | 
|                 | Non-interest bearing
funds, net  |      |         | 145,161 |                     |      |         | 25,708  |                     |  |         | 21.5  | %  |  |         | 119,453 |  |  |    | 8,890   |   |  |  | 8.0   | %  |  |   | 110,563 | 
|                 |                                  |      |         |         |                     |      |         |         |                     |  |         |       |    |  |         |         |  |  |    |         |   |  |  |       |    |  |   |        
|                 | Total sources                    |      | $       | 959,954 |                     |      | $       | 61,285  |                     |  |         | 6.8   | %  |  | $       | 898,669 |  |  | $  | 71,491  |   |  |  | 8.6   | %  |  | $ | 827,178 | 
|                 |                                  |      |         |         |                     |      |         |         |                     |  |         |       |    |  |         |         |  |  |    |         |   |  |  |       |    |  |   |        

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PennRock Financial Services Corp.

Securities Available for Sale

Table 8 indicates the composition and maturity of the securities available for
sale (AFS) portfolio as of December 31, 2003. Included in the portfolio are
callable agencies, state and municipal securities, mortgage-backed securities
(including adjustable rate mortgage-backed securities) and CMOs that may be
called, prepaid or reprice before final maturity. For mortgage-backed
securities, maturity is based on average lives rather than contractual
maturity. The weighted average duration of the portfolio increased from 2.1
years at the end of 2002 to 2.8 years at the end of 2003. Duration is the
weighted-average present value of future cash flows from a financial
instrument. Investment managers use it as an indication of the potential price
volatility of a financial instrument for various changes in market interest
rates. The higher the duration, the more the market value of a portfolio would
be expected to fluctuate as interest rates change. The increase in the
duration of the portfolio is, in part, attributable to an expected decline in
the rate of prepayment of mortgage-backed securities and CMOs in the portfolio.
As prepayment speeds decrease, the average life of mortgage related securities
increases.

Table 8 -  Analysis of Securities Available for Sale
In thousands

|                                    |  |            |        |       |  |       |        |         |  |          |       |       |  |       |        |   |  |            |         |   |  |   |         |   |  |         |      |  
|----------------------------------- |  | ---------- | ------ | ----- |  | ----- | ------ | ------- |  | -------- | ----- | ----- |  | ----- | ------ | - |  | ---------- | ------- | - |  | - | ------- | - |  | ------- | ---- | -
|                                    |  |            |        |       |  |       |        |         |  |          |       |       |  |       |        |   |  |            |         |   |  |   |         |   |  | Taxable
|                                    |  | Within     |        | 1-5   |  | 6-10  |        | Over 10 |  |          |       |       |  |       |        |   |  | Equivalent
|                                    |  | One Year   |        | Years |  | Years |        | Years   |  | Equities |       | Total |  | Yield
|                                    |  |            |        |       |  |       |        |         |  |          |       |       |  |      
|U.S. Treasury and agency            |  | $          | 2,000  |       |  | $     | 1,998  |         |  | $        | 3,914 |       |  | $     | 2,997  |   |  | $          |         |   |  | $ | 10,909  |   |  |         | 4.83 | %
|States and political subdivisions   |  |            |        |       |  |       |        |         |  |          |       |       |  |       | 13,289 |   |  |            |         |   |  |   | 13,289  |   |  |         | 7.29 | %
|Mortgage backed securities          |  |            | 24,168 |       |  |       | 28,111 |         |  |          |       |       |  |       |        |   |  |            |         |   |  |   | 52,279  |   |  |         | 4.43 | %
|Collateralized mortgage
obligations |  |            | 15,099 |       |  |       | 25,073 |         |  |          | 5,137 |       |  |       |        |   |  |            |         |   |  |   | 45,309  |   |  |         | 4.11 | %
|Corporate obligations               |  |            |        |       |  |       |        |         |  |          |       |       |  |       | 80,638 |   |  |            |         |   |  |   | 80,638  |   |  |         | 2.60 | %
|Equity securities                   |  |            |        |       |  |       |        |         |  |          |       |       |  |       |        |   |  |            | 108,268 |   |  |   | 108,268 |   |  |         | 5.75 | %
|                                    |  |            |        |       |  |       |        |         |  |          |       |       |  |       |        |   |  |            |         |   |  |   |         |   |  |         |      |  
|Total (amortized cost)              |  | $          | 41,267 |       |  | $     | 55,182 |         |  | $        | 9,051 |       |  | $     | 96,924 |   |  | $          | 108,268 |   |  | $ | 310,692 |   |  |         | 4.51 | %
|                                    |  |            |        |       |  |       |        |         |  |          |       |       |  |       |        |   |  |            |         |   |  |   |         |   |  |         |      |  
|Total fair value                    |  | $          | 42,113 |       |  | $     | 56,312 |         |  | $        | 8,957 |       |  | $     | 93,213 |   |  | $          | 109,594 |   |  | $ | 309,189 |   |  |         |      |  
|Taxable equivalent yield            |  |            | 4.33   | %     |  |       | 4.25   | %       |  |          | 4.67  | %     |  |       | 3.26   | % |  |            | 5.75    | % |  |   | 4.51    | % |  |         |      |  
|Percent of portfolio                |  |            | 13.28  | %     |  |       | 17.76  | %       |  |          | 2.91  | %     |  |       | 31.20  | % |  |            | 34.85   | % |  |   |         |   |  |         |      |  
|Average maturity of debt
securities |  | 8.88 years |        |       |  |       |        |         |  |          |       |       |  |       |        |   |  |            |         |   |  |   |         |   |  |        

Measured on an amortized cost basis, securities increased $761,000 or 0.2% in
2003 and decreased $1.2 million or 0.4% during 2002. As of December 31, 2003,
securities available for sale at fair value totaled $309.2 million compared
with $304.8 million at the end of 2002. During 2003, PennRock sold $93.4
million and purchased $206.4 million in available for sale securities. During
2002, PennRock sold $119.8 million in securities and purchased $231.1 million.
In addition, principal payments of $109.7 million in 2003 and $112.0 million in
2002 were received from securities that matured or were called and from
principal repayments of mortgage-backed securities.

As of December 31, 2003, the AFS portfolio had a net unrealized loss of $1.5
million consisting of gross unrealized gains of $4.0 million and gross
unrealized losses of $5.5 million. Substantially all of the gross losses were
attributable to floating-rate corporate notes held in the Banks AFS portfolio.
The valuation of the corporate notes has been depressed by the decline in
market rates over the past two years but by year-end 2003 had recovered half
their depreciation from year-end 2002 and have since further recovered an
additional $2.0 million since year-end 2003. As of December 31, 2002, the AFS
portfolio had a net unrealized loss of $5.1 million consisting of gross
unrealized gains of $4.4 million and gross unrealized losses of $9.5 million.
All declines in market value have been determined to be temporary in nature.

Measured at fair value, as of December 31, 2003, PennRock had $98.5 million
invested in mortgage-backed securities and CMOs compared with $141.7 million as
of December 31, 2002. A mortgage-backed security depends on an underlying pool
of mortgage loans to provide a cash flow pass-through of principal and
interest. A CMO is a mortgage-backed security that is comprised of classes of
bonds created by prioritizing the cash flows from the underlying mortgage pool
in order to meet different objectives of investors. PennRock had $53.0 million
in mortgage-backed securities and $45.5 million in CMO securities at the end of
2003 all of which were fixed rate. None of the CMOs in the portfolio was
considered high risk as defined by banking regulations.

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PennRock Financial Services Corp.

The proportion of assets invested in securities on PennRocks balance sheet has
declined significantly over the past several years. In 1999, securities
comprised 37% of PennRocks assets. By the end of 2003, that percentage had
dropped to 28%. Securities at fair-value totaled $309.5 million as of December
31, 1999 and totaled $309.2 million at the end of 2003. Had management elected
to maintain the same proportion of securities relative to total assets from
year-end 1999, the securities portfolio would be approximately $100 million
larger by the end of 2003 than it currently is. Instead, we have elected to
maintain the same level of securities measured in terms of total value from
year-to-year to provide an adequate source of secondary liquidity and cash-flow
and for pledging purposes, and to concentrate our efforts in growing the loan
portfolio in proportion to total assets. See the discussion of the loan
portfolio below.

During 2003 and 2002, there were no investments in securities of any single,
non-federal issues in excess of 10% of stockholders equity.

Loans

Table 9 presents loans outstanding, by type of loan, for the five years ended
December 31, 2003.

Table 9  Loans Outstanding, Net of Unearned Income
In thousands

|                                        |                                    |              |         |         |      |   |         |         |      |   |         |         |  |   |         |         |  |   |         |         | 
|--------------------------------------- | ---------------------------------- | ------------ | ------- | ------- | ---- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                        |                                    | December 31,
|                                        |                                    |             
|                                        |                                    |              | 2003    |         | 2002 |   | 2001    |         | 2000 |   | 1999   
|                                        |                                    |              |         |         |      |   |         |         |      |   |        
|Commercial, financial and
agricultural: |                                    |              |         |         |      |   |         |         |      |   |         |         |  |   |         |         |  |   |         |        
|                                        | Commercial, secured by real estate |              | $       | 371,105 |      |   | $       | 327,592 |      |   | $       | 276,667 |  |   | $       | 223,722 |  |   | $       | 200,633 | 
|                                        | Agricultural                       |              |         | 7,387   |      |   |         | 6,838   |      |   |         | 6,368   |  |   |         | 6,589   |  |   |         | 7,408   | 
|                                        | Other                              |              |         | 91,934  |      |   |         | 83,801  |      |   |         | 77,849  |  |   |         | 80,497  |  |   |         | 62,964  | 
|Real estate  construction              |                                    |              | 45,319  |         |      |   | 32,140  |         |      |   | 46,558  |         |  |   | 22,745  |         |  |   | 26,669  |        
|Real estate  mortgage                  |                                    |              | 187,033 |         |      |   | 141,983 |         |      |   | 137,929 |         |  |   | 151,709 |         |  |   | 146,500 |        
|Consumer loans                          |                                    |              | 9,124   |         |      |   | 10,486  |         |      |   | 12,998  |         |  |   | 15,878  |         |  |   | 17,005  |        
|                                        |                                    |              |         |         |      |   |         |         |      |   |         |         |  |   |         |         |  |   |         |        
|Total loans                             |                                    | $            | 711,902 |         |      | $ | 602,840 |         |      | $ | 558,369 |         |  | $ | 501,140 |         |  | $ | 461,179 |        
|                                        |                                    |              |         |         |      |   |         |         |      |   |         |         |  |   |         |         |  |   |         |        

As indicated in the discussion on securities above, management has made a
concerted effort through its sales staff, especially its commercial banking
officers, to increase the proportion of assets invested in loans outstanding
while maintaining asset quality and our internal underwriting standards. Loans
as a percent of total assets increased from 54.7% at the end of 1999 to 64.2%
by the end of 2003. This decision was made for several reasons. First, in
pure economic terms, loan yields have exceeded security yields by 259
percentage points on average over the past two years. Second, although loans
carry more credit risk and higher operational costs than securities,
investments provide no opportunity to develop any additional relationships or
to cross-sell any additional products or services to our customers. The
third reason is to better fulfill our commitment to serve the credit needs of
customers in our market area.

Loans increased in 2003 by $109.1 million or 18.1%, compared with a $44.5
million or 8.0% increase during 2002. The fastest growing category in the loan
portfolio for the past several years has been commercial real estate loans
which have nearly doubled in the past five years. In 2003, commercial real
estate loans grew $43.5 million or 13.3% and in 2002 they grew $50.9 million or
18.4%. Consumer loans, on the other hand, have declined in each of the past
five years as consumers have shown a preference for home equity loans over
traditional installment loans. Home equity loans are included under the
category real estate  mortgage loans. PennRock originated $145.9 million and
sold $151.3 million in conforming residential mortgage loans in 2003 and
originated $71.0 million and sold $66.4 million in 2002. We retained the
servicing on all loans sold. The Banks mortgage servicing portfolio grew from
$201.7 million at the end of 2002 to $222.9 million at the end of 2003.

As of December 31, 2002, PennRock did not have any loan concentrations
exceeding 10% of total loans to any particular economic group or industry. The
loan portfolio is well diversified as to industry and companies within each
industry which helps minimize risk. Loan quality is maintained through
diversification of risk, strict credit control practices and continued
monitoring of the loan portfolio. As of December 31, 2003, PennRock did not
have any loans outstanding to any foreign entity or government.

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PennRock Financial Services Corp.

Table 10  Loan Maturities and
Interest Sensitivity (1)In thousands

|                                       |  |                   |        |             |  |            |        |       |  |   |         |  |  |   |         | 
|-------------------------------------- |  | ----------------- | ------ | ----------- |  | ---------- | ------ | ----- |  | - | ------- |  |  | - | ------- | 
|                                       |  | December 31, 2003
|                                       |  |                  
|                                       |  | One year          |        | One through |  | Over       |        |       |  |  
|                                       |  | or less           |        | Five years  |  | Five years |        | Total
|                                       |  |                   |        |             |  |            |        |      
|Commercial, financial and agricultural |  | $                 | 20,616 |             |  | $          | 90,128 |       |  | $ | 359,682 |  |  | $ | 470,426 | 
|Real estate  construction             |  |                   | 45,319 |             |  |            |        |       |  |   |         |  |  |   | 45,319  | 
|                                       |  |                   |        |             |  |            |        |       |  |   |         |  |  |   |         | 
|Total                                  |  | $                 | 65,935 |             |  | $          | 90,128 |       |  | $ | 359,682 |  |  | $ | 515,745 | 
|                                       |  |                   |        |             |  |            |        |       |  |   |         |  |  |   |         | 
|Loans with predetermined interest rate |  | $                 | 12,497 |             |  | $          | 43,396 |       |  | $ | 27,435  |  |  | $ | 86,328  | 
|Loans with variable interest rate      |  |                   | 53,438 |             |  |            | 43,732 |       |  |   | 332,247 |  |  |   | 429,417 | 
|                                       |  |                   |        |             |  |            |        |       |  |   |         |  |  |   |         | 
|Total                                  |  | $                 | 65,935 |             |  | $          | 90,128 |       |  | $ | 359,682 |  |  | $ | 515,745 | 
|                                       |  |                   |        |             |  |            |        |       |  |   |         |  |  |   |         | 



|(1) |  | Excludes residential mortgages and consumer loans.
|--- |  | --------------------------------------------------

Non-Performing Assets

Table 11 shows PennRocks non-performing loans for the five years ended
December 31, 2003.

Table 11  Non-performing AssetsIn thousands

|                                                                |                                                                  |              |       |        |      |   |       |        |      |   |       |        |   |   |       |        |   |   |       |        |  
|--------------------------------------------------------------- | ---------------------------------------------------------------- | ------------ | ----- | ------ | ---- | - | ----- | ------ | ---- | - | ----- | ------ | - | - | ----- | ------ | - | - | ----- | ------ | -
|                                                                |                                                                  | December 31,
|                                                                |                                                                  |             
|                                                                |                                                                  |              | 2003  |        | 2002 |   | 2001  |        | 2000 |   | 1999 
|                                                                |                                                                  |              |       |        |      |   |       |        |      |   |      
|Non-accrual loans                                               |                                                                  | $            | 951   |        |      | $ | 1,203 |        |      | $ | 692   |        |   | $ | 3,675 |        |   | $ | 1,114 |       
|Loans accruing but 90 days past due as to
principal or interest |                                                                  |              | 617   |        |      |   | 1,276 |        |      |   | 476   |        |   |   | 569   |        |   |   | 853   |       
|                                                                |                                                                  |              |       |        |      |   |       |        |      |   |       |        |   |   |       |        |   |   |       |       
|Total non-performing loans                                      |                                                                  |              | 1,568 |        |      |   | 2,479 |        |      |   | 1,168 |        |   |   | 4,244 |        |   |   | 1,967 |       
|Other real estate owned                                         |                                                                  |              | 66    |        |      |   | 188   |        |      |   | 208   |        |   |   | 188   |        |   |   | 162   |       
|                                                                |                                                                  |              |       |        |      |   |       |        |      |   |       |        |   |   |       |        |   |   |       |       
|Total non-performing assets                                     |                                                                  | $            | 1,634 |        |      | $ | 2,667 |        |      | $ | 1,376 |        |   | $ | 4,432 |        |   | $ | 2,129 |       
|                                                                |                                                                  |              |       |        |      |   |       |        |      |   |       |        |   |   |       |        |   |   |       |       
|Ratios:                                                         |                                                                  |              |       |        |      |   |       |        |      |   |       |        |   |   |       |        |   |   |       |       
|                                                                | Non-performing loans to total loans                              |              |       | 0.22   | %    |   |       | 0.41   | %    |   |       | 0.21   | % |   |       | 0.85   | % |   |       | 0.43   | %
|                                                                | Non-performing assets to total loans
and
other real estate owned |              |       | 0.23   | %    |   |       | 0.44   | %    |   |       | 0.25   | % |   |       | 0.88   | % |   |       | 0.46   | %
|                                                                | Allowance for loan losses to
non-performing loans                |              |       | 551.21 | %    |   |       | 285.40 | %    |   |       | 621.75 | % |   |       | 140.74 | % |   |       | 280.33 | %

A loan is generally classified as non-accrual when principal or interest has
consistently been in default for a period of 90 days or more or when full
payment of principal and interest is not expected because of deterioration in
the financial condition of the borrower. When a loan is placed on non-accrual
status, any unpaid interest is charged against income. If a loan is past due
90 days or more but still accruing, the loan is generally well secured and in
the process of being collected or is expected to be restored to current status
in the near future.

Non-performing loans increased by $1.3 million or 112.2% from 2001 to 2002 and
decreased by $911,000 or 36.7% in 2003. The proportion of non-performing loans
relative to total loans decreased from 0.41% to 0.22% during 2003. The
coverage ratio of the allowance for loan losses to non-performing loans
increased from 285.40% at the end of 2002 to 551.21% at the end of 2003.

As of December 31, 2003, real estate acquired in foreclosure known as other
real estate owned (OREO) totaled $66,000 and was included in other assets on
the Consolidated Balance Sheets. As of December 31, 2002, OREO totaled
$188,000. During 2003, sales of OREO property totaled $148,000 and $479,000 in
2002. Valuation reserves are established for OREO properties whenever
estimated current realizable values fall below the original fair value
recorded.

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PennRock Financial Services Corp.

Allowance for Loan Losses

The allowance for loan losses (Table 12) is established and maintained at a
level that we believe is adequate to absorb estimated losses in the Banks loan
portfolio based upon a periodic evaluation of current information of the risks
inherent in the portfolio and is monitored with continuous internal as well as
semiannual independent loan reviews. There are many elements that we evaluate
to determine the adequacy of the allowance for loan losses.

The Bank has an internal rating system that assigns grades for all loans except
residential mortgage loans, consumer loans and commercial and commercial real
estate loans under $100,000. Loans are initially assigned to one of seven risk
grades. The loan officer assigns the loan rating at the time the loan is made.
These ratings may be changed over time to reflect changes in the financial
condition of the borrowing entity. If warranted, the risk rating may be
lowered to eight (substandard), nine (doubtful) or ten (loss). Loans
rated ten are charged-off. All loans rated seven through nine, which are
considered watch loans, are assigned either a specific allowance allocation
or a general allowance allocation percentage. The specific allowance
allocation is based on an analysis of each loan for which a specific allowance
allocation is assigned. General allowance allocation percentages assigned to
watch loans are based upon a three-year average historical loss experience for
that particular risk rating. General allowance allocation percentages are also
assigned to commercial and commercial mortgage loans not on the watch loan
list, for consumer loans, residential mortgage loans, letters-of-credit and
loan commitments. The general allowance allocation percentage assigned to
categories of non-watch loans are based on the three-year average historical
loss experience for each category of loan, letter of credit or commitment. The
sum of all allowance amounts determined by this methodology is utilized as the
primary indicator of the appropriate level of the allowance for loan losses.

We may increase the allowance for loan losses to an amount higher than that
computed above in response to factors and conditions that may not be fully
reflected in the determination of the allowance allocation percentages. These
factors and conditions may not be adequately captured in the historical loss
component and is an assessment of information delay and its impact on the
timeliness of the risk rating process. These factors and conditions include:



| | i.    |  | general economic and business conditions affecting our key lending
areas;                                             
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------
|
| | ii.   |  | credit quality trends (including trends in non-performing loans
expected to result from existing economic conditions);
|
| | iii.  |  | trends that could affect collateral values;                                                                           
|
| | iv.   |  | loan volumes and concentrations;                                                                                      
|
| | v.    |  | seasoning of the loan portfolio;                                                                                      
|
| | vi.   |  | specific industry conditions affecting portfolio segments;                                                            
|
| | vii.  |  | duration of the current business cycle;                                                                               
|
| | viii. |  | bank regulatory examination results; and                                                                              
|
| | ix.   |  | the results of our internal loan review process.                                                                      

In addition to the internal grading system analysis, we compare the Banks
allowance for loan losses (as a percentage of total loans) to the peer group
average percentage as shown in the most recently available Uniform Bank
Performance Report (UBPR).

When we assign loan ratings to individual loans, we consider the risk elements
attributable to particular loan types or categories. These risk elements may
include:



| | i.   |  | for non-farm and non-residential loans, multifamily residential
loans and agricultural real estate loans, the debt service coverage
ratio (income from the property in excess of operating expenses
compared to loan payment requirements);                                                    
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | ii.  |  | for construction and land development loans, the perceived
feasibility of the project including the ability to sell developed lots
or improvements constructed for resale or ability to lease property
constructed for lease, experience and ability of the developer and
loan-to-value ratios;
|
| | iii. |  | for commercial and commercial real estate loans, the operating
results of the commercial, industrial or professional enterprise, the
specific risks and volatility of income and operating results typical
for similar businesses and the value, nature and marketability of
collateral; and   
|
| | iv.  |  | for non-real estate agricultural loans, the operating results,
experience and ability of the borrower, historical and expected market
conditions and the value, nature and marketability of the collateral.                                                                                    

In addition, for each category, we consider secondary sources of income and the
financial strength of the borrower and any guarantors.

23



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PennRock Financial Services Corp.

The Board of Directors reviews the allowance on a quarterly basis to determine
whether the amount of monthly provision is adequate or whether additional
provisions should be made to the allowance. The internally classified watch
list, along with the list of non-accrual and non-performing loans, helps the
Board and management assess the overall quality of the loan portfolio and the
adequacy of the allowance. Loans classified as an eight (substandard) are
loans with clear and defined weaknesses such as highly leveraged positions,
unfavorable financial ratios, uncertain repayment sources or poor financial
condition which may jeopardize recoverability of the loan. Loans classified as
a nine (doubtful) are those loans that have characteristics similar to
substandard loans, but also have an increased risk that a loss may occur or at
least a portion of the loan may require a charge-off if liquidated. Both
eight and nine rated loans categories may include loans that are past due
at least 90 days, are on non-accrual status or have been restructured. As of
December 31, 2003, there were no loans rated nine or ten. The total
allowance amount is available to absorb losses across the Banks entire
portfolio.

The following table shows the changes in the allowance for loan losses for the
five years ended December 31, 2003.

Table 12 -  Allowance for Loan LossesIn thousands

|                             |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |         |         |  
|---------------------------- | -------------------------------------- | ------------------------- | ----- | ------- | ------- | ---- | ----- | ------- | ------- | ---- | ----- | ------- | ------- | - | ----- | ------- | ------- | - | ----- | ------- | ------- | -
|                             |                                        | Year Ended December 31,  
|                             |                                        |                          
|                             |                                        |                           |       | 2003    |         | 2002 |       | 2001    |         | 2000 |       | 1999   
|                             |                                        |                           |       |         |         |      |       |         |         |      |       |        
|Balance, beginning of year   |                                        | $                         | 7,075 |         |         | $    | 7,262 |         |         | $    | 5,973 |         |         | $ | 5,514 |         |         | $ | 4,897 |        
|Provision charged to expense |                                        |                           | 1,917 |         |         |      | 1,750 |         |         |      | 1,548 |         |         |   | 3,076 |         |         |   | 1,026 |        
|Loans charged off:           |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|                             | Commercial, financial and agricultural |                           |       | 545     |         |      |       | 2,104   |         |      |       | 393     |         |   |       | 1,258   |         |   |       | 216     |        
|                             | Consumer                               |                           |       | 172     |         |      |       | 93      |         |      |       | 195     |         |   |       | 1,582   |         |   |       | 277     |        
|                             |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|                             | Total loans charged off                |                           |       | 717     |         |      |       | 2,197   |         |      |       | 588     |         |   |       | 2,840   |         |   |       | 493     |        
|                             |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|Recoveries:                  |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|                             | Commercial, financial and agricultural |                           |       | 330     |         |      |       | 215     |         |      |       | 290     |         |   |       | 106     |         |   |       | 21      |        
|                             | Consumer                               |                           |       | 38      |         |      |       | 45      |         |      |       | 39      |         |   |       | 117     |         |   |       | 63      |        
|                             |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|                             | Total recoveries                       |                           |       | 368     |         |      |       | 260     |         |      |       | 329     |         |   |       | 223     |         |   |       | 84      |        
|                             |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|                             | Net charge-offs                        |                           |       | 349     |         |      |       | 1,937   |         |      |       | 259     |         |   |       | 2,617   |         |   |       | 409     |        
|                             |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|Balance, end of year         |                                        | $                         | 8,643 |         |         | $    | 7,075 |         |         | $    | 7,262 |         |         | $ | 5,973 |         |         | $ | 5,514 |        
|                             |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|Total
loans                  |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|                             | Average                                |                           |       | $       | 646,391 |      |       | $       | 576,305 |      |       | $       | 518,202 |   |       | $       | 485,999 |   |       | $       | 430,015 |  
|                             | Year-end                               |                           |       | 711,902 |         |      |       | 602,840 |         |      |       | 558,369 |         |   |       | 501,140 |         |   |       | 461,179 |        
|Ratios:                      |                                        |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |        
|                             | Net charge-offs to:                    |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |         |        
|                             |                                        | Average loans             |       |         | 0.05    | %    |       |         | 0.34    | %    |       |         | 0.05    | % |       |         | 0.54    | % |       |         | 0.10    | %
|                             |                                        | Total loans               |       |         | 0.05    | %    |       |         | 0.32    | %    |       |         | 0.05    | % |       |         | 0.52    | % |       |         | 0.09    | %
|                             |                                        | Allowance for loan losses |       |         | 4.04    | %    |       |         | 27.38   | %    |       |         | 3.57    | % |       |         | 43.81   | % |       |         | 7.42    | %
|                             |                                        | Provision for loan losses |       |         | 18.21   | %    |       |         | 110.69  | %    |       |         | 16.73   | % |       |         | 85.08   | % |       |         | 39.86   | %
|                             | Allowance for loan losses to:          |                           |       |         |         |      |       |         |         |      |       |         |         |   |       |         |         |   |       |         |        
|                             |                                        | Average loans             |       |         | 1.34    | %    |       |         | 1.23    | %    |       |         | 1.40    | % |       |         | 1.23    | % |       |         | 1.28    | %
|                             |                                        | Loans as of year-end      |       |         | 1.21    | %    |       |         | 1.17    | %    |       |         | 1.30    | % |       |         | 1.19    | % |       |         | 1.20    | %

The allowance for loan losses totaled $8.6 million as of December 31, 2003, an
increase of 22.2% from 2002. However, the allowance for loan losses as a
percentage of year-end loans held relatively steady increasing from 1.17% at
the end of December 31, 2002 to 1.21% as of December 31, 2003. The provision
for loan losses exceeded net-charge-offs by $1.6 million in 2003 while net
charge-offs exceed the provision by $187,000 in 2002.

Total loans charged-off decreased from $2.2 million in 2002 to $717,000 in
2003. Loans charged-off in 2001 totaled $588,000. Recoveries of loans
previously charged-off decreased from $329,000 in 2001 to $260,000 in 2002 and
increased to $368,000 in 2003. The ratio of net charge-offs to average loans
was 0.05% in 2003, 0.34% in 2002 and 0.05% in 2001.

24



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PennRock Financial Services Corp.

Based on our analysis of the loan portfolio as well as other factors and
conditions, we believe the current allowance is adequate. However, changing
economic and other conditions may require future adjustments to the allowance
for loan losses.

Table 13 presents the allocation of the allowance for loan losses by major loan
category for the five years ended December 31, 2003. The specific allocations
in any particular category may prove to be excessive or inadequate to absorb
actual future charge-offs so balances may be reallocated in the future to
reflect changing conditions. Accordingly, the entire allowance is considered
available to absorb losses in any category.

Table 13 -  Allocation of Allowance for Loan Losses
In thousands

|                                       |  |              |        |  |       |  |        |   |       |   |        |  |       |  |        |   |       |   |        |  |       |  |       |   |      |   |       |  |  |  |       |   |  |   |       |  |  |  |       |   | 
|-------------------------------------- |  | ------------ | ------ |  | ----- |  | ------ | - | ----- | - | ------ |  | ----- |  | ------ | - | ----- | - | ------ |  | ----- |  | ----- | - | ---- | - | ----- |  |  |  | ----- | - |  | - | ----- |  |  |  | ----- | - | 
|                                       |  | December 31,
|                                       |  |             
|                                       |  |              | 2003   |  | 2002  |  | 2001   |   | 2000  |   | 1999  
|                                       |  |              |        |  |       |  |        |   |       |   |       
|                                       |  |              |        |  |       |  | % of   |   |       |   |        |  | % of  |  |        |   |       |   | % of   |  |       |  |       |   | % of |   |       |  |  |  | % of 
|                                       |  |              | Amount |  | Loans |  | Amount |   | Loans |   | Amount |  | Loans |  | Amount |   | Loans |   | Amount |  | Loans
|                                       |  |              |        |  |       |  |        |   |       |   |        |  |       |  |        |   |       |   |        |  |      
|Commercial, financial and agricultural |  | $            | 7,647  |  |       |  | 66.1   | % |       | $ | 5,693  |  |       |  | 69.4   | % |       | $ | 6,216  |  |       |  | 64.6  | % |      | $ | 4,232 |  |  |  | 61.7  | % |  | $ | 4,181 |  |  |  | 58.7  | %
|Real estate 
construction             |  |              | 38     |  |       |  | 6.4    | % |       |   | 578    |  |       |  | 5.3    | % |       |   |        |  |       |  | 8.4   | % |      |   |       |  |  |  | 4.6   | % |  |   |       |  |  |  | 5.8   | %
|Real estate 
mortgage                 |  |              | 201    |  |       |  | 26.3   | % |       |   | 111    |  |       |  | 23.6   | % |       |   | 71     |  |       |  | 24.7  | % |      |   | 185   |  |  |  | 30.5  | % |  |   | 225   |  |  |  | 31.8  | %
|Consumer                               |  |              | 757    |  |       |  | 1.2    | % |       |   | 693    |  |       |  | 1.7    | % |       |   | 975    |  |       |  | 2.3   | % |      |   | 484   |  |  |  | 3.2   | % |  |   | 440   |  |  |  | 3.7   | %
|Unallocated                            |  |              |        |  |       |  |        |   |       |   |        |  |       |  |        |   |       |   |        |  |       |  |       |   |      |   | 1,072 |  |  |  |       |   |  |   | 668   |  |  |  |       |  
|                                       |  |              |        |  |       |  |        |   |       |   |        |  |       |  |        |   |       |   |        |  |       |  |       |   |      |   |       |  |  |  |       |   |  |   |       |  |  |  |       |  
|Total                                  |  | $            | 8,643  |  |       |  | 100.0  | % |       | $ | 7,075  |  |       |  | 100.0  | % |       | $ | 7,262  |  |       |  | 100.0 | % |      | $ | 5,973 |  |  |  | 100.0 | % |  | $ | 5,514 |  |  |  | 100.0 | %
|                                       |  |              |        |  |       |  |        |   |       |   |        |  |       |  |        |   |       |   |        |  |       |  |       |   |      |   |       |  |  |  |       |   |  |   |       |  |  |  |       |  

The identification of impaired loans is conducted in conjunction with the
review of the adequacy of the allowance for loan losses. Loss allowances are
established for specifically identified impaired loans based on the fair value
of the underlying collateral in accordance with SFAS No. 114.

Impairment losses are included in the allowance for loan losses through a
change to the provision for loan losses. Adjustments to impairment losses
resulting from changes in the fair value of an impaired loans collateral are
included in the provision for loan losses. Upon disposition of an impaired
loan, any related valuation allowance is removed from the allowance for loan
losses.

The following table presents the status of impaired loans.

Table 14 -  Impaired LoansIn thousands

|                                                  |  |      |     |      |  |   |       | 
|------------------------------------------------- |  | ---- | --- | ---- |  | - | ----- | 
|                                                  |  | 2003 |     | 2002
|                                                  |  |      |     |     
|Impaired loans with a reserve                     |  | $    | 187 |      |  | $ | 1,100 | 
|Impaired loans with no reserve                    |  |      | 771 |      |  |   | 112   | 
|                                                  |  |      |     |      |  |   |       | 
|Total impaired loans                              |  | $    | 958 |      |  | $ | 1,212 | 
|                                                  |  |      |     |      |  |   |       | 
|Reserve
for impaired loans(1)                     |  | $    | 88  |      |  | $ | 343   | 
|Average balance of impaired loans during the year |  | $    | 959 |      |  | $ | 959   | 

(1)The reserve for impaired loans is part of the overall allowance for loan
losses.

Liquidity

The purpose of liquidity management is to ensure that there are sufficient cash
flows available to meet a variety of needs while minimizing the cost of funds
and maximizing yields on liquid assets. These needs include financial
commitments such as satisfying the credit needs of our borrowers and
withdrawals by our depositors, the ability to capitalize on investment and
business opportunities as they occur, and the funding of PennRocks own
operations. Liquidity is measured by PennRocks ability to convert assets to
cash at a reasonable cost or a minimum loss. We achieve these objectives
through the implementation of our asset/liability policy. Maturities and sales
of investment

25



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PennRock Financial Services Corp.

securities (Table 8), loan payments and maturities (Table 10), and liquidating
money market investments such as federal funds sold all provide liquidity. In
addition, PennRock is a member of the Federal Home Loan Bank of Pittsburgh (the
FHLB) which provides a reliable source of long and short-term funds. As of
December 31, 2003, PennRock had unused lines of credit with the FHLB of $104.2
million, unused federal funds line of credit of $15 million and unpledged
securities available for sale of $231.3 million. However, PennRocks primary
source of liquidity lies in our ability to renew, replace and expand its base
of core deposits (consisting of demand, NOW, money market and cash management
accounts, savings accounts and time deposits less than $100,000.)

Total deposits increased $40.8 million or 5.5% in 2003 compared with an
increase of $79.6 million or 12.0% in 2002. Core deposits increased $35.3
million in 2003 compared with an increase of $73.4 million in 2002. Deposits
grew in every category in 2003 except money market deposit accounts which
declined by $8.8 million. Non-interest bearing demand deposits increased the
most during in 2003 increasing $19.2 million while total time deposits grew
$17.9 million. The average rate paid on interest bearing deposits in 2003
declined 74 percentage points from 2.52% in 2002 to 1.78%. The average rate
paid in 2002 declined 174 percentage points from 2001. Table 14 reflects the
changes in the major classifications of deposits by comparing the year-end
balances for the five years ended December 31, 2003. Table 15 reflects the
maturity of time deposits of $100,000 or more for the five years ended December
31, 2003.

Table 15 -  Deposits by Major Classification
In thousands

|                                  |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|--------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2003         |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                  |  |              |         |      |  |      |         |      |  |     
|Non-interest bearing deposits     |  | $            | 140,753 |      |  | $    | 121,598 |      |  | $    | 108,529 |  |  | $ | 94,001  |  |  | $ | 87,524  | 
|NOW accounts                      |  |              | 48,408  |      |  |      | 44,429  |      |  |      | 40,936  |  |  |   | 37,390  |  |  |   | 38,418  | 
|Money market deposit accounts     |  |              | 168,130 |      |  |      | 176,967 |      |  |      | 160,590 |  |  |   | 98,130  |  |  |   | 117,603 | 
|Savings accounts                  |  |              | 88,438  |      |  |      | 79,884  |      |  |      | 63,966  |  |  |   | 55,526  |  |  |   | 57,545  | 
|Time deposits under $100,000      |  |              | 290,773 |      |  |      | 278,323 |      |  |      | 253,757 |  |  |   | 340,868 |  |  |   | 283,309 | 
|                                  |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total core accounts               |  |              | 736,502 |      |  |      | 701,201 |      |  |      | 627,778 |  |  |   | 625,915 |  |  |   | 584,399 | 
|Time deposits of $100,000 or more |  |              | 47,540  |      |  |      | 42,061  |      |  |      | 35,916  |  |  |   | 57,079  |  |  |   | 47,016  | 
|                                  |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total deposits                    |  | $            | 784,042 |      |  | $    | 743,262 |      |  | $    | 663,694 |  |  | $ | 682,994 |  |  | $ | 631,415 | 
|                                  |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 

Table 16 -  Maturity of Time Deposits of $100,000 or More
In thousands

|                                      |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2003         |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                      |  |              |        |      |  |      |        |      |  |     
|Three months or less                  |  | $            | 5,490  |      |  | $    | 8,996  |      |  | $    | 10,182 |  |  | $ | 28,208 |  |  | $ | 19,228 | 
|Over three months through six
months  |  |              | 35,319 |      |  |      | 11,780 |      |  |      | 5,660  |  |  |   | 11,416 |  |  |   | 9,786  | 
|Over six months through twelve
months |  |              | 6,063  |      |  |      | 11,884 |      |  |      | 14,677 |  |  |   | 13,809 |  |  |   | 9,374  | 
|Over twelve months                    |  |              | 668    |      |  |      | 9,401  |      |  |      | 5,397  |  |  |   | 3,646  |  |  |   | 8,628  | 
|                                      |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Total                                 |  | $            | 47,540 |      |  | $    | 42,061 |      |  | $    | 35,916 |  |  | $ | 57,079 |  |  | $ | 47,016 | 
|                                      |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 

Deposit levels may be affected by a number of factors, including rates paid by
competitors, general interest rate levels, returns available to customers on
alternative investments and general economic conditions. Loan repayments are a
relatively stable source of funds, but such loans generally are not readily
convertible to cash and are subject to risks associated with borrowers ability
to pay that may be impacted by national and local economic conditions.
Accordingly, PennRock may be required from time to time to rely on secondary
sources of liquidity to meet loan and withdrawal demands or otherwise fund
operations. Such sources include FHLB advances, federal funds lines of credit
from correspondent banks and Federal Reserve Bank borrowings.

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PennRock Financial Services Corp.

The Bank may borrow funds from the FHLB of Pittsburgh and from other sources.
The FHLB system acts as an additional source of funding for financial
institutions. In addition, the Bank uses federal funds lines and securities
sold under agreements to repurchase as funding sources. In order to utilize
the services of the FHLB, the Bank is required to own stock in the FHLB. The
amount of stock held by the Bank varies with the total amount of advances the
Bank has outstanding at any point in time. As of December 31, 2003, the Bank
held $10.0 million in stock of the FHLB. The FHLB uses various factors to
determine the amount of credit to extend to a financial institution. These
factors include:



| | i.   |  | total regulatory capital;                            
| | ---- |  | -----------------------------------------------------
|
| | ii.  |  | net income;                                          
|
| | iii. |  | the quality and composition of assets;               
|
| | iv.  |  | lending policies and practices;                      
|
| | v.   |  | the level of current borrowings from all sources; and
|
| | vi.  |  | the amount of qualifying collateral.                 

Securities sold under agreements to repurchase (repurchase agreements) are
another source of borrowed funds. Under this type of borrowing, securities are
pledged against borrowed funds and are released when the funds are repaid. The
Bank uses this type of short-term borrowing alternative on an overnight basis.
The repurchase agreements with customers are part of a cash management account
arrangement the Bank maintains with certain of its larger corporate customers.

Short-term borrowings increased $72.6 million, from $40.4 million as of
December 31, 2002 to $113.0 million as of December 31, 2003. Of the repurchase
agreements outstanding at year-end 2003, $14.2 million were with bank customers
while $97.0 million were outstanding at the FHLB. The level of short-term
borrowings depends on loan growth, deposit growth, current market rates and
other factors. The large increase in short-term borrowings in 2003 was
required to fund the increase in the loan portfolio since there was
insufficient growth in deposits to do so. As previously indicated, loans grew
$109.1 million in 2003 while deposits grew $40.8 million. We chose to fund the
excess loan growth with short-term borrowing since they represented the least
expensive source of funds readily available. The average cost of short-term
borrowings decreased from 3.42% in 2001 to 1.48% in 2002 and to 1.14% in 2003.
The average balance of short-term borrowings outstanding during the year was
$38.1 million in 2001, $53.7 million in 2002 and $90.2 million on 2003. Table
16 shows PennRocks short-term borrowings for the five years ended December 31,
2003.

Table 17 -  Short-Term Borrowings

In thousands

|                                                |           |   |              |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       
|----------------------------------------------- | --------- | - | ------------ | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------
|                                                |           |   | December 31,
|                                                |           |   |             
|                                                |           |   | 2003         |        | 2002 |   | 2001   |        | 2000 |   | 1999  
|                                                |           |   |              |        |      |   |        |        |      |   |       
|Securities sold under agreements to
repurchase: |           |   |              |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       
|                                                | FHLB      |   | $            | 97,000 |      |   | $      | 12,000 |      |   | $      | 45,000 |  |   | $      | 30,000 |  |   | $      | 40,000
|                                                | Customers |   |              | 14,181 |      |   |        | 23,363 |      |   |        | 26,752 |  |   |        | 21,567 |  |   |        | 8,107 
|Federal funds purchased                         |           |   |              |        |      |   |        |        |      |   | 4,330  |        |  |   |        |        |  |   | 3,600  |       
|Advances from FHLB                              |           |   |              |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       
|U.S. Treasury tax and loan note                 |           |   | 1,781        |        |      |   | 5,000  |        |      |   | 672    |        |  |   | 2,608  |        |  |   | 1,500  |       
|                                                |           |   |              |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       
|Total short-term borrowings                     |           | $ | 112,962      |        |      | $ | 40,363 |        |      | $ | 76,754 |        |  | $ | 54,175 |        |  | $ | 53,207 |       
|                                                |           |   |              |        |      |   |        |        |      |   |        |        |  |   |        |        |  |   |        |       

Long-Term Debt

In addition to short-term borrowings from the FHLB, the Bank has $102.0 million
of long-term fixed rate advances from the FHLB of which $62.0 million are
convertible advances that permit the FHLB to convert the advance from a
fixed-rate to a variable-rate at its discretion on a specified call date
following an initial lock-out period ranging from one year to five years.
$17 million of these convertible advances further restrict the FHLBs ability
to call the advance unless the 3-month LIBOR rate is at or above a specified
rate. If the FHLB exercises its option to convert an advance, the Bank has the
option to repay the advance in full. During 2003 and 2002, the FHLB did not
exercise its option to convert any advances. However, in 2003, one fixed-rate
advance bearing interest at 7.11% matured and was not replaced. Also during
the second quarter of 2003, two advances totaling $40 million were paid-off and
replaced by new advances at lower interest rates. The prepayment penalty
assessed by the FHLB is being amortized over the life of the new advances in
accordance with EITF 96-16 (Debtors Accounting for a Modification or Exchange
of Debt Instruments) issued by the FASB in 1996.

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PennRock Financial Services Corp.

The maturities of long-term debt at the end of 2003 ranged from 2006 to 2012.
The average rate paid on these advances during 2003 was 5.23%. The average
rate on these advances at year-end 2003 was 4.74%. As of December 31, 2002,
the Bank had $127.0 million of long-term fixed rate advances with maturities
ranging from 2003 to 2012. The average rate paid on these advances during 2002
was 5.93%. The average rate on these advances at year-end 2002 was 5.61%.
These long-term advances are part of the same line of credit with the FHLB
utilized by the Banks short-term advances.

Capital Resources

On June 25, 2003, the Board of Directors of PennRock authorized the repurchase
of up to 300,000 shares of common stock. Any repurchased shares will be held
as treasury shares available for issuance in connection with future stock
dividends and stock splits, employee benefit plans, executive compensation
plans, the Dividend Reinvestment Plan and other appropriate corporate purposes.
PennRock began open market repurchases of its outstanding common stock in
1995. In 2003, PennRock purchased 66,424 shares for $1.7 million and reissued
92,286 shares. In 2002, PennRock purchased 129,680 shares for $3.1 million and
reissued 99,713 shares. There were 93,355 shares with a cost of $2.1 million
as of December 31, 2003 and 119,217 shares with a cost of $2.9 million as of
December 31, 2002 held as treasury stock.

Total stockholders equity increased $11.0 million or 12.7% in 2003 compared
with an increase of $8.6 million or 10.9% in 2002. In 2003, stockholders
equity increased by net income of $14.0 million less dividends of $5.7 million.
The change in net unrealized gains and losses on AFS securities increased
equity by $2.4 million. In 2002, stockholders equity increased by net income
of $13.2 million less dividends of $5.4 million. The change in net unrealized
gains and losses on AFS securities increased equity by $1.8 million. The ratio
of average equity to average assets was 8.77% in 2003, compared with 8.47% for
2002 and 8.51% in 2001. Internal capital generation is calculated by
multiplying return on average equity by the percentage of earnings retained.
Internal capital generation amounted to 8.99% in 2003, 9.44% in 2002 and 9.53%
in 2001.

Regulatory risk based capital is segregated into two components, tier 1 capital
and tier 2 capital. Tier 1 capital includes stockholders equity reduced by
certain intangibles and excludes net unrealized holding gains and losses on AFS
securities except for net unrealized losses on marketable equity securities are
deducted from Tier 1 capital. Tier 2 capital includes the allowance for loan
losses (subject to limitations) and qualifying debt obligations. Banking
organizations must adjust their assets and off-balance sheet exposures by
assigning risk-weighted percentages, ranging for 0% to 100%, depending on
regulatory defined credit risks. Off-balance-sheet assets must be converted to
credit equivalents before being risk weighted. These risk-weighted on and
off-balance sheet balances are then added to determine total risk weighted
assets.

As of December 31, 2003, the most recent notification from the Federal Reserve
Bank categorized PennRock as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, PennRock
must maintain a minimum total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6% and a Tier 1 leverage ratio of 5%. As of
December 31, 2003, PennRocks total risk-based capital ratio was 11.64%, its
Tier 1 risk-based capital ratio was 10.54% and its Tier 1 leverage ratio was
8.23%. There are no conditions or events since that notification that
management believes have changed this category. The Bank also exceeded all
minimum ratios at the end of 2003. Table 17 shows PennRocks and the Banks
capital resources for the past three years.

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PennRock Financial Services Corp.

Table 18 -  Capital Resources

|                                  |                    |                                                     |  |              |       |      |  |      |       |   |  |  |       |  
|--------------------------------- | ------------------ | --------------------------------------------------- |  | ------------ | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                  |                    |                                                     |  | December 31,
|                                  |                    |                                                     |  |             
|                                  |                    |                                                     |  | 2003         |       | 2002 |  | 2001
|                                  |                    |                                                     |  |              |       |      |  |     
|PennRock Financial Services Corp: |                    |                                                     |  |              |       |      |  |      |       |   |  | 
|                                  | Leverage ratios:   |                                                     |  |              |       |      |  |      |       |   |  |  |      
|                                  |                    | Total capital to total average assets               |  |              | 9.09  | %    |  |      | 8.64  | % |  |  | 9.21  | %
|                                  |                    | Tier 1 capital to total average assets              |  |              | 8.23  | %    |  |      | 7.92  | % |  |  | 8.40  | %
|                                  | Risk-based ratios: |                                                     |  |              |       |      |  |      |       |   |  |  |      
|                                  |                    | Common stockholders equity to risk
weighted assets |  |              | 11.53 | %    |  |      | 11.45 | % |  |  | 11.10 | %
|                                  |                    | Tier 1 capital to risk-weighted assets              |  |              | 10.54 | %    |  |      | 10.61 | % |  |  | 10.68 | %
|                                  |                    | Total capital to risk-weighted assets               |  |              | 11.64 | %    |  |      | 11.57 | % |  |  | 11.71 | %
|Blue Ball National Bank:          |                    |                                                     |  |              |       |      |  |      |       |   |  | 
|                                  | Leverage ratios:   |                                                     |  |              |       |      |  |      |       |   |  |  |      
|                                  |                    | Total capital to total average assets               |  |              | 8.87  | %    |  |      | 8.56  | % |  |  | 8.85  | %
|                                  |                    | Tier 1 capital to total average assets              |  |              | 7.99  | %    |  |      | 7.79  | % |  |  | 7.99  | %
|                                  | Risk-based ratios: |                                                     |  |              |       |      |  |      |       |   |  |  |      
|                                  |                    | Common stockholders equity to risk
weighted assets |  |              | 10.07 | %    |  |      | 10.11 | % |  |  | 9.59  | %
|                                  |                    | Tier 1 capital to risk-weighted assets              |  |              | 10.25 | %    |  |      | 10.51 | % |  |  | 10.13 | %
|                                  |                    | Total capital to risk-weighted assets               |  |              | 11.37 | %    |  |      | 11.55 | % |  |  | 11.22 | %

Off-Balance Sheet Arrangements

Information regarding off-balance sheet arrangements that are reasonable likely
to have an effect on PennRocks financial condition, liquidity or capital may
be found in Note 15: Commitments and Contingent Liabilities and Concentration
of Credit Risk in the Notes to Consolidated Financial Statements.

Interest Rate Risk

Information regarding interest rate risk may be found in Item 7A of this Annual
Report under the caption Quantitative and Qualitative Disclosures about Market
Risk.

Recently Issued Accounting Standards

For a discussion of recently issued accounting pronouncements, see Note 1:
Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PennRocks financial performance is impacted by, among other factors, interest
rate risk and credit risk. We manage credit risk by relying on strict credit
standards, loan review and adequate loan loss reserves. Interest rate risk
refers to PennRocks degree of exposure to loss of earnings resulting from
changes in market interest rates. As a financial intermediary, PennRock
invests in various types of interest-earning assets (primarily loans and
securities) that are funded largely by interest-bearing liabilities (primarily
deposits and borrowed funds). Such financial instruments have varying levels
of sensitivity to changes in market interest rates. The disparity of
sensitivity between financial assets and liabilities creates interest rate risk
for PennRock. The magnitude of this exposure depends on the severity and
timing of the market rate changes and on our ability to adjust the composition
of the balance sheet in reaction to those changes. PennRocks Asset Liability
Management Committee (the ALCO) addresses this risk. PennRocks executive
management team comprises the ALCO. The ALCO monitors interest rate risk by
modeling the estimated net interest income and net income under various
interest rate scenarios. The ALCO attempts to manage the various components of
PennRocks balance sheet to minimize the impact of sudden and sustained changes
in interest rates on net interest income and net income. However, the ALCO may
sometimes structure the balance sheet to take advantage of expected interest
rate movements.

29



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PennRock Financial Services Corp.

PennRocks exposure to interest rate risk is reviewed on a monthly basis by the
Board of Directors and the ALCO. Interest rate risk exposure is measured using
various types of interest rate sensitivity analyses to determine PennRocks
change in net interest income and net income in the event of hypothetical
changes in interest rates. If the potential changes to net interest income and
net income resulting from hypothetical interest rate swings are not within the
exposure limits established by the Board, the Board may direct management to
adjust its asset and liability mix to bring interest rate risk within
Board-approved limits.

PennRocks net interest income, the most significant component of its net
income, is impacted by changes in market interest rates and yield curves,
particularly if there are differences, or gaps, in the repricing frequencies of
its interest-earning assets and the interest-bearing liabilities which fund
them. The ALCO monitors such interest rate gaps and seeks to manage interest
rate risk by adjusting the repricing frequencies of its interest-earning assets
and interest-bearing liabilities. If more assets than liabilities mature or
reprice within a given time frame, PennRock is considered asset sensitive. If
more liabilities mature or reprice during the time frame, PennRock is liability
sensitive. An asset sensitive gap will generally benefit PennRock in a period
of rising rates while a liability sensitive gap will generally benefit PennRock
during declining rates. Gap analysis has certain limitations. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Some types of financial instruments are very sensitive to changes in
market rates while others may lag behind such changes. Certain assets such as
adjustable-rate loans have limits on the amount of change in interest rates
allowed in the short-term (periodic caps) and over the life of the loan
(lifetime caps). Further, changes in interest rates may change the
characteristics of certain financial instruments and cause them to react
differently than expected due to imbedded options. For example, a decrease in
market rates could trigger the option that allows mortgage customers to
refinance their mortgages while an increase in market rates may induce
customers to exercise their option to redeem their certificates of deposit
prior to maturity. Although the ALCO tries to consider such customer behavior
when calculating changes in net interest income and net income, actual results
could deviate significantly from the assumptions used. While ALCO continuously
monitors and adjusts the gap position to maximize profitability, the primary
objective is to maintain net interest income and net income within self-imposed
parameters for a wide range of possible changes in interest rates. The
following table presents an interest sensitivity analysis of PennRocks assets
and liabilities as of December 31, 2003. All interest rates are on a tax
equivalent basis.

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PennRock Financial Services Corp.

Table 19 -  Interest Sensitivity Analysis
In thousands

|                                                                   |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |           |   | 
|------------------------------------------------------------------ | ----------------------------------- | ----------------- | - | --------------------------- | ------- | --------- | - | --------- | ------- | --------- | - | --------- | ------- | ----- | - | ------- | ------- | - | - | ------- | ------- | - | - | --------- | - | 
|                                                                   |                                     | December 31, 2003
|                                                                   |                                     |                  
|                                                                   |                                     |                   |   | Interest Sensitivity Period
|                                                                   |                                     |                   |   |                            
|                                                                   |                                     |                   |   |                             |         |           |   | More      |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|                                                                   |                                     |                   |   |                             |         |           |   | Than 3    |         | More than |   | More than |         |       |   |         |         |   |   |        
|                                                                   |                                     |                   |   | Less than                   |         | Months to |   | 6 Months  |         | 1 Year to |   | More than |         |       |   |        
|                                                                   |                                     |                   |   | 3 Months                    |         | 6 Months  |   | To 1 Year |         | 5 Years   |   | 5 Years   |         | Total
|                                                                   |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |      
|Earning assets:                                                    |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|                                                                   | Short-term investments              |                   | $ | 6,283                       |         |           | $ |           |         |           | $ |           |         |       | $ |         |         |   | $ |         |         |   | $ | 6,283     |  
|                                                                   | Weighted average interest rate      |                   |   | 1.24                        | %       |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   | 1.24      | %
|                                                                   | Mortgages held for sale             |                   |   | 2,004                       |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   | 2,004     |  
|                                                                   | Weighted average interest rate      |                   |   | 6.63                        | %       |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   | 6.63      | %
|                                                                   | Securities available for sale       |                   |   | 150,732                     |         |           |   | 24,283    |         |           |   | 41,228    |         |       |   | 63,622  |         |   |   | 30,827  |         |   |   | 310,692   |  
|                                                                   | Weighted average interest rate      |                   |   | 3.52                        | %       |           |   | 5.37      | %       |           |   | 4.91      | %       |       |   | 4.44    | %       |   |   | 4.54    | %       |   |   | 4.51      | %
|                                                                   | Loans                               |                   |   | 336,385                     |         |           |   | 79,996    |         |           |   | 125,339   |         |       |   | 137,391 |         |   |   | 32,791  |         |   |   | 711,902   |  
|                                                                   | Weighted average interest rate      |                   |   | 5.07                        | %       |           |   | 6.57      | %       |           |   | 6.45      | %       |       |   | 6.25    | %       |   |   | 5.33    | %       |   |   | 5.72      | %
|                                                                   |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|                                                                   | Total interest earning assets       |                   | $ | 495,404                     |         |           | $ | 104,279   |         |           | $ | 166,567   |         |       | $ | 201,013 |         |   | $ | 63,618  |         |   | $ | 1,030,881 |  
|                                                                   |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|Interest bearing liabilities:                                      |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|                                                                   | Interest bearing demand
deposits(1) |                   | $ | 168,736                     |         |           | $ | 605       |         |           | $ | 1,210     |         |       | $ | 9,682   |         |   | $ | 36,305  |         |   | $ | 216,538   |  
|                                                                   | Weighted average interest rate      |                   |   | 1.21                        | %       |           |   | 0.25      | %       |           |   | 0.25      | %       |       |   | 0.25    | %       |   |   | 0.25    | %       |   |   | 1.00      | %
|                                                                   | Savings
deposits(2)                 |                   |   | 1,105                       |         |           |   | 1,105     |         |           |   | 2,211     |         |       |   | 17,688  |         |   |   | 66,329  |         |   |   | 88,438    |  
|                                                                   | Weighted average interest rate      |                   |   | 0.75                        | %       |           |   | 0.75      | %       |           |   | 1.00      | %       |       |   | 0.75    | %       |   |   | 0.75    | %       |   |   | 0.75      | %
|                                                                   | Time deposits                       |                   |   | 46,485                      |         |           |   | 94,862    |         |           |   | 149,358   |         |       |   | 47,600  |         |   |   | 8       |         |   |   | 338,313   |  
|                                                                   | Weighted average interest rate      |                   |   | 1.32                        | %       |           |   | 2.47      | %       |           |   | 2.77      | %       |       |   | 2.58    | %       |   |   | 3.05    | %       |   |   | 2.46      | %
|                                                                   | Short-term borrowings               |                   |   | 112,962                     |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   | 112,962   |  
|                                                                   | Weighted average interest rate      |                   |   | 1.08                        | %       |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   | 1.08      | %
|                                                                   | Long-term debt                      |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   | 51,000  |         |   |   | 51,000  |         |   |   | 102,000   |  
|                                                                   | Weighted average interest rate      |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   | 5.68    | %       |   |   | 3.80    | %       |   |   | 4.74      | %
|                                                                   |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|                                                                   | Total interest bearing liabilities  |                   | $ | 329,288                     |         |           | $ | 96,572    |         |           | $ | 152,779   |         |       | $ | 125,970 |         |   | $ | 153,642 |         |   | $ | 858,251   |  
|                                                                   |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|Interest sensitivity gap:                                          |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|                                                                   |                                     | Period            |   | $                           | 166,116 |           |   | $         | 7,707   |           |   | $         | 13,788  |       |   | $       | 75,043  |   |   | ($      | 90,024  | ) |   |           |   | 
|                                                                   |                                     | Cumulative        |   |                             | 166,116 |           |   |           | 173,823 |           |   |           | 187,611 |       |   |         | 262,654 |   |   |         | 172,630 |   |   |           |   | 
|Interest sensitive assets to interest
sensitive liabilities ratio: |                                     |                   |   |                             |         |           |   |           |         |           |   |           |         |       |   |         |         |   |   |         |         |   |   |          
|                                                                   |                                     | Period            |   |                             | 150.45  | %         |   |           | 107.98  | %         |   |           | 109.02  | %     |   |         | 159.57  | % |   |         | 41.41   | % |   |           |   | 
|                                                                   |                                     | Cumulative        |   |                             | 150.45  | %         |   |           | 140.82  | %         |   |           | 132.42  | %     |   |         | 137.28  | % |   |         | 120.11  | % |   |           |   | 

(1) Assumes NOW account balances are withdrawn at 5% per year.

(2) Assumes savings balances are withdrawn at 5% per year.

This analysis indicates that PennRock is asset sensitive up to the five year
time frame. This means that PennRocks balance sheet should be well positioned
for rising interest rates. If, however, ALCO is concerned that rates may fall
within the next year and that a drop in market rates would reduce net interest
income and net income, it can take action to reduce the asset sensitivity of
the balance sheet such as by purchasing fixed rate securities and funding such
purchases with short-term borrowings. The ALCO believes that the probability
for the future change in interest rates is toward higher rates rather than
lower rates and is therefore comfortable with the asset sensitivity of the
balance sheet. At some point in 2004, the ALCO may take steps to reduce
PennRocks exposure to higher rates even further by reducing the amount of
short-term borrowings and other interest sensitive liabilities by attracting
fixed rate time deposits, utilizing fixed-rate advances at the FHLB, or other
means.

While the preceding table helps provide some information about PennRocks
interest sensitivity within one year, it is not reliable in predicting the
trends of future earnings in the longer term. For this reason, we use
financial modeling to forecast earnings under different interest rate
projections. PennRocks Board of Directors has adopted an interest rate risk
policy which establishes a maximum decrease in the net interest income and net
income in the event of a sudden and sustained increase or decrease in market
interest rates of 200 percentage points. The

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PennRock Financial Services Corp.

following tables present the Banks projected change in net interest income and
net income for 100 and 200 percentage point rate shocks as of December 31, 2003
and the Boards established limit. The impact on net interest income and net
income relate to the Bank only. The assets and liabilities of the parent
company only or for National and PCS are not considered in this analysis and
their corresponding earnings at risk do not have a significant effect on this
analysis.

Table 20  Changes in Net Interest Income
In thousands

|                             |  |              |        |          |  |         |        |       |  |  |        |    |  |  |        |   
|---------------------------- |  | ------------ | ------ | -------- |  | ------- | ------ | ----- |  |  | ------ | -- |  |  | ------ | --
|                             |  | Net Interest |        | Computed |  | Percent |        | Board
|Change in Interest Rates     |  | Income       |        | Change   |  | Change  |        | Limit
|                             |  |              |        |          |  |         |        |      
|200 percentage point rise    |  | $            | 40,374 |          |  | $       | 2,676  |       |  |  | 7.10   | %  |  |  | (15.00 | %)
|100 percentage point rise    |  |              | 40,326 |          |  |         | 2,628  |       |  |  | 6.97   | %  |  |  |        |   
|Base rate scenario           |  |              | 37,698 |          |  |         |        |       |  |  |        |    |  |  |        |   
|100 percentage point decline |  |              | 35,175 |          |  |         | (2,523 | )     |  |  | (6.69  | %) |  |  |        |   
|200 percentage point decline |  |              | 31,894 |          |  |         | (5,804 | )     |  |  | (15.40 | %) |  |  | (15.00 | %)

Table 21  Changes in Net Income
In thousands

|                             |  |            |        |          |  |         |        |       |  |  |        |    |  |  |        |   
|---------------------------- |  | ---------- | ------ | -------- |  | ------- | ------ | ----- |  |  | ------ | -- |  |  | ------ | --
|                             |  |            |        | Computed |  | Percent |        | Board
|Change in Interest Rates     |  | Net Income |        | Change   |  | Change  |        | Limit
|                             |  |            |        |          |  |         |        |      
|200 percentage point rise    |  | $          | 16,122 |          |  | $       | 1,932  |       |  |  | 13.62  | %  |  |  | (20.00 | %)
|100 percentage point rise    |  |            | 16,016 |          |  |         | 1,826  |       |  |  | 12.87  | %  |  |  |        |   
|Base rate scenario           |  |            | 14,190 |          |  |         |        |       |  |  |        |    |  |  |        |   
|100 percentage point decline |  |            | 12,425 |          |  |         | (1,765 | )     |  |  | (12.44 | %) |  |  |        |   
|200 percentage point decline |  |            | 10,214 |          |  |         | (3,976 | )     |  |  | (28.02 | %) |  |  | (20.00 | %)

The preceding tables indicate that as of December 31, 2003, in the event of a
sudden and sustained decrease in prevailing market interest rates, both
PennRocks net interest income and net income would be expected to decrease
$5.8 million and $4.0 million respectively. However, if market rates increased
by 200 percentage points, net interest income and net income would be expected
to increase by $2.7 million and $1.9 million respectively. This simulation
analysis agrees with Table 19 gap analysis that indicates that PennRock is
asset sensitive. PennRocks interest income and net income increase if rates
rise and decline if rates fall. At December 31, 2003, PennRocks estimated
changes in net interest income and net income given a 200 percentage point
increase in interest rates are well within policy limits. However, PennRocks
estimated changes in net interest income and net income given a 200 percentage
point decrease in interest rates are outside of policy limits. With ALCOs
expectation that rates are more likely to rise than fall (especially with an
apparently improving national economy), the Board of Directors has indicated
that they are satisfied with this exception to policy.

Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions. These include loan and mortgage-backed security
prepayment rates, calls of callable securities, conversions of fixed-rate FHLB
advances to adjustable advances, and rates of deposit decay, and should not be
relied upon as indicative of actual future results. Even minor changes in
these assumptions may significantly alter the results of the model. Further,
the computations do not contemplate any actions the ALCO could take to mitigate
any negative effects of changes in interest rates as discussed above.

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PennRock Financial Services Corp.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following audited consolidated financial statements are set forth in this
Annual Report of Form 10-K on the following pages:

|                                                   |                                                 |  |  |    | 
|-------------------------------------------------- | ----------------------------------------------- |  |  | -- | 
|PennRock Financial Services Corp. and Subsidiaries |                                                 |  |  |   
|                                                   | Independent Auditors Report                    |  |  | 33 | 
|                                                   | Consolidated Balance Sheets                     |  |  | 34 | 
|                                                   | Consolidated Statements of Income               |  |  | 35 | 
|                                                   | Consolidated Statements of Stockholders Equity |  |  | 36 | 
|                                                   | Consolidated Statements of Cash Flows           |  |  | 37 | 
|                                                   | Notes to Consolidated Financial Statements      |  |  | 38 | 

INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders of PennRock Financial Services Corp.

We have audited the accompanying consolidated balance sheets of PennRock
Financial Services Corp. and Subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of income, stockholders equity and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of PennRocks
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PennRock Financial Services Corp. and Subsidiaries as of December 31, 2003 and
2002, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America.



| | /s/ SIMON LEVER LLP
| | -------------------

January 30, 2004
Lancaster, Pennsylvania

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PennRock Financial Services Corp.

CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share data

|                                              |                                                                                                    |                      |           |              |         |      |           |         |         | 
|--------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------- | --------- | ------------ | ------- | ---- | --------- | ------- | ------- | 
|                                              |                                                                                                    |                      |           | December 31,
|                                              |                                                                                                    |                      |           |             
|                                              |                                                                                                    |                      |           | 2003         |         | 2002
|                                              |                                                                                                    |                      |           |              |         |     
|ASSETS                                        |                                                                                                    |                      |           |              |         |      |           |        
|Cash and due from banks                       |                                                                                                    | $                    | 17,858    |              |         | $    | 23,092    |        
|Short-term investments                        |                                                                                                    |                      | 6,283     |              |         |      | 9,226     |        
|Mortgages held for sale                       |                                                                                                    |                      | 2,004     |              |         |      | 7,147     |        
|Securities available for sale (at fair value) |                                                                                                    |                      | 309,189   |              |         |      | 304,814   |        
|Loans                                         |                                                                                                    |                      | 711,902   |              |         |      | 602,840   |        
|                                              | Allowance for loan losses                                                                          |                      |           | (8,643       | )       |      |           | (7,075  | )      
|                                              |                                                                                                    |                      |           |              |         |      |           |        
|                                              | Net loans                                                                                          |                      |           | 703,259      |         |      |           | 595,765 |        
|Premises and equipment                        |                                                                                                    |                      | 16,283    |              |         |      | 16,256    |        
|Accrued interest receivable                   |                                                                                                    |                      | 3,100     |              |         |      | 3,282     |        
|Bank owned life insurance                     |                                                                                                    |                      | 27,609    |              |         |      | 26,491    |        
|Other assets                                  |                                                                                                    |                      | 23,155    |              |         |      | 22,516    |        
|                                              |                                                                                                    |                      |           |              |         |      |           |        
|Total assets                                  |                                                                                                    | $                    | 1,108,740 |              |         | $    | 1,008,589 |        
|                                              |                                                                                                    |                      |           |              |         |      |           |        
|LIABILITIES AND STOCKHOLDERS EQUITY          |                                                                                                    |                      |           |              |         |      |           |        
|Liabilities:                                  |                                                                                                    |                      |           |              |         |      |           |        
|                                              | Deposits:                                                                                          |                      |           |              |         |      |           |         |        
|                                              |                                                                                                    | Non-interest bearing |           | $            | 140,753 |      |           | $       | 121,598 | 
|                                              |                                                                                                    | Interest bearing     |           |              | 643,289 |      |           |         | 621,664 | 
|                                              |                                                                                                    |                      |           |              |         |      |           |        
|                                              |                                                                                                    | Total deposits       |           |              | 784,042 |      |           |         | 743,262 | 
|                                              | Short-term borrowings                                                                              |                      |           | 112,962      |         |      |           | 40,363  |        
|                                              | Long-term debt                                                                                     |                      |           | 102,000      |         |      |           | 127,000 |        
|                                              | Accrued interest payable                                                                           |                      |           | 2,353        |         |      |           | 2,465   |        
|                                              | Other liabilities                                                                                  |                      |           | 9,376        |         |      |           | 8,521   |        
|                                              |                                                                                                    |                      |           |              |         |      |           |        
|                                              | Total liabilities                                                                                  |                      |           | 1,010,733    |         |      |           | 921,611 |        
|Stockholders Equity:                         |                                                                                                    |                      |           |              |         |      |           |        
|                                              | Common stock, par value $2.50 per share; authorized 
20,000,000 shares; issued  7,718,543 shares |                      |           | 19,296       |         |      |           | 17,544  |        
|                                              | Surplus                                                                                            |                      |           | 53,677       |         |      |           | 33,745  |        
|                                              | Accumulated other comprehensive loss, net of tax                                                   |                      |           | (991         | )       |      |           | (3,377  | )      
|                                              | Retained earnings                                                                                  |                      |           | 28,134       |         |      |           | 41,926  |        
|                                              | Treasury stock at cost (93,355 and 119,217 shares)                                                 |                      |           | (2,109       | )       |      |           | (2,860  | )      
|                                              |                                                                                                    |                      |           |              |         |      |           |        
|                                              | Total stockholders equity                                                                         |                      |           | 98,007       |         |      |           | 86,978  |        
|                                              |                                                                                                    |                      |           |              |         |      |           |        
|Total liabilities and stockholders equity    |                                                                                                    | $                    | 1,108,740 |              |         | $    | 1,008,589 |        
|                                              |                                                                                                    |                      |           |              |         |      |           |        

The accompanying notes are an integral part of these consolidated financial
statements.

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PennRock Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME

In thousands, except share and per share data

|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |   |           |        | 
|--------------------------------------------------- |  | ------------------------------------------------------------- | ---------- | - | ----------------------- | ----- | ------ | - | --------- | ------ | ------ | - | --------- | ------ | 
|                                                    |  |                                                               |            |   | Year Ended December 31,
|                                                    |  |                                                               |            |   |                        
|                                                    |  |                                                               |            |   | 2003                    |       | 2002   |   | 2001     
|                                                    |  |                                                               |            |   |                         |       |        |   |          
|Interest income:                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Interest and fees on loans                                    |            | $ | 42,665                  |       |        | $ | 42,733    |        |        | $ | 43,787    |       
|                                                    |  | Securities available for sale:                                |            |   |                         |       |        |   |           |        |        |   |           |       
|                                                    |  |                                                               | Taxable    |   |                         | 9,335 |        |   |           | 12,159 |        |   |           | 13,995 | 
|                                                    |  |                                                               | Tax-exempt |   |                         | 845   |        |   |           | 1,902  |        |   |           | 3,906  | 
|                                                    |  | Mortgages held for sale                                       |            |   | 516                     |       |        |   | 248       |        |        |   | 212       |       
|                                                    |  | Other                                                         |            |   | 33                      |       |        |   | 100       |        |        |   | 374       |       
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Total interest income                                         |            |   | 53,394                  |       |        |   | 57,142    |        |        |   | 62,274    |       
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|Interest expense:                                   |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Deposits                                                      |            |   | 10,918                  |       |        |   | 15,157    |        |        |   | 24,012    |       
|                                                    |  | Short-term borrowings                                         |            |   | 1,033                   |       |        |   | 796       |        |        |   | 1,304     |       
|                                                    |  | Long-term debt                                                |            |   | 5,874                   |       |        |   | 7,330     |        |        |   | 7,050     |       
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Total interest expense                                        |            |   | 17,825                  |       |        |   | 23,283    |        |        |   | 32,366    |       
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Net interest income                                           |            |   | 35,569                  |       |        |   | 33,859    |        |        |   | 29,908    |       
|Provision for loan losses                           |  |                                                               | 1,917      |   |                         |       | 1,750  |   |           |        | 1,548  |  
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|Net interest income after provision for loan losses |  |                                                               | 33,652     |   |                         |       | 32,109 |   |           |        | 28,360 |  
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|Non-interest income:                                |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Service charges on deposit accounts                           |            |   | 3,320                   |       |        |   | 2,851     |        |        |   | 2,544     |       
|                                                    |  | Other service charges and fees                                |            |   | 354                     |       |        |   | 308       |        |        |   | 286       |       
|                                                    |  | Fiduciary activities                                          |            |   | 1,538                   |       |        |   | 1,522     |        |        |   | 1,492     |       
|                                                    |  | Investment management and benefit plan
administration         |            |   | 3,466                   |       |        |   | 2,572     |        |        |   | 1,990     |       
|                                                    |  | Net realized gains on sales of available for sale
securities  |            |   | 349                     |       |        |   | 369       |        |        |   | 1,537     |       
|                                                    |  | Mortgage banking                                              |            |   | 1,219                   |       |        |   | 513       |        |        |   | 500       |       
|                                                    |  | Increase in cash surrender value of bank owned life
insurance |            |   | 1,170                   |       |        |   | 1,243     |        |        |   | 1,015     |       
|                                                    |  | Other                                                         |            |   | 2,334                   |       |        |   | 1,766     |        |        |   | 1,666     |       
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Total non-interest income                                     |            |   | 13,750                  |       |        |   | 11,144    |        |        |   | 11,030    |       
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|Non-interest expenses:                              |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Salaries and benefits                                         |            |   | 18,096                  |       |        |   | 16,147    |        |        |   | 15,218    |       
|                                                    |  | Occupancy, net                                                |            |   | 2,044                   |       |        |   | 1,804     |        |        |   | 1,570     |       
|                                                    |  | Equipment depreciation and service                            |            |   | 1,333                   |       |        |   | 1,389     |        |        |   | 1,359     |       
|                                                    |  | Advertising and marketing                                     |            |   | 982                     |       |        |   | 998       |        |        |   | 955       |       
|                                                    |  | Computer program amortization and maintenance                 |            |   | 930                     |       |        |   | 1,064     |        |        |   | 1,076     |       
|                                                    |  | Other                                                         |            |   | 6,293                   |       |        |   | 6,045     |        |        |   | 5,104     |       
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Total non-interest expense                                    |            |   | 29,678                  |       |        |   | 27,447    |        |        |   | 25,282    |       
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|Income before income taxes                          |  |                                                               | 17,724     |   |                         |       | 15,806 |   |           |        | 14,108 |  
|Income taxes                                        |  |                                                               | 3,724      |   |                         |       | 2,580  |   |           |        | 2,041  |  
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|Net income                                          |  | $                                                             | 14,000     |   |                         | $     | 13,226 |   |           | $      | 12,067 |  
|                                                    |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|Per share information:                              |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Basic earnings                                                |            | $ | 1.84                    |       |        | $ | 1.73      |        |        | $ | 1.59      |       
|                                                    |  | Diluted earnings                                              |            |   | 1.81                    |       |        |   | 1.71      |        |        |   | 1.57      |       
|                                                    |  | Cash dividends                                                |            |   | 0.76                    |       |        |   | 0.68      |        |        |   | 0.63      |       
|Weighted average number of shares outstanding:      |  |                                                               |            |   |                         |       |        |   |           |        |        |  
|                                                    |  | Basic                                                         |            |   | 7,626,208               |       |        |   | 7,641,520 |        |        |   | 7,605,999 |       
|                                                    |  | Diluted                                                       |            |   | 7,741,287               |       |        |   | 7,728,009 |        |        |   | 7,661,921 |       

The accompanying notes are an integral part of these consolidated financial
statements.

35



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##### 



PennRock Financial Services Corp.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

In thousands, except per share data

|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |        |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | - | ------ |  | ------- | - | -------- | - | -------- | - | ---------- | ------ | ------------- | -- | ------ | - |  | -- | ------------- | ------ | - | - | ------ | ------ | -
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    | Accumulated   |        |   |   |       
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    | Other         |        |   |   |       
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    | Comprehensive |        |   |   |       
|                                                              |                                                                                                                                |   | Common |  |         |   |          |   | Retained |   | Treasury   |        | Income (Loss) |    |        |   | 
|                                                              |                                                                                                                                |   | Stock  |  | Surplus |   | Earnings |   | Stock    |   | Net of Tax |        | Total        
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |              
|Balance as of January 1, 2001                                 |                                                                                                                                | $ | 15,194 |  |         | $ | 11,114   |   |          | $ | 51,662     |        |               | ($ | 2,795  | ) |  | ($ | 2,577         | )      |   | $ | 72,598 |       
|Comprehensive income:                                         |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|                                                              | Net income                                                                                                                     |   |        |  |         |   |          |   |          |   |            | 12,067 |               |    |        |   |  |    |               |        |   |   |        | 12,067 |  
|                                                              | Change in net unrealized gains and
losses on securities available for
sale, net of reclassification
adjustment and tax effects |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               | (2,588 | ) |   |        | (2,588 | )
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|                                                              | Total comprehensive income                                                                                                     |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        | 9,479  |  
|Purchase of treasury stock                                    |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    | (588   | ) |  |    |               |        |   |   | (588   | )     
|Sale of treasury stock under
dividend reinvestment plan       |                                                                                                                                |   |        |  |         |   | 28       |   |          |   | (78        | )      |               |    | 1,751  |   |  |    |               |        |   |   | 1,701  |       
|Treasury stock issued as compensation                         |                                                                                                                                |   |        |  |         |   | 1        |   |          |   | (3         | )      |               |    | 23     |   |  |    |               |        |   |   | 21     |       
|5% stock dividend and cash paid in
lieu of fractional shares  |                                                                                                                                |   | 758    |  |         |   | 5,303    |   |          |   | (6,077     | )      |               |    |        |   |  |    |               |        |   |   | (16    | )     
|Cash dividend ($0.63 per share)                               |                                                                                                                                |   |        |  |         |   |          |   |          |   | (4,791     | )      |               |    |        |   |  |    |               |        |   |   | (4,791 | )     
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|Balance as of December 31, 2001                               |                                                                                                                                |   | 15,952 |  |         |   | 16,446   |   |          |   | 52,780     |        |               |    | (1,609 | ) |  |    | (5,165        | )      |   |   | 78,404 |       
|Comprehensive income:                                         |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|                                                              | Net income                                                                                                                     |   |        |  |         |   |          |   |          |   |            | 13,226 |               |    |        |   |  |    |               |        |   |   |        | 13,226 |  
|                                                              | Change in net unrealized gains and
losses on securities available for
sale, net of reclassification
adjustment and tax effects |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               | 1,788  |   |   |        | 1,788  |  
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|                                                              | Total comprehensive income                                                                                                     |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        | 15,014 |  
|Purchase of treasury stock                                    |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    | (3,139 | ) |  |    |               |        |   |   | (3,139 | )     
|Sale of treasury stock under
dividend reinvestment plan       |                                                                                                                                |   |        |  |         |   | (28      | ) |          |   | 342        |        |               |    | 1,527  |   |  |    |               |        |   |   | 1,841  |       
|Treasury stock issued as compensation                         |                                                                                                                                |   |        |  |         |   | (1       | ) |          |   | 5          |        |               |    | 53     |   |  |    |               |        |   |   | 57     |       
|Stock options exercised                                       |                                                                                                                                |   |        |  |         |   |          |   |          |   | (122       | )      |               |    | 308    |   |  |    |               |        |   |   | 186    |       
|10% stock dividend and cash paid in
lieu of fractional shares |                                                                                                                                |   | 1,592  |  |         |   | 17,328   |   |          |   | (18,950    | )      |               |    |        |   |  |    |               |        |   |   | (30    | )     
|Cash dividend ($0.68 per share)                               |                                                                                                                                |   |        |  |         |   |          |   |          |   | (5,355     | )      |               |    |        |   |  |    |               |        |   |   | (5,355 | )     
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|Balance as of December 31, 2002                               |                                                                                                                                |   | 17,544 |  |         |   | 33,745   |   |          |   | 41,926     |        |               |    | (2,860 | ) |  |    | (3,377        | )      |   |   | 86,978 |       
|Comprehensive income:                                         |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|                                                              | Net income                                                                                                                     |   |        |  |         |   |          |   |          |   |            | 14,000 |               |    |        |   |  |    |               |        |   |   |        | 14,000 |  
|                                                              | Change in net unrealized gains and
losses on securities available for
sale, net of reclassification
adjustment and tax effects |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               | 2,386  |   |   |        | 2,386  |  
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|                                                              | Total comprehensive income                                                                                                     |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        | 16,386 |  
|Purchase of treasury stock                                    |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    | (1,744 | ) |  |    |               |        |   |   | (1,744 | )     
|Sale of treasury stock under
dividend reinvestment plan       |                                                                                                                                |   |        |  |         |   |          |   |          |   | (5         | )      |               |    | 1,862  |   |  |    |               |        |   |   | 1,857  |       
|Treasury stock issued as compensation                         |                                                                                                                                |   |        |  |         |   |          |   |          |   | 3          |        |               |    | 44     |   |  |    |               |        |   |   | 47     |       
|Stock options exercised                                       |                                                                                                                                |   |        |  |         |   |          |   |          |   | (340       | )      |               |    | 589    |   |  |    |               |        |   |   | 249    |       
|10% stock dividend and cash paid in
lieu of fractional shares |                                                                                                                                |   | 1,752  |  |         |   | 19,932   |   |          |   | (21,713    | )      |               |    |        |   |  |    |               |        |   |   | (29    | )     
|Cash dividend ($0.76 per share)                               |                                                                                                                                |   |        |  |         |   |          |   |          |   | (5,737     | )      |               |    |        |   |  |    |               |        |   |   | (5,737 | )     
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       
|Balance as of December 31, 2003                               |                                                                                                                                | $ | 19,296 |  |         | $ | 53,677   |   |          | $ | 28,134     |        |               | ($ | 2,109  | ) |  | ($ | ($991         | )      |   | $ | 98,007 |       
|                                                              |                                                                                                                                |   |        |  |         |   |          |   |          |   |            |        |               |    |        |   |  |    |               |        |   |   |        |       

The accompanying notes are an integral part of these consolidated financial
statements.

36



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##### 



PennRock Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands

|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |          |         |  
|-------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------- | - | ----------------------- | -------- | ---- | - | -------- | ------- | - | - | -------- | ------- | -
|                                                         |                                                                                   |                                                               |   | Year Ended December 31,
|                                                         |                                                                                   |                                                               |   |                        
|                                                         |                                                                                   |                                                               |   | 2003                    |          | 2002 |   | 2001    
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |         
|OPERATING ACTIVITIES:                                    |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Net income                                                                        |                                                               | $ | 14,000                  |          |      | $ | 13,226   |         |   | $ | 12,067   |        
|                                                         | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                               |   |                         |          |      |   |          |         |   |   |          |        
|                                                         |                                                                                   | Provision for loan losses                                     |   |                         | 1,917    |      |   |          | 1,750   |   |   |          | 1,548   |  
|                                                         |                                                                                   | Depreciation and amortization                                 |   |                         | 1,310    |      |   |          | 1,331   |   |   |          | 1,462   |  
|                                                         |                                                                                   | Amortization of goodwill                                      |   |                         |          |      |   |          |         |   |   |          | 258     |  
|                                                         |                                                                                   | Accretion and amortization of securities                      |   |                         | 1,962    |      |   |          | 1,708   |   |   |          | (958    | )
|                                                         |                                                                                   | Deferred income taxes (benefit)                               |   |                         | (340     | )    |   |          | (290    | ) |   |          | (323    | )
|                                                         |                                                                                   | Net realized gains on sale of available for sale securities   |   |                         | (349     | )    |   |          | (369    | ) |   |          | (1,537  | )
|                                                         |                                                                                   | Proceeds from sales of mortgage loans                         |   |                         | 151,286  |      |   |          | 66,382  |   |   |          | 57,794  |  
|                                                         |                                                                                   | Originations of mortgages held for sale                       |   |                         | (145,912 | )    |   |          | (71,019 | ) |   |          | (59,994 | )
|                                                         |                                                                                   | (Gain) loss on sale of mortgage loans, net                    |   |                         | (231     | )    |   |          | (90     | ) |   |          | 15      |  
|                                                         |                                                                                   | Decrease in interest receivable                               |   |                         | 182      |      |   |          | 608     |   |   |          | 2,415   |  
|                                                         |                                                                                   | Decrease in interest payable                                  |   |                         | (112     | )    |   |          | (495    | ) |   |          | (1,807  | )
|                                                         |                                                                                   | Increase in cash surrender value of bank owned life insurance |   |                         | (1,118   | )    |   |          | (1,243  | ) |   |          | (1,015  | )
|                                                         |                                                                                   | Other changes, net                                            |   |                         | 102      |      |   |          | (1,741  | ) |   |          | (2,544  | )
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Net cash provided by operations                                                   |                                                               |   | 22,697                  |          |      |   | 9,758    |         |   |   | 7,381    |        
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|INVESTING ACTIVITIES:                                    |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Proceeds from sales of securities available for sale                              |                                                               |   | 93,375                  |          |      |   | 119,799  |         |   |   | 200,277  |        
|                                                         | Purchases of securities available for sale                                        |                                                               |   | (206,442                | )        |      |   | (231,116 | )       |   |   | (269,044 | )      
|                                                         | Maturities of securities available for sale                                       |                                                               |   | 109,694                 |          |      |   | 111,994  |         |   |   | 87,563   |        
|                                                         | Proceeds from sale of other real estate                                           |                                                               |   | 148                     |          |      |   | 479      |         |   |   | 367      |        
|                                                         | Purchase of bank owned life insurance                                             |                                                               |   |                         |          |      |   |          |         |   |   | (8,000   | )      
|                                                         | Net increase in loans                                                             |                                                               |   | (109,062                | )        |      |   | (44,471  | )       |   |   | (57,229  | )      
|                                                         | Net cash paid for business acquisition                                            |                                                               |   |                         |          |      |   | (1,665   | )       |   |   | (7,677   | )      
|                                                         | Purchases of premises and equipment                                               |                                                               |   | (1,609                  | )        |      |   | (3,226   | )       |   |   | (2,274   | )      
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Net cash used in investing activities                                             |                                                               |   | (113,896                | )        |      |   | (48,206  | )       |   |   | (56,017  | )      
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|FINANCING ACTIVITIES:                                    |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Net increase in non-interest bearing deposits                                     |                                                               |   | 19,155                  |          |      |   | 13,068   |         |   |   | 14,528   |        
|                                                         | Net increase (decrease) in interest bearing deposits                              |                                                               |   | 21,625                  |          |      |   | 66,499   |         |   |   | (33,828  | )      
|                                                         | Net increase (decrease) in short-term borrowings                                  |                                                               |   | 72,599                  |          |      |   | (36,391  | )       |   |   | 22,579   |        
|                                                         | Net increase (decrease) in long-term debt                                         |                                                               |   | (25,000                 | )        |      |   | 6,000    |         |   |   | 30,000   |        
|                                                         | Issuance of treasury stock                                                        |                                                               |   | 2,153                   |          |      |   | 2,085    |         |   |   | 1,722    |        
|                                                         | Purchase of treasury stock                                                        |                                                               |   | (1,744                  | )        |      |   | (3,139   | )       |   |   | (588     | )      
|                                                         | Cash dividends                                                                    |                                                               |   | (5,737                  | )        |      |   | (5,355   | )       |   |   | (4,791   | )      
|                                                         | Cash paid with stock dividend                                                     |                                                               |   | (29                     | )        |      |   | (30      | )       |   |   | (16      | )      
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Net cash provided by financing activities                                         |                                                               |   | 83,022                  |          |      |   | 42,737   |         |   |   | 29,606   |        
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Increase (decrease) in cash and cash equivalents                                  |                                                               |   | (8,177                  | )        |      |   | 4,289    |         |   |   | (19,030  | )      
|                                                         | Cash and cash equivalents at beginning of year                                    |                                                               |   | 32,318                  |          |      |   | 28,029   |         |   |   | 47,059   |        
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Cash and cash equivalents at end of year                                          |                                                               | $ | 24,141                  |          |      | $ | 32,318   |         |   | $ | 28,029   |        
|                                                         |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|Supplemental schedule of interest and income taxes paid: |                                                                                   |                                                               |   |                         |          |      |   |          |         |   |   |         
|                                                         | Total interest paid                                                               |                                                               | $ | 17,937                  |          |      | $ | 23,778   |         |   | $ | 30,558   |        
|                                                         | Total income taxes paid                                                           |                                                               |   | 3,550                   |          |      |   | 3,189    |         |   |   | 1,750    |        

The accompanying notes are an integral part of these consolidated financial
statements.

37



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##### 



PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of PennRock Financial Services Corp.
(PennRock) and subsidiaries conform to accounting principles generally
accepted in the United States of America and to general practices within the
banking industry. The following is a description of PennRocks more
significant accounting policies.

Business:

PennRock is a bank holding company incorporated in 1986 under the laws of
Pennsylvania. Blue Ball National Bank (the Bank), The National Advisory
Group, Inc. (National) and Pension Consulting Services, Inc. (PCS) are
wholly owned subsidiaries of PennRock. The Bank provides a broad range of
banking, trust and other financial services to consumers, small businesses and
corporations in south-central and southeastern Pennsylvania. PennRock
Insurance Group, Inc., a wholly owned subsidiary of the Bank, began operations
in the first quarter of 1999 to offer and sell annuity and other insurance
products. National, established in 1984, is the parent company of four
corporations: National Actuarial Consultants, Ltd. which provides consulting,
actuarial and administrative services to retirement and employee benefit plans;
National Financial Advisors, Inc. which offers investment, advisory and asset
management services to retirement plan sponsors and participants, and serves as
an investment advisor to the Dresher Family of Funds; NFA Brokerage Services,
Inc. which is a mutual-funds-only broker-dealer; and National Shareholder
Services, Inc. which provides transfer agency services. PCS is a third-party
administrator of retirement plans for small to medium sized businesses and
professional corporations.

Basis of Presentation:

The consolidated financial statements of PennRock include the accounts of
PennRock and its subsidiaries. All significant intercompany balances and
transactions have been eliminated. Certain prior year amounts may have been
reclassified to conform to current year presentation. All share and per-share
data have been restated to reflect the impact of 10% stock dividends paid in
both 2003 and 2002 and a 5% stock dividend paid in 2001.

Use of Estimates:

In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
consolidated balance sheets and operations for the reporting periods. One
material estimate that is particularly susceptible to significant change in the
near-term relates to the determination of the allowance for loan losses.
Actual results could differ significantly from those estimates.

Cash and Cash Equivalents:

For purposes of the Consolidated Statements of Cash Flows, PennRock defines
cash and cash equivalents to include cash, amounts due from banks, federal
funds sold and other short-term investments all of which have maturities of
less than 90 days.

Mortgages Held for Sale:

Mortgages originated and intended for sale in the secondary market are carried
at the lower of aggregate cost or fair value with market determined on the
basis of open commitments for committed loans. For uncommitted loans, market
is determined on the basis of current delivery prices in the secondary mortgage
market. Any resulting unrealized losses are included in other income under the
category Mortgage Banking. Mortgages are sold with mortgage servicing rights
retained by PennRock. Gains or losses on sales of mortgage loans are based on
the difference between the selling price and the carrying value of the related
mortgage loan sold.

Securities Available for Sale:

Debt securities are classified as available for sale if management intends to
hold these securities for an indefinite period of time but not necessarily to
maturity. All equity securities with readily determinable fair values are
classified as available for sale. All securities purchased by PennRock, 1906
Founders, Inc. or the Bank are classified as available for sale (AFS). Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of PennRocks assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. AFS securities
are carried at fair value. Unrealized gains or losses, net of the related
deferred tax effect, are reported in other comprehensive income.

38



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Purchase premiums and discounts on securities are amortized and accreted to
interest income using a method which approximates a level yield over the period
to maturity of the related securities. Purchase premiums and discounts on
mortgage-backed securities are amortized and accreted to interest income using
a method which approximates a level yield over the remaining lives of the
securities, taking into consideration assumed prepayment patterns. Interest
and dividend income are recognized when earned. A decline in the market value
of any debt or equity security below cost that is deemed to be other than
temporary is charged to income resulting in the establishment of a new cost
basis for the security. In estimating the other-than-temporary impairment
losses, management considers the financial condition and near-term prospects of
the issuer and the intent and ability of PennRock to retain its investment in
the issuer for a period sufficient to allow for any anticipated recovery in
fair value. Realized gains and losses for securities are included in other
income and are determined using the specific identification method.

Loans:

A substantial percentage of PennRocks loans are made to individuals and
businesses in the counties in which PennRock has branch facilities: Lancaster,
Berks and Chester Counties in Pennsylvania. Accordingly, the ultimate
collectibility of the loan portfolio is susceptible to changes in market
conditions in the above counties.

Loans are carried at the principal amount outstanding, net of unearned income,
if any, and are reduced by any charge-offs or specific valuation accounts.
Interest income is accounted for on an accrual basis. Loan fees, net of
certain origination costs are deferred and amortized over the lives of the
underlying loans using a method, which approximates a level yield. Interest
income is generally not accrued when, in the opinion of management, its full
collectibility is doubtful or when the loan becomes past due 90 days as to
principal or interest unless the loan is well secured and in the process of
collection. When a loan is designated as non-accrual, any accrued interest
receivable is charged against current earnings. The interest on these loans is
accounted for on a cash basis or cost recovery method. Loans may be returned
to accrual status when they become current as to principal and interest or
demonstrate a period of performance under the contractual terms, and, in
managements opinion, are fully collectible.

A loan is considered to be impaired when it is probable that all amounts,
including principal and interest, will not be collected in accordance with the
contractual terms of the loan agreement. In such cases, the amount of
impairment and any subsequent changes are recorded as an adjustment to the
allowance for loan losses. This analysis applies to all loans, both
collateralized and uncollateralized, except for large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, loans held
for sale and debt securities. PennRock evaluates a loan for impairment when
the loan is internally classified as an 8 (substandard) or 9 (doubtful).
All non-accrual loans not meeting the definition of smaller balance homogeneous
loans are considered impaired. PennRock generally measures impairment based
upon the present value of the loans expected future cash flows, except where
foreclosure or liquidation is probable or when the primary source of repayment
is provided by real estate collateral. In these circumstances, impairment is
based upon the fair value of the collateral. Impairment with regard to
substantially all of PennRocks impaired loans has been measured by the fair
value of the underlying collateral.

Allowance for Loan Losses:

PennRocks allowance for loan losses is established and maintained based upon
managements evaluation of the risks inherent in PennRocks loan portfolio
including the economic trends and other conditions in specific geographic areas
as they relate to the nature of PennRocks portfolio. PennRocks one-to four
family residential loans and consumer loans are homogeneous in nature and no
single loan is individually significant in terms of its size or potential risk
of loss. Therefore, management evaluates these loans as a group of loans.
Management utilizes historical loan losses, current trends in delinquencies and
charge-offs, plans for problem loan administration and resolution, the views of
its regulators, and other relevant factors, such as assumptions and projections
of current economic and market conditions in order to determine the adequacy of
the allowance for loan losses on these loans. For individually impaired
commercial real estate loans, an estimated value of the property or collateral
securing the loan is determined through an appraisal, where possible. If the
unpaid balance of the loan is greater than the estimated fair value of the
property, a reserve is established for the difference between the carrying
value and the estimated fair value or liquidation value. Other impaired loans
such as non-mortgage commercial loans are evaluated individually as well. For
these loans, a determination is made of the value of the collateral, if any,
through examination of current financial information. If the unpaid balance of
the loan is greater than estimated fair value of the collateral, a reserve is
established for the difference between the carrying value and the estimated
fair value or liquidation value.

39



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Allowances are also established on some classes of the performing portfolio and
represent loss allowances that have been established to recognize the probable
losses inherent in that class of the loan portfolio. In determining the
adequacy of the loss allowance, management considers changes in the size and
composition of the loan portfolio, historical loan loss experience, current
economic and market conditions and PennRocks credit administration procedures.

Management believes that the allowance for loan losses is adequate. While
management uses historical and currently available information to evaluate the
adequacy of the allowance, this evaluation is inherently subjective as it
requires material estimates, including the amounts and timing of expected
future cash flows on impaired loans, which may be susceptible to significant
change. Future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the allowance for loan
losses. Such agencies may require changes to the allowance based on their
judgments about information available to them at the time of their examination.

Loan losses are charged directly against the allowance for loan losses, and
recoveries on previously charged off loans are added to the allowance.
Provisions for loan losses charged against income increase the allowance.

Other Real Estate Owned:

Other real estate owned represents properties acquired through customers loan
defaults. When properties are acquired through foreclosure or deed in lieu of
foreclosure, any excess of the loan balance at the time of foreclosure over the
fair value of the real estate held as collateral is recognized as a loss and
charged to the allowance for loan losses. After foreclosure, other real estate
is reported at the lower of fair value at acquisition date or current fair
value less estimated disposal costs. Fair value is determined on the basis of
current appraisals obtained from independent sources. Subsequent write-downs
are charged to an allowance for other real estate established through
provisions for other real estate expenses. Costs of significant property
improvements which enhance the salability of the property are capitalized while
costs associated with holding or maintaining other real estate are charged to
operations as incurred. Other real estate owned is recorded as other assets in
the Consolidated Balance Sheets.

Premises and Equipment:

Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on straight line and accelerated methods based on the
estimated service lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income for the period.
Maintenance, repairs, and minor improvements are expensed as incurred.
Significant renewals and improvements are capitalized.

Goodwill:

Goodwill represents the excess of cost over the assigned value of net assets
acquired in a business combination. In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other
Intangible Assets. On January 1, 2002, PennRock adopted the provisions of
SFAS No. 142. This statement eliminates the regularly scheduled amortization
of goodwill and other intangibles with indefinite lives and replaces this
method with a two-step process for testing the impairment of goodwill on at
least an annual basis. This includes goodwill and intangibles recorded from
past business combinations and acquisitions. In October 2002, the FASB issued
SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147
clarifies that a branch acquisition that meets the definition of a business
is to be accounted for as a business combination. If the acquisition is a
business combination, then the purchase accounting provisions of SFAS No. 141
Business Combinations apply. Prior to SFAS No. 147, the intangibles arising
from a branch acquisition were accounted for in accordance with SFAS No. 72,
Accounting for Certain Acquisitions of Bank and Thrift Institutions and were
therefore not considered goodwill for purposes of SFAS No. 142. If the branch
acquisition is considered a business combination, SFAS No. 147 requires that
the unamortized balance of these intangibles are to be reclassified as goodwill
and accounted for and reported prospectively under the provisions of SFAS No.
142. Under SFAS No. 142, this reclassified goodwill will be evaluated for
impairment but will no longer be amortized. PennRock adopted the provisions of
SFAS No. 147 during the fourth quarter of 2002, and subsequently reclassified
$308,000 of intangibles from prior branch acquisitions to goodwill. In
addition, $75,000 of amortization of the reclassified intangible previously
expensed for the first three quarters of 2002 was reversed and taken back into
income. The adoption of SFAS No. 142 and SFAS No. 147 eliminates annual
goodwill amortization of approximately $587,000 per year. As of December 31,
2003 and December 31, 2002, PennRock has goodwill of $9.8 million which
includes the reclassified goodwill.

40



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Originated Mortgage Servicing Rights:

Originated mortgage loan servicing rights (OMSRs) are capitalized when
realized through the origination of mortgage loans that are subsequently sold
with servicing rights retained. PennRock recognizes OMSRs as an allocation of
the carrying amount of the loans sold between the loans sold and the servicing
rights retained. PennRock receives fees for servicing mortgage loans it has
sold. Servicing fees, expressed as a percentage of the unpaid principal
balance, are collected from the borrowers payments. Late charges and other
ancillary fees are also included in servicing income. Servicing fee revenue is
recognized as earned, unless collection is doubtful.

OMSRs are periodically evaluated for impairment based on the fair value of
these rights. The fair value of OMSRs is determined by discounting the
estimated future cash flows using a discount rate commensurate with the risks
involved. This method of valuation incorporates assumptions that market
participants would use in estimating future servicing income and expense,
including assumptions about prepayment, default, and interest rates. For
purposes of measuring impairment, the loans underlying the OMSRs are stratified
by type (conventional fixed-rate, conventional adjustable-rate, etc.).
Impairment is measured by the amount the book value of the OMSRs exceeds the
fair value of the OMSRs. Impairment, if any, is recognized through a valuation
allowance and a charge to current operations. The recovery of any previously
established impairment reserve is recognized as income in current operations.
OMSRs, net of valuation allowances, are amortized in proportion to, and over
the period of, the estimated net servicing revenue of the underlying mortgages,
which are secured by single-family properties. The amortization expense is
deducted from the related servicing fee revenue in the Consolidated Statements
of Income. The amortization of OMSRs is periodically evaluated and adjusted,
if necessary, to reflect changes in prepayment rates or other related factors.

Rate Lock Commitments:

In April of 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 clarifies certain
issues and amends definitions contained in SFAS No. 133 to ensure that
contracts with comparable characteristics are accounted for similarly. This
statement is effective for contracts entered into or modified after June 30,
2003, except for hedging transactions designated after June 30, 2003, in which
case it is effective in accordance with the respective effective dates outlined
in SFAS No. 133. With SFAS 149, the FASB 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 in accordance with
SFAS No. 133. Accordingly, PennRock adopted such accounting on July 1, 2003.

PennRock 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. Prior to July 1, 2003, such commitments were recorded to the extent of
fees received. Fees received were subsequently included in the net gain or
loss on sale of mortgage loans.

The cumulative effect of adopting SFAS No. 133 for rate lock commitments as of
July 1, 2003 was not material.

Fiduciary Assets and Assets Under Management:

Assets held by the Bank or National in a fiduciary or agency capacity are not
included in the consolidated financial statements since such assets are not
assets of the Bank or National. In accordance with banking industry practice,
income from fiduciary activities is generally recognized on a cash basis which
is not significantly different from amounts that would have been recognized on
the accrual basis.

41



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Federal Income Taxes:

PennRock and its subsidiaries file a consolidated federal income tax return.
Deferred income taxes have been provided for elements of income and expense
that are recognized for financial reporting purposes in periods different than
when such items are recognized for income tax purposes. PennRock accounts for
income taxes under the liability method which applies the enacted statutory tax
rates in effect as of the balance sheet date to differences between the book
and tax bases of assets and liabilities. The resulting deferred tax assets or
liabilities are adjusted to reflect changes in tax rates or laws. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period the change is enacted. For further discussion on
federal income taxes and deferred tax assets and liabilities, see Note 12:
Income Taxes in Notes to Consolidated Financial Statements.

Treasury Stock:

The purchase of PennRocks treasury stock is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on a first-in, first-out method.

Profit Sharing Plan:

Profit sharing contributions are calculated by a formula approved by the Board
of Directors and are based on the Banks return on equity. Costs are funded as
accrued.

Advertising, Marketing and Public Relations:

PennRock expenses advertising, marketing and public relations costs as
incurred. These expenses for 2003, 2002 and 2001 totaled $982,000, $998,000
and $955,000, respectively.

Stock-Based Compensation:

PennRock accounts for its stock options and stock-based compensation plans
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Based Compensation. Under
this method, no compensation expense is recognized for stock options when the
exercise price of the option equals fair value, or market price, of the
underlying stock at the date of grant. Under the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure  an
Amendment of FASB Statement No. 123, the fair value of a stock option is
recognized as compensation expense over the service period (generally the
vesting period). Since we have chosen to continue to account for stock options
and stock-based compensation plans in accordance with APB 25, we have adopted
the disclosure-only provisions of SFAS No. 123. This requires us to provide
pro forma net income and earnings per share information to show the impact on
earnings from the compensation expense as if the fair value approach of SFAS
No. 123 had been adopted. This disclosure is provided in Note 14: Stock
Incentive Plan in the Notes to Consolidated Financial Statements.

Net Income per Share:

Basic earnings per share (EPS) is computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted EPS is computed by dividing net income
available to common stockholders by the weighted-average number of common
shares outstanding during the period plus the maximum number of potentially
dilutive common shares related to PennRocks outstanding stock options.
Potentially dilutive common shares are computed using the treasury stock
method.

Earnings per common share have been computed based on the following:

Net income in thousands

|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|-------------------------------------------- |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                             |  | Years Ended December 31
|                                             |  |                        
|                                             |  | 2003                    |           | 2002 |  | 2001
|                                             |  |                         |           |      |  |     
|Net income                                   |  | $                       | 14,000    |      |  | $    | 13,226    |  |  | $ | 12,067    | 
|Average number of common shares outstanding  |  |                         | 7,626,208 |      |  |      | 7,641,520 |  |  |   | 7,605,999 | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|Basic earnings per share                     |  | $                       | 1.84      |      |  | $    | 1.73      |  |  | $ | 1.59      | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|Add effect of dilutive options               |  |                         | 115,079   |      |  |      | 86,489    |  |  |   | 55,922    | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|Diluted average number of shares outstanding |  |                         | 7,741,287 |      |  |      | 7,728,009 |  |  |   | 7,661,921 | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 
|Diluted earnings per share                   |  | $                       | 1.81      |      |  | $    | 1.71      |  |  | $ | 1.57      | 
|                                             |  |                         |           |      |  |      |           |  |  |   |           | 

42



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Segment Disclosure:

Management measures the performance and allocates the resources of PennRock as
a single segment, community banking. Therefore, we do not have any operating
segments that require additional information.

Recent Accounting Pronouncements:

FIN 45:

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.
This interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. This interpretation
does not prescribe a specific approach for subsequently measuring the
guarantors recognized liability over the term of the related guarantee. This
interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which is being superseded. The initial recognition and initial
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Although
applicable to PennRock, FIN 45 has not had a significant impact on its
consolidated financial condition or results of operations.

FIN 46:

In January of 2003, FASB issued FASB Interpretation No. 46 (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, Consolidated Financial
Statements. FIN 46 establishes the criteria used to identify variable interest
entities and to determine whether or not to consolidate a variable interest
entity. FIN 46 requires a variable interest entity to be consolidated by a
company if that company will absorb a majority of the expected losses, will
receive a majority of the expected residual returns, or both. On December 17,
2003, the FASB revised FIN 46 and deferred the date of FIN 46 to no later than
the end of the first reporting period that ends after March 15, 2004, however
for special purpose entities, PennRock would be required to apply FIN 46 as of
December 31, 2003. FIN 46 has had no impact on PennRocks consolidated
financial condition or results of operations.

SFAS No. 150:

In May of 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity. Most
of the guidance in SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 30, 2003. This
statement had no effect on PennRocks consolidated financial condition or
results of operations.

NOTE 2: RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required to maintain average balances of reserves on deposit with
the Federal Reserve Bank based on deposits outstanding. The amount of those
required reserves as of December 31, 2003 was approximately $9.8 million.
Balances maintained at the Federal Reserve Bank are included in cash and due
from banks.

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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

NOTE 3: SECURITIES AVAILABLE FOR SALE

The amortized cost and estimated fair value of securities available for sale,
with gross unrealized gains and losses, are as follows:

In thousands

|                                                            |  |                   |         |            |  |            |       |       |  |           |        |   |  |   |         | 
|----------------------------------------------------------- |  | ----------------- | ------- | ---------- |  | ---------- | ----- | ----- |  | --------- | ------ | - |  | - | ------- | 
|                                                            |  | December 31, 2003
|                                                            |  |                  
|                                                            |  |                   |         |            |  | Gross      |       | Gross |  | Estimated
|                                                            |  | Amortized         |         | Unrealized |  | Unrealized |       | Fair 
|                                                            |  | Cost              |         | Gains      |  | Losses     |       | Value
|                                                            |  |                   |         |            |  |            |       |      
|U.S. Treasury securities and other
U.S. government agencies |  | $                 | 10,909  |            |  | $          | 74    |       |  | $         | (114   | ) |  | $ | 10,869  | 
|Obligations of states and political
subdivisions            |  |                   | 13,289  |            |  |            | 346   |       |  |           | (436   | ) |  |   | 13,199  | 
|U.S. agency mortgage-backed securities                      |  |                   | 52,279  |            |  |            | 807   |       |  |           | (80    | ) |  |   | 53,006  | 
|Collateralized mortgage obligations                         |  |                   | 45,309  |            |  |            | 306   |       |  |           | (114   | ) |  |   | 45,501  | 
|Corporate notes                                             |  |                   | 80,638  |            |  |            | 31    |       |  |           | (3,649 | ) |  |   | 77,020  | 
|                                                            |  |                   |         |            |  |            |       |       |  |           |        |   |  |   |         | 
|Total debt securities available for sale                    |  |                   | 202,424 |            |  |            | 1,564 |       |  |           | (4,393 | ) |  |   | 199,595 | 
|Equity securities                                           |  |                   | 108,268 |            |  |            | 2,462 |       |  |           | (1,136 | ) |  |   | 109,594 | 
|                                                            |  |                   |         |            |  |            |       |       |  |           |        |   |  |   |         | 
|Total securities available for sale                         |  | $                 | 310,692 |            |  | $          | 4,026 |       |  | ($        | 5,529  | ) |  | $ | 309,189 | 
|                                                            |  |                   |         |            |  |            |       |       |  |           |        |   |  |   |         | 

|                                                            |  |                   |         |            |  |            |       |       |  |           |        |   |  |   |         | 
|----------------------------------------------------------- |  | ----------------- | ------- | ---------- |  | ---------- | ----- | ----- |  | --------- | ------ | - |  | - | ------- | 
|                                                            |  | December 31, 2002
|                                                            |  |                  
|                                                            |  |                   |         |            |  | Gross      |       | Gross |  | Estimated
|                                                            |  | Amortized         |         | Unrealized |  | Unrealized |       | Fair 
|                                                            |  | Cost              |         | Gains      |  | Losses     |       | Value
|                                                            |  |                   |         |            |  |            |       |      
|U.S. Treasury securities and other
U.S. government agencies |  | $                 | 7,018   |            |  | $          | 105   |       |  | $         | 0      |   |  | $ | 7,123   | 
|Obligations of states and political
subdivisions            |  |                   | 16,813  |            |  |            | 295   |       |  |           | (598   | ) |  |   | 16,510  | 
|U.S. agency mortgage-backed securities                      |  |                   | 81,131  |            |  |            | 1,538 |       |  |           | (102   | ) |  |   | 82,567  | 
|Collateralized mortgage obligations                         |  |                   | 58,870  |            |  |            | 419   |       |  |           | (192   | ) |  |   | 59,097  | 
|Corporate notes                                             |  |                   | 75,341  |            |  |            | 26    |       |  |           | (7,096 | ) |  |   | 68,271  | 
|                                                            |  |                   |         |            |  |            |       |       |  |           |        |   |  |   |         | 
|Total debt securities available for sale                    |  |                   | 239,173 |            |  |            | 2,383 |       |  |           | (7,988 | ) |  |   | 233,568 | 
|Equity securities                                           |  |                   | 70,758  |            |  |            | 1,974 |       |  |           | (1,486 | ) |  |   | 71,246  | 
|                                                            |  |                   |         |            |  |            |       |       |  |           |        |   |  |   |         | 
|Total securities available for sale                         |  | $                 | 309,931 |            |  | $          | 4,357 |       |  | ($        | 9,474  | ) |  | $ | 304,814 | 
|                                                            |  |                   |         |            |  |            |       |       |  |           |        |   |  |   |         | 

The amortized cost and fair value of debt securities as of December 31, 2003,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.

In thousands

|                                       |  |           |         |       |  |   |         | 
|-------------------------------------- |  | --------- | ------- | ----- |  | - | ------- | 
|                                       |  | Amortized |         | Fair 
|                                       |  | Cost      |         | Value
|                                       |  |           |         |      
|Due after one year through five years  |  | $         | 1,995   |       |  | $ | 2,024   | 
|Due after five years through ten years |  |           | 3,917   |       |  |   | 3,851   | 
|Due after ten years                    |  |           | 98,924  |       |  |   | 95,213  | 
|                                       |  |           |         |       |  |   |         | 
|                                       |  |           | 104,836 |       |  |   | 101,088 | 
|Mortgage backed securities             |  |           | 52,279  |       |  |   | 53,006  | 
|Collateralized mortgage obligations    |  |           | 45,309  |       |  |   | 45,501  | 
|                                       |  |           |         |       |  |   |         | 
|Total debt securities                  |  | $         | 202,424 |       |  | $ | 199,595 | 
|                                       |  |           |         |       |  |   |         | 

44



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Gains and losses from sales of securities available for sale are as follows:

In thousands

|                       |                       |   |      |      |      |   |        |       |   |   |       |       |  
|---------------------- | --------------------- | - | ---- | ---- | ---- | - | ------ | ----- | - | - | ----- | ----- | -
|                       |                       |   | 2003 |      | 2002 |   | 2001  
|                       |                       |   |      |      |      |   |       
|Debt securities        |                       |   |      |      |      |   |        |       |   |   |       |      
|                       | Gross gains           |   | $    | 638  |      |   | $      | 1,751 |   |   | $     | 1,693 |  
|                       | Gross losses          |   |      | (267 | )    |   |        | (103  | ) |   |       | (379  | )
|                       |                       |   |      |      |      |   |        |       |   |   |       |      
|                       | Total debt securities |   |      | 371  |      |   |        | 1,648 |   |   |       | 1,314 |  
|Equity securities, net |                       |   | (22  | )    |      |   | (1,279 | )     |   |   | 223   |      
|                       |                       |   |      |      |      |   |        |       |   |   |       |      
|Total securities gains |                       | $ | 349  |      |      | $ | 369    |       |   | $ | 1,537 |      
|                       |                       |   |      |      |      |   |        |       |   |   |       |      

Proceeds from sales of securities available for sale are as follows:

In thousands

|                  |  |      |        |      |  |      |         |  |  |   |         | 
|----------------- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                  |  | 2003 |        | 2002 |  | 2001
|                  |  |      |        |      |  |     
|Debt securities   |  | $    | 64,880 |      |  | $    | 100,456 |  |  | $ | 172,499 | 
|Equity securities |  |      | 28,495 |      |  |      | 19,343  |  |  |   | 27,778  | 
|                  |  |      |        |      |  |      |         |  |  |   |         | 
|Total proceeds    |  | $    | 93,375 |      |  | $    | 119,799 |  |  | $ | 200,277 | 
|                  |  |      |        |      |  |      |         |  |  |   |         | 

Securities with carrying values of $78.3 million and $57.6 million as of
December 31, 2003 and 2002 were pledged to secure public and trust deposits,
repurchase agreements as well as other purposes.

Information pertaining to securities with gross unrealized losses at December
31, 2003, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, is as follows:

In thousands

|                                                            |  |                         |     |                    |  |            |        |       |  |   |       |  |  |   |        | 
|----------------------------------------------------------- |  | ----------------------- | --- | ------------------ |  | ---------- | ------ | ----- |  | - | ----- |  |  | - | ------ | 
|                                                            |  | Less Than Twelve Months |     | Over Twelve Months
|                                                            |  |                         |     |                   
|                                                            |  | Gross                   |     |                    |  |            |        | Gross |  |   |       | 
|                                                            |  | Unrealized              |     | Fair               |  | Unrealized |        | Fair 
|                                                            |  | Losses                  |     | Value              |  | Losses     |        | Value
|                                                            |  |                         |     |                    |  |            |        |      
|U.S. Treasury securities and other
U.S. government agencies |  | $                       | 114 |                    |  | $          | 4,882  |       |  | $ |       |  |  | $ |        | 
|Obligations of states and political
subdivisions            |  |                         |     |                    |  |            |        |       |  |   | 436   |  |  |   | 5,331  | 
|U.S. agency mortgage-backed securities                      |  |                         | 67  |                    |  |            | 9,948  |       |  |   | 14    |  |  |   | 3,269  | 
|Collateralized mortgage obligations                         |  |                         | 60  |                    |  |            | 6,395  |       |  |   | 54    |  |  |   | 2,444  | 
|Corporate notes                                             |  |                         | 50  |                    |  |            | 4,950  |       |  |   | 3,599 |  |  |   | 51,826 | 
|                                                            |  |                         |     |                    |  |            |        |       |  |   |       |  |  |   |        | 
|Total debt securities                                       |  |                         | 291 |                    |  |            | 26,175 |       |  |   | 4,103 |  |  |   | 62,870 | 
|Equity securities                                           |  |                         | 57  |                    |  |            | 12,719 |       |  |   | 1,078 |  |  |   | 12,216 | 
|                                                            |  |                         |     |                    |  |            |        |       |  |   |       |  |  |   |        | 
|Total temporarily impaired securities                       |  | $                       | 348 |                    |  | $          | 38,894 |       |  | $ | 5,181 |  |  | $ | 75,086 | 
|                                                            |  |                         |     |                    |  |            |        |       |  |   |       |  |  |   |        | 

Management evaluates securities for other-than-temporary impairment when
economic or market concerns warrant such evaluation. Consideration is given to
the financial condition and near-term prospects of the issuer and the intent
and ability of PennRock to retain its investment in the issuer for a period
sufficient to allow for any anticipated recovery in fair value. For debt
securities, management considers whether the securities are issued by the
federal government or its agencies and whether downgrades by bond rating
agencies have occurred. In the case of equity securities, management reviews
industry analysts reports and corporate financial performance. As management
has the ability to hold debt and equity securities for the foreseeable future,
no declines are deemed to be other than temporary.

45



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##### 



PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

NOTE 4: LOANS

The loan portfolio, net of unearned income and deferred loan fees, as of
December 31, 2003 and 2002 is as follows:

In thousands

|                                        |                                    |   |         |         |      |   |         |         | 
|--------------------------------------- | ---------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                                        |                                    |   | 2003    |         | 2002
|                                        |                                    |   |         |         |     
|Commercial, financial and agricultural: |                                    |   |         |         |      |   |         |        
|                                        | Commercial, secured by real estate |   | $       | 371,105 |      |   | $       | 327,592 | 
|                                        | Agricultural                       |   |         | 7,387   |      |   |         | 6,838   | 
|                                        | Other                              |   |         | 91,934  |      |   |         | 83,801  | 
|Real estate  construction              |                                    |   | 45,319  |         |      |   | 32,140  |        
|Real estate  mortgage                  |                                    |   | 187,033 |         |      |   | 141,983 |        
|Consumer                                |                                    |   | 9,124   |         |      |   | 10,486  |        
|                                        |                                    |   |         |         |      |   |         |        
|Total loans                             |                                    | $ | 711,902 |         |      | $ | 602,840 |        
|                                        |                                    |   |         |         |      |   |         |        

In the ordinary course of business, the Bank has loan, deposit, and other
transactions with its directors, their affiliated companies, executive
management and their associates (as defined), collectively referred to as
related parties. Such transactions are on substantially the same terms,
including interest rates and collateral (with regard to loans), as those
prevailing at the time for comparable transactions with others. Activity for
the related party loans for the year ended December 31, 2003, was as follows:

In thousands

|                           |  |   |        |  
|-------------------------- |  | - | ------ | -
|Balance, January 1, 2003   |  | $ | 15,029 |  
|New loans                  |  |   | 4,811  |  
|Repayments                 |  |   | (5,404 | )
|                           |  |   |        |  
|Balance, December 31, 2003 |  | $ | 14,436 |  
|                           |  |   |        |  

Included in the loan portfolio are loans on which the Bank has ceased the
accrual of interest. Such loans amounted to $958,000 and $1.2 million as of
December 31, 2003 and 2002. If interest income had been recorded on all
non-accrual loans outstanding during the years 2003, 2002 and 2001, interest
income would have been increased as shown in the following table:

In thousands

|                                                             |  |      |    |      |  |      |    |  |  |   |     | 
|------------------------------------------------------------ |  | ---- | -- | ---- |  | ---- | -- |  |  | - | --- | 
|                                                             |  | 2003 |    | 2002 |  | 2001
|                                                             |  |      |    |      |  |     
|Interest which would have been recorded
under original terms |  | $    | 80 |      |  | $    | 78 |  |  | $ | 161 | 
|Interest income recorded during the year                     |  |      | 36 |      |  |      | 27 |  |  |   | 25  | 
|                                                             |  |      |    |      |  |      |    |  |  |   |     | 
|Net impact on interest income                                |  | $    | 44 |      |  | $    | 51 |  |  | $ | 136 | 
|                                                             |  |      |    |      |  |      |    |  |  |   |     | 

PennRock accounts for impaired loans in accordance with SFAS No. 114. Under
this standard, once a loan has been identified as being impaired, management
measures impairment using discounted cash flows, or in the case of collateral
dependent loans, the fair value of the collateral. When the recorded
investment in an impaired loan exceeds the estimated fair value, such
impairment is recognized as a valuation reserve that is included in the overall
allowance for loan losses.

46



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

The following table presents the status of impaired loans.

In thousands

|                                                  |  |      |     |      |  |   |       | 
|------------------------------------------------- |  | ---- | --- | ---- |  | - | ----- | 
|                                                  |  | 2003 |     | 2002
|                                                  |  |      |     |     
|Impaired loans with a reserve                     |  | $    | 187 |      |  | $ | 1,100 | 
|Impaired loans with no reserve                    |  |      | 771 |      |  |   | 112   | 
|                                                  |  |      |     |      |  |   |       | 
|Total impaired loans                              |  | $    | 958 |      |  | $ | 1,212 | 
|                                                  |  |      |     |      |  |   |       | 
|Reserve for impaired loans (1)                    |  | $    | 88  |      |  | $ | 343   | 
|Average balance of impaired loans during the year |  | $    | 959 |      |  | $ | 959   | 

(1) The reserve for impaired loans is part of the overall allowance for loan
losses.

NOTE 5: LOAN SERVICING

Mortgage loans serviced for Fannie Mae and Federal Home Loan Mortgage
Corporation are not included in the accompanying Consolidated Balance Sheets.
The unpaid principal balances of those loans were $222.9 million as of December
31, 2003 and $201.7 million as of December 31, 2002.

During 2003, $823,000 of originated mortgage servicing rights were capitalized
and $445,000 of amortization and impairment of mortgage servicing rights were
recorded. In 2002, $359,000 of originated mortgage servicing rights were
capitalized and $346,000 of amortization and impairment of mortgage servicing
rights were recorded. The estimated fair value of mortgage servicing rights
was $1,021,000 as of December 31, 2003 and $571,000 as of December 31, 2002
which are included in Other Assets in the Consolidated Balance Sheets.

NOTE 6: ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:

In thousands

|                                |  |      |       |      |  |      |        |   |  |   |       |  
|------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                |  | 2003 |       | 2002 |  | 2001
|                                |  |      |       |      |  |     
|Balance at beginning of year    |  | $    | 7,075 |      |  | $    | 7,262  |   |  | $ | 5,973 |  
|Provision charged to expense    |  |      | 1,917 |      |  |      | 1,750  |   |  |   | 1,548 |  
|Recoveries of loans charged-off |  |      | 368   |      |  |      | 260    |   |  |   | 329   |  
|                                |  |      |       |      |  |      |        |   |  |   |       |  
|                                |  |      | 9,360 |      |  |      | 9,272  |   |  |   | 7,850 |  
|Loans charged off               |  |      | (717  | )    |  |      | (2,197 | ) |  |   | (588  | )
|                                |  |      |       |      |  |      |        |   |  |   |       |  
|Balance at end of year          |  | $    | 8,643 |      |  | $    | 7,075  |   |  | $ | 7,262 |  
|                                |  |      |       |      |  |      |        |   |  |   |       |  

NOTE 7: PREMISES AND EQUIPMENT

Details of premises and equipment as of December 31 are as follows:

In thousands

|                              |  |      |         |      |  |   |         |  
|----------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                              |  | 2003 |         | 2002
|                              |  |      |         |     
|Land                          |  | $    | 2,222   |      |  | $ | 2,081   |  
|Premises                      |  |      | 15,419  |      |  |   | 15,128  |  
|Furniture and equipment       |  |      | 14,512  |      |  |   | 14,347  |  
|Construction in progress      |  |      | 112     |      |  |   | 42      |  
|                              |  |      |         |      |  |   |         |  
|Total cost                    |  |      | 32,265  |      |  |   | 31,598  |  
|Less accumulated depreciation |  |      | (15,982 | )    |  |   | (15,342 | )
|                              |  |      |         |      |  |   |         |  
|Net book value                |  | $    | 16,283  |      |  | $ | 16,256  |  
|                              |  |      |         |      |  |   |         |  

Depreciation expense was $1.3 million in 2003, 2002 and 2001.

47



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Future minimum rental payments that are related to non-cancelable operating
leases having initial terms in excess of one year are:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2004       |  | $ | 447,000   | 
|2005       |  |   | 452,000   | 
|2006       |  |   | 391,000   | 
|2007       |  |   | 371,000   | 
|2008       |  |   | 195,000   | 
|Thereafter |  |   | 1,022,000 | 

The lease agreements contain options to extend for various periods. The costs
of such rentals is not included in amounts listed above. Total lease payments
were $376,000, $318,000 and $229,000 in 2003, 2002 and 2001.

NOTE 8: DEPOSITS

The following is a summary of deposit account balances as of December 31, 2003
and 2002:

In thousands

|                              |  |      |         |      |  |   |         | 
|----------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                              |  | 2003 |         | 2002
|                              |  |      |         |     
|Non-interest bearing deposits |  | $    | 140,753 |      |  | $ | 121,598 | 
|NOW accounts                  |  |      | 48,408  |      |  |   | 44,429  | 
|Money market deposit accounts |  |      | 168,130 |      |  |   | 176,967 | 
|Savings accounts              |  |      | 88,438  |      |  |   | 79,884  | 
|Time deposits                 |  |      | 338,313 |      |  |   | 320,384 | 
|                              |  |      |         |      |  |   |         | 
|Total deposits                |  | $    | 784,042 |      |  | $ | 743,262 | 
|                              |  |      |         |      |  |   |         | 

The following shows the maturity of time deposits by year as of December 31,
2003:

In thousands

|      |  |   |         | 
|----- |  | - | ------- | 
|2004  |  | $ | 290,705 | 
|2005  |  |   | 38,378  | 
|2006  |  |   | 5,541   | 
|2007  |  |   | 2,248   | 
|2008  |  |   | 8       | 
|      |  |   |         | 
|Total |  | $ | 338,313 | 
|      |  |   |         | 

The aggregate amount of time deposits in denominations of $100,000 or more as
of December 31, 2003 and 2002 was $47.5 million and $42.1 million,
respectively.

48



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

NOTE 9: SHORT-TERM BORROWINGS

Federal funds purchased, securities sold under agreements to repurchase and the
treasury tax and loan note generally mature within one to thirty days from the
transaction date.

A summary of short-term borrowings is as follows for the years ended December
31, 2003, 2002 and 2001.

In thousands

|                                                    |                        |   |         |        |      |   |        |        |  |   |        |        | 
|--------------------------------------------------- | ---------------------- | - | ------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                    |                        |   | 2003    |        | 2002 |   | 2001  
|                                                    |                        |   |         |        |      |   |       
|Securities sold under agreements to repurchase:     |                        |   |         |        |      |   |        |        |  |   |        |       
|                                                    | Federal Home Loan Bank |   | $       | 97,000 |      |   | $      | 12,000 |  |   | $      | 45,000 | 
|                                                    | Customers              |   |         | 14,181 |      |   |        | 23,363 |  |   |        | 26,752 | 
|Federal funds purchased                             |                        |   |         |        |      |   |        |        |  |   | 4,330  |       
|U.S. Treasury tax and loan note                     |                        |   | 1,781   |        |      |   | 5,000  |        |  |   | 672    |       
|                                                    |                        |   |         |        |      |   |        |        |  |   |        |       
|Total short-term borrowings outstanding at year-end |                        | $ | 112,962 |        |      | $ | 40,363 |        |  | $ | 76,754 |       
|                                                    |                        |   |         |        |      |   |        |        |  |   |        |       
|Average interest rate at year-end                   |                        |   | 1.08    | %      |      |   | 1.08   | %      |  |   | 1.68   | %     
|Maximum outstanding at any month-end                |                        | $ | 134,373 |        |      | $ | 80,692 |        |  | $ | 76,754 |       
|Average amount outstanding                          |                        | $ | 90,245  |        |      | $ | 53,710 |        |  | $ | 38,094 |       
|Weighted average interest rate                      |                        |   | 1.14    | %      |      |   | 1.48   | %      |  |   | 3.42   | %     

The Bank controls all securities that serve as collateral for the securities
sold under agreements to repurchase.

The Bank has approved federal funds lines totaling $15.0 million and a
borrowing capacity of $303.5 million at the Federal Home Loan Bank of
Pittsburgh (the FHLB) as of December 31, 2003.

NOTE 10: LONG-TERM DEBT

Long-term debt consists of fixed rate advances from the FHLB with maturity
schedules as follows:

In thousands

|                  |         |                   |  |                    |  |        |      |               |          |      |        |   |         |                |  |                    |      |   |          |   |  |  | 
|----------------- | ------- | ----------------- |  | ------------------ |  | ------ | ---- | ------------- | -------- | ---- | ------ | - | ------- | -------------- |  | ------------------ | ---- | - | -------- | - |  |  | 
|December 31, 2003 |         | December 31, 2002
|                  |         |                  
|                  |         |                   |  |                    |  |        |      |               | Interest |      |        |   |         |                |  |                    |      |   | Interest
|Amount            |         | Maturity Date     |  | Rate               |  | Amount |      | Maturity Date |          | Rate
|                  |         |                   |  |                    |  |        |      |               |          |     
|$                 | 25,000  |                   |  | June 5, 2006       |  |        | 5.59 | %             |          | $    | 25,000 |   |         | June 2, 2003   |  |                    | 7.11 | %
|                  | 15,000  |                   |  | June 5, 2006       |  |        | 5.05 | %             |          |      | 15,000 |   |         | April 21, 2005 |  |                    | 6.27 | %
|                  | 11,000  |                   |  | June 4, 2007       |  |        | 6.76 | %             |          |      | 25,000 |   |         | June 2, 2005   |  |                    | 6.89 | %
|                  | 30,000  |                   |  | March 23, 2011     |  |        | 3.94 | %             |          |      | 11,000 |   |         | June 4, 2007   |  |                    | 6.76 | %
|                  | 6,000   |                   |  | July 16, 2012      |  |        | 4.09 | %             |          |      | 30,000 |   |         | March 23, 2011 |  |                    | 3.94 | %
|                  | 15,000  |                   |  | September 16, 2012 |  |        | 3.41 | %             |          |      | 6,000  |   |         | July 16, 2012  |  |                    | 4.09 | %
|                  |         |                   |  |                    |  |        |      |               |          |      |        |   | 15,000  |                |  | September 16, 2012 |      |   | 3.41     | %
|                  |         |                   |  |                    |  |        |      |               |          |      |        |   |         |                |  |                    |      |   |          |   |  | 
|$                 | 102,000 |                   |  |                    |  |        |      |               |          |      |        | $ | 127,000 |                |  |                    |      |   |          |   |  | 
|                  |         |                   |  |                    |  |        |      |               |          |      |        |   |         |                |  |                    |      |   |          |  

At December 31, 2003, $62 million of the long-term advances are convertible
advances. $45 million of the advances permit the FHLB to convert the advance
from a fixed-rate to a variable-rate at its discretion on a specified call date
following an initial lock-out period ranging from one year to five years.
$17 million of the advances further restrict the FHLBs ability to call the
advance unless 3-month LIBOR is at or above a specified rate. If the FHLB
exercises its option to convert an advance, PennRock has the option to repay
the advance in full. During 2003 and 2002, the FHLB did not exercise its
option to convert any advances. However, in 2003, one fixed-rate advance
bearing interest at 7.11% matured and was not replaced. Also during the second
quarter of 2003, two advances totaling $40 million were paid-off and replaced
by new advances at lower interest rates. The prepayment penalty assessed by
the FHLB is being amortized over the life of the new advances in accordance
with EITF 96-16 (Debtors Accounting for a Modification or Exchange of Debt
Instruments) issued by the FASB in 1996.

All advances from the FHLB are collateralized by a security agreement covering
qualified loans, and treasury, agency and mortgage-backed securities.

49



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

NOTE 11: CAPITAL TRANSACTIONS

On June 25, 2003, PennRock announced that the Board of Directors had authorized
the repurchase of up to 300,000 shares of PennRocks outstanding common stock.
Any repurchased shares will be held as treasury shares available for issuance
with future stock dividends and stock splits, employee benefit plans, executive
compensation plans, for issuance under the Dividend Reinvestment Plan or for
issuance for any other appropriate corporate purpose. PennRock began open
market repurchases of its outstanding common stock in 1995. In 2003, PennRock
purchased 66,424 shares for $1.7 million and reissued 92,286 shares. In 2002,
PennRock purchased 129,680 shares for $3.1 million and reissued 99,713 shares.
PennRock purchased 38,144 shares for $588,000 and reissued 126,198 shares in
2001. There were 93,355 shares with a cost of $2.1 million as of December 31,
2003 and 119,217 shares with a cost of $2.9 million as of December 31, 2002
held as treasury stock.

NOTE 12: INCOME TAXES

An analysis of the provision for income taxes included in the Consolidated
Statements of Income is as follows:

In thousands

|                         |  |      |       |      |  |      |       |   |  |   |       |  
|------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                         |  | 2003 |       | 2002 |  | 2001
|                         |  |      |       |      |  |     
|Current expense          |  | $    | 4,064 |      |  | $    | 2,870 |   |  | $ | 2,364 |  
|Deferred taxes           |  |      | (340  | )    |  |      | (290  | ) |  |   | (323  | )
|                         |  |      |       |      |  |      |       |   |  |   |       |  
|Total income tax expense |  | $    | 3,724 |      |  | $    | 2,580 |   |  | $ | 2,041 |  
|                         |  |      |       |      |  |      |       |   |  |   |       |  

A reconciliation between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate to income before provision
for income taxes is as follows:

|                                                         |  |      |       |      |  |      |       |    |  |  |       |   
|-------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                         |  | 2003 |       | 2002 |  | 2001
|                                                         |  |      |       |      |  |     
|Statutory federal income tax rate                        |  |      | 35.0  | %    |  |      | 35.0  | %  |  |  | 34.0  | % 
|Tax exempt income, net                                   |  |      | (10.9 | %)   |  |      | (12.0 | %) |  |  | (15.0 | %)
|Low income housing, rehabilitation
and other tax credits |  |      | (0.4  | %)   |  |      | (5.7  | %) |  |  | (4.9  | %)
|Disqualifying disposition of options                     |  |      | (0.7  | %)   |  |      | (0.4  | %) |  |  |       |   
|Other, net                                               |  |      | (2.0  | %)   |  |      | (0.6  | %) |  |  | 0.4   | % 
|                                                         |  |      |       |      |  |      |       |    |  |  |       |   
|Effective income tax rate                                |  |      | 21.0  | %    |  |      | 16.3  | %  |  |  | 14.5  | % 
|                                                         |  |      |       |      |  |      |       |    |  |  |       |   

The tax effect of tax-exempt income on income tax expense is shown net of TEFRA
interest expense disallowance.

Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of PennRocks
deferred tax liabilities and assets as of December 31, 2003 and 2002 are as
follows:

In thousands

|                          |                                                      |   |       |       |      |   |       |       | 
|------------------------- | ---------------------------------------------------- | - | ----- | ----- | ---- | - | ----- | ----- | 
|                          |                                                      |   | 2003  |       | 2002
|                          |                                                      |   |       |       |     
|Deferred tax assets:      |                                                      |   |       |       |      |   |       |      
|                          | Allowance for loan losses                            |   | $     | 2,948 |      |   | $     | 2,399 | 
|                          | Net unrealized loss on securities available for sale |   |       | 511   |      |   |       | 1,740 | 
|                          | Goodwill amortization or impairment                  |   |       | 165   |      |   |       | 165   | 
|                          | Other                                                |   |       | 50    |      |   |       | 29    | 
|                          |                                                      |   |       |       |      |   |       |      
|                          | Total deferred tax assets                            |   |       | 3,674 |      |   |       | 4,333 | 
|                          |                                                      |   |       |       |      |   |       |      
|Deferred tax liabilities: |                                                      |   |       |       |      |   |       |      
|                          | Depreciation                                         |   |       | 254   |      |   |       | 205   | 
|                          | Investment security discount                         |   |       | 362   |      |   |       | 253   | 
|                          |                                                      |   |       |       |      |   |       |      
|                          | Total deferred tax liabilities                       |   |       | 616   |      |   |       | 458   | 
|                          |                                                      |   |       |       |      |   |       |      
|Net deferred tax asset    |                                                      | $ | 3,058 |       |      | $ | 3,875 |      
|                          |                                                      |   |       |       |      |   |       |      

50



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Included in the table above is the recognition of unrealized gains and losses
on certain investments in debt and equity securities accounted for under SFAS
No. 115 for which no deferred tax expense or benefit was recognized in the
Consolidated Statements of Income.

Management believes that it is more likely than not that the net deferred tax
asset of $3.1 million will be realized since PennRock has a long history of
earnings and has a carry-back potential greater than the deferred tax asset and
is unaware of any reason that PennRock would not ultimately realize this asset.

NOTE 13: EMPLOYEE BENEFIT PLAN

The Bank has a non-contributory profit sharing plan covering substantially all
full time employees of the Bank. Contributions made to the plan by PennRock
were $1.4 million in 2003, $1.3 million in 2002 and $1.1 million in 2001.

NOTE 14: STOCK INCENTIVE PLAN

PennRock has a Stock Incentive Plan (the Plan), the terms of which permit the
granting of incentive stock options, nonqualified stock options and bonus stock
to key employees of PennRock and its subsidiaries. All options under this Plan
are granted at an exercise price equal to the market price at the date of the
grant and an options maximum term is ten years.

A summary of PennRocks options outstanding as of December 31 is as follows:

|                                |           |  |         |         |       |   |          |       |       |  |         |         |          |   |       |       |  |  |          |         |   |   |       |       | 
|------------------------------- | --------- |  | ------- | ------- | ----- | - | -------- | ----- | ----- |  | ------- | ------- | -------- | - | ----- | ----- |  |  | -------- | ------- | - | - | ----- | ----- | 
|                                |           |  | 2003    |         | 2002  |   | 2001    
|                                |           |  |         |         |       |   |         
|                                |           |  |         |         |       |   | Weighted |       |       |  |         |         | Weighted |   |       |       |  |  | Weighted
|                                |           |  |         |         |       |   | Average  |       |       |  |         |         | Average  |   |       |       |  |  | Average 
|                                |           |  |         |         |       |   | Exercise |       |       |  |         |         | Exercise |   |       |       |  |  | Exercise
|                                |           |  | Shares  |         | Price |   | Shares   |       | Price |  | Shares  |         | Price   
|                                |           |  |         |         |       |   |          |       |       |  |         |         |         
|Outstanding, beginning
of year  |           |  | 243,903 |         |       | $ | 16.29    |       |       |  | 193,878 |         |          | $ | 13.76 |       |  |  | 93,718   |         |   | $ | 15.14 |      
|                                | Granted   |  |         | 52,800  |       |   |          | 26.82 |       |  |         | 65,560  |          |   |       | 23.13 |  |  |          | 106,068 |   |   |       | 12.19 | 
|                                | Exercised |  |         | (20,991 | )     |   |          | 11.96 |       |  |         | (15,535 | )        |   |       | 11.96 |  |  |          |         |   |   |       |       | 
|                                | Forfeited |  |         |         |       |   |          |       |       |  |         |         |          |   |       |       |  |  |          | (5,908  | ) |   |       | 11.95 | 
|                                |           |  |         |         |       |   |          |       |       |  |         |         |          |   |       |       |  |  |          |         |   |   |       |      
|Outstanding, end of
year        |           |  | 275,712 |         |       | $ | 18.64    |       |       |  | 243,903 |         |          | $ | 16.29 |       |  |  | 193,878  |         |   | $ | 13.76 |      
|Options exercisable at
year-end |           |  | 71,594  |         |       | $ | 14.58    |       |       |  | 92,585  |         |          | $ | 11.12 |       |  |  | 30,333   |         |   | $ | 16.65 |      
|                                |           |  |         |         |       |   |          |       |       |  |         |         |          |   |       |       |  |  |          |         |   |   |       |      

The weighted average fair values of options granted in the past three years are
as follows:

|         |  |       |       |       |  |       |         |       |  |       |      |  |  |     |         |  |  |   |      | 
|-------- |  | ----- | ----- | ----- |  | ----- | ------- | ----- |  | ----- | ---- |  |  | --- | ------- |  |  | - | ---- | 
|2003     |  | 2002  |       | 2001 
|         |  |       |       |      
|         |  | Per   |       |       |  |       |         | Per   |  |       |      |  |  | Per
|Total    |  | Share |       | Total |  | Share |         | Total |  | Share
|         |  |       |       |       |  |       |         |       |  |      
|$580,160 |  | $     | 10.99 |       |  | $     | 506,539 |       |  | $     | 7.68 |  |  | $   | 294,515 |  |  | $ | 3.24 | 
|         |  |       |       |       |  |       |         |       |  |       |      |  |  |     |         |  |  |   |      | 

51



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Information pertaining to options outstanding as of December 31, 2003 is as
follows:

|                           |  |                     |         |                     |  |           |  |             |       |          |  |  |        |          |  |   |       |  |  | 
|-------------------------- |  | ------------------- | ------- | ------------------- |  | --------- |  | ----------- | ----- | -------- |  |  | ------ | -------- |  | - | ----- |  |  | 
|                           |  | Options Outstanding |         | Options Exercisable
|                           |  |                     |         |                    
|                           |  |                     |         |                     |  | Weighted  |  |             |       |          |  |  |        |          |  |   |       | 
|                           |  |                     |         |                     |  | Average   |  | Weighted    |       |          |  |  |        | Weighted
|                           |  |                     |         |                     |  | Remaining |  | Average     |       |          |  |  |        | Average 
|                           |  | Number              |         | Contractual         |  | Exercise  |  | Number      |       | Exercise
|Range of Exercise Prices   |  | Outstanding         |         | Life                |  | Price     |  | Exercisable |       | Price   
|                           |  |                     |         |                     |  |           |  |             |       |         
|$11.96 - $18.30            |  |                     | 150,047 |                     |  | 6.1 years |  | $           | 13.69 |          |  |  | 64,289 |          |  | $ | 13.91 | 
|$20.40 - $26.82            |  |                     | 125,665 |                     |  | 8.4 years |  |             | 24.56 |          |  |  | 7,305  |          |  |   | 20.46 | 
|                           |  |                     |         |                     |  |           |  |             |       |          |  |  |        |          |  |   |       |  |  | 
|Outstanding at end of
year |  |                     | 275,712 |                     |  | 7.2 years |  | $           | 18.64 |          |  |  | 71,594 |          |  | $ | 14.58 | 
|                           |  |                     |         |                     |  |           |  |             |       |          |  |  |        |          |  |   |       | 

PennRock has elected to account for its stock options and stock-based
compensation plans using the intrinsic value method in accordance with APB 25,
Accounting for Stock Based Compensation. Under this method, no compensation
expense is recognized for stock options when the exercise price equals fair
value at the date of grant. Since the Plan stipulates that the exercise price
of the options is always equal to the market price at the date of the grant, we
have recognized no compensation costs under the Plan. Had compensation costs
for the Plan been determined based on the fair value of the options at the
grant dates in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, as amended, PennRocks net income and earnings per share would
have been as follows:

In thousands, except per share data

|                                                                                                                                            |                       |   |        |      |      |   |        |      |  |   |        |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                            |                       |   | 2003   |      | 2002 |   | 2001  
|                                                                                                                                            |                       |   |        |      |      |   |       
|Net income  as reported                                                                                                                    |                       | $ | 14,000 |      |      | $ | 13,226 |      |  | $ | 12,067 |     
|Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects |                       |   | (243   | )    |      |   | (165   | )    |  |   | (186   | )   
|                                                                                                                                            |                       |   |        |      |      |   |        |      |  |   |        |     
|Pro-forma net income                                                                                                                        |                       | $ | 13,757 |      |      | $ | 13,061 |      |  | $ | 11,881 |     
|                                                                                                                                            |                       |   |        |      |      |   |        |      |  |   |        |     
|Earnings per share:                                                                                                                         |                       |   |        |      |      |   |        |      |  |   |        |     
|                                                                                                                                            | Basic  as reported   |   | $      | 1.84 |      |   | $      | 1.73 |  |   | $      | 1.59 | 
|                                                                                                                                            | Basic  pro-forma     |   |        | 1.80 |      |   |        | 1.71 |  |   |        | 1.56 | 
|                                                                                                                                            | Diluted  as reported |   |        | 1.81 |      |   |        | 1.71 |  |   |        | 1.57 | 
|                                                                                                                                            | Diluted  pro-forma   |   |        | 1.78 |      |   |        | 1.69 |  |   |        | 1.55 | 

The fair value of each option is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2003, 2002 and 2001:

|                        |  |           |       |            |  |            |       |   |  |  |       |  
|----------------------- |  | --------- | ----- | ---------- |  | ---------- | ----- | - |  |  | ----- | -
|                        |  | 2003      |       | 2002       |  | 2001      
|                        |  |           |       |            |  |           
|Dividend yield          |  |           | 2.62  | %          |  |            | 3.33  | % |  |  | 3.82  | %
|Expected volatility     |  |           | 40.00 | %          |  |            | 36.00 | % |  |  | 30.00 | %
|Risk free interest rate |  |           | 4.89  | %          |  |            | 5.58  | % |  |  | 5.44  | %
|Expected life           |  | 8.0 years |       | 7.12 years |  | 3.41 years

52



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

The following table sets forth information as of December 31, 2003, with
respect to stock compensation plans under which equity securities are
authorized for issuance:

|                                                            |  |                  |         |                |  |               |       |  |  |  |         | 
|----------------------------------------------------------- |  | ---------------- | ------- | -------------- |  | ------------- | ----- |  |  |  | ------- | 
|                                                            |  | Number of        |         |                |  |               |       |  |  | 
|                                                            |  | Securities to be |         | Weighted       |  | Number of    
|                                                            |  | Issued Upon      |         | Average        |  | Securities   
|                                                            |  | Exercise of      |         | Exercise Price |  | Remaining    
|                                                            |  | Outstanding      |         | of Outstanding |  | Available for
|                                                            |  | Options          |         | Options        |  | Future Issues
|                                                            |  |                  |         |                |  |              
|Stock based compensation plans approved
by stockholders     |  |                  | 275,329 |                |  | $             | 18.65 |  |  |  | 486,200 | 
|Stock based compensation plans not
approved by stockholders |  |                  | 383     |                |  |               | 11.96 |  |  |  |         | 
|                                                            |  |                  |         |                |  |               |       |  |  |  |         | 
|Total                                                       |  |                  | 275,712 |                |  | $             | 18.64 |  |  |  | 486,200 | 
|                                                            |  |                  |         |                |  |               |       |  |  |  |         | 

Of the shares outstanding under stock based compensation plans approved by
stockholders, 156,969 were issued under the Omnibus Stock Plan of 1992 and
118,360 were issued under the Stock Incentive Plan of 2002.

NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES AND CONCENTRATIONS OF CREDIT
RISK

PennRocks financial statements do not reflect certain off-balance sheet
arrangements that include various commitments and contingent liabilities that
arise in the normal course of business to meet the financing needs of its
customers and that involve elements of credit risk, interest rate risk and
liquidity risk. These financial instruments include commitments to extend
credit, standby letters of credit, guarantees, and liability for assets held in
trust. PennRocks exposure to credit loss in the event of nonperformance by
the other party on the financial instrument is represented by the contractual
amount and the collateral value, if any, of those instruments. PennRock uses
the same credit policies in commitments and conditional obligations as it does
for on-balance sheet instruments.

A summary of PennRocks commitments and contingent liabilities as of December
31, 2003 and 2002 are as follows:

In thousands

|                                                    |  |      |         |      |  |   |         | 
|--------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                    |  | 2003 |         | 2002
|                                                    |  |      |         |     
|Commitments to extend credit                        |  | $    | 137,838 |      |  | $ | 146,559 | 
|Financial and performance standby letters of credit |  |      | 37,197  |      |  |   | 42,271  | 
|Commercial letters of credit                        |  |      |         |      |  |   | 164     | 
|Commitments to purchase securities                  |  |      | 1,990   |      |  |   |         | 

Commitments to extend credit are agreements to lend to a customer to the extent
that there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
represent future cash requirements. Management evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by management upon extension of credit is based on a credit
evaluation of the customer.

Stand-by letters of credit are conditional commitments issued by PennRock to
guarantee the performance of a customer to a third party. The term of the
letters of credit varies from one month to 24 months and may have renewal
features. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. PennRock holds
collateral supporting those commitments for which collateral is deemed
necessary.

53



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PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Most of PennRocks business activity is with customers located within
PennRocks defined market area. Investments in state and municipal securities
may also involve government entities within PennRocks market area. The
concentrations by loan type are set forth in Note 4: Loans in the Notes to
Consolidated Financial Statements. The distribution of commitments to extend
credit approximates the distribution of loans outstanding. The Bank, as a
matter of policy, does not extend credit to any single borrower or group of
related borrowers in excess of 65% of its legal lending limit. As of December
31, 2003, our legal lending limit was $15.2 million while our in-house
lending limit was $9.9 million.

NOTE 16: RESTRICTIONS ON RETAINED EARNINGS

Certain restrictions exist regarding the ability of the Bank to transfer funds
to PennRock in the form of cash dividends. The approval of the Comptroller of
the Currency is required if the total dividends declared by a national bank in
any calendar year exceeds the banks net profits (as defined) for that year
combined with its retained net profits for the preceding two calendar years.
Under this formula, the Bank can declare dividends during 2004, without
approval of the Comptroller of the Currency, of approximately $15.5 million
plus an additional amount equal to the Banks net profit (as defined) for 2004
up to the date of any such dividend declaration.

NOTE 17: COMPREHENSIVE INCOME

PennRock has elected to report its comprehensive income in the Consolidated
Statements of Stockholders Equity. The only element of other comprehensive
income applicable to PennRock is the net unrealized gain or loss on available
for sale securities.

The components of the change in unrealized gains (losses) on securities
available for sale are as follows:

In thousands

|                                                                 |  |      |        |      |  |      |       |   |  |    |        |  
|---------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | -- | ------ | -
|                                                                 |  | 2003 |        | 2002 |  | 2001
|                                                                 |  |      |        |      |  |     
|Net unrealized holding gains (losses) arising during the year    |  | $    | 4,020  |      |  | $    | 3,120 |   |  | ($ | 2,384  | )
|Reclassification adjustment for net gains realized in net income |  |      | (349   | )    |  |      | (369  | ) |  |    | (1,537 | )
|                                                                 |  |      |        |      |  |      |       |   |  |    |        |  
|Net unrealized holding gains (losses) before taxes               |  |      | 3,671  |      |  |      | 2,751 |   |  |    | (3,921 | )
|Tax effect                                                       |  |      | (1,285 | )    |  |      | (963  | ) |  |    | 1,333  |  
|                                                                 |  |      |        |      |  |      |       |   |  |    |        |  
|Net change                                                       |  | $    | 2,386  |      |  | $    | 1,788 |   |  | ($ | 2,588  | )
|                                                                 |  |      |        |      |  |      |       |   |  |    |        |  

NOTE 18: REGULATORY MATTERS

PennRock 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 PennRocks financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, PennRock and the Bank must meet specific capital guidelines
that involve quantitative measures of PennRocks assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. PennRocks and the Banks 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 PennRock and the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2003,
that PennRock and the Bank meet all capital adequacy requirements to which they
are subject. Prompt corrective action provisions are not applicable to bank
holding companies.

54



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##### 



PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

As of December 31, 2003, the most recent notification from the Federal Reserve
Bank categorized PennRock as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, PennRock
must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth below. There are no conditions or events since that
notification that management believes have changed this category. PennRocks
and the Banks actual capital amounts and ratios are also presented in the
following table.

|                                  |                                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |     |     |  
|--------------------------------- | ------------------------------------- | ----------------------- | - | ------ | ------ | ----------------- |  | ----------------- | ----- | ----- | - | ----------------- | ------ | ----------- |  | ---- | --- | - | - | ------ | ------ |  |  | --- | --- | -
|                                  |                                       |                         |   |        |        |                   |  |                   |       |       |   | To Be Well        |        |             |  |      |     |   |   |       
|                                  |                                       |                         |   |        |        |                   |  |                   |       |       |   | Capitalized Under |        |             |  |      |     |   |   |       
|                                  |                                       |                         |   |        |        |                   |  |                   |       |       |   | Prompt Corrective |        | For Capital
|                                  |                                       |                         |   | Actual |        | Action Provisions |  | Adequacy Purposes
|                                  |                                       |                         |   |        |        |                   |  |                  
|                                  |                                       |                         |   | Amount |        | Ratio             |  | Amount            |       | Ratio |   | Amount            |        | Ratio      
|                                  |                                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |            
|PennRock Financial
Services Corp. |                                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |    
|As of December 31, 2003:          |                                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |    
|                                  | Total capital to
risk-weighted assets |                         | $ | 98,078 |        |                   |  | 11.64             | %     |       |   |                   |        |             |  |      |     |   | $ | 67,418 |        |  |  | 8.0 | %  
|                                  | Tier 1 capital:                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |     |    
|                                  |                                       | to risk-weighted assets |   |        | 88,838 |                   |  |                   | 10.54 | %     |   |                   |        |             |  |      |     |   |   |        | 33,709 |  |  |     | 4.0 | %
|                                  |                                       | to average assets       |   |        | 88,838 |                   |  |                   | 8.23  | %     |   |                   |        |             |  |      |     |   |   |        | 43,168 |  |  |     | 4.0 | %
|As of December 31, 2002:          |                                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |    
|                                  | Total capital to
risk-weighted assets |                         | $ | 87,528 |        |                   |  | 11.57             | %     |       |   |                   |        |             |  |      |     |   | $ | 60,523 |        |  |  | 8.0 | %  
|                                  | Tier 1 capital:                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |     |    
|                                  |                                       | to risk-weighted assets |   |        | 80,234 |                   |  |                   | 10.61 | %     |   |                   |        |             |  |      |     |   |   |        | 30,262 |  |  |     | 4.0 | %
|                                  |                                       | to average assets       |   |        | 80,234 |                   |  |                   | 7.92  | %     |   |                   |        |             |  |      |     |   |   |        | 40,532 |  |  |     | 4.0 | %
|Blue Ball National Bank           |                                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |    
|As of December 31, 2003:          |                                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |    
|                                  | Total capital to
risk-weighted assets |                         | $ | 95,409 |        |                   |  | 11.37             | %     |       | $ | 83,940            |        |             |  | 10.0 | %   |   | $ | 67,152 |        |  |  | 8.0 | %  
|                                  | Tier 1 capital:                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |     |    
|                                  |                                       | to risk-weighted assets |   |        | 86,021 |                   |  |                   | 10.25 | %     |   |                   | 50,364 |             |  |      | 6.0 | % |   |        | 33,576 |  |  |     | 4.0 | %
|                                  |                                       | to average assets       |   |        | 86,021 |                   |  |                   | 7.99  | %     |   |                   | 53,829 |             |  |      | 5.0 | % |   |        | 43,063 |  |  |     | 4.0 | %
|As of December 31, 2002:          |                                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |    
|                                  | Total capital to
risk-weighted assets |                         | $ | 86,831 |        |                   |  | 11.55             | %     |       | $ | 75,178            |        |             |  | 10.0 | %   |   | $ | 60,143 |        |  |  | 8.0 | %  
|                                  | Tier 1 capital:                       |                         |   |        |        |                   |  |                   |       |       |   |                   |        |             |  |      |     |   |   |        |        |  |  |     |    
|                                  |                                       | to risk-weighted assets |   |        | 79,029 |                   |  |                   | 10.51 | %     |   |                   | 45,107 |             |  |      | 6.0 | % |   |        | 30,071 |  |  |     | 4.0 | %
|                                  |                                       | to average assets       |   |        | 79,029 |                   |  |                   | 7.79  | %     |   |                   | 50,735 |             |  |      | 5.0 | % |   |        | 40,587 |  |  |     | 4.0 | %

NOTE 19: FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than a forced liquidation. Fair value
is best determined based upon quoted market prices. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions would significantly affect the estimates. SFAS No. 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements.

55



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##### 



PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of future business. The
value of significant sources of income such as fiduciary or asset management
fees or mortgage banking operations has not been estimated. In addition, the
tax effect relative to the recognition of unrealized gains and losses can have
a significant impact on fair value estimates and have not been considered in
any of the estimates. Accordingly, the aggregate fair value amounts do not
represent the underlying value of PennRock.

We used the following methods and assumptions in estimating the fair value of
PennRocks financial instruments:

Cash and cash equivalents:



| |  | The carrying amounts reported in the Consolidated Balance Sheets for cash
and short-term investments approximate their fair values.
| |  | -----------------------------------------------------------------------------------------------------------------------------------

Mortgages held for sale:



| |  | The fair value of mortgages held for sale is estimated using current
secondary market rates.
| |  | --------------------------------------------------------------------------------------------

Securities:



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

Loans:



| |  | Loans are segregated by category, such as commercial, commercial real
estate, residential mortgage, and installment. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and non-performing status. The fair value of loans is calculated
by discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit risk inherent in the
loan. The estimate of average maturity is based on historical experience
with prepayments for each loan classification modified, as required, by an
estimate of the effect of current economic and lending conditions. The
carrying amount of accrued interest receivable approximates its fair value.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Off-balance sheet instruments:



| |  | For PennRocks off-balance sheet instruments consisting of commitments to
extend credit and financial and performance standby letters of credit, the
estimated fair value is the same as the instruments contract or notional
values since they are priced at market at the time of funding.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Deposit liabilities:



| |  | The fair values of deposits with no stated maturities, such as demand
deposits, savings accounts, NOW and money market deposits are calculated
using estimated future cash flows, discounted at the FHLB overnight advance
rate less the Banks operating costs to service the account. We also assume
that 1% of the outstanding balance of the accounts will be withdrawn each
month for 100 months. Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Short-term borrowings:



| |  | The carrying amounts of federal funds purchased and securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank and other
short-term borrowings approximate their fair values.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Long-term debt:



| |  | The fair values of long-term debt are estimated using discounted cash flow
analyses, based on PennRocks incremental borrowing rates for similar types
of borrowing arrangements.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accrued interest payable:



| |  | The fair value of accrued interest payable is estimated to be the current
book value.
| |  | -------------------------------------------------------------------------------------

56



---



##### 



PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

As of December 31, 2003 and 2002,
the estimated fair values of financial instruments based on disclosed assumptions are as follows:

In thousands

|                                         |                                                     |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   |         |         |   |   |         |         | 
|---------------------------------------- | --------------------------------------------------- | -------------------------------------- | - | -------- | ------- | ----- | - | ------- | ------- |  |  | -------- |  | ----- | - | ------- | ------- | - | - | ------- | ------- | 
|                                         |                                                     |                                        |   | 2003     |         | 2002 
|                                         |                                                     |                                        |   |          |         |      
|                                         |                                                     |                                        |   | Carrying |         | Fair  |   |         |         |  |  | Carrying |  | Fair 
|                                         |                                                     |                                        |   | Amount   |         | Value |   |         |         |  |  | Amount   |  | Value
|                                         |                                                     |                                        |   |          |         |       |   |         |         |  |  |          |  |      
|Financial assets:                        |                                                     |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   |         |         |   |   |        
|                                         | Cash and due from banks                             |                                        | $ | 17,858   |         |       | $ | 17,858  |         |  |  |          |  |       | $ | 23,092  |         |   | $ | 23,092  |        
|                                         | Short-term investments                              |                                        |   | 6,283    |         |       |   | 6,283   |         |  |  |          |  |       |   | 9,226   |         |   |   | 9,226   |        
|                                         | Mortgages held for sale                             |                                        |   | 2,004    |         |       |   | 2,004   |         |  |  |          |  |       |   | 7,147   |         |   |   | 7,147   |        
|                                         | Securities available for sale                       |                                        |   | 309,189  |         |       |   | 309,189 |         |  |  |          |  |       |   | 304,814 |         |   |   | 304,814 |        
|                                         | Loans:                                              |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   |         |         |   |   |         |        
|                                         |                                                     | Commercial, financial and agricultural |   |          | 470,426 |       |   |         | 477,894 |  |  |          |  |       |   |         | 418,231 |   |   |         | 437,122 | 
|                                         |                                                     | Real estate  construction             |   |          | 45,319  |       |   |         | 45,915  |  |  |          |  |       |   |         | 32,140  |   |   |         | 33,547  | 
|                                         |                                                     | Real estate  mortgage                 |   |          | 187,033 |       |   |         | 189,105 |  |  |          |  |       |   |         | 141,983 |   |   |         | 146,458 | 
|                                         |                                                     | Consumer                               |   |          | 9,124   |       |   |         | 9,155   |  |  |          |  |       |   |         | 10,486  |   |   |         | 10,654  | 
|                                         |                                                     | Allowance for loan losses              |   |          | (8,643  | )     |   |         |         |  |  |          |  |       |   |         | (7,075  | ) |   |         |         | 
|                                         |                                                     |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   |         |         |   |   |         |        
|                                         |                                                     | Net loans                              |   |          | 703,259 |       |   |         | 722,069 |  |  |          |  |       |   |         | 595,765 |   |   |         | 627,781 | 
|                                         | Accrued interest receivable                         |                                        |   | 3,100    |         |       |   | 3,100   |         |  |  |          |  |       |   | 3,282   |         |   |   | 3,282   |        
|Financial liabilities:                   |                                                     |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   |         |         |   |   |        
|                                         | Deposits:                                           |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   |         |         |   |   |         |        
|                                         |                                                     | Non-interest bearing demand            |   |          | 140,753 |       |   |         | 136,486 |  |  |          |  |       |   |         | 121,598 |   |   |         | 120,258 | 
|                                         |                                                     | Interest bearing demand                |   |          | 216,538 |       |   |         | 198,118 |  |  |          |  |       |   |         | 221,396 |   |   |         | 220,943 | 
|                                         |                                                     | Savings                                |   |          | 88,438  |       |   |         | 84,497  |  |  |          |  |       |   |         | 79,884  |   |   |         | 78,601  | 
|                                         |                                                     | Time deposits under $100,000           |   |          | 290,773 |       |   |         | 293,628 |  |  |          |  |       |   |         | 278,323 |   |   |         | 281,749 | 
|                                         |                                                     | Time deposits over $100,000            |   |          | 47,540  |       |   |         | 47,972  |  |  |          |  |       |   |         | 42,061  |   |   |         | 42,579  | 
|                                         |                                                     |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   |         |         |   |   |        
|                                         |                                                     | Total deposits                         |   |          | 784,042 |       |   |         | 760,701 |  |  |          |  |       |   |         | 743,262 |   |   |         | 744,130 | 
|                                         | Short-term borrowings                               |                                        |   | 112,962  |         |       |   | 112,962 |         |  |  |          |  |       |   | 40,363  |         |   |   | 40,363  |        
|                                         | Long-term debt                                      |                                        |   | 102,000  |         |       |   | 109,106 |         |  |  |          |  |       |   | 127,000 |         |   |   | 142,373 |        
|                                         | Accrued interest payable                            |                                        |   | 2,353    |         |       |   | 2,353   |         |  |  |          |  |       |   | 2,465   |         |   |   | 2,465   |        
|Off-balance sheet financial instruments: |                                                     |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   |         |         |   |   |        
|                                         | Commitments to extend credit                        |                                        |   | 137,838  |         |       |   | 137,838 |         |  |  |          |  |       |   | 146,559 |         |   |   | 146,559 |        
|                                         | Financial and performance standby letters
of credit |                                        |   | 37,197   |         |       |   | 37,197  |         |  |  |          |  |       |   | 42,271  |         |   |   | 42,271  |        
|                                         | Commercial letters of credit                        |                                        |   |          |         |       |   |         |         |  |  |          |  |       |   | 164     |         |   |   | 164     |        
|                                         | Commitments to purchase securities                  |                                        |   | 1,990    |         |       |   | 1,990   |         |  |  |          |  |       |   |         |         |   |   |         |        

57



---



##### 



PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

NOTE 20: PARENT COMPANY ONLY FINANCIAL INFORMATION

The following represents parent only financial information:

PennRock Financial Services Corp. (Parent Company Only) Balance Sheets

In thousands

|                                           |                                                  |   |              |        |      |   |        |        |  
|------------------------------------------ | ------------------------------------------------ | - | ------------ | ------ | ---- | - | ------ | ------ | -
|                                           |                                                  |   | December 31,
|                                           |                                                  |   |             
|                                           |                                                  |   | 2003         |        | 2002
|                                           |                                                  |   |              |        |     
|ASSETS:                                    |                                                  |   |              |        |      |   |        |       
|Cash and cash equivalents                  |                                                  | $ | 635          |        |      | $ | 103    |       
|Securities available for sale              |                                                  |   | 1,769        |        |      |   | 1,588  |       
|Investment in subsidiaries                 |                                                  |   | 95,500       |        |      |   | 87,409 |       
|Receivable from subsidiary                 |                                                  |   | 2,002        |        |      |   | 627    |       
|Other assets                               |                                                  |   | 1,307        |        |      |   | 973    |       
|                                           |                                                  |   |              |        |      |   |        |       
|Total assets                               |                                                  | $ | 101,213      |        |      | $ | 90,700 |       
|                                           |                                                  |   |              |        |      |   |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY:      |                                                  |   |              |        |      |   |        |       
|Liabilities:                               |                                                  |   |              |        |      |   |        |       
|                                           | Dividends payable                                |   | $            | 1,523  |      |   | $      | 1,386  |  
|                                           | Payable to subsidiary                            |   |              |        |      |   |        | 611    |  
|                                           | Note payable to subsidiary                       |   |              | 850    |      |   |        | 850    |  
|                                           | Other liabilities                                |   |              | 833    |      |   |        | 875    |  
|                                           |                                                  |   |              |        |      |   |        |       
|                                           | Total liabilities                                |   |              | 3,206  |      |   |        | 3,722  |  
|                                           |                                                  |   |              |        |      |   |        |       
|Stockholders equity:                      |                                                  |   |              |        |      |   |        |       
|                                           | Common stock                                     |   |              | 19,297 |      |   |        | 17,544 |  
|                                           | Surplus                                          |   |              | 53,676 |      |   |        | 33,745 |  
|                                           | Accumulated other comprehensive loss, net of tax |   |              | (991   | )    |   |        | (3,377 | )
|                                           | Retained earnings                                |   |              | 28,134 |      |   |        | 41,926 |  
|                                           | Treasury stock at cost                           |   |              | (2,109 | )    |   |        | (2,860 | )
|                                           |                                                  |   |              |        |      |   |        |       
|                                           | Total stockholders equity                       |   |              | 98,007 |      |   |        | 86,978 |  
|                                           |                                                  |   |              |        |      |   |        |       
|Total liabilities and stockholders equity |                                                  | $ | 101,213      |        |      | $ | 90,700 |       
|                                           |                                                  |   |              |        |      |   |        |       

PennRock Financial Services Corp. (Parent Company Only) Statements of Income

In thousands

|                                                                        |                                                               |   |                         |       |      |   |        |        |   |   |        |        |  
|----------------------------------------------------------------------- | ------------------------------------------------------------- | - | ----------------------- | ----- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                        |                                                               |   | Year Ended December 31,
|                                                                        |                                                               |   |                        
|                                                                        |                                                               |   | 2003                    |       | 2002 |   | 2001  
|                                                                        |                                                               |   |                         |       |      |   |       
|Income:                                                                 |                                                               |   |                         |       |      |   |        |        |   |   |        |       
|                                                                        | Dividends from bank subsidiary                                |   | $                       | 8,150 |      |   | $      | 6,400  |   |   | $      | 10,020 |  
|                                                                        | Securities available for sale                                 |   |                         | 28    |      |   |        | 14     |   |   |        | 54     |  
|                                                                        | Management fee from (paid to) subsidiaries                    |   |                         | (872  | )    |   |        | 337    |   |   |        | 456    |  
|                                                                        | Net realized losses on sales of available for sale
securities |   |                         | (118  | )    |   |        | (1,645 | ) |   |        | (537   | )
|                                                                        |                                                               |   |                         |       |      |   |        |        |   |   |        |       
|                                                                        | Total income                                                  |   |                         | 7,188 |      |   |        | 5,106  |   |   |        | 9,993  |  
|General and administrative expenses                                     |                                                               |   | 607                     |       |      |   | 636    |        |   |   | 628    |       
|                                                                        |                                                               |   |                         |       |      |   |        |        |   |   |        |       
|Income before income taxes and undistributed net income
of subsidiaries |                                                               |   | 6,581                   |       |      |   | 4,470  |        |   |   | 9,365  |       
|Income tax expense (benefit)                                            |                                                               |   | (672                    | )     |      |   | (659   | )      |   |   | (309   | )     
|Equity in undistributed net income of subsidiaries                      |                                                               |   | 6,747                   |       |      |   | 8,097  |        |   |   | 2,393  |       
|                                                                        |                                                               |   |                         |       |      |   |        |        |   |   |        |       
|Net income                                                              |                                                               | $ | 14,000                  |       |      | $ | 13,226 |        |   | $ | 12,067 |       
|                                                                        |                                                               |   |                         |       |      |   |        |        |   |   |        |       

58



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##### 



PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

PennRock Financial Services Corp. (Parent Company Only) Statements of Cash
Flows

In thousands

|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |        |        |   |  |  |  | 
|-------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------ | - | ----------------------- | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | - |  |  |  | 
|                     |                                                                                   |                                                              |   | Year Ended December 31,
|                     |                                                                                   |                                                              |   |                        
|                     |                                                                                   |                                                              |   | 2003                    |        | 2002 |   | 2001   |        |   |   |       
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|OPERATING ACTIVITIES |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|                     | Net income                                                                        |                                                              | $ | 14,000                  |        |      | $ | 13,226 |        |   | $ | 12,067 |       
|                     | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                              |   |                         |        |      |   |        |        |   |   |        |       
|                     |                                                                                   | Equity in undistributed net income from subsidiaries         |   |                         | (6,747 | )    |   |        | (8,097 | ) |   |        | (2,393 | )
|                     |                                                                                   | Net realized losses on sale of available for sale
securities |   |                         | 118    |      |   |        | 1,645  |   |   |        | 537    |  
|                     |                                                                                   | (Increase) decrease in receivable from subsidiary            |   |                         | (1,986 | )    |   |        | 1,737  |   |   |        | (1,829 | )
|                     |                                                                                   | Other, net                                                   |   |                         | 3      |      |   |        | (401   | ) |   |        | 7      |  
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|                     | Net cash provided by operating activities                                         |                                                              |   | 5,388                   |        |      |   | 8,110  |        |   |   | 8,389  |       
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|INVESTING ACTIVITIES |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|                     | Net cash paid for business acquisition                                            |                                                              |   |                         |        |      |   | (1,665 | )      |   |   | (7,677 | )     
|                     | Proceeds from sale of securities available for sale                               |                                                              |   | 1,407                   |        |      |   | 720    |        |   |   | 1,599  |       
|                     | Purchases of securities available for sale                                        |                                                              |   | (906                    | )      |      |   | (584   | )      |   |   | (1,448 | )     
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|                     | Net cash provided by (used in) investing activities                               |                                                              |   | 501                     |        |      |   | (1,529 | )      |   |   | (7,526 | )     
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|FINANCING ACTIVITIES |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|                     | Net increase (decrease) in short-term borrowings                                  |                                                              |   |                         |        |      |   | (59    | )      |   |   | 909    |       
|                     | Issuance of common and treasury stock                                             |                                                              |   | 2,153                   |        |      |   | 2,085  |        |   |   | 1,722  |       
|                     | Purchase of treasury stock                                                        |                                                              |   | (1,744                  | )      |      |   | (3,139 | )      |   |   | (588   | )     
|                     | Cash dividends paid                                                               |                                                              |   | (5,737                  | )      |      |   | (5,355 | )      |   |   | (4,791 | )     
|                     | Cash paid with stock dividend                                                     |                                                              |   | (29                     | )      |      |   | (30    | )      |   |   | (16    | )     
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|                     | Net cash used in financing activities                                             |                                                              |   | (5,357                  | )      |      |   | (6,498 | )      |   |   | (2,764 | )     
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|                     | Increase (decrease) in cash and cash equivalents                                  |                                                              |   | 532                     |        |      |   | 83     |        |   |   | (1,901 | )     
|                     | Cash and cash equivalents at beginning of year                                    |                                                              |   | 103                     |        |      |   | 20     |        |   |   | 1,921  |       
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       
|                     | Cash and cash equivalents at end of year                                          |                                                              | $ | 635                     |        |      | $ | 103    |        |   | $ | 20     |       
|                     |                                                                                   |                                                              |   |                         |        |      |   |        |        |   |   |       

59



---



##### 



PennRock Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

NOTE 21: CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)

In thousands except per share data

|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|---------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                             |  | 2003   
|                             |  |        
|                             |  | First   |        | Second  |  | Third   |        | Fourth 
|                             |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                             |  |         |        |         |  |         |        |        
|Interest income              |  | $       | 13,356 |         |  | $       | 13,546 |         |  | $ | 13,070 |  |  | $ | 13,422 | 
|Interest expense             |  |         | 4,812  |         |  |         | 4,448  |         |  |   | 4,258  |  |  |   | 4,307  | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Net interest income          |  |         | 8,544  |         |  |         | 9,098  |         |  |   | 8,812  |  |  |   | 9,115  | 
|Provision for loan losses    |  |         | 450    |         |  |         | 455    |         |  |   | 460    |  |  |   | 552    | 
|Non-interest income          |  |         | 3,325  |         |  |         | 3,289  |         |  |   | 3,425  |  |  |   | 3,711  | 
|Non-interest expense         |  |         | 7,083  |         |  |         | 7,417  |         |  |   | 7,638  |  |  |   | 7,540  | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Income before income taxes   |  |         | 4,336  |         |  |         | 4,515  |         |  |   | 4,139  |  |  |   | 4,734  | 
|Income taxes                 |  |         | 740    |         |  |         | 849    |         |  |   | 856    |  |  |   | 1,279  | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Net income                   |  | $       | 3,596  |         |  | $       | 3,666  |         |  | $ | 3,283  |  |  | $ | 3,455  | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Basic earnings per share     |  | $       | 0.48   |         |  | $       | 0.48   |         |  | $ | 0.43   |  |  | $ | 0.45   | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Dividends declared per share |  | $       | 0.18   |         |  | $       | 0.19   |         |  | $ | 0.19   |  |  | $ | 0.20   | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 

|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|---------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                             |  | 2002   
|                             |  |        
|                             |  | First   |        | Second  |  | Third   |        | Fourth 
|                             |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                             |  |         |        |         |  |         |        |        
|Interest income              |  | $       | 14,686 |         |  | $       | 14,207 |         |  | $ | 13,769 |  |  | $ | 14,480 | 
|Interest expense             |  |         | 6,124  |         |  |         | 5,954  |         |  |   | 5,845  |  |  |   | 5,360  | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Net interest income          |  |         | 8,562  |         |  |         | 8,253  |         |  |   | 7,924  |  |  |   | 9,120  | 
|Provision for loan losses    |  |         | 444    |         |  |         | 375    |         |  |   | 226    |  |  |   | 705    | 
|Non-interest income          |  |         | 2,455  |         |  |         | 2,643  |         |  |   | 2,979  |  |  |   | 3,067  | 
|Non-interest expense         |  |         | 6,523  |         |  |         | 6,771  |         |  |   | 6,915  |  |  |   | 7,238  | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Income before income taxes   |  |         | 4,050  |         |  |         | 3,750  |         |  |   | 3,762  |  |  |   | 4,244  | 
|Income taxes                 |  |         | 704    |         |  |         | 606    |         |  |   | 719    |  |  |   | 551    | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Net income                   |  | $       | 3,346  |         |  | $       | 3,144  |         |  | $ | 3,043  |  |  | $ | 3,693  | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Basic earnings per share     |  | $       | 0.44   |         |  | $       | 0.41   |         |  | $ | 0.40   |  |  | $ | 0.48   | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|Dividends declared per share |  | $       | 0.16   |         |  | $       | 0.17   |         |  | $ | 0.17   |  |  | $ | 0.18   | 
|                             |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 

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PennRock Financial Services Corp.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Disclosure relating to a change in accountants is set forth in a Current Report
on Form 8-K dated September 30, 2003 previously filed by the Registrant.

ITEM 9A. CONTROLS AND PROCEDURES

An evaluation of the effectiveness of the design and operation of PennRocks
disclosure controls and procedures (as defined in Section 13(a)-14(c) of the
Securities and Exchange Act of 1934) was carried out by PennRock, within 90
days prior to the filing date of this report, under the supervision and with
the participation of PennRocks management, including the Chief Executive
Officer and Chief Financial Officer. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that PennRocks
disclosure controls and procedures have been designed and are being operated in
a manner that provides reasonable assurance that the information required to be
disclosed by PennRock in reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. A controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected. Subsequent to the date of the most recent
evaluation of PennRocks internal controls, there were no significant changes
in PennRocks internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning directors and nominees for election to the Board of
Directors is incorporated herein by reference to the Registrants Proxy
Statement for its annual meeting to be held on April 27, 2004 under the caption
Information about Nominees, Continuing Directors and Executive Officers, and
information concerning executive officers is included under Part I, Item 3A,
Executive Officers of the Registrant of this report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning director compensation is incorporated herein by
reference to the Registrants Proxy Statement for its annual meeting to be held
on April 27, 2004 under the caption Compensation of Directors and concerning
executive compensation under the caption Executive Compensation and Related
Matters, except that information appearing under the caption Board Report on
Executive Compensation and information appearing under the caption Stock
Performance Graph is not incorporated herein by reference.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

Information concerning security ownership of certain beneficial owners is
incorporated herein by reference to the Registrants Proxy Statement for its
annual meeting to be held on April 27, 2004, under the caption Voting of
Shares and Principal Holders Thereof and concerning security ownership of
management under the caption Information about Nominees and Continuing
Directors. Information concerning PennRocks stock compensation plan can be
found in Note 13: Stock Incentive Plan in the Notes to Consolidated Financial
Statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information under the caption Transactions with Directors and Executive
Officers is incorporated herein by reference to the Registrants Proxy
Statement for its annual meeting to be held on April 27, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information under the caption Relationship with Independent Public
Accountants is incorporated herein by reference to the Registrants Proxy
Statement for its annual meeting to be held on April 27, 2004.

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PennRock Financial Services Corp.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



|(a)1. |  | Financial Statements. required in response to this Item are incorporated by reference to
Part II, Item 8 of this Report.
|----- |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | The following consolidated financial statements of PennRock and the report of the independent
certified public accountants thereon filed with this report are incorporated by reference to
Part II, Item 8 of this Report.:
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Independent Auditors Report (Simon Lever LLP)
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders Equity for the years ended
December 31, 2003, 2002
and 2001
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | Financial Statement Schedules.
|-- |  | ------------------------------



| |  |  | Financial Statement Schedules are omitted because the required information
is either not
applicable, not required or is shown in the respective financial
statements or in the note thereto.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | The Exhibits filed herewith or incorporated by reference as a part of
this Annual Report, are set forth in
|-- |  | ----------------------------------------------------------------------------------------------------------



| |  |  | (c) below.
| |  |  | ----------



|(b) |  | PennRock filed the following Current Reports on Form 8-K From October 1,
2003 to the date of this
Report:
|--- |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Current Report on Form 8-K dated October 15, 2003, announcing PennRocks
earnings for the
quarter ended September 30, 2003.                                                           
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Current Report on Form 8-K dated December 9, 2003, announcing that
PennRocks Board of
Directors had declared a quarterly cash dividend.                                              
|
| |  |  | Current Report on Form 8-K dated December 9, 2003, announcing the addition
of an
independent director to PennRocks Board of Directors who possesses the
skills of a financial
expert.
|
| |  |  | Current Report on Form 8-K dated January 16, 2004, announcing PennRocks
earnings for the
fourth quarter and year ended December 31, 2003.                                            



|(c) |  | Exhibit Index
|--- |  | -------------

|      |  |                                                                                                                                                                 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(a)  |  | Articles of Incorporation of PennRock, incorporated by reference to Exhibit 3(a) of
PennRocks Annual Report on Form 10-K for the year ended December 31, 2000. 
|      |  |                                                                                                                                                                 
|3(b)  |  | Bylaws of PennRock.                                                                                                                                             
|      |  |                                                                                                                                                                 
|10(a) |  | Omnibus Stock Plan, incorporated by reference to Exhibit 4.1 to PennRocks
Registration Statement Number 33-53022 of Form S-8 dated October 8, 1992.            
|      |  |                                                                                                                                                                 
|10(b) |  | Executive Incentive Compensation Plan, incorporated by reference to Exhibit 10(b)
of PennRocks Annual Report on Form 10-K for the year ended December 31, 2000.

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PennRock Financial Services Corp.

|      |  |                                                                                                                                                                                                                         
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10(c) |  | Melvin Pankuch Deferred Compensation Agreement Plan, incorporated by reference
to Exhibit 10(c) of PennRocks Annual Report on Form 10-K for the year ended
December 31, 2000.                                          
|      |  |                                                                                                                                                                                                                         
|10(d) |  | Melvin Pankuch Employment Agreement, incorporated by reference to
Exhibit 10(d) of PennRocks Annual Report on Form 10-K for the year ended
December 31, 2000.                                                          
|      |  |                                                                                                                                                                                                                         
|10(e) |  | Employment Agreement with Certain Executive Officers, incorporated by reference
to Exhibit 10(e) of PennRocks Annual Report on Form 10-K for the year ended
December 31, 2000.                                         
|      |  |                                                                                                                                                                                                                         
|10(f) |  | Stock Incentive Plan of 2002, incorporated by reference to Exhibit 10(f) of PennRocks
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.                                                              
|      |  |                                                                                                                                                                                                                         
|11    |  | Statement re: Computation of Earnings per share (Included herein in Note 1: Summary of
Significant Accounting Policies in the Notes to Consolidated Financial
Statements included under
Part II, Item 8 of this Report.)
|      |  |                                                                                                                                                                                                                         
|21    |  | Subsidiaries of the Registrant                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                         
|23    |  | Consent of Simon Lever LLP, Independent Auditors                                                                                                                                                                        
|      |  |                                                                                                                                                                                                                         
|31.1  |  | Certification of Chief Executive Officer pursuant to 15 U.S.C.
Section 10A, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       
|      |  |                                                                                                                                                                                                                         
|31.2  |  | Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       
|      |  |                                                                                                                                                                                                                         
|32    |  | Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                 



|(d) |  | NOT APPLICABLE.
|--- |  | ---------------

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PennRock Financial Services Corp.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  |                                  
|-------------------- |  | ---------------------------------
|                     |  | PENNROCK FINANCIAL SERVICES CORP.
|                     |  |                                  
|                     |  | (Registrant)                     
|                    
|Dated: March 9, 2004 |  | By /s/ Glenn H. Weaver           
|                     |  |                                  
|                     |  | Glenn H. Weaver, President       

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 9th of March 2004.

|                       |  |                                             
|---------------------- |  | --------------------------------------------
|Signatures             |  | Title                                       
|                       |  |                                             
|/s/ Melvin Pankuch     |  | Executive Vice President, Chief             
|                       |  | Executive Officer and Director              
|Melvin Pankuch         |  |                                             
|                       |  |                                             
|/s/ George B. Crisp    |  | Vice President and Treasurer                
|                       |  | (Principal Financial and Accounting Officer)
|George B. Crisp        |  |                                             
|                       |  |                                             
|/s/ Norman Hahn        |  | Chairman and director                       
|                       |  |                                             
|Norman Hahn            |  |                                             
|                       |  |                                             
|/s/ Glenn H. Weaver    |  | President and director                      
|                       |  |                                             
|Glenn H. Weaver        |  |                                             
|                       |  |                                             
|/s/ Robert K. Weaver   |  | Secretary and director                      
|                       |  |                                             
|Robert K. Weaver       |  |                                             
|                       |  |                                             
|/s/ Dale M. Weaver     |  | Director                                    
|                       |  |                                             
|Dale M. Weaver         |  |                                             
|                       |  |                                             
|/s/ Aaron S. Kurtz     |  | Director                                    
|                       |  |                                             
|Aaron S. Kurtz         |  |                                             
|                       |  |                                             
|/s/ Robert L. Spotts   |  | Director                                    
|                       |  |                                             
|Robert L. Spotts       |  |                                             
|                       |  |                                             
|/s/ Elton Horning      |  | Director                                    
|                       |  |                                             
|Elton Horning          |  |                                             
|                       |  |                                             
|/s/ Lewis M. Good      |  | Director                                    
|                       |  |                                             
|Lewis M. Good          |  |                                             
|                       |  |                                             
|/s/ Irving E. Bressler |  | Director                                    
|                       |  |                                             
|Irving E. Bressler     |  |                                             
|                       |  |                                             
|/s/ Sandra J. Bricker  |  | Director                                    
|                       |  |                                             
|Sandra J. Bricker      |  |                                             
|                       |  |                                             
|/s/ Dennis L. Dinger   |  | Director                                    
|                       |  |                                             
|Dennis L. Dinger       |  |                                             

64