PENNROCK FINANCIAL SERVICES CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended June 30, 2004 Commission File Number 0-15040
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PennRock Financial Services Corp.
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(Exact name of registrant as specified in its charter)

Pennsylvania 23-2400021
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1060 Main St.
Blue Ball, Pennsylvania 17506
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(Address of principal executive offices) (Zip code)

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes /X/ No

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.

Class Outstanding at August 2, 2004
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Common Stock ($2.50 par value) 7,641,865 Shares

PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
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FORM 10-Q
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For the Quarter Ended June 30, 2004

Contents
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets - June 30, 2004 and December 31, 2003.

Consolidated Statements of Income - Three months and six months ended
June 30, 2004 and 2003.

Consolidated Statements of Comprehensive Income - Three months and
six months ended June 30, 2004 and 2003.

Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 2004 and 2003.

Condenses Notes to Consolidated Financial Statements.

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

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

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

PART I. FINANCIAL INFORMATION

For the Quarter Ended June 30, 2004

Item 1. Financial Statements

PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Six months Ended
(Amounts in thousands) June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------

Net income $3,120 $3,666 $7,238 $ 7,262
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities available for sale:
Gain (loss) arising during the
period, net of tax (2,733) 2,257 (2,244) 1,424
Reclassification adjustment
for (gains) losses included
in net income, net of tax 5 (3) (411) (166)
------- ------- ------- -------
Other comprehensive income (loss) (2,728) 2,254 (2,655) 1,258
------- ------- ------- -------

Comprehensive income $ 392 $5,920 $4,583 $8,520
======= ======= ======= =======

See accompanying condensed notes to consolidated financial statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2004

NOTE 1. BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
PennRock Financial Services Corp. and its subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation.

The information contained in the financial statements is unaudited. In the
opinion of management, all material adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
results of interim periods have been made. These unaudited interim
statements are presented in accordance with the requirements of Form 10-Q,
accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. Operating results for the three
and six months ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004. These
condensed notes should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in PennRock's Annual Report
on Form 10-K for the year ended December 31, 2003.

Earnings per share:

Basic earnings per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income by the
weighted-average number of shares outstanding during the period plus
additional common shares that would have been outstanding if dilutive
potential common shares had been issued. Potential common shares that
may be issued consist of outstanding stock options and are determined by
using the treasury stock method. Adjustments to net income and the
weighted average number of shares of common stock are made only when such
adjustments dilute earnings per share. There was no antidilutive effect
from stock options during the three and six months ending
June 30, 2004 and 2003.

Three Months Ended Six Months Ended
(Net income in thousands) June 30, June 30,
--------------------- ---------------------
- --
2004 2003 2004 2003
--------- ---------- ---------- ----------

Net income $3,120 $3,666 $7,238 $7,262
Average number of common shares
outstanding 7,652,243 7,613,042 7,650,211 7,606,313
--------- --------- --------- ---------
Basic earnings per share $0.41 $0.48 $0.95 $0.95
========= ========= ========= =========
Add effect of dilutive options 108,687 95,304 108,687 95,304
--------- --------- --------- ---------
Diluted average number of shares
outstanding 7,760,930 7,708,346 7,758,898 7,701,617
Diluted earnings per share $0.40 $0.48 $0.93 $0.94

Stock based employee compensation:

In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change from the intrinsic
value method to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results.

SFAS No. 148 has also amended APB Opinion 28, "Interim Financial Reporting"
to require that public companies provide a tabular presentation similar to
that called for in annual statements in condensed quarterly statements if,
for any period presented, the intrinsic value method is used. PennRock
adopted the provisions of SFAS No. 148 in December 2002 but will continue to
account for stock-based employee compensation under the intrinsic value
method in accordance with APB 25.

Pro forma information regarding net income and earnings per share has been
determined as if we had accounted for all stock-based compensation under the
fair value method of SFAS 123.

Three Months Ended Six Months Ended
(Amounts in thousands except June 30, June 30,
per share data) -------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------

Net income as reported $3,120 $3,666 $7,238 $7,262
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of tax effect (86) (97) (162) (152)
------- ------- -------- --------
Pro-forma net income $3,034 $3,569 $7,068 $7,110
======= ======= ======== ========
Earnings per share:
Basic - as reported $0.41 $0.48 $0.95 $0.95
Basic - pro-forma 0.40 0.47 0.92 0.93
Diluted - as reported 0.40 0.48 0.93 0.94
Diluted - pro-forma 0.39 0.46 0.91 0.92

We estimate the fair value of each option on the grant date using the Black-
Sholes option-pricing model with the follow weighted average assumptions
used options granted for 2004 and 2003:

2004 2003
-------- --------

Dividend yield 2.86% 2.62%
Expected volatility 81.00% 40.00%
Risk free interest rate 5.53% 4.89%
Expected average life 8 years 8 years

On June 14, 2004, under the Stock Incentive Plan of 2002 ("the Plan"), the
Board of Directors granted stock options totaling 45,000 shares at an
exercise price of $28.12 per share which was the fair market value of
PennRock's common stock on the date of the grant as determined in accordance
with the provisions of the Plan.

NOTE 2. 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"), Pension Consulting Services, Inc. ("PCS") and 1906
Founders, Inc. 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. ("PIGI") and PennRock
Financial Advisors, NA. ("PFA") are wholly owned subsidiaries of the Bank.
On April 1, 2004, the net assets of National and each of its subsidiaries
and the net assets of PCS as well as all operations of these companies were
transferred to PFA. At the same time, the operations of the Bank's
Financial Services Division, including trust operations, were transferred to
PFA. All employees of National and PCS became employees of the Bank and are
contracted to PFA. The purpose of the reorganization is to promote
operating efficiencies and the cross-selling of services among the various
corporations. PFA is a limited purpose bank. PIGI began operations in the
first quarter of 1999 to offer and sell annuity and other insurance
products. 1906 Founders, Inc. owns and manages certain investment
securities.

NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES

The financial statements do not reflect various commitments and contingent
liabilities, such as commitments to extend credit, letters of credit, and
liability for assets held in a fiduciary capacity, which arise in the normal
course of business. Commitments under outstanding letters of credit
amounted to $45.4 million and commitments to extend credit totaled
$150.8 million at June 30, 2004. Management does not anticipate any
significant loss as a result of these transactions.

NOTE 4. SECURITIES AVAILABLE FOR SALE

The amortized cost and estimated fair value of securities available for sale
are as follows:

(Amounts in thousands)

(Amounts in thousands)

The amortized cost and estimated fair value of debt securities as of
June 30, 2004 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.

(Amounts in thousands)

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

This section presents management's discussion and analysis of the financial
condition and results of operations of PennRock Financial Services Corp. and
its subsidiaries. This discussion should be read in conjunction with the
financial statements which appear elsewhere in this report.

FORWARD LOOKING STATEMENTS

In this report, we may have included 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 the
Company'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. Factors that could affect
future results include changes in market interest rates, local and national
economic trends and conditions, competition for products and services,
changes in customer preferences, legislative and regulatory changes,
delinquency rates on loans, changes in accounting principles, policies or
guidelines, or the failure of major customers, vendors or suppliers. You
should consider these factors in evaluating any forward looking statements
and not place undue reliance on such statements. We are not obligated to
publicly update any forward looking statements we may make in this report to
reflect the impact of subsequent events.

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. In implementing its
policies, management must make estimates and assumptions about the effect of
matters that are inherently less than certain. Actual results could differ
significantly from these estimates which could materially affect the amounts
of our assets, liabilities, income and expenses. A variety of estimates
impact the carrying value of the loan portfolio, including the amount of the
allowance for loan losses, the placement of loans on non-accrual status, and
the valuation of mortgages held for sale and mortgage servicing rights. For
a more detailed discussion on critical accounting policies, see "Critical
Accounting Policies" in PennRock's Annual Report on Form 10-K for the year
ended December 31, 2003.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Total assets of PennRock increased $29.7 million or 2.7% from year-end
2003. Loans grew $17.6 million, securities available for sale decreased
$2.0 million, deposits increased $26.6 million while borrowed funds
decreased $3.1 million.

Net income for the second quarter of 2004 was $3.1 million or $.41 per share
compared with $3.7 million or $.48 per share for the second quarter of 2003,
a decrease of $546,000 or 14.9%. Dividends paid in the second quarter of
2004 totaled $1.5 million or $.20 per share and $1.4 million or $.18 per
share for the second quarter of 2003.

For the first six months of 2004, net income totaled $7.2 million or $0.95
per share compared with $7.3 million or $0.95 per share for the first six
months of 2003, a decrease of $24,000 or 0.3%. Net interest income
increased $514,000, non-interest income excluding security gains and losses
increased $149,000 and non-interest expenses increased $796,000. Dividends
of $3.1 million or $.40 per share were paid in the first six months of 2004
compared with $2.8 million or $.36 per share in 2003. The dividend payout
ratio was 42% in 2004 and 38% in 2003.

NET INTEREST INCOME

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. The amount of net
interest income is affected by changes in interest rates, volumes and the
mix of earning assets and paying liabilities. For analytical purposes, net
interest income is adjusted to a taxable equivalent basis. This adjustment
allows for a more accurate comparison among taxable and tax-exempt assets by
increasing tax-exempt income by an amount equivalent to the federal income
tax that would have been paid if this income were taxable at the statutory
rate of 35%.

Table 1 presents net interest income on a fully taxable equivalent basis for
the second quarter and first six months of 2004 and 2003. For the second
quarter of 2004, net interest income on a fully taxable equivalent basis
totaled $9.6 million, an increase of $35,000 or 0.4% from $9.5 million
earned for the same period of 2003. For the first six months of 2004 and
2003, net interest income on a fully taxable equivalent basis totaled $19.1
million and $18.5 million, respectively.

TABLE 1 - NET INTEREST INCOME
Three Months Ended Six months Ended
(Amounts in thousands) June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------

Total interest income $13,449 $13,546 $26,784 $26,902
Total interest expense 4,316 4,447 8,628 9,260
------- ------- -------- --------
Net interest income 9,133 9,099 18,156 17,642
Tax equivalent adjustment 438 437 901 826
------- ------- -------- --------
Net interest income
(fully taxable equivalent) $ 9,571 $ 9,536 $19,057 $18,468
======= ======= ======== ========

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.

Table 2 presents the average balances, taxable equivalent interest income
and expense and rates for PennRock's assets and liabilities for the three
and six months ended June 30, 2004 and 2003.

Net interest income earned in the second quarter of 2004 was essentially
unchanged from the second quarter of last year as both the yield on earning
assets and cost of funds declined. For the first six months of 2004,
although net interest income increased from the first six months of 2003,
the net interest spread and net interest margin declined.

Having operated in an historically low interest rate environment for several
years, we have structured the balance sheet so that our net interest income
would improve if interest rates were to increase. On June 30, 2004, the
Federal Reserve increased interest rates for the first time in over four
years. However, since the increase came late in June, net interest income
for the second quarter did not benefit from this increase. We do expect the
increase to benefit our margins in the third quarter.

NON-INTEREST INCOME

Table 3 indicates changes in the major categories of non-interest income for
the three and six months ended June 30, 2004 and 2003. 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 3 - NON-INTEREST INCOME

(Amounts in thousands)

Total non-interest income decreased $199,000 or 6% in the second quarter of
2004 from the second quarter of 2003 but increased $525,000 or 8% for the
first half of 2004 from 2003. The decrease in income from mortgage banking
reflects a reduction in volume of mortgage refinancing activity from 2003.
The decrease in earnings on the bank owned life insurance reflects a
decrease in yield of the underlying securities. For the first six months of
2004, security gains totaled $632,000 consisting of a $628,000 gain in debt
securities and a $4,000 gain on equity securities. The gain in debt
secruities is primarily the result of sales, during the first quarter of
2004, of higher coupon "odd-lot" mortgage backed security pools that had
experienced rapid prepayments from mortgage refinancings. The proceeds from
the sales were used to purchase larger pools of lower-coupon mortgage-backed
securities with more stable prepayment speeds. Security gains in the first
half of 2003 totaled $256,000.

NON-INTEREST EXPENSE

Table 4 indicates changes in the major categories of non-interest expense
for the three and six months ended June 30, 2004 and 2003.

TABLE 4 - NON-INTEREST EXPENSE

(Amounts in thousands)

Total non-interest expense for the second quarter of 2004 increased $419,000
or 6% over the second quarter of 2003 which is attributable to salaries and
employee benefit expenses which increased $495,000 million or 11%. For the
first half of 2004, non-interest expenses totaled $15.3 million which was
$796,000 or 5% higher than the first half of 2003. Salaries and benefit
expenses increased $908,000 or 10% from last year. The number of full-time
equivalent employees increased by 5, from 344 in at June 30, 2003 to 349 at
June 30, 2004. Also contributing to the increase of benefit expenses was a
significant increase in employee health insurance premiums. All other non-
interest expenses decreased by a net $112,000 or 2% from last year.
Included in the other non-interest expense category are legal, consulting
and other professional fees, supplies, liability insurance, fees for
outsourced services and shares tax expense.

PROVISION AND ALLOWANCE FOR LOAN LOSSES

The provision for loan losses charged to earnings was $167,000 for the
second quarter of 2004 compared with $455,000 for the second quarter of last
year. The provision totaled $565,000 for the first six months of 2004
compared with $905,000 for the first six months of 2003. The provision is
based on management's estimate of the amount needed to maintain an adequate
allowance for loan losses. The adequacy of the allowance is examined
in light of past loan loss experience, current economic conditions, volume
of non-performing and delinquent loans and other relevant factors. For a
more detailed discussion of PennRock's methodology for determining the
adequacy of the allowance, see "Allowance for Loan Losses" on page 23 of
PennRock's Annual Report on Form 10-K for the year ended December 31, 2003.

TABLE 5 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

NON-PERFORMING ASSETS

Table 6 reflects PennRock's non-performing assets at June 30, 2004, December
31, 2003 and June 30, 2003. PennRock's policy is to discontinue the accrual
of interest on loans for which the principal or interest is past due 90 days
or more unless the loan is well secured and corrective action has begun or
the loan is in the process of collection. When a loan is placed on
non-accrual status, any unpaid interest is charged against income. Other
real estate owned represents property acquired through foreclosure.

TABLE 6 - NON-PERFORMING ASSETS

Total non-performing loans decreased $769,000 or 47% from year-end. The
proportion of non-performing loans to total loans decreased from 0.22% at
year-end to 0.12% as of June 30, 2004. The coverage ratio of the allowance
for loan losses to non-performing loans increased from 551% at year-end 2003
to 1,078% as of June 30, 2004. As a result of the significant decrease in
non-performing assets from year-end 2003 and the amount of net credit losses
realized, our analysis indicated that the alowance for loan losses was
adequate to cover losses in the portfolio. Therefore, we discontinued
additions to the allowance for loan losses in the second quarter of 2004.
We will begin adding to the allowance when the adequacy of the allowance
indicates that is is necessary to do so.

LIQUIDITY

The purpose of liquidity management is to ensure that there are sufficient
cash flows available to meet a variety of needs. These 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 provided by maturities and sales of investment
securities, loan payments and maturities and liquidating money market
investments such as federal funds sold. Liquidity is also provided by
short-term lines of credit with various correspondents and fixed and
variable rate advances from the Federal Home Loan Bank of Pittsburgh
("the FHLB") and other correspondent banks. However, PennRock's primary
source of liquidity lies in PennRock's ability to renew, replace and expand
its base of core deposits (consisting of demand, NOW, money market, savings
and time deposits less than $100,000).

Total deposits increased $26.6 million or 3.4% since the prior from
year-end. Non-maturity deposits increased $75.9 million from year-end while
time deposits under $100,000 decreased by $55.6 million. Short-term
borrowed funds declined by $3.1 million and long-term debt was unchanged.
Borrowed funds represented 230% of tier one capital as of June 30, 2004 and
234% of tier one capital as of December 31, 2003. Management's policy is to
limit borrowed funds to no more than 250% of tier one capital.

Table 7 reflects the changes in the major classifications of deposits and
borrowed funds by comparing the balances at the end of the second quarter of
2004 with year-end 2003.

TABLE 7 - DEPOSITS AND BORROWED FUNDS BY MAJOR CLASSIFICATION

CAPITAL RESOURCES

Total stockholders' equity increased $2.0 million or 2.1% since year end
2003. Stockholders' equity is impacted by changes in the unrealized market
gains and losses of the securities available for sale portfolio, net of
deferred taxes and is shown on the consolidated balance sheets as a
component of stockholders' equity as accumulated other comprehensive loss,
net of tax. The net unrealized loss increased by $2.7 million from year-end
2003. The net unrealized gains and losses of the securities available for
sale portfolio are excluded from computations of regulatory ratios.

Table 8 shows PennRock's capital resources as of June 30, 2004 and at
December 31, 2003. PennRock and its subsidiary bank exceed all minimum
capital guidelines.

TABLE 8 - CAPITAL RESOURCES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss from adverse changes in market prices and
rates. Our primary market risk arises from interest-rate risk. We acquire
interest earning assets (loans and securities) and fund them with interest-
bearing and non-interest bearing liabilities (deposits and borrowings).
These financial instruments have varying degrees of sensitivity to changes
in market interest rates. The disparity of sensitivity between these
financial assets and liabilities creates interest rate risk. We believe
there have been no material changes in the levels of interest rate risk
exposure since year-end 2003. Further information on interest rate risk can
be found under the caption "Quantitative and Qualitative Disclosures About
Market Risk" on pages 29 in PennRock's 2003 Annual Report on Form 10-K.

Item 4. 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, as of
period end 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 II. OTHER INFORMATION
---------------------------
For the Quarter ended June 30, 2004

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities

On June 25, 2003, the Board of Directors authorized the repurchase of up to
300,000 shares of its common stock to be used for future stock dividends and
splits, employee benefit plans and other appropriate corporate purposes. The
following table shows the repurchases of common stock by PennRock during the
second quarter of 2004 under this plan. All purchases made in the second
quarter were part of this publicly announced plan.

On June 23, 2004, the Board of Directors authorized a new plan for the
repurchase of up to 300,000 shares of its common stock to be used for the same
purposes as described under the 2003 plan. There were no shares repurchased
under the new plan as of June 30, 2004.

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

The Annual Meeting of Shareholders (the "Meeting") of PennRock Financial
Services Corp. was held on April 27, 2004. Notice of the meeting was mailed
to shareholders on or about April 1, 2004, together with proxy materials
prepared in accordance with Section 14(a) of the Securities Exchange Act of
1934, as amended, and the regulations promulgated thereunder.

The Meeting was held for the purpose of electing four Class B directors to hold
office for three years from the date of the election and until their successors
are elected and have qualified.

There were no solicitations in opposition to the nominees of the Board of
Directors for the election to the Board. All nominees of the Board of
Directors were elected. The number of votes cast or withheld was as follows:

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

32 Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

A current report on Form 8-K dated April 1, 2004 was filed with the
Securities and Exchange Commission on or about April 1, 2004. The
report was filed under Item 5 which disclosed a press release, dated
April 1, 2004, announcing the formation of a new trust company, PennRock
Financial Advisors, NA.

A current report on Form 8-K dated April 20, 2004 was filed with the
Securities and Exchange Commission on or about April 20, 2004. The
report was filed under Item 12 which disclosed a press release, dated
April 20, 2004, announcing PennRock's earnings for the first quarter of
2004.

A current report on Form 8-K dated June 9, 2004 was filed with the
Securities and Exchange Commission on or about June 9, 2004. The report
was filed under Item 5 which disclosed a press release, dated June 9,
2004, announcing that PennRock had declared a cash dividend.

A current report on Form 8-K dated June 22, 2004 was filed with the
Securities and Exchange Commission on or about June 24, 2004. The
report was filed under Item 5 which disclosed a press release, dated
June 22, 2004, announcing that PennRock had authorized the repurchase
of up to 300,000 shares of common stock.

A current report on Form 8-K dated July 8, 2003 was filed with the
Securities and Exchange Commission on or about July 8, 2003. The report
was filed under Item 5 which disclosed that PennRock had declared a 10%
stock dividend.

SIGNATURES

Pursuant to the requirements 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)

Date: August 9, 2004 By: /s/Melvin Pankuch
- ----------------------- -----------------------------------------------
Melvin Pankuch
Executive Vice President and
Chief Executive Officer

Date: August 9, 2004 By: /s/George B. Crisp
- ------------------------ -----------------------------------------------
George B. Crisp
Vice President and Treasurer
(Principal Financial and Accounting Officer)

Exhibit Index
----------------