PENNS WOODS BANCORP INC - 10-K Annual Report

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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, 2001

OR

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

For the transition period from ___________________to___________

Commission file number 0-17077

PENNS WOODS BANCORP, INC.
(exact name of registrant as specified in its charter)

Pennsylvania 23-2226454
(State or other jurisdiction (IRS. Employer
of incorporation or organization) Identification No.)

300 Market Street, P.O. Box 967
Williamsport, Pennsylvania 17703-0967___
(Address of principal executive offices)

Registrant's telephone number,
including area code (570) 322-1111

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange
which registered
None None_________

Securities to be registered pursuant to Section 12(g) of the
Act:

Common Stock, par value $10 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
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

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

State the aggregate market value of the voting stock held by
non-affiliates of the registrant. $90,681,196 at March 5, 2002

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

Class Outstanding at March 5, 2002
Common Stock, $10 Par Value 3,038,590 Shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement prepared
in connection with its annual meeting of shareholders to be held
on May 1, 2002 are incorporated by reference in Part III hereof.

INDEX

PART I

ITEM

Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security
Holders

PART II

Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure

PART III

Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership and Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions

PART IV

Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K

Index to Exhibits
Signatures

PART I

ITEM 1 BUSINESS

A. General Development of Business and History

On January 7, 1983, Penns Woods Bancorp, Inc. (the
"Company") was incorporated under the laws of the Commonwealth
of Pennsylvania as a bank holding company. The Jersey Shore
State Bank (the "Bank") became a wholly owned subsidiary of the
Company, and each outstanding share of Bank common stock was
converted into one share of Company common stock. This
transaction was approved by the shareholders of the Bank on
April 11, 1983 and was officially effective on July 12, 1983.
The Company's business has consisted primarily of managing and
supervising the Bank, and its principal source of income has
been dividends paid by the Bank. The Company's two other
wholly-owned subsidiaries are Woods Real Estate Development Co.,
Inc. and Woods Investment Co., Inc.

The Bank is engaged in commercial and retail banking and
the taking of time and regular savings and demand deposits, the
making of commercial and consumer loans and mortgage loans, and
safe deposit services. Auxiliary services, such as cash
management, are provided to commercial customers. The Bank
operates full banking services with ten branch offices and a
Mortgage/Loan Center in Northcentral Pennsylvania.

In October 2000, the Bank acquired The M Group, Inc. D/B/A
The Comprehensive Financial Group ("The M Group"). The M Group,
which operates as a subsidiary of the Bank, offers insurance and
securities brokerage services. Securities are offered by The M
Group through Locust Street Securities, Inc., a registered
broker-dealer.

Neither the Company nor the Bank anticipates that
compliance with environmental laws and regulations will have any
material effect on capital expenditures, earnings, or on its
competitive position. The Bank is not dependent on a single
customer or a few customers, the loss of whom would have a
material effect on the business of the Bank.

The Bank employed approximately 141 persons as of
December 31, 2001. The Company does not have any employees.
The principal officers of the Bank also serve as officers of the
Company.

B. Regulation and Supervision

The Company is also subject to the provisions of the Bank
Holding Company Act of 1956, as amended (the "BHCA") and to
supervision and examination by the Board of Governors of the
Federal Reserve System (the "FRB"). The Bank is subject to the
supervision and examination by the Federal Deposit Insurance
Corporation (the "FDIC"), as its primary federal regulator and
as the insurer of the Bank's deposits. The Bank is also
regulated and examined by the Pennsylvania Department of Banking
(the "Department").

The insurance activities of The M Group are subject to
regulation by the insurance departments of the various states in
which The M Group conducts business including principally the
Pennsylvania Department of Insurance. The securities brokerage
activities of The M Group are subject to regulation by federal
and state securities commissions.

The FRB has issued regulations under the BHCA that require
a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. As a result, the
FRB, pursuant to such regulations, may require the Company to
stand ready to use its resources to provide adequate capital
funds to the Bank during periods of financial stress or
adversity. The BHCA requires the Company to secure the prior
approval of the FRB before it can acquire all or substantially
all of the assets of any bank, or acquire ownership or control
of 5% or more of any voting shares of any bank. Such a
transaction would also require approval of the Department.

A bank holding company is prohibited under the BHCA from
engaging in, or acquiring direct or indirect control of, more
than 5% of the voting shares of any company engaged in non-
banking activities unless the FRB, by order or regulation, has
found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident
thereto. Under the BHCA, the FRB has the authority to require a
bank holding company to terminate any activity or relinquish
control of a non-bank subsidiary (other than a non-bank
subsidiary of a bank) upon the FRB's determination that such
activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank
holding company.

Bank holding companies are required to comply with the
FRB's risk-based capital guidelines. The risk-based capital
rules are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank
holding companies and to minimize disincentives for holding
liquid assets. Currently, 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, 45% of net unrealized gains on
marketable equity 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 FRB
requires each bank holding company to comply with the leverage
ratio, under which the bank holding company must maintain a
minimum level of Tier 1 capital to average total consolidated
assets of 3% 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 expected to maintain a leverage ratio of
at least 4% to 5%. The Bank is subject to similar capital
requirements adopted by the FDIC.

C. Regulation of the Bank

From time to time, various types of federal and state
legislation have been proposed that could result in additional
regulation of, and restrictions of, the business of the Bank.
It cannot be predicted whether any such legislation will be
adopted or how such legislation would affect the business of the
Bank. As a consequence of the extensive regulation of
commercial banking activities in the United States, the Bank's
business is particularly susceptible to being affected by
federal legislation and regulations that may increase the costs
of doing business.

Prompt Corrective Action - The FDIC has specified the levels at
which an insured institution will be considered "well-
capitalized," "adequately capitalized," "undercapitalized," and
"critically undercapitalized." In the event an institution's
capital deteriorates to the "undercapitalized" category or
below, the Federal Deposit Insurance Act (the "FDIA") and FDIC
regulations prescribe an increasing amount of regulatory
intervention, including: (1) the institution of a capital
restoration plan by a bank and a guarantee of the plan by a
parent institution; and (2) the placement of a hold on increases
in assets, number of branches or lines of business. If capital
has reached the significantly or critically undercapitalized
levels, further material restrictions can be imposed, including
restrictions on interest payable on accounts, dismissal of
management and (in critically undercapitalized situations)
appointment of a receiver. For well-capitalized institutions,
the FDIA provides authority for regulatory intervention where
the institution is deemed to be engaging in unsafe or unsound
practices or receives a less than satisfactory examination
report rating for asset quality, management, earnings or
liquidity.

Deposit Insurance - There are two deposit insurance funds
administered by the FDIC - the Savings Association Insurance
Fund ("SAIF") and the Bank Insurance Fund ("BIF"). The Bank's
deposits are insured under the BIF; however, the deposits
assumed by the Bank in connection with the merger of Lock Haven
Savings Bank are treated and assessed as SAIF-insured deposits.
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 measure. Under the
risk-related premium schedule, the FDIC assigns, on a semiannual
basis, each 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 gauging
the risk posed by the institution. Only institutions with a
total capital to risk-adjusted assets ratio of 10.0% or greater,
a Tier 1 capital to risk-adjusted assets ratio of 6.0% or
greater and a Tier 1 leverage ratio of 5.0% or greater, are
assigned to the well-capitalized group. As of December 31,
2001, the Bank's ratios were well above required minimum ratios.

Both the BIF and SAIF are presently fully funded at more
than the minimum amount required by law. Accordingly, the BIF
and SAIF assessment rates range from zero for those institutions
with the least risk, to $0.27 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 indicated that all banks may again be required to pay
deposit insurance premiums in the future if the current trend of
the size of the deposit 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 ("FICO") bonds. FICO was created by
Congress to issue bonds to finance the resolution of failed
thrift institutions. The annual FICO assessment for the Bank
(and all banks) is $.0182 for each $100 of BIF deposits.

Gramm-Leach Bliley Act and Other Legislation

The Gramm-Leach-Bliley Act enacted in November 1999
dramatically changes certain banking laws that have been in
effect since the early part of the 20th Century. The most radical
changes are that the separation between banking and the
securities businesses mandated by the Glass-Steagall Act has now
been removed, and the provisions of any state law that prohibits
affiliation between banking and insurance entities have been
preempted. Accordingly, the new legislation now permits firms
engaged in underwriting and dealing in securities, and insurance
companies, to own banking entities, and permits bank holding
companies (and in some cases, banks) to own securities firms and
insurance companies. The provisions of federal law that preclude
banking entities from engaging in non-financially related
activity, such as manufacturing, have not been changed. For
example, a manufacturing company cannot own a bank and become a
bank holding company, and a bank holding company cannot own a
subsidiary that is not engaged in financial activities, as
defined by the regulators.

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

The Company believes it qualifies to become a financial
holding company, but has not yet determined whether or not it
will file to become treated as one.

It is too early to tell what effect the Gramm-Leach-Bliley
Act may have on the Company and the Bank. The intent and scope
of the act is positive for the financial industry, and is an
attempt to modernize federal banking laws and make U.S.
institutions competitive with those from other countries. While
the legislation makes significant changes in U.S. banking law,
such changes may not directly affect the Company's business
unless it decides to avail itself of new opportunities available
under the new law. The Company does not expect any of the
provisions of the Act to have a material adverse effect on our
existing operations, or to significantly increase its costs.

In October 2001, the President signed into law the USA
PATRIOT Act. This Act was in direct response to the terrorist
attacks on September 11, 2001, and 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.

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

In addition to federal banking law, the Bank is subject to
the Pennsylvania Banking Code. The Banking Code was amended in
late 2000 to provide more complete "parity" in the powers of
state-chartered institutions compared to national banks and
federal savings banks doing business in Pennsylvania.
Pennsylvania banks have all the same ability to form financial
subsidiaries authorized by the Gramm-Leach-Bliley Act, as do
national banks.

Environmental Laws

Environmentally related hazards have become a source of
high risk and potential liability for financial institutions
relating to their loans. Environmentally contaminated
properties owned by an institution's borrowers may result in a
drastic reduction in the value of the collateral securing the
institution's loans to such borrowers, high environmental clean
up costs to the borrower affecting its ability to repay the
loans, the subordination of any lien in favor of the institution
to a state or federal lien securing clean up costs, and
liability to the institution for clean up costs if it forecloses
on the contaminated property or becomes involved in the
management of the borrower. The Company is not aware of any
borrower who is currently subject to any environmental
investigation or clean up proceeding which is likely to have a
material adverse effect on the financial condition or results of
operations of the Company.

Effect of Government Monetary Policies

The earnings of the Company are and will be affected by
domestic economic conditions and the monetary and fiscal
policies of the United States Government and its agencies. The
monetary policies of the FRB have had, and will likely continue
to have, an important impact on the operating results of
commercial banks through its power to implement national
monetary policy in order, among other things, to curb inflation
or combat a recession. The FRB has a major effect upon the
levels of bank loans, investments and deposits through its open
market operations in the United States Government securities and
through its regulation of, among other things, the discount rate
on borrowing of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the
nature and impact of future changes in monetary and fiscal
policies.

DESCRIPTION OF BANK

a. History and Business

Jersey Shore State Bank "("Bank")" was incorporated under
the laws of the Commonwealth of Pennsylvania as a state bank in
1934 and became a wholly owned subsidiary of the Company on
July 12, 1983.

As of December 31, 2001, the Bank had total assets of
$424,810,000; total shareholders' equity of $55,252,000 and
total deposits of $305,150,000. The Bank's deposits are insured
by the Federal Deposit Insurance Corporation for the maximum
amount provided under current law.

The Bank engages in business as a commercial bank, doing
business at several locations in Lycoming, Clinton and Centre
Counties, Pennsylvania. The Bank offers insurance and
securities brokerage services through its wholly owned
subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial
Group.

Services offered by the Bank include accepting time, demand
and savings deposits including Super NOW accounts, regular
savings accounts, money market certificates, investment
certificates, fixed rate certificates of deposit and club
accounts. Its services also include making secured and
unsecured commercial and consumer loans, financing commercial
transactions, making construction and mortgage loans and the
renting of safe deposit facilities. Additional services include
making residential mortgage loans, revolving credit loans with
overdraft protection, small business loans, etc. Business loans
include seasonal credit collateral loans and term loans, as well
as accounts receivable and inventory financing.

The Bank's loan portfolio mix can be classified into four
principal categories of real estate, agricultural, commercial
and consumer.

Real estate loans can be further segmented into
construction and land development, farmland, one-to-four family
residential, multi-family and commercial or industrial.
Qualified borrowers are defined by policy or by industry
underwriting standards. Owner provided equity requirements
range from 20% to 30% with a first lien status required. Terms
are restricted to between 10 and 20 years with the exception of
construction and land development, which is limited to one to
five years. Appraisals, verifications and visitations comply
with industry standards.

Financial information that is required on all commercial
mortgages includes the most current three years' balance sheets
and income statements and projections on income to be developed
through the project. In the case of corporations and
partnerships, the principals are often asked to in debt
themselves personally as well. As regards residential
mortgages, repayment ability is determined from information
contained in the application and recent income tax returns.
Emphasis is on credit, employment, income and residency
verification. Broad hazard insurance is always required and
flood insurance where applicable. In the case of construction
mortgages, builders risk insurance is requested.

Agricultural loans for the purchase or improvement of real
estate must meet the Bank's real estate underwriting criteria.
The only permissible exception is when a Farmers Home Loan
Administration guaranty is obtained. Agricultural loans made
for the purchase of equipment are usually payable in five years,
but never more than seven, depending upon the useful life of the
purchased asset. Minimum borrower equity required is 20%.
Livestock financing criteria depends upon the nature of the
operation. A dairy herd could be financed over three years, but
a feeder operation would require cleanup in intervals of less
than one year. Agricultural loans are also made for crop
production purposes. Such loans are structured to repay within
the production cycle and not carried over into a subsequent
year. General purpose working capital loans are also a
possibility with repayment expected within one year. It is also
a general policy to collateralize non-real estate loans with not
only the asset purchased but also junior liens on all other
available assets. Insurance and credit criteria is the same as
mentioned previously. In addition, annual visits are made to
our agricultural customers to determine the general condition of
assets. Personal credit requirements are handled as consumer
loans.

Commercial loans are made for the acquisition and
improvement of real estate, purchase of equipment and for
working capital purposes on a seasonal or revolving basis.
Criteria was discussed under real estate financing for such
loans, but it is important to note that such loans may be made
in conjunction with the Pennsylvania Industrial Development
Authority. Caution is also exercised in taking industrial
property for collateral by requiring, on a selective basis,
environmental audits.

Equipment loans are generally amortized over three to seven
years, with an owner equity contribution required of at least
20% of the purchase price. Unusually expensive pieces may be
financed for a longer period depending upon the asset's useful
life. The increased cash flow resulting from the additional
piece, through improved income or greater depreciation expense,
serves in establishing the terms. Insurance coverage with the
Bank as loss payee is required, especially in the case where the
equipment is rolling stock.

Seasonal and revolving lines of credit are offered for
working capital purposes. Collateral for such a loan includes
the pledge of inventory and/or receivables. Drawing
availability is usually 50% of inventory and 75% of eligible
receivables. Eligible receivables are defined as invoices less
than 90 days delinquent. Exclusive reliance is very seldom
placed on such collateral, therefore, other lienable assets are
also taken into the collateral pool. Where reliance is placed
on inventory and accounts receivable, the applicant must provide
financial information including agings on a monthly basis. In
addition, the guaranty of the principals is usually obtained.

It is unusual for the Bank to make unsecured commercial
loans. But when such a loan is a necessity, credit information
in the file must support that decision.

Letter of Credit availability is limited to standbys where
the customer is well known to the Bank. Credit criteria is the
same as that utilized in making a direct loan and collateral is
obtained in most cases, and whenever the expiration date is for
more than one year.

Consumer loan products include second mortgages, automobile
financing, small loan requests, overdraft check lines and PHEAA
referral loans. Our policy includes standards used in the
industry on debt service ratios and terms are consistent with
prudent underwriting standards and the use of proceeds.
Verifications are made of employment and residency, along with
credit history. Second mortgages are confined to equity
borrowing and home improvements. Terms are generally ten years
or less and rates are fixed. Loan to collateral value criteria
is 80% or less and verifications are made to determine values.
Automobile financing is generally restricted to four years and
done on a direct basis. The Bank, as a practice, does not floor
plan and therefore does not discount dealer paper. Small loan
requests are to accommodate personal needs such as the purchase
of small appliances or for the payment of taxes. Overdraft
check lines are limited to $5,000 or less.

The Bank's investment portfolio is analyzed and priced on a
monthly basis. Investments are made in U.S. Treasuries, U.S.
Agency issues, bank qualified municipal bonds, corporate bonds
and corporate stocks which consist of Pennsylvania bank stocks.
Bonds with BAA or better ratings are used, unless a local issue
is purchased that has a lesser or no rating.

Factors taken into consideration when investments are made
include liquidity, the Company's tax position and the policies
of the Asset/Liability Committee.

The Bank has experienced deposit growth in the range of
.96% to 8.83% over the last five years. This growth has
primarily come in the form of core deposits. Although the Bank
has regular opportunities to bid on pools of funds of $100,000
or more in the hands of municipalities, hospitals and others, it
does not rely on these monies to fund loans on intermediate or
longer-term investments. Minor seasonal growth in deposits is
experienced at or near the year-end.

It is the policy of the Bank to generally maintain a rate
sensitive asset (RSA) to rate sensitive liability (RSL) ratio of
200% of equity for a 6-month time horizon, 200% of equity for a
2-year time horizon and 200% of equity for a 5-year time
horizon.

The Bank operates 10 full service offices in Lycoming,
Clinton, and Centre Counties, Pennsylvania, and a Mortgage/Loan
Center in Centre County, Pennsylvania. The economic base of the
region is developed around service, light manufacturing
industries and agriculture. The banking environment in
Lycoming, Clinton and Centre Counties, Pennsylvania is highly
competitive. The Bank competes for loans and deposits with
commercial banks, savings and loan associations and other
financial institutions.

The Bank has a relatively stable deposit base and no
material amount of deposits is obtained from a single depositor
or group of depositors (including federal, state and local
governments). The Bank has not experienced any significant
seasonal fluctuations in the amount of its deposits.

b. Supervision and Regulation

The earnings of the Bank are affected by the policies of
regulatory authorities including the FDIC and the FRB. An
important function of the FRB is to regulate the money supply
and interest rates. Among the instruments used to implement
these objectives are open market operations in U.S. Government
Securities, changes in reserve requirements against member bank
deposits, and limitations on interest rates that member banks
may pay on time and savings deposits. These instruments are
used in varying combinations to influence overall growth and
distribution of bank loans, investments on deposits, and their
use may also affect interest rates charged on loans or paid for
deposits.

The policies and regulations of the FRB have had and will
probably continue to have a significant effect on the Bank's
deposits, loans and investment growth, as well as the rate of
interest earned and paid, and are expected to affect the Bank's
operation in the future. The effect of such policies and
regulations upon the future business and earnings of the Bank
cannot accurately be predicted.

EXECUTIVE OFFICERS OF THE REGISTRANT:

NAME AGE FIVE-YEAR ANALYSIS OF DUTIES

Theodore H. Reich 63 Chairman of the Company; the Bank
Woods Real Estate Development
Co., Inc; Woods Investment
Company, Inc.; and The M Group,
Inc. D/B/A The Comprehensive
Financial Group.

Ronald A. Walko 55 President and Chief Executive
Officer of the Company; the Bank;
The M Group, Inc. D/B/A The
Comprehensive Financial Group;
and Woods Investment Company,
Inc.; Vice President of Woods
Real Estate Development Co.,
Inc.; and Federal Bank examiner
prior to 1986 for an eighteen-
year period.

Hubert A. Valencik 60 Senior Vice President of the
Company; Senior Vice President
and Operations Officer of the
Bank; Vice President of Woods
Real Estate Development Co. Inc,;
Vice President - Operations of
the M Group Inc., D/B/A The
Comprehensive Financial Group
Inc; Vice President with another
bank prior to 1985 for a
fourteen-year period.

Sonya E. Scott 42 Secretary of the Company; Vice
President And Chief Financial
Officer of the Bank; Secretary
and Treasurer of Woods Real
Estate Development Co., Inc.;
Woods Investment Co., Inc.; and
The M Group Inc., D/B/A The
Comprehensive Financial Group
Inc.

ITEM 2 PROPERTIES

The Company owns and leases its properties. Listed herewith are
the locations of properties owned or leased, in which the
banking offices and Mortgage/Loan Center are located; all
properties are in good condition and adequate for the Bank's
purposes:

Office Address

Main 115 South Main Street Owned
PO. Box 5098
Jersey Shore, Pennsylvania 17740

Bridge Street 112 Bridge Street Owned
Jersey Shore, Pennsylvania 17740

DuBoistown 2675 Euclid Avenue Under
DuBoistown, Pennsylvania 17702 Lease

Williamsport 300 Market Street Owned
P.O. Box 967
Williamsport, Pennsylvania 17703-0967

Montgomery RR 1, Box 493 Under
Montgomery, Pennsylvania 17752 Lease

Lock Haven 4 West Main Street Owned
Lock Haven, Pennsylvania 17745

Mill Hall (Inside Walmart) Under
167 Hogan Boulevard Lease
Mill Hall, Pennsylvania 17751

Spring Mills Ross Hill Road, P.O. Box 66 Owned
Spring Mills, Pennsylvania 16875

Centre Hall 2842 Earlystown Road Land
Centre Hall, Pennsylvania 16828 Under
Lease

Zion 100 Cobblestone Road Under
Bellefonte, Pennsylvania 16823 Lease

Jersey Shore 1952 Waddle Road, Suite 106 Under
State Bank State College, PA 16803 Lease
Financial Center
State College

The M Group, Inc. 705 Washington Boulevard Under
D/B/A The Williamsport, Pennsylvania 17701 Lease
Comprehensive
Financial Group

ITEM 3 LEGAL PROCEEDINGS

In the normal course of business, various lawsuits and claims
arise against the Company and its subsidiary. There are no such
legal proceedings or claims currently pending or threatened.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

No matters were submitted to a vote of security holders during
the fourth quarter of 2001.

PART II

ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

The Registrant's Common Stock is traded locally. The following
table sets forth (1) the quarterly high and low prices for a
share of the Registrant's Common Stock during the periods
indicated as reported by the management of the Registrant, and
(2) quarterly dividends on a share of the Common Stock with
respect to each quarter since January 1, 1999. The following
quotations represent prices between buyers and sellers and do
not include retail markup, markdown or commission. They may not
necessarily represent actual transactions.

Dividends
HIGH LOW Declared
----- ------ --------
1999:
First quarter $56.36 $51.82 $0.18
Second quarter 54.32 48.00 0.20
Third quarter 50.75 44.75 0.20
Fourth quarter 47.50 40.00 0.43
2000
First quarter $41.00 $29.00 $0.23
Second quarter 31.00 26.00 0.23
Third quarter 32.00 26.00 0.23
Fourth quarter 33.50 28.00 0.41
2001
First quarter $33.50 $27.25 $0.25
Second quarter 33.00 27.25 0.25
Third quarter 32.00 30.75 0.25
Fourth quarter 35.50 31.15 0.47

The stock prices and the dividends have been adjusted to reflect
the issuance of a 10% stock dividend on June 8, 1999. The stock
prices and dividends have also been adjusted for the acquisition
of the First National Bank of Spring Mills.

The Bank has paid cash dividends since December 31, 1941. The
Registrant has paid dividends since the effective date of its
formation as a bank holding company. It is the present
intention of the Registrant's Board of Directors to continue the
dividend payment policy; however, further dividends must
necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors relevant at the
time the Board of Directors of the Registrant considers dividend
policy. Cash available for dividend distributions to
shareholders of the Registrant must initially come from
dividends paid by the Bank to the Registrant. Therefore, the
restrictions on the Bank's dividend payments are directly
applicable to the Registrant.

Under the Pennsylvania Business Corporation Law of 1988 a
corporation may not pay a dividend, if after giving effect
thereto, the corporation would be unable to pay its debts as
they become due in the usual course of business and after giving
effect thereto the total assets of the corporation would be less
than the sum of its total liabilities plus the amount that would
be needed, if the corporation were to be dissolved at the time
of the distribution, to satisfy the preferential rights upon
dissolution of the shareholders whose preferential rights are
superior to those receiving the dividend.

As of March 5, 2002, the Registrant had approximately 1,217
shareholders of record.

ITEM 6 SELECTED FINANCIAL DATA

The following table sets forth certain financial data as of
and for each of the years in the five-year period ended
December 31, 2001.

Per share data and number of shares outstanding have been
adjusted in each reporting period to give retroactive effect to
a stock split effected in the form of a 100% stock dividend
issued January 15, 1998, and a 10% stock dividend issued June 8,
1999. In addition, all financial data has been adjusted for the
acquisition of the First National Bank of Spring Mills in 1999.

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income is determined by calculating the
difference between the yields earned on interest earning assets
and the rates paid on interest bearing liabilities.

2001 vs 2000

Taxable equivalent net interest income increased 5.9% or
$992,000, to $17,944,000 from year-end 2000 to year-end 2001.
The increase in net interest income is due to a $695,000
increase in interest income and a reduction of $297,000 of
interest expense. Tax-exempt investment securities contributed
the most to interest income adding, $1,374,000 in income of
which $1,296,000 was due to volume and $78,000 due to rate.
Taxable investment securities partially offset the gain in
interest income declining $998,000. Again, the decrease was
mainly due to the reduction in volume that amounted to
$790,000. Rates caused a reduction of $208,000 of income on
taxable investment securities. The average balance of state and
political subdivisions increased $16,471,000 while the average
balances of U.S. Treasury and federal agencies and other
securities declined $10,883,000 and $2,006,000, respectively.
The shift to tax-exempt securities was to take advantage of
their higher after-tax yields. The average rate of state and
political subdivisions was 7.88% as opposed to 6.41% on U.S.
Treasury and federal agency securities and 3.89% on other
securities.

Loan interest income contributed $319,000 to total interest
income. The increase was caused by the net effect of a $611,000
increase due to volume and a $292,000 decrease due to rates.
The average balance of total loans increased $6,938,000 to
$246,907,000 during 2001. Prime rate reductions resulting from
Federal Open Markets Committees' monetary policy initiatives
during 2001 affected income collected on loans negatively.

Total expense on interest-bearing liabilities declined
$297,000 in 2001 due to the net effect of a $963,000 decrease in
expense on short-term borrowings, an increase of $438,000 on
other time deposits and interest expense increases on savings
deposits and other borrowings of $54,000 and $174,000,
respectively. Interest expense related to volume increased
$442,000 while rates contributed a net decrease of $739,000.
Total average interest bearing liabilities increased $9,236,000
to $292,923,000 in 2001. Average other time deposits
contributed the most to the total, increasing $14,396,000. The
interest expense due to the volume on other time deposits
increased $736,000. Average balances of savings, and other
borrowings added $2,063,000 and $4,468,000 respectively.
Savings and other borrowings also added $43,000 and $250,000 in
interest expense related to volume. The average balances on
short-term borrowings decreased $11,691,000, resulting in an
expense reduction due to volume of $587,000. The bank
successfully attracted time deposits resulting in the
substantial increase in average other time deposits. This
caused less need for short-term borrowings, which consists of
overnight Federal Home Loan Bank borrowings. Short-term
borrowings experienced a decline in its average balance in 2001.
Although interest expense on short-term deposits declined,
interest expense on other time deposits more than offset the
reduction. Overall, interest rates declined considerably in
2001. This resulted in a reduction in interest expense related
to rates in every category except savings deposits. Interest
rates on savings deposits change only minimally year-to-year.
This explains the $11,000 increase in expense related to rates,
even with other deposit rates declining considerably. Interest
expense related to rates on short-term borrowings decreased the
most of the four categories. Short-term borrowings consisting
of overnight Federal Home Loan Bank advances, naturally, are
affected much more by the federal funds target rate set by the
Federal Open Markets Committee. Interest on other time
deposits, other borrowings and short term borrowings due to rate
decreased $298,000, $76,000 and $376,000, respectively.

The effective interest differential increased 13 basis
points during 2001. The increase was due to the net effect of a
five basis point interest rate decrease in total average earning
assets and an 18 basis point rate decrease in total average
interest bearing liabilities. The shape of the economy in 2001
was such that the Federal Open Markets Committee (FOMC) felt the
need to reduce its federal funds target rate 475 basis points.
Rates on both deposits and loans have fallen in response to the
FOMC's objective. Rates have affected liabilities positively.
This has allowed earning assets to increase $10,520,000 to
$370,481,000 while interest expense decreased, resulting in an
interest expense/earning assets ratio 18 points less than 2000.

2000 vs 1999

Fully taxable equivalent net interest income increased
$556,000 (3.4%) to $16,952,000 for the year ended December 31,
2000. Income related to volume increased $872,000 while income
related to rates decreased $316,000.

Total interest-earning average assets increased $25,281,000
from the year ended December 31, 1999 to the year ended
December 31, 2000. The volume increases in total interest
earning average assets is comprised of a 7.4% or $16,629,000
increase in total average loans and a 7.8% or $8,652,000
increase in total average securities.

The volume increases in interest-earning average assets
accounts for $2,280,000 of the $2,816,000 increase in total
interest income on earning assets. An increase of $536,000 was
due to rate changes. Loans contributed $1,692,000 to the total
income, $1,503,000 attributable to volume and $189,000 due to
rate changes. Tax-exempt investment securities added $1,224,000
to interest income while net taxable investment securities
reduced income $100,000.

Total interest bearing liabilities increased $22,010,000 or
8.4% during the year ended December 31, 2000. The expense
related to the volume increases contributed $1,408,000 to the
net interest expense increase of $2,260,000. The increase of
$852,000 was due to rate increases. The volume increases of
other time deposits, short-term borrowings and other borrowings
explain $1,523,000 of the expense related to volume. A decline
in the average balance of savings deposits reduced the expense
by $115,000 due to volume. The $852,000 increase in expense
related to rate changes is comprised of a $541,000 increase due
to deposits and a $311,000 increase in borrowings.

The effective interest differential fell 19 basis points to
4.71% in 2000. Amid inflation fears, the Federal Reserve
increased the federal funds target rate in 2000. The rate
increases have positively effected loan rates and interest
income on earning assets by 22 basis points. Due to competitive
deposit pricing, interest expense on interest-bearing deposits
also increased 41 basis points.

AVERAGE BALANCES AND INTEREST RATES
(INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS)
(IN THOUSANDS)

1. Fees on loans are included with interest on loans.

2. Information on this table has been calculated using average
daily balance sheets to obtain average balances.

3. Nonaccrual loans have been included with loans for the
purpose of analyzing net interest earnings.

4. Loan fees are included in interest income as follows: 2001,
$668,000, 2000, $411,000, 1999, $601,000.

5. Income and rates on a fully taxable equivalent basis include
an adjustment for the difference between annual income from
tax-exempt obligations and the taxable equivalent of such
income at the standard 34% tax rate (derived by dividing
tax-exempt interest by 66%).

SUMMARY OF CHANGES IN INTEREST EARNED AND INTEREST PAID
(IN THOUSANDS)

Rate/Volume Analysis

The table below sets forth certain information regarding
changes in our interest income and interest expense for the
periods indicated. For interest-earning assets and interest-
bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in average volume
multiplied by old rate); (ii) changes in rates (changes in rate
multiplied by old average volume). Increases and decreases due
to both rate and volume, which cannot be separated, have been
allocated proportionally to the change due to volume and the
change due to rate.

PROVISION FOR LOAN LOSSES

2001 vs 2000

The provision for loan losses is based upon management's
quarterly review of the loan portfolio. The purpose of the
review is to assess loan quality, identify impaired loans,
analyze delinquencies, ascertain loan growth, evaluate potential
charge-offs and recoveries, and assess general economic
conditions in the markets served. An external independent loan
review is also performed annually for the bank. Management
remains committed to an aggressive program of problem loan
identification and resolution.

The allowance is calculated by applying loss factors to
outstanding loans by type, excluding loans for which a specific
allowance has been determined. Loss factors are based on
management's consideration of the nature of the portfolio
segments, changes in mix and volume of the loan portfolio, and
historical loan loss experience. In addition, management
considers industry standards and trends with respect to
nonperforming loans and its knowledge and experience with
specific lending segments.

Although management believes that it uses the best
information available to make such determinations and that the
allowance for loan losses was adequate at December 31, 2001,
future adjustments could be necessary if circumstances or
economic conditions differ substantially from the assumptions
used in making the initial determinations. A downturn in the
local economy, employment and delays in receiving financial
information from borrowers could result in increased levels of
nonperforming assets and charge-offs, increased loan loss
provisions and reductions in income. Additionally, as an
integral part of the examination process bank regulatory
agencies periodically review the bank's loan loss allowance.
The banking agencies could require the recognition of additions
to the loan loss allowance based on their judgment of
information available to them at the time of their examination.

The allowance for loan losses increased 1.7% or $48,000
from fiscal 2000 after net charge-offs of $324,000 contributing
to a year-end allowance for loan losses of $2,927,000 or 1.2%
of total loans. This percentage is consistent with the
guidelines of regulators and peer banks. Management's
conclusion is that the provision for loan loss is adequate.

2000 vs 1999

The allowance for loan losses increased 2.0% or $56,000
from fiscal 1999 after net charge-offs of $230,000 contributing
to a year end allowance for loan losses of $2,879,000.

OTHER INCOME

2001 vs 2000

Total other income for the year ended December 31, 2001 of
$4,284,000 grew from $2,358,000 in 2000, an increase of
$1,926,000 or 81.7%. Most of the $954,000 increase of other
operating income is due to the growth of $820,000 commission
income recognized from the sale of various financial products,
sold by the Bank's subsidiary, The M Group. The substantial
increase in commission is due to comparing an entire year's
commission in 2001 and a partial year for the newly acquired
subsidiary in 2000. The Company realized security gains of
$1,033,000 versus $269,000 in 2001, an increase of $764,000.
The majority of the gains taken were due to the liquidation of
equity securities that had reached, in management's opinion,
their peak performance. Service charges increased $208,000, or
15.3%, which is mostly attributable to an increase on deposits
and in fees collected on deposit accounts.

2000 vs 1999

Total other income for the year ended December 31, 2000
decreased 33.1% or $1,169,000 from 1999. Most of the decrease
resulted from securities gains taken during 2000 versus 1999.
Securities gains realized during 2000 were $269,000 versus
$1,946,000 realized in 1999. Market conditions in 1999 provided
more opportunity for the Company to take security gains than in
2000. The Company also realized losses on debt securities in
efforts to prudently position its assets and liabilities. Income
on service charges increased $171,000 or 14.4% from 1999. The
growth is mainly due to an increase in the fees collected on
deposit accounts. Other operating income increased $337,000 to
$732,000 in 2000. The substantial increase over 1999's other
operating income of $395,000 was mostly due to commission income
recognized from the sale of various financial products, sold by
the Bank's newly acquired subsidiary, The M Group.

OTHER EXPENSES

2001 vs 2000

Other expenses at year-end December 31, 2001 increased
$884,000 or 9.2%. The majority of the other operating expense
increase of $574,000 is due to a full year of expenses of the
Bank's subsidiary The M Group. and an entry fee of $53,000 for
The Nasdaq National Market. The salaries and employee benefits
expense increase of $304,000 or 6.1% is attributable to the
normal wage increases and the additional salaries expense of the
Bank's subsidiary for a full year. Occupancy expense increased
$28,000 or 3.8%. Most of the expense was also produced by a
full year of The M Group's occupancy expenses. Furniture and
equipment expenses were $22,000 less in 2001 than in 2000.

2000 vs 1999

Other expenses at December 31, 2000 increased $224,000 or
2.4% from year-end 1999. Expenses relating to salaries and
employee benefits increased $144,000 or 3.0% from 1999 due to
normal wage increases and the addition of the Bank's subsidiary,
The M Group. Occupancy expense during 2000 increased $68,000
over 1999 expenses. The majority of this expense was due to the
first full year's operation of the Zion branch and painting
expense in the Williamsport branch. Furniture and equipment
expense increased 10.0% in 2000 to $756,000. The $69,000
increase from year-end 1999 amount of $687,000 resulted mostly
from costs associated with the acquisition of additional
computer equipment to accommodate the implementation of internet
and telephone banking. Other operating expenses decreased
$57,000 to $3,062,000 during 2000. Expenses relating to
directors' insurances represent the majority of the decrease.

INCOME TAXES

2001 vs 2000

The provision for income taxes for the year ended
December 31, 2001 resulted in an effective income tax rate of
20.3% compared to 19.8% for 2000.

2000 vs 1999

The provision for income taxes for the year ended
December 31, 2000 resulted in an effective income tax rate of
19.8% compared to 23.6% for 1999. The 3.8% decline is
attributable to the increase in tax-exempt interest earned when
comparing 2000 to 1999.

FINANCIAL CONDITION

INVESTMENTS

2001

The investment portfolio increased $17,015,000 or 14.6% in
2001. The bank borrowed $10,000,000 in long-term FHLB advances
to purchase state and political bonds and take advantage of
interest rate imbalances in the market. Deposits grew greater
than loan demand with the excess funding the purchase of
additional investment securities. Most of the increase is
attributable to an increase of $15,591,000 in the state and
political subdivisions category and corporate stock of
$2,791,000 and a decrease of $2,136,000 in the U.S. Government
agencies category. U.S. Treasury securities also increased
$1,080,000, and other bonds, notes and debentures decreased
$311,000. The investment portfolio at year end 2001 comprised
of 19.5% U.S. Government agency and treasury securities, 63.1%
state and political subdivisions, 16.6% equity securities and
.8% other bonds, notes and debentures. Held to Maturity
securities had a carrying value of $1,302,000. Available for
sale securities occupied 99% of the total portfolio and had an
amortized cost of $129,365,000 with an estimated market value of
$131,985,000. The unrealized gain of $2,620,000 effected
shareholders' equity by $1,729,000, net of deferred taxes.

2000

The investment portfolio increased $2,652,000 or 2.3% in
2000. The increase is mostly attributable to an increase of
$19,167,000 in the state and political subdivisions category and
a decrease in the U.S. Government agencies category of
$11,363,000 and corporate stock of $4,628,000. U.S. Treasury
securities and other bonds, notes and debentures also decreased
$524,000. The total investment portfolio at year end 2000
comprised of 23.3% U.S. Government agency and treasury
securities, 58.9% state and political subdivisions, 16.6% equity
securities and 1.2% other bonds, notes and debentures. Held to
Maturity securities had a carrying value of $3,228,000.
Available for sale securities occupied 97.2% of the total
portfolio and had an amortized cost of $114,271,000 with an
estimated market value of $113,044,000. The unrealized loss of
$1,227,000 effected shareholders' equity by $(810,000), net of
deferred taxes.

The carrying amounts of investment securities at the dates
indicated are summarized as follows (in thousands):

The following table shows the maturities and repricing of
investment securities at December 31, 2001 and the weighted
average yields (for tax-exempt obligations on a fully taxable
basis assuming a 34% tax rate) of such securities (in
thousands):

All yields represent weighted average yields expressed on a
tax equivalent basis. They are calculated on the basis of the
cost, adjusted for amortization of premium and accretion of
discount and effective yields weighted for the scheduled
maturity of each security. The taxable equivalent adjustment
represents the difference between annual income from tax-exempt
obligations and the taxable equivalent of such income at the
standard 34% tax rate (derived by dividing tax-exempt interest
by 66%).

LOAN PORTFOLIO

2001

At December 31, 2001, gross loans totaled $251,623,000, an
increase of $6,825,000 or 2.8% over year-end 2000. While
commercial, agricultural, construction real estate mortgages and
installment loans to individuals decreased from 2000, loans
secured by residential and commercial real estate grew by
$14,964,000 or 7.8%. Residential real estate mortgages increased
$8,823,000 (6.7%). Commercial real estate mortgages grew by
10.1% or $6,141,000. Commercial and agricultural loans
decreased $3,842,000 (14.5%). Construction real estate mortgages
declined $671,000 or 14.1% and installment loans to individuals
decreased 16.8% or $3,626,000.

2000

At December 31, 2000, gross loans totaled $244,798,000, an
increase of $12,983,000 or 5.6% over year-end 1999. While
commercial, agricultural and installment loans to individuals
decreased from 1999, loans secured by real estate mortgages grew
by $20,209,000 or 11.4%. Residential real estate mortgages
increased $10,016,000 (8.3%). Commercial real estate mortgages
grew by 17.8% or $9,177,000. Construction real estate mortgages
increased $1,016,000 (27.2%). Commercial and agricultural loans
decreased $5,264,000 (16.6%) and installment loans to
individuals declined $1,962,000 or 8.3%.

The amount of loans outstanding at the indicated dates are shown
in the following table according to type of loan (in thousands):

The amount of domestic loans at December 31, 2001 are presented
below by category and maturity (in thousands):

COMMERCIAL INSTALLMENT
AND LOANS TO
REAL ESTATE OTHER INDIVIDUALS TOTAL
Loans with floating
interest rates:
1 year or less $ 5,364 $ 6,962 $ 1,438 $ 13,764
1 through 5 years 1,511 892 147 2,550
5 through 10 years 8,811 645 36 9,492
After 10 years 38,475 1,465 96 40,036
-------- ------- ------- --------
Sub Total 54,161 9,964 1,717 65,842
-------- ------- ------- --------
Loans with predetermined
interest rates:
1 year or less 9,517 1,453 2,494 13,464
1 through 5 years 20,589 7,758 10,813 39,160
5 through 10 years 36,481 3,413 1,331 41,225
After 10 years 90,315 41 1,576 91,932
-------- ------- ------- --------
Sub Total 156,902 12,665 16,214 185,781
-------- ------- ------- --------
Total $211,063 $22,629 $17,931 $251,623
======== ======= ======= ========

(1) The loan maturity information is based upon original loan
terms and is not adjusted for "rollovers." In the ordinary
course of business, loans maturing within one year may be
renewed, in whole or in part, as to principal amount at
interest rates prevailing at the date of renewal.

(2) Scheduled repayments are reported in maturity categories in
which the payment is due.

The Bank does not make loans that provide for negative
amortization nor do any loans contain conversion features. The
Bank does not have any foreign loans outstanding at December 31,
2001.

ALLOWANCE FOR LOAN LOSSES

2001

The allowance for loan losses represents the amount that
management estimates is adequate to provide for probable losses
inherent in the loan portfolio, as of the balance sheet date.
Accordingly, all loan losses are charged to the allowance, and
all recoveries are credited to it. The allowance for loan
losses is established through a provision for loan losses, which
is charged to operations. The provision is based on
management's quarterly evaluation of the adequacy of the
allowance for loan losses, taking into account the overall risk
characteristics of the various portfolio segments, past
experience with losses, the impact of economic conditions on
borrowers, and other relevant factors. Underwriting continues
to emphasize the need for security and adequate collateral
margins. The total allowance for loan losses is a combination
of a specific allowance for identified problem loans, a formula
allowance, and an unallocated allowance.

At December 31, 2001, the allowance for loan losses as a
percent of gross loans remained unchanged from December 31,
2000, at 1.2%. Gross loans increased by $9,442,000 from
$248,642,000 at December 31, 2000 to $258,084,000 at
December 31, 2001.

Non-accruing loans decreased $496,000 (63.8%) to $281,000
from year-end 2000. Overall non-performing loans decreased
$185,000 (23.0%) to $619,000 from fiscal 2000.

Based on management's loan-by-loan review, the past
performance of the borrowers and current economic conditions,
including recent plant closures and bankruptcy levels,
management does not anticipate any current losses related to
non-accrual, nonperforming, or classified loans above that have
already been considered in its overall judgment of the adequacy
of the reserve.

2000

At December 31, 2000, the allowance for loan losses stood
at $2,879,000 or 1.2% of gross loans. This was a $56,000 (2.0%)
increase over year-end 1999. The adequacy of the loan loss
allowance is determined quarterly in unison with management's
comprehensive review of the loan portfolio credit quality.
Reviews are further enhanced by analyses of recent and past
economic conditions, portfolio trends and growth, peer
comparisons and other factors impacting overall credit quality.
Underwriting continues to emphasize the need for security and
adequate collateral margins.

Non-accruing loans increased $493,000 (173.6%) to $777,000
from year-end 1999. Overall non-performing loans increased
$279,000 (53.1%) to $804,000 from fiscal 1999.

The following table presents information concerning non-
performing loans. The accrual of interest will be discontinued
when the principal or interest of a loan is in default for 90
days or more, or as soon as payment is questionable, unless the
loan is well secured and in the process of collection. Consumer
loans and residential real estate loans secured by 1 to 4 family
dwellings shall ordinarily not be subject to those guidelines.
The reversal of previously accrued but uncollected interest
applicable to any loan placed in a non-accrual status and the
treatment of subsequent payments of either principal or interest
will be handled in accordance with accounting principles
generally accepted in the United States of America. These
principles do not require a write-off of previously accrued
interest if principal and interest are ultimately protected by
sound collateral values. A non-performing loan may be restored
to an accruing status when:

1. Principal and interest is no longer due and unpaid.
2. It becomes well secured and in the process of collection.
3. Prospects for future contractual payments are no longer in
doubt.

TOTAL NONPERFORMING LOANS
(IN THOUSANDS)
-------------------------
90 DAYS
NONACCRUAL PAST DUE
-------------------------
2001 $281 $338
2000 $777 $ 27
1999 $284 $241
1998 $646 $ 60
1997 $552 $430

If interest had been recorded at the original rate on
nonaccrual loans, such income would have approximated $28,000,
$86,000 and $48,000 for the years ended December 31, 2001, 2000
and 1999, respectively. Interest income on such loans, which is
recorded when received, amounted to approximately $19,000,
$45,000 and $38,000 for the years ended December 31, 2001, 2000
and 1999, respectively.

The significant reduction in non-accruing loans from year-
end 2000 is attributed to the successful culmination of several
commercial loan workouts. The level of non-accruing loans
continues to fluctuate annually and is attributed to the various
economic factors experienced both regionally and nationally.
Overall the portfolio is well secured with a majority of the
balance making regular payments or scheduled to be satisfied in
the near future. Presently there are no significant amounts of
loans where serious doubts exist as to the ability of the
borrower to comply with the current loan payment terms which are
not included in the nonperforming categories as indicated above.

Management's judgment in determining the amount of the
additions to the allowance charged to operating expense
considers the following factors:

1. Economic conditions and the impact on the loan portfolio.
2. Analysis of past loan charge-offs experienced by category
and comparison to outstanding loans.
3. Problem loans on overall portfolio quality.
4. Reports of examination of the loan portfolio by the
Pennsylvania State Banking Department and the Federal
Deposit Insurance Corporation.

ALLOCATION IN THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
PERCENT OF
LOANS IN
EACH
CATEGORY TO
AMOUNT TOTAL LOANS

DECEMBER 31, 2001:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $ 414 9.0%
Real estate mortgage:
Residential 1,379 55.8%
Commercial 763 26.5%
Construction 74 1.6%
Installment loans to individuals 271 7.1%
Unallocated general allowance 26
------ -----
Total $2,927 100.0%
====== =====
DECEMBER 31, 2000:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $ 541 10.8%
Real estate mortgage:
Residential 1,211 53.7%
Commercial 723 24.8%
Construction 71 1.9%
Installment loans to individuals 306 8.8%
Unallocated general allowance 27
------ -----
Total $2,879 100.0%
====== =====
DECEMBER 31, 1999:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $ 531 13.7%
Real estate mortgage:
Residential 1,186 52.4%
Commercial 710 22.2%
Construction 70 1.6%
Installment loans to individuals 300 10.1%
Unallocated general allowance 26
------ -----
Total $2,823 100.0%
====== =====
DECEMBER 31, 1998:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $ 505 15.3%
Real estate mortgage:
Residential 1,126 51.2%
Commercial 673 20.3%
Construction 67 1.8%
Installment loans to individuals 284 11.4%
Unallocated general allowance 26
------ -----
Total $2,681 100.0%
====== =====
DECEMBER 31, 1997:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $ 485 18.7%
Real estate mortgage:
Residential 1,083 52.6%
Commercial 647 15.8%
Construction 65 1.5%
Installment loans to individuals 273 11.4%
Unallocated general allowance 26
------ -----
Total $2,579 100.0%
====== =====

DEPOSITS

2001

Total average deposits increased $20,288,000 during 2001.
The most significant growth occurred in time deposits. Time
deposits increased $14,396,000, demand and savings deposits
increased $4,519,000 and $1,373,000, respectively. Time
deposits increased 11.0% from 2000 mostly due to successful
marketing strategies and penetration into the Centre County
market. In addition to growth, the downward rate environment in
2001 caused the average rate paid on time deposits to decline.
Noninterest bearing deposits increased 9.0% to $46,594,000.
Interest bearing demand deposits also increased minimally to
$46,154,000 (1.5%).

2000

Overall average deposits increased $11,748,000 or 4.6% to
$265,480,000 over 1999's average deposits of $253,732,000.
Demand deposits grew slightly by $2,063,000 with noninterest and
interest-bearing demand increasing $1,694,000 and $369,000,
respectively. Savings deposits declined by $3,281,000. The
majority of the decline was due to a shift from savings deposits
to time deposits, with average time deposits increasing by
$12,966,000 over 1999's average time deposits. The Bank's
ability to offer competitive products during a period of rising
interest rates attracted such deposits.

Time deposits of $100,000 or more totaled approximately
$32,646,000 on December 31, 2001 and $31,148,000 on December 31,
2000. Interest expense related to such deposits was
approximately $1,913,000, $1,571,000 and $1,242,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
Time deposits of $100,000 or more at December 31, 2001 mature as
follows: 2002 - $27,248,000; 2003 - $3,106,000; 2004 -
$1,116,000; 2005 - $676,000 beyond 2006 - $500,000.

The average amount and the average rate paid on deposits
are summarized below (in thousands):

SHAREHOLDERS' EQUITY

2001

Shareholders' equity is evaluated in relation to total
assets and the risks associated with those assets. A company is
more likely to meet its cash obligations and absorb unforeseen
losses when the capital resources are greater. Total
shareholders' equity at December 31, 2001 was $55,252,000,
increasing $4,738,000 from the balance at December 31, 2000 of
$50,514,000. Net income and the exercising of stock options
contributed $7,742,000 and $24,000, respectively, to
shareholders' equity. The unrealized appreciation on securities
also added $2,539,000 to total equity. Reductions to
shareholders' equity included $3,729,000 that was paid out in
dividends and $1,838,000 for the purchase of treasury stock.

2000

Total shareholders' equity at December 31, 2000 was
$50,514,000, increasing $4,429,000 from the balance at
December 31, 1999 of $46,085,000. Net income and the exercising
of stock options contributed $6,566,000 and $74,000,
respectively, to shareholders' equity. The unrealized
appreciation on securities also added $2,117,000 to total
equity. Reductions to shareholders' equity included $3,426,000
that was paid out in dividends and $902,000 for the purchase of
treasury stock.

Bank regulators have risk based capital guidelines. Under
these guidelines, banks are required to maintain minimum ratios
of core capital and total qualifying capital as a percentage of
risk weighted assets and certain off-balance sheet items. At
December 31, 2001, the Company's required ratios were well above
the minimum ratios as follows:

2001
Minimum
Company Standards
------- ---------
Tier 1 capital ratio 18.84% 4.00%
Total capital ratio 20.10% 8.00%

For a more comprehensive discussion of these requirements,
see "Regulations and Supervision" on the Form 10K. Management
believes that the Company will continue to exceed regulatory
capital requirements.

RETURN ON EQUITY AND ASSETS

The ratio of net income to average total assets and average
shareholders' equity and certain ratios are presented as
follows:

2001 2000 1999
------ ------ ------
Percentage of net income to:
Average total assets 1.95% 1.74% 1.99%
Average shareholders' equity 14.38% 13.77% 14.96%
Percentage of dividends declared
per common share 48.17% 52.18% 44.20%
Percentage of average shareholders'
equity to average total assets 13.54% 12.62% 13.81%

LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK

Fundamental objectives of the Company's asset/liability
management process are to maintain adequate liquidity while
minimizing interest rate risk. The maintenance of adequate
liquidity provides the Company with the ability to meet its
financial obligations to depositors, loan customers and
stockholders. Additionally, it provides funds for normal
operating expenditures and business opportunities as they arise.
The objective of interest rate sensitivity management is to
increase net interest income by managing interest sensitive
assets and liabilities in such a way that they can be repriced
in response to changes in market interest rates.

The Company, like other financial institutions, must have
sufficient funds available to meet its liquidity needs for
deposit withdrawals, loan commitments and expenses. In order
to control cash flow, the bank estimates future flows of cash
from deposits and loan payments. The primary sources of funds
are deposits, principal and interest payments on loans and
mortgage-backed securities, as well as Federal Home Loan Bank
borrowings. Funds generated are used principally to fund loans
and purchase investment securities. Management believes the
Company has adequate resources to meet its normal funding
requirements.

Management monitors the Company's liquidity on both a long
and short-term basis thereby, providing management necessary
information to react to current balance sheet trends. Cash flow
needs are assessed and sources of funds are determined. Funding
strategies consider both customer needs and economical cost.
Both short and long term funding needs are addressed by
maturities and sales of available for sale investment
securities, loan repayments and maturities, and liquidating
money market investments such as federal funds sold. The use of
these resources, in conjunction with access to credit provides
core ingredients to satisfy depositor, borrower and creditor
needs.

Management monitors and determines the desirable level of
liquidity. Consideration is given to loan demand, investment
opportunities, deposit pricing and growth potential as well as
the current cost of borrowing funds. The Company has a current
borrowing capacity at the Federal Home Loan Bank of $78,888,000.
In addition to this credit arrangement the Company has
additional lines of credit with correspondent banks of
$8,000,000. The Company's management believes that it has
sufficient liquidity to satisfy estimated short-term and long-
term funding needs.

Interest rate sensitivity, which is closely related to
liquidity management, is a function of the repricing
characteristics of the Company's portfolio of assets and
liabilities. Asset/liability management strives to match
maturities and rates between loan and investment security assets
with the deposit liabilities and borrowings that fund them.
Successful asset/liability management results in a balance sheet
structure which can cope effectively with market rate
fluctuations. The matching process is affected by segmenting
both assets and liabilities into future time periods (usually 12
months, or less) based upon when repricing can be effected.
Repriceable assets are subtracted from repriceable liabilities,
for a specific time period to determine the "gap", or
difference. Once known, the gap is managed based on predictions
about future market interest rates. Intentional mismatching, or
gapping, can enhance net interest income if market rates move as
predicted. However, if market rates behave in a manner contrary
to predictions, net interest income will suffer. Gaps,
therefore, contain an element of risk and must be prudently
managed.

In addition to gap management, the Company has an asset
liability management policy which incorporates a market value at
risk calculation which is used to determine the effects of
interest rate movements on shareholders' equity and a simulation
analysis to monitor the effects of interest rate changes on the
Company's balance sheets.

INTEREST RATE SENSITIVITY

The following table sets forth the Company's interest rate
sensitivity as of December 31, 2001:

(1) Investment balances reflect estimated prepayments on
mortgage-backed securities.

(2) Loan balances include annual repayment assumptions based on
projected cash flow from the loan portfolio. The cash flow
projections are based on the terms of the credit facilities
and estimated prepayments on fixed rate mortgage loans.
Loans include loans held for resale.

(3) Adjustments to the interest sensitivity of Savings, NOW and
MMDA account balances reflect managerial assumptions based
on historical experience, expected behavior in future rate
environments and the Company's positioning for these
products.

(4) Net noninterest-bearing funds are the sum of noninterest-
bearing liabilities and shareholders' equity minus
noninterest-earning assets and reflect managerial
assumptions as to the appropriate investment maturity
categories.

In this analysis the Company examines the result of a 100
and 200 basis point change in market interest rates and the
effect on net interest income. It is assumed that the change is
instantaneous and that all rates move in a parallel manner.
Assumptions are also made concerning prepayment speeds on
mortgage loans and mortgage securities. The results of this
rate shock are a useful tool to assist the Company in assessing
of this rate shock analysis for the periods indicated:

December 31, 2001
Net Interest
Income Change (After Tax)
Rates (In thousands)
-200 $263
-100 $185
+100 $105
+200 $139

The model utilized to create the report presented above
makes various estimates at each level of interest rate change
regarding cash flow from principal repayment on loans and
mortgage-backed securities and or call activity on investment
securities. Actual results could differ significantly from
these estimates which would result in significant differences in
the calculated projected change. In addition, the limits stated
above do not necessarily represent the level of change under
which management would undertake specific measure to realign its
portfolio in order to reduce the projected level of change.
Generally, management believes the Company is well positioned to
respond expeditiously when the market interest rate outlook
changes.

INFLATION

The asset and liability structure of a financial
institution is primarily monetary in nature, therefore, interest
rates rather than inflation have a more significant impact on
the Corporation's performance. Interest rates are not always
affected in the same direction or magnitude as prices of other
goods and services, but are reflective of fiscal policy
initiatives or economic factors that are not measured by a price
index.

COMPREHENSIVE INCOME

Comprehensive income is a measure of all the changes in
equity of a corporation. It excludes transactions with owners in
their capacity as owners (i.e. stock options granted or
exercised, repurchase of treasury stock transactions and
dividends to shareholders).

Other comprehensive income is the difference between net
income and comprehensive income. The Company's other
comprehensive income is composed of unrealized gains and losses
on available for sale securities, net of deferred income tax.
Comprehensive income is not a measure of net income. Net income
would be affected by other comprehensive income only in the
event that the entire securities portfolio was sold on the
statement date.

Unrealized gains or losses reflected in the Company's
comprehensive income may vary widely at statement dates as a
result of changing markets and /or interest rate movements.

Other comprehensive income (loss) for the years ended
December 31, 2001, 2000, 1999 were $2,539,000, $2,117,000 and
$(7,885,000), respectively.

CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

This Report contains certain "forward-looking statements"
including statements concerning plans, objectives, future events
or performance and assumptions and other statements which are
other than statements of historical fact.

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, Penns Woods
Bancorp, Inc. and its subsidiaries (the "Company") notes that a
variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking
statements. The risks and uncertainties that may affect the
operations, performance, development and results of the
Company's business include the following: general economic
conditions and changes in interest rates including their impact
on capital expenditures; business conditions in the banking
industry; the regulatory environment; rapidly changing
technology and evolving banking industry standards; the effect
of changes in accounting policies and practices, including
increased competition with community, regional and national
financial institutions; new service and product offerings by
competitors and price pressures; changes in the Company's
organization, compensation and benefit plans; and similar items.

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Penns Woods Bancorp, Inc.

We have audited the accompanying consolidated balance sheet of
Penns Woods Bancorp, Inc. and subsidiaries, as of December 31,
2001 and 2000, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 financial
position of Penns Woods Bancorp, Inc. and subsidiaries as of
December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.

/s/ S. R. Snodgrass, A.C.

Wexford, PA
February 15, 2002

CONSOLIDATED BALANCE SHEET

See Accompanying Notes to the Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF INCOME

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

The Company paid approximately $12,743,000, $12,449,000,
and $10,606,000 in interest on deposits and other borrowings
during 2001, 2000, and 1999, respectively.

The Company made income tax payments of approximately
$2,136,000, $2,008,000, and $1,972,000 during 2001, 2000, and
1999, respectively.

Transfers from loans to foreclosed assets held for sale
amounted to approximately $493,000, $294,000, and $102,000 in
2001, 2000, and 1999, respectively.

See accompanying notes to the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Principles of Consolidation

The accompanying consolidated financial statements include
the accounts of Penns Woods Bancorp, Inc. and its wholly-owned
subsidiaries, Jersey Shore State Bank (the "Bank"), Woods Real
Estate Development Co., Inc., Woods Investment Company, Inc. and
The M Group Inc. D/B/A The Comprehensive Financial Group ("The M
Group"), a wholly-owned subsidiary of the Bank (collectively,
the "Company"). All significant intercompany balances and
transactions have been eliminated.

Nature of Business

The Bank engages in a full-service commercial banking
business, making available to the community a wide range of
financial services including, but not limited to, installment
loans, credit cards, mortgage and home equity loans, lines of
credit, construction financing, farm loans, community
development loans, loans to nonprofit entities and local
government loans and various types of time and demand deposits
including, but not limited to, checking accounts, savings
accounts, clubs, money market deposit accounts, certificates of
deposit and IRAs. Deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) to the extent provided by law.

The financial services are provided by the bank to
individuals, partnerships, non-profit organizations and
corporations through its ten offices and Financial Center
located in Clinton, Lycoming, and Centre Counties, Pennsylvania.

Woods Real Estate Development Co., Inc. engages in real
estate transactions on behalf of Penns Woods Bancorp, Inc. and
the Bank.

Woods Investment Company, Inc. is engaged in investing
activities.

The M Group engages in securities brokerage and insurance
activities.

Use of Estimates

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

Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for loan losses and the valuation of real estate acquired
through, or in lieu of, foreclosure on settlement of debt.

Investment Securities

Investment securities are classified as held to maturity,
available for sale, or trading.

Securities held to maturity include bonds, notes, and
debentures for which the Company has the positive intent and
ability to hold to maturity and are reported at amortized cost.

Trading account securities are recorded at their fair
values. Unrealized gains and losses on trading account
securities are included in other income. The Company has no
trading account securities as of December 31, 2001 or 2000.

Available for sale securities consist of bonds, notes,
debentures, and certain equity securities not classified as
trading securities nor as held to maturity securities.
Unrealized holding gains and losses, net of tax, on available
for sale securities are reported as a net amount in a separate
component of shareholders' equity until realized.

Gains and losses on the sale of all securities are
determined using the average cost method.

Declines in the fair value of individual securities held to
maturity and available for sale below their cost that are other
than temporary result in write-downs of the individual
securities to their fair value and are included in earnings as
realized losses.

Premiums and discounts on all securities are recognized in
interest income using the interest method over the period to
maturity.

The fair value of investments and mortgage-backed
securities, except certain state and political securities, is
estimated based on bid prices published in financial newspapers
bid quotations received from securities dealers or in the case
of equity securities, the closing price of the day as listed on
the Internet. The fair value of certain state and political
securities is not readily available through market sources other
than dealer quotations, fair value estimates are then based on
quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments
being valued.

Loans

Loans are stated at the principal amount outstanding, net
of unearned discount, unamortized loan fees and costs, and the
allowance for loan losses. Interest on loans is recognized as
income when earned on the accrual method. The Company's general
policy has been to stop accruing interest on loans when it is
determined a reasonable doubt exists as to the collectibility of
additional interest. Income is subsequently recognized only to
the extent that cash payments are received provided the loan is
not delinquent in payment and, in management's judgment, the
borrower has the ability and intent to make future principal
payments.

Allowance for Loan Losses

The allowance for loan losses represents the amount which
management estimates is adequate to provide for probable losses
inherent in its loan portfolio, as of the balance sheet date.
The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance and
all recoveries are credited to it. The allowance for loan
losses is established through a provision for loan losses
charged to operations. The provision for loan losses is based
on management's periodic evaluation of individual loans,
economic factors, past loan loss experience, changes in the
composition and volume of the portfolio, and other relevant
factors. The estimates used in determining the adequacy of the
allowance for loan losses, including the amounts and timing of
future cash flows expected on impaired loans, are particularly
susceptible to changes in the near term.

Impaired loans are commercial and commercial real estate
loans for which it is probable the Company will not be able to
collect all amounts due according to the contractual terms of
the loan agreement. The Company individually evaluates such
loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two
categories overlap. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired if
the loan is not a commercial or commercial real estate loan.
Factors considered by management in determining impairment
include payment status and collateral value. The amount of
impairment for these types of impaired loans is determined by
the difference between the present value of the expected cash
flows related to the loan, using the original interest rate, and
its recorded value, or as a practical expedient in the case of
collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based on the
fair value of the collateral.

Mortgage loans on one-to-four family properties and all
consumer loans are large groups of smaller-balance homogeneous
loans and are measured for impairment collectively. Loans that
experience insignificant payment delays, which are defined as 90
days or less, generally are not classified as impaired.
Management determines the significance of payment delays on a
case-by-case basis taking into consideration all circumstances
surrounding the loan and the borrower including the length of
the delay, the borrower's prior payment record, and the amount
of shortfall in relation to the principal and interest owed.

Foreclosed Assets Held for Sale

Foreclosed assets held for sale are carried at the lower of
fair value minus estimated costs to sell or cost. Prior to
foreclosure, the value of the underlying loan is written down to
the fair value of the real estate to be acquired by a charge to
the allowance for loan losses, if necessary. Any subsequent
write-downs are charged against operating expenses. Operating
expenses of such properties, net of related income, and gains
and losses on their disposition are included in other expenses.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods over the estimated useful
lives of the related assets. Costs incurred for routine
maintenance and repairs are charged to operations as incurred.
Costs of major additions and improvements are capitalized.

Income Taxes

Deferred tax assets and liabilities result from temporary
differences in financial and income tax methods of accounting,
and are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.

Earnings Per Share

The Company provides dual presentation of basic and diluted
earnings per share. Basic earnings per share is calculated
utilizing net income as reported in the numerator and average
shares outstanding in the denominator. The computation of
diluted earnings per share differs in that the dilutive effects
of any stock options are adjusted in the denominator.

Stock Options

The Company maintains a stock option plan for the
Directors, officers and employees. When the exercise price of
the Company's stock options is greater than or equal to the
market price of the underlying stock on the date of the grant,
no compensation expense is recognized in the Company's financial
statements. Pro forma net income and earnings per share are
presented to reflect the impact of the stock option plan
assuming compensation expense had been recognized based on the
fair value of the stock options granted under the plan.

Comprehensive Income

The Company is required to present comprehensive income in
a full set of general-purpose financial statements for all
periods presented. Other comprehensive income is comprised
exclusively of unrealized holding gains (losses) on the
available for sale securities portfolio. The Company has
elected to report the effects of other comprehensive income as
part of the Consolidated Statement of Changes in Shareholders'
Equity.

Cash Flows

The Company utilizes the net reporting of cash receipts and
cash payments for deposit and lending activities.

The Company considers amounts due from banks as cash
equivalents.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (FAS)
No. 141, Business Combinations, effective for all business
combinations initiated after June 30, 2001, as well as all
business combinations accounted for by the purchase method that
are completed after June 30, 2001. The new statement requires
that the purchase method of accounting be used for all business
combinations a prohibits the use of the pooling-of-interests
methods. The adoption of FAS No. 141 is not expected to have a
material effect on the Company's financial position or results
of operations.

In July 2001, the FASB issued FAS No. 142, Goodwill and
Other Intangible Assets effective for fiscal years beginning
after December 15, 2001. The statement changes the accounting
for goodwill from an amortization method to an impairment-only
approach. Thus, amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption
of this statement. At December 31, 2001, the Company has
goodwill of approximately $3.0 million from past business
combinations that will be evaluated for impairment
prospectively.

In August 2001, the FASB issued FAS No. 143, Accounting for
Asset Retirement Obligations, which requires that the fair value
of a liability be recognized when incurred for the retirement of
a long-lived asset and the value of the asset be increased by
that amount. The statement also requires that the liability be
maintained at its present value in subsequent periods and
outlines certain disclosures for such obligations. The adoption
of this statement, which is effective January 1, 2003, is not
expected to have a material effect on the Company's financial
statements.

In October 2001, the FASB issued FAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. FAS No.
144 supercedes FAS No. 121 and applies to all long-lived assets
(including discontinued operations) and consequently amends APB
Opinion No. 30, Reporting Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business. FAS No. 144
requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less
costs to sell. FAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15,
2001 and, generally, its provisions are to be applied
prospectively. The adoption of this statement is not expected
to have material effect on the Company's financial statements.

NOTE B - PER SHARE DATA

There are no convertible securities, which would affect the
numerator in calculating basis and dilutive earnings per share,
therefore, net income as presented on the consolidated statement
of income will be used as the numerator. The following table
sets forth the composition of the weighted average common shares
(denominator) used in the basic and dilutive per share
computation.

Options to purchase 20,350 shares of common stock at prices from
$42.00 to $53.18 were outstanding during 2001, 30,350 shares at
prices from $32.63 to $53.18 were outstanding during 2000, and
9,900 shares at a price of $53.18 were outstanding during 1999,
but were not included in the computation of diluted earnings per
share because to do so would have been anti-dilutive.

NOTE C - CASH AND DUE FROM BANKS

Banks are required to maintain reserves consisting of vault
cash and deposit balances with the Federal Reserve Bank in their
district. The reserves are based on deposit levels during the
year and account activity and other services provided by the
Federal Reserve Bank. Average daily currency, coin and cash
balances with the Federal Reserve Bank needed to cover reserves
against deposits for 2001 ranged from $0 to $2,459,000. For
2000, these balances ranged from $0 to $1,972,000. Average
daily cash balances with the Federal Reserve Bank required to
cover services provided to the Bank amounted to $800,000
throughout 2001 and 2000. Total balances restricted at
December 2001 and 2000, respectively, were $1,523,000 and
$4,819,000.

NOTE D - INVESTMENT SECURITIES

The amortized cost of investment securities and their
approximate fair values at December 31, 2001 and 2000 were as
follows (in thousands):

The amortized cost and fair value of debt securities at
December 31, 2001, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

Total gross proceeds from sales of securities available for
sale, were $22,156,000, $53,301,000 and $48,123,000 for 2001,
2000 and 1999, respectively. The following table represents
gross realized gains and gross realized losses on those
transactions (in thousands):

2001 2000 1999
------ ------ ------

Gross realized gains:
U.S. Government and agency securities $ 133 $ 36 $ 128
State and political securities 20 170 364
Equity securities 1,226 1,577 2,104
------ ------ ------
$1,379 $1,783 $2,596
====== ====== ======
Gross realized losses:
U.S. Government and agency securities $ 13 $ 731 $ 416
State and political securities 149 30 26
Equity securities 184 753 181
Other debt securities - - 27
------ ------ ------
$ 346 $1,514 $ 650
====== ====== ======

Investment securities with a carrying value of
approximately $36,539,000 and $32,859,000 at December 31, 2001
and 2000, respectively, were pledged to secure certain deposits,
security repurchase agreements, and for other purposes as
required by law.

There is no concentration of investments that exceed ten
percent of shareholders' equity for any individual issuer,
excluding those guaranteed by the U.S. Government.

NOTE E - LOANS

Major loan classifications loans are summarized as follows
(in thousands):

December 31, 2001
-------------------------------------------------------------
Past Due Past Due
30 to 90 90 Days Non-
Current Days or More Accrual Total
-------- -------- --------- -------- ---------

Commercial and agricultural $ 22,233 $ 334 $ 36 $ 26 $ 22,629
Real estate mortgage:
Residential 136,361 3,311 296 255 140,223
Commercial 64,051 2,712 - - 66,763
Construction 4,042 35 - - 4,077
Installment loans to individuals 17,583 342 6 - 17,931
-------- -------- -------- -------- --------
$244,270 $ 6,734 $ 338 $ 281 $251,623
======== ======== =========
Less: Allowance for loan losses 2,927 2,927
-------- --------
Loans, net $241,343 $248,696
======== ========

December 31, 2000
-------------------------------------------------------------
Past Due Past Due
30 to 90 90 Days Non-
Current Days or More Accrual Total
-------- -------- --------- -------- ---------

Commercial and agricultural $ 26,001 $ 241 $ - $ 229 $ 26,471
Real estate mortgage:
Residential 128,844 2,366 22 168 131,400
Commercial 59,586 885 - 151 60,622
Construction 4,522 - - 226 4,748
Installment loans to individuals 21,252 297 5 3 21,557
-------- -------- -------- -------- --------
$240,205 $ 3,789 $ 27 $ 777 244,798
======== ======== ========
Less: Allowance for loan losses 2,879 2,879
-------- --------
Loans, net $237,326 $241,919
======== ========

Loans on which the accrual of interest has been
discontinued or reduced amounted to approximately $281,000 and
$777,000 at December 31, 2001 and 2000, respectively. If
interest had been recorded at the original rate on those loans,
such income would have approximated $28,000, $86,000, and
$48,000 for the years ended December 31, 2001, 2000, and 1999,
respectively. Interest income on such loans, which is recorded
as received, amounted to approximately $19,000, $45,000, and
$38,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.

Transactions in the allowance for loan losses are
summarized as follows (in thousands):

Years Ended December 31,
2001 2000 1999
------- ------- -------

Balance, beginning of year $ 2,879 $ 2,823 $ 2,681
Provision charged to operations 372 286 286
Loans charged off (358) (269) (176)
Recoveries 34 39 32
------- ------- -------
Balance, end of year $ 2,927 $ 2,879 $ 2,823
======= ======= =======

The Company had no concentration of loans to borrowers
engaged in similar businesses or activities which exceed five
percent of total assets at December 31, 2001 or December 31,
2000.

The Company grants commercial, industrial, residential, and
installment loans to customers throughout Northcentral
Pennsylvania. Although the Company has a diversified loan
portfolio at December 31, 2001 and 2000, a substantial portion
of its debtors' ability to honor their contracts is dependent on
the economic conditions within this region.

NOTE F - BANK PREMISES AND EQUIPMENT

Bank premises and equipment are summarized as follows (in
thousands):

December 31,
2001 2000
------- -------
Land $ 566 $ 566
Bank premises 4,668 4,630
Furniture and equipment 5,292 5,129
Leasehold improvements 834 795
------- -------
Total 11,360 11,120
Less accumulated depreciation 6,882 6,393
------- -------
Net $ 4,478 $ 4,727
======= =======

Depreciation expense for the years ended 2001, 2000 and
1999 was $489,000, $551,000, and $512,000, respectively.

NOTE G - DEPOSITS

Time deposits of $100,000 or more totaled approximately
$32,646,000 on December 31, 2001 and $31,148,000 on December 31,
2000. Interest expense related to such deposits were
approximately $1,913,000, $1,571,000, and $1,242,000 for the
years ended December 31, 2001, 2000, and 1999, respectively.
These time deposits at December 31, 2001 mature as follows: 2002
- - $27,248,000; 2003 - $3,106,000; 2004 - $1,116,000; 2005 -
$676,000 beyond 2006 - $500,000.

NOTE H - SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased,
securities sold under agreements to repurchase, and FHLB
advances which generally represent overnight or less than 30-day
borrowings. The outstanding balances and related information
for short-term borrowings are summarized as follows (in
thousands):

2001 2000
------- -------

Federal Home Loan Bank:
Balance at year end $ - $ -
Maximum amount outstanding at any month end $ - $ 2,000
Average balance outstanding during the year $ - $ 1,394
Weighted-average interest rate:
At year end - -
Paid during the year - 6.45%

Open Repo Plus:
Balance at year end $ 8,830 $15,610
Maximum amount outstanding at any month end $16,861 $20,970
Average balance outstanding during the year $ 4,425 $14,009
Weighted-average interest rate:
At year end 1.20% 6.63%
Paid during the year 3.48% 6.49%

Repurchase Agreements:
Balance at year end $10,275 $15,411
Maximum amount outstanding at any month end $18,825 $20,724
Average balance outstanding during the year $15,697 $16,410
Weighted-average interest rate:
At year end 3.76% 5.64%
Paid during the year 4.77% 5.29%

NOTE I - OTHER BORROWINGS

Other borrowings are comprised of advances from the FHLB.
A schedule of other borrowings by maturity as of December 31,
2001 and 2000 is summarized as follows (in thousands):

Interest
Description Maturity Rate 2001 2000
- -------------------------- ---------------- --------- ------- -------

Convertible Select Advance April 7, 2008 (1) 5.54% $10,000 $10,000
Convertible Select Advance June 16, 2008 (2) 5.56% 10,000 10,000
Convertible Select Advance February 26, 2009 (3) 5.06% 5,000 5,000
Convertible Select Advance August 10, 2010 (4) 6.65% 5,000 5,000
Convertible Select Advance October 15, 2011 (5) 4.72% 5,000 -
FHLB Borrowing October 17, 2011 6.92% 500 500
Convertible Select Advance November 5, 2011 (6) 4.25% 5,000 -
FHLB Borrowing June 24, 2013 5.87% 528 528
FHLB Borrowing May 25, 2015 6.92% 750 750
------- -------
Total $41,778 $31,778
======= =======

The Bank maintains a credit arrangement, which includes a
revolving line of credit with FHLB. Under this credit
arrangement, the Bank has a remaining borrowing capacity of
approximately $78,888,000 at December 31, 2001, is subject to
annual renewal, and typically incurs no service charges. Under
terms of a blanket agreement, collateral for the FHLB borrowings
must be secured by certain qualifying assets of the Bank which
consist principally of first mortgage loans.

(1) The FHLB has the option to convert this interest rate to an
adjustable rate based on the three month LIBOR at the five-
year anniversary date of the borrowings origination, which
will occur in the third quarter of 2003.

(2) The FHLB has the option to convert this interest rate to an
adjustable rate based on the three month LIBOR at the five-
year anniversary date of the borrowings origination, which
will occur in the second quarter of 2003.

(3) The FHLB has the option to convert this interest rate to an
adjustable rate based on the three month LIBOR at the five-
year anniversary date of the borrowings origination, which
will occur in the first quarter of 2004.

(4) The FHLB has the option to convert this interest rate to an
adjustable rate based on the three month LIBOR at the five-
year anniversary date of the borrowings origination, which
will occur in the third quarter of 2005.

(5) The FHLB has the option to convert this interest rate to an
adjustable rate based on the three month LIBOR at the two-
year anniversary date of the borrowings origination, which
will occur in the fourth quarter of 2003.

(6) The FHLB has the option to convert this interest rate to an
adjustable rate based on the three month LIBOR at the
three-year anniversary date of the borrowings origination,
which will occur in the fourth quarter of 2004.

NOTE J - INCOME TAXES

The following temporary differences gave rise to the net
deferred tax asset at December 31, 2001 and 2000 (in thousands):

2001 2000
------ ------

Deferred tax asset:
Allowance for loan losses $ 668 $ 634
Deferred compensation 303 283
Contingencies 55 73
Pension 348 266
Loan fees and costs 215 184
Unrealized losses on available for sale securities - 417
------ ------
Total 1,589 1,857
------ ------
Deferred tax liability:
Bond accretion 25 17
Depreciation 129 127
Unrealized gains on available for sale securities 891 -
------ ------
Total 1,045 144
------ ------
Deferred tax asset, net $ 544 $1,713
====== ======

No valuation allowance was established at December 31, 2001
and 2000, in the view of the Company's ability to carry back to
taxes paid in previous years and certain tax strategies, coupled
with the anticipated future taxable income as evidenced by the
Company's earning potential.

The provision for income taxes is comprised of the
following (in thousands):

Year Ended December 31,
2001 2000 1999
------- ------- -------

Currently payable $ 2,117 $ 1,730 $ 2,422
Deferred benefit (139) (111) (198)
------- ------- -------
Total provision $ 1,978 $ 1,619 $ 2,224
======= ======= =======

The effective federal income tax rate for the years ended
December 31, 2001, 2000, and 1999 was 20.3 percent, 19.8
percent, and 23.6 percent, respectively. A reconciliation
between the expected income tax and rate and the effective
income tax and rate on income before income tax provision
follows (in thousands):

Year Ended December 31,
2001 2000 1999
------------------ ------------------ ------------------
Amount % Amount % Amount %
------- ------- ------- ------- ------- -------

Provision at expected rate $ 3,305 34.0% $ 2,783 34.0% $ 3,201 34.0%
Decrease in tax resulting from:
Tax-exempt income (1,103) (11.4) (837) (10.2) (677) (7.2)
Other, net (224) (2.3) (327) (4.0) (300) (3.2)
------- ----- ------- ----- ------- -----
Effective income tax
and rates $ 1,978 20.3% $ 1,619 19.8% $ 2,224 23.6%
======= ==== ======= ===== ======= =====

NOTE K - EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plan

The Company has a noncontributory defined benefit pension
plan (the "Plan") for all employees meeting certain age and
length of service requirements. Benefits are based primarily on
years of service and the average annual compensation during the
highest five consecutive years within the final ten years of
employment.

The following tables show the funded status and components
of net periodic benefit cost from this defined benefit plan (in
thousands):

2001 2000
-------- --------

Change in benefit obligation:
Benefit obligation at beginning of year $ 3,935 $ 4,099
Service cost 298 256
Interest cost 271 242
Actuarial adjustment 524 (625)
Benefits paid (52) (37)
-------- --------
Benefit obligation at end of year 4,976 3,935
-------- --------
Change in plan assets:
Fair value of plan assets at beginning
of year 3,597 3,641
Actual loss on plan assets (430) (7)
Benefits paid (52) (37)
-------- --------
Fair value of plan assets at end of year 3,115 3,597
-------- --------
Funded status (1,861) (338)
-------- --------
Unrecognized net actuarial gain 609 (646)
Unrecognized transition asset (27) (30)
Unrecognized prior service cost 209 229
-------- --------
Accrued benefit payable $ (1,070) $ (785)
======== ========

Weighted-average assumptions as of December 31:
Discount rate 6.50% 7.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%

2001 2000 1999
-------- -------- --------

Components of net periodic benefit cost:
Service cost $ 298 $ 256 $ 254
Interest cost 271 242 236
Expected return on plan assets (286) (291) (268)
Amortization of transition asset (3) (3) (3)
Amortization of prior service cost 20 20 20
Recognized net actuarial gain (15) (33) (15)
-------- -------- --------
Net periodic benefit cost $ 285 $ 191 $ 224
======== ======== ========

The plan assets are invested primarily in bonds, stocks,
equity funds, and mortgages under the control of the plan's
trustees as of December 31, 2001.

401(k) Savings Plan

The Company also offers a 401(k) savings plan in which
eligible participating employees may elect to contribute up to a
maximum percentage allowable not to exceed the limits of Code
Sections 401(k), 404, and 415. The Company may make matching
contributions equal to a discretionary percentage to be
determined by the Company. Participants are at all times fully
vested in their contributions and vest over a period of five
years in the employer contribution. Contribution expense was
approximately $65,000, $67,000, and $64,000 for the years ended
December 31, 2001, 2000, and 1999, respectively.

Deferred Compensation Plan

The Company has a deferred compensation plan whereby
participating directors elected to forego director's fees for a
period of five years. Under this plan the Company will make
payments for a ten-year period beginning at age 65 in most cases
or at death, if earlier, at which time payments would be made to
their designated beneficiaries.

To fund benefits under the deferred compensation plan, the
Company has acquired corporate-owned life insurance policies on
the lives of the participating directors for which insurance
benefits are payable to the Company. The total expense charged
to other expenses was $67,000, $66,000 and $128,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
Benefits paid under the plan were approximately $51,000 in 2001
and $53,000 in 2000 and $57,000 in 1999.

NOTE L - STOCK OPTIONS

Prior to 1998, the Company granted a select group of its
officer's options to purchase shares of its common stock. These
options, which are immediately exercisable, expire within three
to ten years after having been granted. Also, in 1998, the
Company adopted the "1998 Stock Option Plan" for key employees
and directors. Incentive stock options and nonqualified stock
options may be granted to eligible employees of the Bank and
nonqualified options may be granted to directors of the Company.
In addition, non-employee directors are eligible to receive
grants of nonqualified stock options. Incentive nonqualified
stock options granted under the 1998 Plan may be exercised not
later than ten years after the date of grant. Each option
granted under the 1998 Plan shall be exercisable only after the
expiration of six months following the date of grant of such
options.

The Company applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for these options.
Accordingly, compensation expense is recognized on the grant
date, in the amount equivalent to the intrinsic value of the
options (stock price less exercise price, at measurement date).
Had compensation costs for these options been determined based
on the fair values at the grant dates for awards consistent with
the method of FAS No. 123, the effect on the Company's net
income and earnings per share for 2001, 2000, and 1999 would
have been insignificant. For purposes of the calculations
required by FAS No. 123, the fair value of each option grant is
estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions for grants issued in 2001, 2000 and 1999,
respectively: dividend yield of 1.03 percent, 1.03 percent, and
1.85 percent, respectively; risk-free interest rates of 4.95
percent, 4.95 percent, and 6.75 percent, respectively; expected
option lives of three years and expected volatility of 23.81
percent, 23.81 percent, and 18.73 percent, respectively.

A summary of the status of the Company's common stock
option plans, adjusted to reflect a 10 percent stock dividend
issued June 8, 1999, is presented below:

2001 2000 1999
------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------

Outstanding, beginning of year 42,301 $ 37.87 34,813 $ 38.52 28,479 $ 34.27
Granted - - 10,000 32.63 10,450 42.00
Exercised 800 25.98 2,512 25.98 4,116 17.95
------ ------ ------
Outstanding, end of year 41,501 $ 38.10 42,301 $ 37.87 34,813 $ 38.52
====== ====== ======
Options exercisable
at year-end 41,501 $ 38.10 32,301 $ 39.49 24,363 $ 37.03
====== ====== ======

The following table summarizes information about
nonqualified and incentive stock options outstanding at
December 31, 2001:

Exercise Number Remaining Number
Prices Outstanding Contractual Life Exercisable
-------- ----------- ---------------- -----------

$ 25.98 11,151 2 years 11,151
53.18 9,900 7 years 9,900
42.00 10,450 8 years 10,450
32.63 10,000 9 years 10,000
------ ------
41,501 41,501
====== ======

NOTE M - RELATED PARTY TRANSACTIONS

Certain directors and executive officers of the Company and
the Bank, including their immediate families and companies in
which they are principal owners (more than ten percent), are
indebted to the Company. Such indebtedness was incurred in the
ordinary course of business on the same terms and at those rates
prevailing at the time for comparable transactions with others.

A summary of loan activity with executive officers,
directors, principal shareholders, and associates of such
persons is listed below (in thousands):

Beginning Ending
Year Balance Additions Payments Balance
---- --------- --------- -------- -------
2001 $ 4,954 $ 3,729 $ 3,491 $ 5,192
2000 5,810 1,387 2,243 4,954
1999 2,452 6,775 3,417 5,810

NOTE N - COMMITMENTS AND CONTINGENT LIABILITIES

The following schedule of future minimum rental payments
under operating leases with noncancellable terms in excess of
one year as of December 31, 2001 (in thousands):

Year Ending December 31,
2002 $ 193
2003 154
2004 129
2005 117
2006 89
Thereafter 165
-----
Total $ 847
=====

Total rental expense for all operating leases for the years
ended December 31, 2001, 2000, and 1999 approximated $251,000,
$208,000, and $197,000, respectively.

The Company is subject to lawsuits and claims arising out
of its business. In the opinion of management, after review and
consultation with counsel, any proceedings that may be assessed
will not have a material adverse effect on the consolidated
financial position of the Company.

NOTE O - OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-
balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements
of credit, interest rate or liquidity risk in excess of the
amount recognized in the consolidated balance sheet. The
contract amounts of these instruments express the extent of
involvement the Company has in particular classes of financial
instruments.

The Company's exposure to credit loss from nonperformance
by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by
the contractual amount of these instruments. The Company uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.

The Company may require collateral or other security to
support financial instruments with off-balance sheet credit
risk.

Financial instruments whose contract amounts represent
credit risk are as follows at December 31 (in thousands):

2001 2000
-------- --------
Commitments to extend credit $ 29,490 $ 27,911

Standby letters of credit $ 348 $ 1,332

Commitments to extend credit are legally binding agreements
to lend to customers. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of fees. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future liquidity requirements. The
Company evaluates each customer's credit worthiness on a case-
by-case basis. The amount of collateral obtained, if deemed
necessary by the Company, on extension of credit is based on
management's credit assessment of the counterparty.

Standby letters of credit are conditional commitments
issued by the Company guaranteeing performance by a customer to
a third party. Those guarantees are issued primarily to support
public and private borrowing arrangements including commercial
paper, bond financing, and similar transactions. The credit
risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.

NOTE P - CAPITAL REQUIREMENTS

Federal regulations require the Company and the Bank to
maintain minimum amounts of capital. Specifically, each is
required to maintain certain minimum dollar amounts and ratios
of Total and Tier 1 capital to risk-weighted assets and of Tier
1 capital to average total assets.

In addition to the capital requirements, the Federal
Deposit Insurance Corporation Improvement Act (FDICIA)
established five capital categories ranging from "well
capitalized" to "critically undercapitalized." Should any
institution fail to meet the requirements to be considered
"adequately capitalized," it would become subject to a series of
increasingly restrictive regulatory actions.

As of December 31, 2001 and 2000, the FDIC categorized the
Bank as well capitalized under the regulatory framework for
prompt corrective action. To be classified as a well
capitalized financial institution, Total risk-based, Tier 1
risk-based and Tier 1 leverage capital ratios must be at least
10%, 6%, and 5%, respectively.

The Company's and the Bank's actual capital ratios are
presented in the following tables, which shows that both met all
regulatory capital requirements.

The Company's actual capital amounts and ratios are
presented in the following table (in thousands).

2001 2000
------------------- -------------------
Amount Ratio Amount Ratio
-------- ------- -------- -------

Total Capital
(to Risk-weighted Assets)

Actual $ 53,281 20.1% $ 50,533 20.1%
For Capital Adequacy Purposes 21,208 8.0 20,162 8.0
To Be Well Capitalized 26,510 10.0 25,202 10.0

Tier I Capital
(to Risk-weighted Assets)

Actual $ 49,936 18.8% $ 47,654 18.9%
For Capital Adequacy Purposes 10,604 4.0 10,081 4.0
To Be Well Capitalized 15,906 6.0 15,121 6.0

Tier I Capital
(to Average Assets)

Actual $ 49,936 12.6% $ 47,654 12.4%
For Capital Adequacy Purposes 15,880 4.0 15,428 4.0
To Be Well Capitalized 19,805 5.0 19,285 5.0

The Bank's actual capital amounts and ratios are presented
in the following table (in thousands).

2001 2000
------------------- -------------------
Amount Ratio Amount Ratio
-------- ------- -------- -------

Total Capital
(to Risk-weighted Assets)

Actual $41,409 16.3% $39,584 16.3%
For Capital Adequacy Purposes 20,390 8.0 19,416 8.0
To Be Well Capitalized 25,488 10.0 24,270 10.0

Tier I Capital
(to Risk-weighted Assets)

Actual $38,100 15.0% $36,705 15.1%
For Capital Adequacy Purposes 10,195 4.0 9,708 4.0
To Be Well Capitalized 15,293 6.0 14,562 6.0

Tier I Capital
(to Average Assets)

Actual $38,100 9.7% $36,705 9.8%
For Capital Adequacy Purposes 15,727 4.0 15,059 4.0
To Be Well Capitalized 19,659 5.0 18,823 5.0

The Pennsylvania Banking Code restricts the availability of
capital funds for payment of dividend by all state-chartered
banks to the additional paid in capital of the bank.
Accordingly, at December 31, 2001, the balance in the additional
paid in capital account totaling approximately $11,700,000 is
unavailable for dividends.

The Bank is subject to regulatory restrictions, which limit
its ability to loan funds to Penns Woods Bancorp, Inc. At
December 31, 2001, the regulatory lending limit amounted to
approximately $6,439,000.

NOTE Q - ACQUISITION

On October 1, 2000, the Bank acquired The M Group in a
business acquisition accounted for as a purchase. The M Group
is engaged in the insurance business. The results of operations
of The M Group are included in the accompanying consolidated
financial statements since the date of acquisition. The total
cost of the acquisition was $3,321,000, which exceeds the fair
value of the net assets of The M Group by $3,261,000 which was
allocated to goodwill.

On January 11, 1999 the Company completed the acquisition
of all the outstanding common stock of the First National Bank
of Spring Mills in exchange for 262,471 shares of the Company's
common stock, in a business combination accounted for as a
pooling of interest. As a result of this transaction, total
consolidated assets increased approximately $31,834,000.
Historical financial information has been restated to include
the First National Bank of Spring Mills.

NOTE R - STOCK DIVIDEND

On April 28, 1999, the Board of Directors approved a ten
percent stock dividend to shareholders of record as of May 10,
1999. As a result of the dividend, an additional 283,393 shares
of the Company were issued, with fractional shares paid in cash.

Average shares and all per share amounts included in the
consolidated financial statements are based on the increased
number of shares after giving retroactive effect to the stock
dividend.

NOTE S - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company is required to disclose estimated fair values
for its financial instruments. Fair value estimates are made at
a specific point in time, based on relevant market information
and information about the financial instrument. These estimates
do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a
particular financial instrument. Also, it is the Company's
general practice and intention to hold most of its financial
instruments to maturity and not to engage in trading or sales
activities. Because no market exists for a significant portion
of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions can significantly affect the
estimates.

Estimated fair values have been determined by the Company
using historical data and an estimation methodology suitable for
each category of financial instruments. The estimated fair
value of the Company's investment securities is described in
Note A. The Company's fair value estimates, methods, and
assumptions are set forth below for the Company's other
financial instruments.

As certain assets and liabilities, such as deferred tax
assets, premises and equipment, and many other operational
elements of the Company, are not considered financial
instruments but have value, this estimated fair value of
financial instruments would not represent the full market value
of the Company.

The estimated fair values of the Company's financial
instruments are as follows:

2001 2000
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------

Financial assets:
Cash and due from banks $ 14,844 $ 14,844 $ 15,318 $ 15,318
Investment securities:
Available for sale 131,985 131,985 113,044 113,044
Held to maturity 1,302 1,312 3,228 3,261
Loans held for resale 3,993 3,993 1,688 1,688
Loans, net 248,696 257,062 241,919 241,836
Bank owned life insurance 8,126 8,126 2,353 2,353
Regulatory stock 2,875 2,875 2,878 2,878
Accrued interest receivable 2,685 2,685 2,581 2,581
-------- -------- -------- --------
Total $414,506 $422,882 $383,009 $382,959
======== ======== ======== ========

Financial liabilities:
Interest -bearing Deposits $249,873 $251,955 $230,666 $230,267
Noninterest-bearing Deposits 55,277 55,277 47,468 47,468
Short-term borrowings 19,105 19,105 31,021 31,021
Other borrowings 41,778 42,369 31,778 31,638
Accrued interest payable 1,190 1,190 1,452 1,452
-------- -------- --------- --------
Total $367,223 $369,896 $342,385 $341,846
======== ======== ======== ========

Cash and due from banks, regulatory stock, accrued interest
receivable, short-term borrowings, and accrued interest payable:

The fair value is equal to the carrying value.

Investment securities:

The fair value of investment securities available for sale
and held to maturity is equal to the available quoted market
price. If no quoted market price is available, fair value is
estimated using the quoted market price for similar securities.

Loans:

Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type
such as commercial, commercial real estate, residential
mortgage, credit card, and other consumer. Each loan category
is further segmented into fixed and adjustable rate interest
terms and by performing and nonperforming categories.

The fair value of performing loans, except residential
mortgage and credit card loans, is calculated by discounting
scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan. The estimate of
maturity is based on the Company's historical experience with
repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending
conditions. For performing residential mortgage loans, fair
value is estimated by discounting contractual cash flows
adjusted for prepayment estimates using discounted rates based
on secondary market sources adjusted to reflect differences in
servicing and credit costs. For credit card loans, cash flows
and maturities are estimated based on contractual interest rates
and historical experience and are discounted using secondary
market rates adjusted for differences in servicing and credit
costs.

Fair value for significant nonperforming loans is based on
recent external appraisals. If appraisals are not available,
estimated cash flows are discounted using a rate commensurate
with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discounted
rates are judgmentally determined using available market
information and specific borrower information.

Bank owned life insurance:

The fair value is equal to the Cash Surrender Value of life
insurance policies.

Deposits:

The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts,
and money market and checking accounts, is equal to the amount
payable on demand as of December 31, 2001 and 2000. The fair
value of certificates of deposit is based on the discounted
value of contractual cash flows.

The fair value estimates above do not include the benefit
that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the
market, commonly referred to as the core deposit intangible.

Other Borrowings:

The fair value of other borrowings is based on the
discounted value of contractual cash flows.

Commitments to Extend Credit, Standby Letters of Credit, and
Financial Guarantees Written:

There is no material difference between the notional amount
and the estimated fair value of off-balance sheet items at
December 31, 2001 and 2000 respectively.

PARENT COMPANY ONLY FINANCIAL STATEMENTS

Condensed financial information for Penns Woods Bancorp,
Inc. follows

CONDENSED BALANCE SHEET, DECEMBER 31,

2001 2000
-------- ---------
(in thousands)
ASSETS
Cash $ 151 $ 156
Investment in subsidiaries:
Bank 43,371 39,566
Nonbank 11,938 11,030
Other assets 29 11
-------- --------
Total Assets $ 55,489 $ 50,763
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 237 $ 249
Shareholders' equity 55,252 50,514
-------- --------
Total Liabilities and
Shareholders' Equity $ 55,489 $ 50,763
======== ========

CONDENSED STATEMENT OF INCOME, FOR THE YEARS ENDED DECEMBER 31,

2001 2000 1999
-------- -------- --------
(in thousands)

OPERATING INCOME
Dividends from subsidiaries $ 5,984 $ 6,220 $ 3,735
Equity in undistributed net income
of subsidiaries 1,899 443 3,583
Other income - 2 1

OPERATING EXPENSES (141) (99) (129)
-------- -------- --------
NET INCOME $ 7,742 $ 6,566 $ 7,190
======== ======== ========

CONDENSED STATEMENT OF CASH FLOWS, FOR THE YEARS ENDED
DECEMBER 31,

2001 2000 1999
-------- -------- --------
(in thousands)

OPERATING ACTIVITIES
Net income $ 7,742 $ 6,566 $ 7,190
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net income
of subsidiaries (1,899) (443) (3,583)
Increase (decrease) in income taxes
payable (12) 16 174
Increase (decrease) in liabilities (14) 5 (24)
-------- -------- --------
Net cash provided by operating
activities 5,817 6,144 3,757
-------- -------- --------

INVESTING ACTIVITIES
Additional investment in subsidiaries (276) (1,752) (620)

FINANCING ACTIVITIES
Dividends paid (3,729) (3,426) (3,178)
Proceeds from exercise of stock options 21 65 40
Purchase of treasury stock (1,838) (902) (23)
-------- -------- --------
Net cash used for financing
activities (5,546) (4,263 ) (3,161)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH (5) 129 (24)
CASH, BEGINNING OF YEAR 156 27 51
-------- -------- --------
CASH, END OF YEAR $ 151 $ 156 $ 27
========= ======== ========

CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE THREE MONTHS ENDED
March June September December
2001 31 30 30 31
- ---- -------- -------- --------- --------

Interest income $ 7,103 $ 7,150 $ 7,229 $ 7,254
Interest expense 3,293 3,197 3,055 2,936
-------- -------- -------- --------
Net interest income 3,810 3,953 4,174 4,318

Provision for loan losses 93 93 93 93
Other income 731 751 860 909
Securities gains, net 135 211 369 318
Other expenses 2,508 2,584 2,598 2,757
-------- -------- -------- --------
Income before income tax
provision 2,075 2,238 2,712 2,695
Income tax provision 391 432 586 569
-------- -------- -------- --------
Net income $ 1,684 $ 1,806 $ 2,126 $ 2,126
======== ======== ======== ========
Earnings per share - basic $ 0.55 $ 0.58 $ 0.70 $ 0.70

Earnings per share - diluted $ 0.55 $ 0.58 $ 0.70 $ 0.70

FOR THE THREE MONTHS ENDED
March June September December
2000 31 30 30 31
- ---- -------- -------- --------- --------

Interest income $ 6,819 $ 6,945 $ 7,252 $ 7,438
Interest expense 2,931 3,038 3,349 3,460
-------- -------- -------- --------
Net interest income 3,888 3,907 3,903 3,978

Provision for loan losses 78 52 78 78
Other income 412 477 461 739
Securities gains (losses), net 161 91 153 (136)
Other expenses 2,371 2,402 2,319 2,471
-------- -------- -------- --------
Income before income tax
provision 2,012 2,021 2,120 2,032
Income tax provision 466 417 399 337
-------- -------- -------- --------
Net income $ 1,546 $ 1,604 $ 1,721 $ 1,695
======== ======== ======== ========
Earnings per share - basic $ 0.49 $ 0.52 $ 0.55 $ 0.54

Earnings per share - diluted $ 0.49 $ 0.52 $ 0.55 $ 0.54

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

None

PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information appearing in the Proxy Statement under the caption
"Election of Directors" is incorporated herein by reference.
(a) Identification of directors. The information appearing
under the caption "Election of Directors" in the Company's Proxy
Statement dated March 20, 2002 (at page 4 thereto) is
incorporated herein by reference.

ITEM 11 EXECUTIVE COMPENSATION

Information appearing under the caption "Executive Compensation"
in the Company's Proxy Statement (at page 5 thereto) is
incorporated herein by reference.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The information appearing under the caption "Principal
Beneficial Owners of the Corporation's Common Stock" in the
Company's Proxy Statement (at page 2 thereto) is incorporated
herein by reference.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There have been no material transactions between the Company and
the Bank, nor any material transactions proposed, with any
Director or executive officer of the Company and the Bank, or
any associate of the foregoing persons. The Company and the
Bank have had, and intend to continue to have, banking and
financial transactions in the ordinary course of business with
Directors and Officers of the Company and the Bank and their
associates on comparable terms and with similar interest rates
as those prevailing from time to time for other customers of the
Company and the Bank.

Total loans outstanding from the Bank at December 31, 2001 to
the Company's and the Bank's Officers and Directors as a group
and members of their immediate families and companies in which
they had an ownership interest of 10% or more was $5,192,000 or
approximately 9.4% of the total equity capital of the Company.
Loans to such persons were made in the ordinary course of
business, were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and did not
involve more than the normal risk of collectability or present
other unfavorable features.

See also the information appearing in footnote M to the
Consolidated Financial Statements included elsewhere in the
Annual Report.

PART IV

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K

(a) Financial Statements
1. The following consolidated financial statements and
reports are set forth in Item 8:
Report of Independent Certified Public Accountants
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders'
Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements

2. The following schedules are submitted herewith:
I. Indebtedness of Related Parties

The schedules not included are omitted because the required
matter or conditions are not present, the data is insignificant
or the required information is submitted as part of the
consolidated financial statements and notes thereto.

(b) Reports on Form 8-K

None.

(c) Exhibits:

(3)(i) Articles of Incorporation of the Registrant, as presently
in effect (incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-4, No. 333-65821).

(3)(ii) Bylaws of the Registrant as presently in effect
(incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form S-4, No. 333-65821).

(10)(i) Executive Employment Agreement, dated as of January 1,
1995, among the Registrant., Jersey Shore State Bank, and
Theodore H. Reich (incorporated by reference to Exhibit 10.2 of
the Registrant's Registration Statement on form S-4, No. 333-
65821).*

(10)(ii) Employment Agreement, dated August, 1991, between
Jersey Shore State Bank and Ronald A. Walko (incorporated by
reference to Exhibit 10.3 of the Registrant's Registration
Statement on form S-4, No. 333-65821).*

(10)(iii) Employment Agreement, dated November 5, 1984, between
Jersey Shore State Bank and Hubert A. Valencik (incorporated by
reference to Exhibit (10)(iii) of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000).*

(10)(iv) Employee Severance Benefit Plan, dated May 30, 1991,
for Ronald A. Walko (incorporated by reference to Exhibit 10.4
of the Registrant's Registration Statement on form S-4, No. 333-
65821).*

(10)(v) Employee Severance Benefit Plan, dated May 30, 1996, for
Hubert A. Valencik (incorporated by reference to Exhibit (10)(v)
of the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000).*

(10)(vi) Penns Woods Bancorp, Inc. 1998 Stock Option Plan
(incorporated by reference to Exhibit 10.1 of the Registrant's
Registration Statement on form S-4, No. 333-65821).

(21) Subsidiaries of the Registrant.

(23) Consent of Independent Auditors.

* Denotes compensatory plan or arrangement.

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.

March 12, 2002 PENNS WOODS BANCORP, INC.
BY: THEODORE H. REICH, Chairman

Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated:

/s/ Theodore H. Reich March 12, 2002
Theodore H. Reich, Chairman

/s/ Ronald A. Walko March 12, 2002
Ronald A. Walko, President, Chief Executive
Officer and Director

/s/ Sonya E. Scott March 12, 2002
Sonya E. Scott, Principal Accounting Officer &
Principal Financial Officer

/s/ Phillip H. Bower March 12, 2002
Phillip H. Bower, Director

/s/ Lynn S. Bowes March 12, 2002
Lynn S. Bowes, Director

/s/ Michael J. Casale, Jr. March 12, 2002
Michael J. Casale, Jr., Director

/s/ H. Thomas Davis, Jr. March 12, 2002
H. Thomas Davis, Jr., Director

/s/ William S. Frazier March 12, 2002
William S. Frazier, Director

/s/ James M. Furey II March 12, 2002
James M. Furey II, Director

/s/ Jay H. McCormick March 12, 2002
Jay H. McCormick, Director

/s/ R. Edward Nestlerode, Jr. March 13, 2001
R. Edward Nestlerode, Jr., Director

/s/ James E. Plummer March 12, 2002
James E. Plummer, Director

/s/ William H. Rockey March 12, 2002
William H. Rockey, Sr. Vice President &
Director

EXHIBIT INDEX

(21) Subsidiaries of the Registrant.

(23) Consent of Independent Auditors.