PENNS WOODS BANCORP INC - 10-K Annual Report

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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

For the fiscal year ended December 31, 2002

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

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 (I.R.S. 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

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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. [ X }

Indicate by check mark whether the registrant is an accelerated
filed (as defined in Rule 12b-2 of the Act).

Yes [ X ] No [ ]

As of June 30, 2002, the aggregate market value of the voting
and non-voting common stock of the registrant held by non-
affiliates computed by reference to the price at which the
common stock was last sold was approximately
$95,174,842 million.

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, 2000
Common Stock, $10 Par Value 3,030,128 Shares

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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 April 30, 2003 are incorporated by reference in
Part III hereof.

INDEX

PART I

ITEM PAGE

Item 1. Business...................................... 5
Item 2. Properties.................................... 17
Item 3. Legal Proceedings............................. 18
Item 4. Submission of Matters to a Vote of Security
Holders....................................... 18

PART II

Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters.. ............... 19
Item 6. Selected Financial Data....................... 20
Item 7. Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations................................. 22
Item 7.A Quantitative and Qualitative Disclosure About
Market Risk................................... 51
Item 8. Financial Statements and Supplementary Data... 52
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................... 95

PART III

Item 10. Directors and Executive Officers of the
Registrant.................................... 96
Item 11. Executive Compensation........................ 96
Item 12. Security Ownership and Certain Beneficial
Owners and Management......................... 96
Item 13. Certain Relationships and Related
Transactions.................................. 97

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Item 14. Controls and Procedures....................... 98

PART IV

Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................... 99
Index to Exhibits....................................... 100
Signatures and Certifications........................... 102

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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 eleven 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 146 persons as of
December 31, 2002. The Company does not have any employees.
The principal officers of the Bank also serve as officers of the
Company.

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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.

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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

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"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, 2002, 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

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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 $.0168 for each $100 of BIF deposits.

Other Legislation

On July 30, 2002, the President signed into law the
Sarbanes-Oxley Act of 2002. The stated goals of this sweeping
legislation are to enhance penalties for accounting and auditing
improprieties at publicly traded companies and to protect
investors by improving the accuracy and reliability of corporate
disclosures under the federal securities laws. The Sarbanes-
Oxley Act generally applies to all companies, including the
Company, that file or are required to file periodic reports with
the Securities and Exchange Commission under the Securities
Exchange Act of 1934, or the Exchange Act. The legislation
includes provisions, among other things, governing the services
that can be provided by a public company's independent auditors
and the procedures for approving such services, requiring the
chief executive officer and chief financial officer to certify
certain matters relating to the company's periodic filings under
the Exchange Act, requiring expedited filings of reports by
insiders of their securities transactions and containing other
provisions relating to insider conflicts of interest, increasing
disclosure requirements relating to critical financial
accounting policies and their application, increasing penalties
for securities law violations, and creating a new public
accounting oversight board, a regulatory body subject to SEC
jurisdiction with broad powers to set auditing, quality control
and ethics standards for accounting firms. The legislation also
requires the national securities exchanges and NASDAQ to adopt
rules relating to certain matters, including the independence of
members of a company's audit committee as a condition to listing

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or continued listing. Given the extensive SEC role in
implementing rules relating to many of the new requirements, the
final scope of these requirements remains to be determined at
this time, although the Company does not believe that the
application of these new rules to the Company as they become
effective will have a material effect on its results of
operations.

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

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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, 2002, the Bank had total assets of
$468,782,000; total shareholders' equity of $51,019,000 and
total deposits of $340,472,000. 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 accounts, 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

11

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 indebt
themselves personally as well. 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

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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

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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 11.37% 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.

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The Bank operates eleven 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.

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EXECUTIVE OFFICERS OF THE REGISTRANT:

NAME AGE FIVE-YEAR ANALYSIS OF DUTIES
- ------------------ --- -------------------------------------
Ronald A. Walko 56 President and Chief Executive Officer
of the Company; the Bank; The
M 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 61 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; Vice President with
another bank prior to 1985 for a
fourteen-year period.

Sonya E. Scott 43 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.

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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 Financial Center are located; all
properties are in good condition and adequate for the Bank's
purposes:

Office Address
- ------------- ----------------------------------
Main 115 South Main Street Owned
P.O. Box 5098
Jersey Shore, Pennsylvania 17740

Bridge Street 112 Bridge Street Owned
Jersey Shore, Pennsylvania 17740

DuBoistown 2675 Euclid Avenue Under Lease
DuBoistown, Pennsylvania 17702

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

Montgomery 9094 Rt. 405 Highway Under Lease
Montgomery, Pennsylvania 17752

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

Mill Hall (Inside Wal-Mart), Under Lease
167 Hogan Boulevard
Mill Hall, Pennsylvania 17751

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

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

Zion 100 Cobblestone Road Under Lease
Bellefonte, Pennsylvania 16823

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

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

State College (Inside Wal-Mart) Under Lease
1665 North Atherton Place
State College, Pennsylvania 16803

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 SECURITY HOLDERS

No matters were submitted to a vote of security holders
during the fourth quarter of 2002.

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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, 2000. 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
---- --- ---------
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

2002
First quarter $35.00 $32.33 $0.27
Second quarter 36.37 33.00 0.27
Third quarter 35.70 32.20 0.27
Fourth quarter 36.85 33.00 0.55

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

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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, 2003, the Registrant had approximately 1,215
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, 2002.

20

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.

21

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.

2002 vs 2001

Fully taxable equivalent net interest income increased
$2,053,000 or 11.44% to $19,997,000 during the year 2002. The
net interest income growth was the result of an increase in
interest income of $418,000 and a decrease in interest expense
of $1,635,000.

The effective interest differential increased 3 basis
points to 4.87% from December 31, 2001 to December 31, 2002.
Prime rates and federal funds rates held steady most of the year
declining 50 basis points in November. The low rates had a
greater impact on the repricing of deposits than they had on
loans and investment securities. The Company's assets and
liabilities were positioned to benefit from the rate
environment. Overall, rates had a positive impact on earnings.
Although interest-earning assets suffered a reduction in income
due to rates of $2,033,000, interest expense relating to
interest-bearing liabilities also declined by $2,326,000. The
net effect was an increase in income of $293,000 due to rates.

Total average interest earning assets increased $39,805,000
during 2002 which contributed $2,451,000 to net interest income.

Interest income on loans decreased during 2002 by
$1,055,000. This was the result of a decrease in interest
income of $1,669,000 due to rate offset by an increase in
interest income of $614,000 due to volume. Total average loans
increased from 2001 to 2002 by $7,021,000 which contributed to
the volume increase. Although the volume increased, as loans
were paid off and new loans originated, low prime rates caused a
reduction in interest income. Bank prime rates remained
relatively low in 2002 compared to historical standards and were
directly responsible for the decline of interest income of

22

$1,669,000. This is evident by the decline of the average rate
on total loans from 8.92% in 2001 to 8.26% in 2002.

Investment securities interest income contributed
$1,473,000 of additional income in 2002 relative to 2001.
Taxable securities income represented the majority of the
increase at $1,390,000 while tax-exempt investment securities
added $83,000. Together, an increase of investment securities
income of $1,837,000 due to volume more than offset a decrease
of $364,000 due to rates. Total average securities increased
$32,784,000 or 26.53% from 2001 to 2002. This increase explains
the substantial increase in income related to volume.

Total average interest-bearing liabilities increased
$35,898,000 or 12.26% during 2002. The interest expense related
to volume increased $691,000 while rates subtracted interest
expenses totaling $2,326,000.

Due to successful marketing strategies and market
penetration in the Centre County region, the bank increased
total average deposits by $31,166,000. Average savings deposits
increased $35,893,000 while average time deposits decreased
$9,010,000. Non-interest-bearing demand deposits increased
$4,283,000. Deposit rates held steady through most of 2002.
Savings deposits had little change in average rate while other
time deposits repriced throughout the year into the current low
rates. The average rate on other time deposits declined from
5.28% in 2001 to 3.77% in 2002.

The increase in funding due to deposits added to an
increase in average other borrowings of $12,672,000 and offset
the reduction of average short-term borrowings of $3,657,000.
The bank had less need for overnight borrowings to fund assets
with the increase of deposits and other borrowings. The bank
acquired two loans totaling $10,000,000 with the Federal Home
Loan Bank that are reflected in the increase of other
borrowings. The Federal Home Loan Bank borrowings were intended
to match investment security purchases that generate long-term
interest income with minimal risk.

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 in

23

interest expense. Tax-exempt investment securities contributed
the most to interest income adding $1,374,000 in income of which
$1,298,000 was due to volume and $76,000 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 $752,000. Rates
caused a reduction of $246,000 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 $622,000
increase due to volume and a $303,000 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
$831,000 while rates contributed a net decrease of $1,128,000.
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 $770,000. 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 $258,000 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 $240,000. 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.

24

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 $332,000, $84,000 and $723,000, 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 policy 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 of 18
points less than 2000.

25

AVERAGE BALANCES AND INTEREST RATES
(IN THOUSANDS)

The following tables set forth certain information relating
to the Company's average balance sheet and reflects the average
yield on assets and average cost of liabilities for the periods
indicated and the average yields earned and rates paid. Such
yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for
the periods presented.

26

29

1. Fees on loans are included with interest on loans. Loan
fees are included in interest income as follows: 2002,
$803,000, 2001, $668,000, 2000, $411,000.

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. 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.

30

PROVISION FOR LOAN LOSSES

2002 vs 2001

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

31

allowance for loan losses was adequate at December 31, 2002,
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 judgement of
information available to them at the time of their examination.

The allowance for loan losses increased 0.9% or $26,000
from fiscal 2001 after net charge-offs of $339,000 contributing
to a year-end allowance for loan losses of $2,953,000 or 1.1%
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.

2001 vs 2000

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.

32

OTHER INCOME

2002 vs 2001

Total other income for 2002 was $5,453,000, an increase of
$344,000 from the prior year. Excluding security gains of
$233,000 in 2002 and $1,033,000 in 2001, other income increased
$1,144,000. Service charges increased 17.12% or $268,000 to
$1,833,000 in 2002. The rate charged for overdraft fees was
increased in 2002 which resulted in $229,000 additional service
charge income.

Other operating income increased $876,000 from 2001 to
2002. Commission income growth from the sale of financial
products sold by the Bank's subsidiary, The M Group, account
for $401,000 of the total increase of other operating income.
Income on cash surrender value adjustments on bank owned life
insurance increased $242,000. The year 2002 was the first full
year the life insurance policies were in effect, resulting in a
greater adjustment. Life insurance proceeds also added

33

$102,000. The remaining contributors were credit card merchant
machine processing fees, debit card fees and ATM surcharge
revenue.

2001 vs 2000

Total other income for the year ended December 31, 2001 of
$5,109,000 grew from $2,615,000 in 2000, an increase of
$2,494,000 or 95.37%. Most of the $2,494,000 increase of other
operating income is due to the growth of $1,313,000 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.

OTHER EXPENSES

2002 vs 2001

Total other expenses increased $941,000 or 8.35% from the
year ended December 31, 2001 to December 31, 2002. Salaries and
employee benefits increased $1,152,000, the most substantial of
the other expenses category. Employee salaries and benefits
increased more than $500,000 as a result of increased salaries
that correspond with the growth in sales of financial products
offered by The M Group and the cost of staff at the new State
College Wal-Mart Branch. The Bank's pension expense increased
$320,000 in 2002. The remaining expenses were due to normal
wage increases. The new branch also caused the majority of the
$44,000 increase to occupancy expense. The Bank has
substantially upgraded its computer networking capabilities
which has resulted in most of the $98,000 increase to furniture
and equipment expense. Other operating expenses decreased
$353,000. The elimination of goodwill amortization as per the
adoption of FAS No. 142 represents $221,000 of the decrease in
expenses. Bookkeeping expenses increased due to securities
transactions and maintenance. The other miscellaneous operating
expenses decrease was additionally offset by a $55,000 expense
as a result of a check kiting incident.

34

2001 vs 2000

Other expenses at year-end December 31, 2001 increased
$1,452,000 or 14.79%. The majority of the other operating
expense increase of $870,000 is due to a full year of expenses
of the Bank's subsidiary, The M Group, an entry fee of $53,000
for The NASDAQ National Market, audit and consulting fees in
excess of $50,000, additional advertising expenses and other
miscellaneous operating expenses. The salaries and employee
benefits expense increase of $656,000 or 12.77% is attributable
to the normal wage increases and the additional salaries expense
of the Bank's subsidiary for a full year. Occupancy expense
increased $42,000 or 5.64%. Most of the expense was also
produced by a full year of The M Group's occupancy expenses.
Furniture and equipment expenses were $19,000 less in 2001 than
in 2000.

INCOME TAXES

2002 vs 2001

The provision for income taxes for the year ended
December 31, 2002 resulted in an effective income tax rate of
20.2% compared to 20.3% for 2001.

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.

FINANCIAL CONDITION

INVESTMENTS

2002

The investment portfolio increased $44,330,000 or 33.3% in
2002. Deposits grew faster than loan demand with the excess
funding the purchase of additional investment securities. Most
of the increase is attributable to an increase of $62,906,000 in
U.S. Government agencies category, $975,000 in other bonds,
notes and debentures and $170,000 in U.S. Treasury securities
category. State and Political subdivisions category decreased
$12,575,000 and a $7,146,000 decrease was also found in the
equity securities category. The investment portfolio at year-

35

end 2002 comprised of 50.2% U.S. Government agency and Treasury
securities, 40.2% state and political subdivisions, 8.4% equity
securities, and 1.2% other bonds, notes and debentures. Held to
maturity securities had a carrying value of $1,181,000.
Available for sale securities occupied 99% of the total
portfolio and had an amortized cost of $168,641,000 with an
estimated market value of $176,436,000. The unrealized gain of
$7,795,000 effected shareholders' equity by $5,145,000, net of
deferred taxes.

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.

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

36

The following table shows the maturities and repricing of
investment securities at December 31, 2002 and the weighted
average yields (for tax-exempt obligations on a fully taxable
basis assuming a 34% tax rate) of such securities (in
thousands):

37

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

2002

Gross loans for the year ended December 31, 2002, were
$257,845,000 or $6,222,000 (2.47%) more than the prior year.
Real estate mortgages increased $8,128,000 as a whole with
residential and commercial real estate loans increasing $49,000
and $8,800,000, respectively. Construction real estate
mortgages decreased $721,000. Commercial and agricultural loans
increased $1,079,000, while installment loans to individuals
decreased $2,985,000.

38

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 or (6.7%). Commercial real estate mortgages grew by
10.1% or $6,141,000. Commercial and agricultural loans
decreased $3,842,000 or (14.5%). Construction real estate
mortgages declined $671,000 or 14.1% and installment loans to
individuals decreased 16.8% or $3,626,000.

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, 2002 are
presented below by category and maturity (in thousands):

39

(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,
2002.

ALLOWANCE FOR LOAN LOSSES

2002

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

40

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
homogeneous pool allowance, and off balance sheet risk
allowance.

At December 31, 2002, the allowance for loan losses as
a percent of gross loans declined from December 31, 2001 to
1.1%. Gross loans increased by $6,222,000 from $251,623,000 at
December 31, 2001 to $257,845,000 at December 31, 2002.

Nonaccruing loans increased $590,000 to $871,000 from year-
end 2001. Overall nonperforming loans increased $1,477,000 to
$2,096,000 from fiscal 2001.

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

2001

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 $6,825,000 from
$244,798,000 at December 31, 2000 to $251,623,000 at
December 31, 2001.

Nonaccruing loans decreased $496,000 (63.8%) to $281,000
from year-end 2000. Overall nonperforming 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
nonaccrual, nonperforming, or classified loans above that have
already been considered in its overall judgment of the adequacy
of the reserve.

41

The following table presents information concerning
nonperforming 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
nonaccrual 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
nonperforming 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
---------- --------
2002 $871 $1,225
2001 $281 $ 338
2000 $777 $ 27
1999 $284 $ 241
1998 $646 $ 60

If interest had been recorded at the original rate on those
loans, such income would have approximated $24,000, $28,000, and
$86,000 for the years ended December 31, 2002, 2001, and 2000,
respectively. Interest income on such loans, which is recorded
as received, amounted to approximately $17,000, $19,000 and
$45,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.

The level of nonaccruing loans continues to fluctuate
annually and is attributed to the various economic factors

42

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, 2002:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $ 471 9.2%
Real estate mortgage:
Residential 1,162 54.4%
Commercial 1,082 29.3%
Construction 66 1.3%
Installment loans to individuals 172 5.8%
------ -----
Total $2,953 100.0%
====== =====

43

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%
====== =====

44

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%
====== =====

DEPOSITS

2002

Total average deposits were $316,934,000 for 2002, an
increase of $31,166,000 or 10.9%. Unlike the previous year, the
majority of the increase was in the demand deposit category.
Total demand deposits increased $29,903,000. Noninterest-
bearing demand deposits increased $4,283,000 and interest-
bearing demand deposits increased $25,620,000. Savings deposits
increased $10,273,000 while time deposits decreased $9,010,000.
The Bank continues to penetrate into the Centre County market
with the opening of a new branch office inside the State College
Wal-Mart on North Atherton Street. Historically low rate levels
have influenced investors away from longer term commitments
which has resulted in a decrease in time deposits and a
significant increase in more liquid accounts such as demand
deposits and savings. The shift from time deposits to demand
and savings deposits have also had a positive impact on
earnings. More details pertaining to the changes in interest
expense are stated in the Net Interest Income discussion.

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.

45

Noninterest-bearing deposits increased 9.0% to $46,594,000.
Interest-bearing demand deposits also increased minimally to
$46,154,000 (1.5%).

Time deposits of $100,000 or more totaled approximately
$29,126,000 on December 31, 2002 and $32,646,000 on December 31,
2001. Interest expense related to such deposits was
approximately $1,098,000, $1,913,000 and $1,571,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.

Maturities on time deposits of $100,000 or more are as
follows:

2002
-------
Three months or less $ 6,770
Three months to six months 7,436
Six months to twelve 6,093
Over twelve months 8,827
-------
Total $29,126
=======

Time deposits at December 31, 2002 mature as follows: 2003
- - $85,397,000; 2004 - $20,365,000; 2005 - $15,168,000; 2006 -
$10,627,000; 2007 - $1,169,000; thereafter - $1,054,000.

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

46

SHAREHOLDERS' EQUITY

2002

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, 2002 was $63,142,000,
increasing $7,890,000 from the balance at December 31, 2001 of
$55,252,000. Net income and the exercising of stock options
contributed $8,886,000 and $113,000, respectively, to
shareholders' equity. The unrealized appreciation on securities
also added $3,416,000 to total equity. Reductions to
shareholders' equity included $4,124,000 that was paid out in
dividends and $401,000 for the purchase of treasury stock.

2001

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.

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, 2002, the Company's required ratios were well above
the minimum ratios as follows:

2002
Minimum
Company Standards
------- ---------
Tier 1 capital ratio 20.7% 4.0%
Total capital ratio 22.2% 8.0%

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

47

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:

2002 2001 2000
------ ------ ------
Percentage of net income to:
Average total assets 2.01% 1.95% 1.74%
Average shareholders' equity 15.00% 14.38% 13.77%
Percentage of dividends declared per
common share 46.40% 48.17% 52.18%
Percentage of average shareholders'
equity to average total assets 13.39% 13.54% 12.62%

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

48

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
$153,147,000. In addition to this credit arrangement the
Company has additional lines of credit with correspondent banks
of $10,500,000. The Company's management believes that it has
sufficient liquidity to satisfy estimated short-term and long-
term funding needs. Federal Home Loan Bank advances totaled
$53,618,000 as of December 31, 2002.

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.

49

INTEREST RATE SENSITIVITY

The following table sets forth the Company's interest rate
sensitivity as of December 31, 2002:

(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 sale.

(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

50

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 following is a rate
shock analysis for the period indicated:

December 31, 2002
Net Interest
Income Change (After Tax)
Rates (In thousands)
----- -------------------------
-200 $(350)
-100 $(226)
+100 $ 140
+200 $ 6

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 measures 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 Company'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

51

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 for the years ended December 31,
2002, 2001 and 2000 were $3,416,000, $2,539,000 and $2,117,000,
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, 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.

52

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK

Market risk for the Company is comprised primarily from
interest rate risk exposure and liquidity risk. Interest rate
risk and liquidity risk management is performed at the Bank
level as well as the Company level. The Company's interest rate
sensitivity is monitored by management through selected interest
rate risk measures produced internally. Additional information
and details are provided in the Interest Sensitivity section of
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.

Generally, management believes the Company is well
positioned to respond expeditiously when the market interest
rate outlook changes.

53

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,
2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.

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

Wexford, PA
February 14, 2003

54

PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET

December 31,
---------------------
2002 2001
--------- ---------
(in thousands)
ASSETS:
Cash and due from banks $ 11,731 $ 14,844
Securities available for sale 176,436 131,985
Securities held to maturity (fair value
of $1,289 and $1,312) 1,181 1,302
Loans held for sale 2,651 3,993
Loans, net of unearned discount of $769 257,845 251,623
Less: Allowance for loan losses 2,953 2,927
-------- --------
Loans, net 254,892 248,696
Bank premises and equipment, net 4,856 4,478
Accrued interest receivable 2,460 2,685
Bank-owned life insurance 8,537 8,126
Goodwill 3,032 3,032
Other assets 6,430 5,669
-------- --------
TOTAL $472,206 $424,810
======== ========
LIABILITIES:
Interest-bearing deposits $272,787 $249,873
Noninterest-bearing deposits 67,061 55,277
-------- --------
TOTAL DEPOSITS 339,848 305,150

Short-term borrowings 13,563 19,105
Other borrowings 51,778 41,778
Accrued interest payable 1,092 1,190
Other liabilities 2,783 2,335
-------- --------
TOTAL LIABILITIES 409,064 369,558
-------- --------

SHAREHOLDERS' EQUITY:
Common stock, par value $10; 10,000,000
shares authorized 3,136,832 and
3,131,644 shares issued 31,368 31,316
Additional paid-in capital 18,291 18,230
Retained earnings 11,749 6,987
Accumulated other comprehensive income 5,145 1,729
Treasury stock, at cost (105,503 and
92,054 shares) (3,411) (3,010)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 63,142 55,252
-------- --------
TOTAL $472,206 $424,810
======== ========

See Accompanying Notes to the Consolidated Financial Statements.

55

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME

See accompanying notes to the consolidated financial statements.

56

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

See accompanying notes to the consolidated financial statements.

57

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

58

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

The Company paid approximately $10,944,000, $12,743,000,
and $12,449,000 in interest on deposits and other borrowings
during 2002, 2001, and 2000, respectively. The Company made
income tax payments of approximately $3,394,000, $2,136,000, and
$2,008,000 during 2002, 2001, and 2000, respectively. Transfers
from loans to foreclosed assets held for sale amounted to
approximately $254,000, $493,000, and $294,000 in 2002, 2001,
and 2000, respectively.

See accompanying notes to the consolidated financial statements.

59

PENNS WOODS BANCORP, INC.
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 eleven 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.

60

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, 2002 or 2001.

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 equity securities are
determined using the average cost method, while all other
investment securities use the specific 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.

61

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, therefore these 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.

62

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.

Loans Held for Sale

In general, fixed rate residential mortgage loans
originated by the Bank are held for sale and are carried at the
aggregate lower of cost or market. Such loans sold are not
serviced by the Bank.

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

63

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, which range from five to seven
years for furniture, fixtures and equipment and thirty-one and a
half for buildings and improvements. Costs incurred for routine
maintenance and repairs are charged to operations as incurred.
Costs of major additions and improvements are capitalized.

Goodwill

Goodwill is the excess cost over the fair market value of
assets acquired in connection with business acquisitions and was
being amortized on the straight-line method over fifteen years,
prior to October 1, 2001. On October 1, 2001, the Company
adopted FAS No. 142, Goodwill and Other Intangible Assets, which
changed the accounting for goodwill from an amortization method
to an impairment-only approach. This statement eliminates the
regularly scheduled amortization of goodwill and replaces this
method with a two-step process for testing the impairment of
goodwill on at least an annual basis. This approach could cause
more volatility in the Company's reported net income because
impairment losses, if any, could occur irregularly and in
varying amounts. The Company, upon adoption of this statement,
stopped amortizing existing goodwill of $3.0 million. In
addition, the Company performed its initial impairment analysis
of goodwill and other intangible assets and determined that the
estimated fair value exceeded the carrying amount.

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.

64

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.

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, there would be no
effect on the Company's net income and earnings per share for
2002, 2001, and 2000 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 2000, 1999 and
1998, 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.

65

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.

Reclassification of Comparative Amounts

Certain items previously reported have been reclassified to
conform to the current year's reporting format. Such
reclassifications did not affect net income or stockholders'
equity.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("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.

66

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 did not
have a material effect on the Company's financial statements.

In April 2002, the FASB issued FAS No. 145, Rescission of
FASB Statement No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. FAS No. 145 rescinds FAS
No. 4, which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a
result, the criteria in APB Opinion No. 30 will now be used to
classify those gains and losses. This statement also amends FAS
No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sale-leaseback transactions.
This statement also makes technical corrections to existing
pronouncements, which are not substantive but in some cases may
change accounting practice. The provisions of this statement
related to the rescission of FAS No. 4 shall be applied in
fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishments of debt that was classified as an extraordinary
item in prior periods presented that does not meet the criteria
in APB Opinion No. 30 for classification as an extraordinary
item shall be reclassified. Early adoption of the provisions of
this statement related to FAS No. 13 shall be effective for
transactions occurring after May 15, 2002. All other provisions
of this statement shall be effective for financial statements
issued on or after May 15, 2002. Early application of this
statement is encouraged. The adoption of the effective portions
of this statement did not have an impact on the Company's
financial position of results of operations. The adoption of
the remaining portions of this statement is not expected to have
an impact on the Company's financial position or results of
operations.

In July 2002, the FASB issued FAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, which
requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. This
statement replaces EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to

67

Exit an Activity (Including Certain Costs Incurred in a
Restructuring). The new statement will be effective for exit or
disposal activities initiated after December 31, 2002, the
adoption of which is not expected to have a material effect on
the Company's financial statements.

On October 1, 2002, FASB issued FAS No. 147, Acquisitions
of Certain Financial Institutions, effective for all business
combinations initiated after October 1, 2002. This statement
addresses the financial accounting and reporting for the
acquisition of all or part of a financial institution, except
for a transaction between two or more mutual enterprises. This
statement removes acquisitions of financial institutions, other
than transactions between two or more mutual enterprises, from
the scope of FAS No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17 When a Savings and Loan
Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method. The
acquisition of all or part of a financial institution that meets
the definition of a business combination shall be accounted for
by the purchase method in accordance with FAS No. 141, Business
Combinations, and FAS No. 142, Goodwill and Other Intangible
Assets. This statement also provides guidance on the accounting
for the impairment or disposal of acquired long-term customer-
relationship intangible assets (such as depositor- and borrower-
relationship intangible assets and credit cardholder intangible
assets), including those acquired in transactions between two or
more mutual enterprises. The adoption of this statement did not
have a material effect on the Company's financial statements.

On December 31, 2002, the FASB issued FAS No. 148,
Accounting for Stock-Based Compensation - Transition and
Disclosure, which amends FAS No. 123, Accounting for Stock-Based
Compensation. FAS No. 148 amends the disclosure requirements of
FAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-
based compensation. Under the provisions of FAS No. 123,
companies that adopted the preferable, fair value based method
were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-
based compensation expense in the first few years following
adoption, which caused concern for companies and investors
because of the lack of consistency in reported results. To
address that concern, FAS No. 148 provides two additional
methods of transition that reflect an entity's full complement

68

of stock-based compensation expense immediately upon adoption,
thereby eliminating the ramp-up effect. FAS No. 148 also
improves the clarity and prominence of disclosures about the pro
forma effects of using the fair value based method of accounting
for stock-based compensation for all companies-regardless of the
accounting method used-by requiring that the data be presented
more prominently and in a more user-friendly format in the
footnotes to the financial statements. In addition, the
statement improves the timeliness of those disclosures by
requiring that this information be included in interim as well
as annual financial statements. The transition guidance and
annual disclosure provisions of FAS No. 148 are effective for
fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim
disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning
after December 15, 2002.

In November, 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that
it has issued. This interpretation clarifies that a guarantor
is required to disclose (a) the nature of the guarantee,
including the approximate term of the guarantee, how the
guarantee arose, and the events or circumstances that would
require the guarantor to perform under the guarantee; (b) the
maximum potential amount of future payments under the guarantee;
(c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature
and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid
under the guarantee. This interpretation also clarifies that a
guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in
issuing the guarantee, including its ongoing obligation to stand
ready to perform over the term of the guarantee in the event
that the specified triggering events or conditions occur. The
objective of the initial measurement of that liability is the
fair value of the guarantee at its inception. The initial
recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure

69

requirements in this interpretation are effective for financial
statements of interim or annual periods ending after
December 15, 2002.

NOTE B - PER SHARE DATA

There are no convertible securities, which would affect the
numerator in calculating basic 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 2002 and 2001, and
30,350 shares at prices from $32.63 to $53.18 were outstanding
during 2000, but were not included in the computation of diluted
earnings per share because to do so would have been anti-
dilutive.

NOTE C - INVESTMENT SECURITIES

The amortized cost of investment securities and their
approximate fair values are as follows (in thousands):

70

The amortized cost and fair value of debt securities at
December 31, 2002, 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.

71

Held to Maturity Available for Sale
------------------ --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- --------
Due in one year or
less $ 300 $ 306 $ 2,017 $ 2,087
Due after one year
to five years 100 100 10,377 10,654
Due after five years
to ten years 141 141 27,149 27,566
Due after ten years 640 742 116,684 121,182
------ ------ -------- --------
$1,181 $1,289 $156,227 $161,489
====== ====== ======== ========

Total gross proceeds from sales of securities available for
sale were $79,022,000, $22,156,000 and $53,301,000 for 2002,
2001 and 2000, respectively. The following table represents
gross realized gains and gross realized losses on those
transactions (in thousands):

2002 2001 2000
------ ------ ------
Gross realized gains:
U.S. Government and agency
securities $ 204 $ 133 $ 36
State and political securities 2,234 20 170
Other Debt Securities 6 - -
Equity securities 1,803 1,226 1,577
------ ------ ------
$4,247 $1,379 $1,783
====== ====== ======
Gross realized losses:
U.S. Government and agency
securities $ 125 $ 13 $ 731
State and political securities 67 149 30
Equity securities 3,822 184 753
------ ------ ------
$4,014 $ 346 $1,514
====== ====== ======

In 2002, the Company recorded an investment security gain
of $69,000 resulting from a business combination where the
Company received the common stock of the acquirer in a non-
monetary exchange. This gain is included in the above table.

72

A charge of $270,000 was recorded in 2002 to recognize
other than temporary declines in the value of marketable equity
securities. This loss is included in the above table.

Investment securities with a carrying value of
approximately $34,914,000 and $36,539,000 at December 31, 2002
and 2001, 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 D - LOANS

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

73

Loans on which the accrual of interest has been
discontinued or reduced amounted to approximately $871,000 and
$281,000 at December 31, 2002 and 2001, respectively. If
interest had been recorded at the original rate on those loans,
such income would have approximated $24,000, $28,000, and
$86,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Interest income on such loans, which is recorded
as received, amounted to approximately $17,000, $19,000, and
$45,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.

Changes in the allowance for loan losses for the years
ended December 31, are as follows (in thousands):

2002 2001 2000
------- ------- -------
Balance, beginning of year $2,927 $2,879 $2,823
Provision charged to operations 365 372 286
Loans charged off (402) (358) (269)
Recoveries 63 34 39
------ ------ ------
Balance, end of year $2,953 $2,927 $2,879

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, 2002 or December 31,
2001.

The Company grants commercial, industrial, residential, and
installment loans to customers throughout North-central
Pennsylvania. Although the Company has a diversified loan
portfolio at December 31, 2002 and 2001, a substantial portion
of its debtors' ability to honor their contracts is dependent on
the economic conditions within this region.

NOTE E - BANK PREMISES AND EQUIPMENT

Major classifications of Bank premises and equipment are
summarized as follows at December 31, (in thousands):

74

2002 2001
------- -------
Land $ 566 $ 566
Bank premises 4,855 4,668
Furniture and equipment 6,001 5,292
Leasehold improvements 842 834
------- -------
Total 12,264 11,360
Less accumulated depreciation 7,408 6,882
------- -------
Net $ 4,856 $ 4,478
======= =======

Depreciation charges to operations for the years ended
2002, 2001 and 2000 was $526,000, $489,000 and $551,000,
respectively.

NOTE F - GOODWILL

A summary of goodwill is as follows:

2002 2001
------- -------
Gross carrying amount $3,308 $3,308
Less accumulated amortization (276) (276)
------ ------
Net carrying amount $3,032 $3,032

Amortization expense amounted to $221,000 for 2001.

The gross carrying amount of goodwill was tested for
impairment in the second quarter. The Company performed its
initial impairment analysis of goodwill noting that the
estimated fair value exceeded the carrying amount.

The following tables sets forth a comparison of net income
and basic and diluted earnings per share adjusted for the
adoption of FAS No. 142, Goodwill and Other Intangible Asset:.

75

2002 2001 2000
------ ------ ------
(Dollars in thousands,
except per share amounts)

Goodwill amortization $ - $ 221 $ 55

Net income $8,886 $7,742 $6,566
Addback: Goodwill amortization
(net of tax) - 146 36
------ ------ ------
Adjusted net income $8,886 $7,888 $6,602
====== ====== ======
Basic earnings per share:
Net income $ 2.93 $ 2.53 $ 2.10
Goodwill amortization - 0.04 0.01
------ ------ ------
Adjusted basic earnings per share $ 2.93 $ 2.57 $ 2.11
====== ====== ======
Diluted earnings per share:
Net income $ 2.93 $ 2.53 $ 2.10
Goodwill amortization - 0.04 0.01
------ ------ ------
Adjusted diluted earnings per share $ 2.93 $ 2.57 $ 2.11
====== ====== ======

NOTE G - DEPOSITS

Time deposits of $100,000 or more totaled approximately
$29,126,000 on December 31, 2002 and $32,646,000 on December 31,
2001. Interest expense related to such deposits was
approximately $1,098,000, $1,913,000, and $1,571,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.

Maturities on time deposits of $100,000 or more are as
follows:

2002
-------
Three months or less $ 6,770
Three months to six months 7,436
Six months to twelve months 6,093
Over twelve months 8,827
-------
Total $29,126
=======

76

Time deposits at December 31, 2002 mature as follows: 2003
- - $85,397,000; 2004 - $20,365,000; 2005 - $15,168,000; 2006 -
$10,627,000; 2007 - $1,169,000; thereafter - $1,054,000.

NOTE H - SHORT-TERM BORROWINGS

Short-term borrowings consist of 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):

2002 2001
-------- --------
Open Repo Plus:
Balance at year end $ 1,840 $ 8,830
Maximum amount outstanding at any month
end 8,510 16,861
Average balance outstanding during the
year 1,646 4,425
Weighted-average interest rate:
At year end 1.31% 1.20%
Paid during the year 1.96% 3.48%
Repurchase Agreements:
Balance at year end $11,723 $10,275
Maximum amount outstanding at any month
end 20,870 18,825
Average balance outstanding during the
year 14,819 15,697
Weighted-average interest rate:
At year end 2.68% 3.76%
Paid during the year 3.17% 4.77%

NOTE I - OTHER BORROWINGS

Other borrowings are comprised of advances from the FHLB.
A schedule of other borrowings by maturity as of December 31,
2002 and 2001 is summarized as follows (in thousands):

77

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 $153,147,000 at December 31, 2002, 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.

78

(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.

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

(8) 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 2004.

NOTE J - INCOME TAXES

The following temporary differences gave rise to the net
deferred tax asset at December 31, 2002 and 2001 (in thousands):

2002 2001
-------- ------
Deferred tax asset:
Allowance for loan losses $ 693 $ 668
Deferred compensation 337 303
Contingencies 20 55
Pension 371 348
Loan fees and costs 261 215
Investment securities allowance 92 -
------- ------
Total 1,774 1,589
------- ------
Deferred tax liability:
Bond accretion 31 25
Depreciation 192 129
Unrealized gains on available for sale
securities 2,650 891
------- ------
Total 2,873 1,045
------- ------
Deferred tax asset (liability), net $(1,099) $ 544
======= ======

79

No valuation allowance was established at December 31, 2002
and 2001, in the view of the Company's ability to carry back
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,
---------------------------
2002 2001 2000
------- ------- -------
Currently payable $2,363 $2,117 $1,730
Deferred benefit (116) (139) (111)
------ ------ ------
Total provision $2,247 $1,978 $1,619
====== ====== ======

The effective federal income tax rate for the years ended
December 31, 2002, 2001, and 2000 was 20.2 percent,
20.3 percent, and 19.8 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):

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

80

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):

2002 2001
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $ 4,976 $ 3,935
Service cost 381 298
Interest cost 342 271
Amendments 97 -
Actuarial adjustment 753 524
Benefits paid (76) (52)
------- -------
Benefit obligation at end of year 6,473 4,976
------- -------
Change in plan assets:
Fair value of plan assets at beginning
of year 3,115 3,597
Actual loss on plan assets (407) (430)
Employer contribution 499 -
Benefits paid (76) (52)
------- -------
Fair value of plan assets at end of year 3,131 3,115
------- -------
Funded status (3,342) (1,861)
------- -------
Unrecognized net actuarial loss 1,996 609
Unrecognized transition asset (24) (27)
Unrecognized prior service cost 280 209
------- -------
Accrued benefit payable $(1,090) $(1,070)
======= =======
Weighted-average assumptions as of
December 31:
Discount rate 6.00% 6.50%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%

81

2002 2001 2000
------ ------ ------
Components of net periodic benefit
cost:
Service cost $ 381 $ 298 $ 256
Interest cost 342 271 242
Expected return on plan assets (246) (286) (291)
Amortization of transition asset (3) (3) (3)
Amortization of prior service cost 26 20 20
Recognized net actuarial (gain)
loss 19 (15) (33)
----- ----- -----
Net periodic benefit cost $ 519 $ 285 $ 191
===== ===== =====

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, 2002.

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 $80,000, $65,000, and $67,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.

Deferred Compensation Plan

The Company has a deferred compensation plan whereby
participating directors elected to forego directors' 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

82

benefits are payable to the Company. The total expense charged
to other expenses was $98,000, $67,000 and $66,000 for the years
ended December 31, 2002, 2001 and 2000, respectively. Benefits
paid under the plan were approximately $51,000 in 2002 and
$51,000 in 2001 and $53,000 in 2000.

NOTE L - STOCK OPTIONS

Prior to 1998, the Company granted a select group of its
officers 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.

A summary of the status of the Company's common stock
option plans are presented below:

2002 2001
----------------- -------------------
Weighted- Weighted-
average average
Exercise Exercise
Shares Price Shares Price
------ -------- ------- ---------
Outstanding, beginning
of year 41,501 $38.60 42,301 $37.87
Granted - - - -
Exercised 5,188 25.98 800 25.98
Forfeited 5,963 25.98 - -
------ ------ ------ ------
Outstanding, end of
year 30,350 $42.56 41,501 $38.10
====== ======
Options exercisable at
year-end 30,350 $42.56 41,501 $38.10
====== ======

83

The following table summarizes information about
nonqualified and incentive stock options outstanding at
December 31, 2002:

Outstanding Exercisable
----------------------------- -------------------
Average Average
Exercise Average Exercise Exercise
Price Shares Life Price Shares Price
- -------- ------ ------- -------- ------ --------

$53.18 9,900 6 $53.18 9,900 $53.18
$42.00 10,450 7 $42.00 10,450 $42.00
$32.63 10,000 8 $32.63 10,000 $32.63

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
- ---- --------- --------- -------- -------
2002 $5,192 $3,234 $1,641 $6,785

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, 2002 (in thousands):

84

Year Ending December 31,
------------------------
2003 $ 237
2004 218
2005 205
2006 179
2007 149
Thereafter 76
------
Total $1,064
======

Total rental expense for all operating leases for the years
ended December 31, 2002, 2001 and 2000 approximated $258,000,
$270,000 and $213,000, 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.

85

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

2002 2001
------- -------

Commitments to extend credit $29,497 $29,490

Standby letters of credit $ 741 $ 348

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 represent conditional commitments
issued by the Company to guarantee the performance of a customer
to a third party. These instruments are issued primarily to
support bid or performance related contracts. The coverage
period for these instruments is typically a one year period with
an annual renewal option subject to prior approval by
management. Fees earned from the issuance of these letters are
recognized over the coverage period. For secured letters of
credit, the collateral is typically Bank deposit instruments or
customer business assets.

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.

86

As of December 31, 2002 and 2001, 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):

2002 2001
--------------- ---------------
Amount Ratio Amount Ratio
------- ----- ------- -----
Total Capital
(to Risk-weighted Assets)

Actual $58,953 22.2% $53,281 20.1%
For Capital Adequacy Purposes 21,236 8.0 21,208 8.0
To Be Well Capitalized 26,545 10.0 26,510 10.0

Tier I Capital
(to Risk-weighted Assets)

Actual $54,915 20.7% $49,936 18.8%
For Capital Adequacy Purposes 10,618 4.0 10,604 4.0
To Be Well Capitalized 15,927 6.0 15,906 6.0

Tier I Capital
(to Average Assets)

Actual $54,915 12.0% $49,936 12.6%
For Capital Adequacy Purposes 18,310 4.0 15,880 4.0
To Be Well Capitalized 22,888 5.0 19,805 5.0

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

87

2002 2001
--------------- ---------------
Amount Ratio Amount Ratio
------- ----- ------- -----
Total Capital
(to Risk-weighted Assets)

Actual $47,232 18.3% $41,409 16.3%
For Capital Adequacy Purposes 20,616 8.0 20,390 8.0
To Be Well Capitalized 25,770 10.0 25,488 10.0

Tier I Capital
(to Risk-weighted Assets)

Actual $43,723 17.0% $38,100 15.0%
For Capital Adequacy Purposes 10,308 4.0 10,195 4.0
To Be Well Capitalized 15,462 6.0 15,293 6.0

Tier I Capital
(to Average Assets)

Actual $43,723 9.7% $38,100 9.7%
For Capital Adequacy Purposes 17,970 4.0 15,727 4.0
To Be Well Capitalized 22,462 5.0 19,659 5.0

NOTE Q - REGULATORY RESTRICTIONS

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, 2002, 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, 2002, the regulatory lending limit amounted to
approximately $4,676,000.

Cash and Due from Banks

Included in cash and due from banks are reserves required
by the district Federal Reserve Bank of $1,152,000 and
$1,523,000 at December 31, 2002 and 2001. The required reserves
are computed by applying prescribed ratios to the classes of

88

average deposit balances. These are held in the form of cash on
hand and a balance maintained directly with the Federal Reserve
Bank.

NOTE R - 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 $3,308,000 which was
allocated to goodwill.

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

89

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:

2002 2001
------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Financial assets:
Cash and due from banks $ 11,731 $ 11,731 $ 14,844 $ 14,844
Investment securities:
Available for sale 176,436 176,436 131,985 131,985
Held to maturity 1,181 1,289 1,302 1,312
Loans held for sale 2,651 2,651 3,993 3,993
Loans, net 254,892 267,563 248,696 257,062
Bank-owned life insurance 8,537 8,537 8,126 8,126
Regulatory stock 3,963 3,963 2,875 2,875
Accrued interest receivable 2,460 2,460 2,685 2,685
-------- -------- -------- --------
Total $461,851 $474,630 $414,506 $422,882
======== ======== ======== ========
Financial liabilities:
Interest-bearing deposits $272,787 $276,881 $249,873 $251,955
Noninterest-bearing deposits 67,061 67,061 55,277 55,277
Short-term borrowings 13,563 13,563 19,105 19,105
Other borrowings 51,778 56,384 41,778 42,369
Accrued interest payable 1,092 1,092 1,190 1,190
-------- -------- -------- --------
Total $406,281 $414,981 $367,223 $369,896
======== ======== ======== ========

Cash and due from banks, loans held for sale, 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.

90

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

91

payable on demand as of December 31, 2002 and 2001. 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, 2002 and 2001 respectively. The contractual
amounts of unfunded commitments and letters of credit are
presented in Note O.

NOTE T - PARENT COMPANY ONLY FINANCIAL STATEMENTS

Condensed financial information for Penns Woods Bancorp,
Inc. follows:

CONDENSED BALANCE SHEET, DECEMBER 31,

2002 2001
------- -------
(in thousands)
ASSETS
Cash $ 481 $ 151
Investment in subsidiaries:
Bank 51,019 43,371
Nonbank 11,760 11,938
Other assets 20 29
------- -------
Total Assets $63,280 $55,489
======= =======

92

LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 138 $ 237
Shareholders' equity 63,142 55,252
------- -------
Total Liabilities and Shareholders'
Equity $63,280 $55,489
======= =======

CONDENSED STATEMENT OF INCOME,
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
------- ------- -------
(in thousands)
OPERATING INCOME
Dividends from subsidiaries $4,878 $5,984 $6,220
Equity in undistributed net
income of subsidiaries 4,121 1,899 443
Other income - - 2

OPERATING EXPENSES (113) (141) (99)
------ ------ ------
NET INCOME $8,886 $7,742 $6,566
====== ====== ======

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

93

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

94

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

None

95

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 21, 2003 (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 AND RELATED SHAREHOLDER MATTERS

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.

96

Equity Compensation Plan Information

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, 2002
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
$6,785,000 or approximately 10.7% 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 L to the Consolidated Financial Statements
included elsewhere in the Annual Report.

97

ITEM 14 CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this Form 10-K, the
Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including
the Company's President and Chief Executive Officer along with
the Company's Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon
that evaluation, the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures
are effective in timely alerting them to material information
relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic
SEC filings. There have been no significant changes in the
Company's internal controls or in other factors which could
significantly affect internal controls subsequent to the date
the Company carried out its evaluation.

98

PART IV

ITEM 15 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 Auditors
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 schedule is 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).

99

(10)(i) Employment Agreement, dated August 29, 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)(ii) 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)(iii) Employee Severance Benefit Plan, dated May 30,
1996, 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)(iv) 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)(v) 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 Certified Public
Accountants.

(99)(i) Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

(99)(ii) Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

* Denotes compensatory plan or arrangement.

100

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 11, 2003 PENNS WOODS BANCORP, INC.

BY: /s/ Ronald A. Walko
-------------------------------
Ronald A. Walko,
President and
Chief Executive Officer

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/ Ronald A. Walko
- -----------------------------
Ronald A. Walko President, Chief March 11, 2003
Executive Officer
and Director

/s/ Sonya E. Scott
- -----------------------------
Sonya E. Scott Principal March 11, 2003
Accounting Officer
and Principal
Financial Officer

/s/ Phillip H. Bower
- -----------------------------
Phillip H. Bower Director March 11, 2003

/s/ Lynn S. Bowes
- -----------------------------
Lynn S. Bowes Director March 11, 2003

/s/ Michael J. Casale, Jr.
- -----------------------------
Michael J. Casale, Jr. Director March 11, 2003

101

/s/ H. Thomas Davis, Jr.
- -----------------------------
H. Thomas Davis, Jr. Director March 11, 2003

/s/ James M. Furey II
- -----------------------------
James M. Furey II Director March 11, 2003

/s/ Jay H. McCormick
- -----------------------------
Jay H. McCormick Director March 11, 2003

/s/ R. Edward Nestlerode, Jr.
- -----------------------------
R. Edward Nestlerode, Jr. Director March 11, 2003

/s/ James E. Plummer
- -----------------------------
James E. Plummer Director March 11, 2003

/s/ William H. Rockey
- -----------------------------
William H. Rockey Senior Vice March 11, 2003
President and
Director

102

CERTIFICATIONS

I, Ronald A. Walko, Chief Executive Officer of Penns Woods
Bancorp, Inc. (the "Company"), certify that:

1. I have reviewed this annual report on Form 10-K of
Penns Woods Bancorp, Inc.;

2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and
other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;

4. The Company's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the Company and have:

(a) designed such disclosure controls and procedures
to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;

(b) evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation
Date"); and

(c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;

5. The Company's other certifying officer and I have
disclosed, based on our most recent evaluation, to the Company's
auditors and the audit committee of Company's Board of
Directors:

103

(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
Company's ability to record, process, summarize and report
financial data and have identified for the Company's auditors
any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Company's internal controls; and

6. The Company's other certifying officer and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: March 11, 2003 /s/ Ronald A. Walko
----------------------------------
Ronald A. Walko
Chief Executive Officer

104

I, Sonya E. Scott, Chief Financial Officer of Penns Woods
Bancorp, Inc. (the "Company"), certify that:

1. I have reviewed this annual report on Form 10-K of
Penns Woods Bancorp, Inc.;

2. Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and
other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;

4. The Company's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the Company and have:

(a) designed such disclosure controls and procedures
to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;

(b) evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation
Date"); and

(c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;

4. The Company's other certifying officer and I have
disclosed, based on our most recent evaluation, to the Company's
auditors and the audit committee of Company's Board of
Directors:

(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the

105

Company's ability to record, process, summarize and report
financial data and have identified for the Company's auditors
any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Company's internal controls; and

6. The Company's other certifying officer and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: March 11, 2003 /s/ Sonya E. Scott
----------------------------------
Sonya E. Scott
Chief Financial Officer

106

EXHIBIT INDEX

(21) Subsidiaries of the Registrant.

(23) Consent of Independent Certified Public
Accountants.

(99)(i) Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

(99)(ii) Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

107