PENNS WOODS BANCORP INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the Quarterly Period
Ended March 31, 2003,

[ ] Transition report pursuant to Section 13 or 15 (d) of the
Exchange Act for the Transition Period from _______________
to _______________.

No. 0-17077
(Commission File Number)

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, Williamsport, Pennsylvania 17701
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

YES [ X ] NO[ ]

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

YES [ X ] NO[ ]

On May 13, 2003 there were 3,030,129 of the Registrant's common stock
outstanding.

1

PENNS WOODS BANCORP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

Page
Number
------

Part I Financial Information

Item 1. Financial Statements

Consolidated Balance Sheet (unaudited)
as of March 31, 2003 and December 31, 2002 3

Consolidated Statement of Income
(unaudited) for the Three Months ended
March 31, 2003 and 2002 5

Consolidated Statement of Comprehensive
Income (unaudited) For the Three Months
ended March 31, 2003 and 2002 7

Consolidated Statement of Changes in
Shareholders' Equity (unaudited) for the
Three Months ended March 31, 2003 8

Consolidated Statement of Cash Flows
(unaudited) for the Three Months ended
March 31, 2003 and 2002 9

Notes to Consolidated Financial
Statements 11-16

Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17-24

Item 3. Quantitative and Qualitative Disclosure
About Market Risk 24

Item 4. Controls and Procedures 24

Part II Other Information 24

Signatures 26

2

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

March 31, December 31,
2003 2002
--------- ------------
(in thousands)
ASSETS:
Cash and due from banks $ 17,898 $ 11,731
Investment securities available for
sale 199,173 176,436
Investment securities held to
maturity (market value of $1,210
and $1,289) 1,176 1,181
Loans held for sale 2,072 2,651
Loans, net of unearned discount of
$793 and $769 251,240 257,845
Allowance for loan losses (3,018) (2,953)
-------- --------
Loans, net 248,222 254,892

Bank premises and equipment, net 4,731 4,856
Accrued interest receivable 2,351 2,460
Bank-owned life insurance 8,607 8,537
Goodwill 3,032 3,032
Other assets 6,940 6,430
-------- --------
TOTAL ASSETS $494,202 $472,206
======== ========
LIABILITIES:
Demand deposits $ 59,994 $ 67,061
Interest-bearing demand deposits 82,181 78,590
Savings deposits 64,332 60,417
Time deposits 134,267 133,780
-------- --------
Total deposits $340,774 $339,848

Short-term borrowings 13,417 13,563
Other borrowings 70,878 51,778
Accrued interest payable 983 1,092

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Other liabilities 3,310 2,783
-------- --------
Total liabilities 429,362 409,064
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, par value $10;
10,000,000 shares authorized;
3,137,832 and 3,136,832 shares
issued $ 31,378 $ 31,368
Additional paid-in capital 18,314 18,291
Retained earnings 13,028 11,749
Accumulated other comprehensive
income 5,617 5,145
Less: Treasury stock at cost,
107,703 and 105,503 (3,497) (3,411)
-------- --------
Total shareholders' equity $ 64,840 $ 63,142
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $494,202 $472,206
======== ========

See accompanying notes to the unaudited consolidated financial statements.

4

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

Three Months Ended
March 31,
----------------------
2003 2002
--------- ----------
(in thousands except
per share data)
INTEREST INCOME:
Interest and fees on loans $4,995 $5,270
Interest and dividends on investments:
Taxable 1,199 982
Tax-exempt 863 785
Other dividend and interest income 35 39
--------- ---------
Total interest and dividend income 7,092 7,076
--------- ---------
INTEREST EXPENSE:
Interest on deposits 1,633 2,037
Interest on short-term borrowings 72 117
Interest on other borrowings 681 565
--------- ---------
Total interest expense 2,386 2,719
--------- ---------
Net interest income 4,706 4,357
Provision for loan losses 90 105
--------- ---------
Net interest income after provision
for loan losses 4,616 4,252
--------- ---------
OTHER INCOME:
Service charges 465 390
Securities gains(losses), net 101 (119)
Earnings on bank-owned life insurance 104 100
Insurance commissions 358 572
Other operating income 255 339
--------- ---------
Total other operating income 1,283 1,282
--------- ---------
OTHER EXPENSES:
Salaries and employee benefits 1,635 1,628
Occupancy expense, net 233 195
Furniture and equipment expense 285 207

5

Other expenses 986 922
--------- ---------
Total other operating expenses 3,139 2,952
--------- ---------
INCOME BEFORE INCOME TAX PROVISION 2,760 2,582
APPLICABLE INCOME TAX PROVISION 573 485
--------- ---------
NET INCOME $2,187 $2,097
========= =========
EARNINGS PER SHARE - BASIC $ 0.72 $ 0.69

EARNINGS PER SHARE - DILUTED $ 0.72 $ 0.69

BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 3,030,357 3,037,934

DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 3,031,910 3,040,468

See accompanying notes to the unaudited consolidated financial statements.

6

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)

Three Months Ended
March 31,
------------------
2003 2002
------ -------
(in thousands)
Net Income $2,187 $2,097
Other comprehensive income (loss):
Unrealized gains (losses) on available
for sale securities $ 816 $ (566)
Less: Reclassification adjustment for
gain (loss) included in net income 101 (119)
------ ------
Other comprehensive income (loss) before
tax 715 (447)
Income tax expense (benefit) related to
other comprehensive income 243 (152)
Other comprehensive income (loss), net of
tax 472 (295)
------ ------
Comprehensive income $2,659 $1,802
====== ======

See accompanying notes to the unaudited consolidated financial statements.

7

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands except per share data)

See accompanying notes to the unaudited consolidated financial statements.

8

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

The Company paid approximately $2,495,000 and $2,846,000 interest on
deposits and other borrowings during the first quarter of 2003 and 2002,
respectively.

See accompanying notes to the unaudited consolidated financial statements.

10

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. Basis of Presentation

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

The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for the fair presentation of
results for such periods. All of those adjustments are of a normal,
recurring nature. The results of operations for any interim period are
not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with financial statements and
notes thereto contained in the Company's annual report for the year ended
December 31, 2002.

Recent Accounting Pronouncements

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

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

11

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. The adoption of this
statement did not have a material effect 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 Exit an
Activity (Including Certain Costs Incurred in a Restructuring). The new
statement is effective for exit or disposal activities initiated after
December 31, 2002. The adoption of this statement did not have a material
effect on the Company's financial position or results of operations.

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 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

12

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. The adoption of this statement did not
have a material effect on the Company's financial statements.

In April 2003, the FASB issued FAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This statement
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under FAS No. 133. The amendments set forth in FAS No.
149 improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. In particular, this
statement clarifies under what circumstances a contract with an initial
net investment meets the characteristic of a derivative as discussed in
FAS No. 133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. FAS No. 149 amends certain other existing pronouncements.
Those changes will result in more consistent reporting of contracts that
are derivatives in their entirety or that contain embedded derivatives
that warrant separate accounting. This statement is effective for
contracts entered into or modified after June 30, 2003, except as stated
below and for hedging relationships designated after June 30, 2003. The
guidance should be applied prospectively. The provisions of this
statement that relate to FAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.

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

13

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 requirements in this
interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, in an effort to expand upon and strengthen
existing accounting guidance that addresses when a company should include
in its financial statements the assets, liabilities and activities of
another entity. The objective of this interpretation is not to restrict
the use of variable interest entities but to improve financial reporting
by companies involved with variable interest entities. Until now, one
company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting
interests. This interpretation changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of this interpretation
apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The adoption of this interpretation has not and is not
expected to have a material effect on the Company's financial position or
results of operations.

Per Share Data

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

14

Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
Weighted average common shares
outstanding 3,137,316 3,131,644

Average treasury stock shares (106,959) (93,710)
--------- ---------

Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share 3,030,357 3,037,934

Additional common stock equivalents
(stock options)used to calculate
diluted earnings per share 1,553 2,534
--------- ---------

Weighted average common shares and
common stock equivalents used to
calculate diluted earnings per share 3,031,910 3,040,468
========= =========

Options to purchase 20,350 shares of common stock at prices from
$42.00 to $53.18 were outstanding during the three months ended March 31,
2003 and 2002, but were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive.

Reclassification of Comparative Amounts

Certain comparative amounts for the prior periods have been
reclassified to conform to current period presentations. Such
reclassifications had no effect on net income or stockholders' equity.

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 Company wishes to caution readers that the following
important factors, among others, may have affected and could in the future
affect the Company's actual results and could cause the Company's actual
results for subsequent periods to differ materially from those expressed

15

in any forward-looking statement made by or on behalf of the Company
herein: (i) the effect of changes in laws and regulations, including
federal and state banking laws and regulations, which the Company must
comply, and the associated costs of compliance with such laws and
regulations either currently or in the future as applicable; (ii) the
effect of changes in accounting policies and practices, as may be adopted
by the regulatory agencies as well as by the Financial Accounting
Standards Board, or of changes in the Company's organization, compensation
and benefit plans; (iii) the effect on the Company's competitive position
within its market area of the increasing consolidation within the banking
and financial services industries, including the increased competition
from larger regional and out-of-state banking organizations as well as
non-bank providers of various financial services; (iv) the effect of
changes in interest rates; and (v) the effect of changes in the business
cycle and downturns in the local, regional or national economies.

16

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

EARNINGS SUMMARY

Comparison of the Three Months Ended March 31, 2003 and 2002

Interest Income

For the three months ended March 31, 2003, total interest income
increased by $16,000 compared to the first three months of 2002. Total
interest and dividends on investments increased $295,000 and interest and
fees on loans decreased $275,000. Other dividend and interest income
decreased $4,000. Overall, the increase in total interest income of
$16,000 is the result of an increase in the volume of investment
securities average balance held for the period relative to the same period
a year ago offset by a decrease in the return on loans. Interest income
generated from the net increase in volume of interest earning assets was
offset by a general decline in rates.

On a tax equivalent basis, investment security interest income
increased $329,000 for the first quarter of 2003 compared to the first
quarter of 2002. The increase of taxable interest is due to the
significant purchase of U.S. Government Agency securities over the past
year. US Treasury and Agency securities average balance increased
interest income $673,000 while the decrease in the average of S&P
securities decreased interest income $293,000. Management has
repositioned the investment portfolio from longer term assets to shorter
term assets to take advantage of the cash flow opportunities for
reinvestment. Interest earned on other securities decreased $51,000. The
net growth in the volume of investment holdings has generated additional
interest that has offset the 79 basis point negative impact of lower
rates.

Historically low rates have negatively affected interest income
collected on variable and new loans compared to a year ago. The average
Prime rate during the quarter was the lowest it has been for over thirty
years. A 54 basis point decrease of the tax equivalent return on loans,
partially offset by an increase in the average balance of $2.8 million,
caused a decrease of $291,000 to interest income.

Interest Expense

For the three months ended March 31, 2003, total interest expense
decreased by $333,000 or 12% compared to the first three months of 2002.
Historically low interest rates have positively impacted interest expense.

17

Lower rates for all deposit accounts contribute the most substantial
decrease in interest expense. The rate on interest paid on deposits
declined 88 basis points. Interest expense on savings deposits decreased
$75,000 and interest expense on time deposits decreased $329,000.
Favorable long-term borrowing rates offer opportunities to reduce interest
expenses over the coming years. The rate paid for interest on borrowings
decreased 77 basis points. Interest paid on short-term borrowings
decreased $45,000. The Company borrowed an additional $20 million in long
term advances through the FHLB during the first quarter of 2003 to
minimize future borrowing costs and to enhance asset and liability
positioning. The $116,000 increase in expense on other borrowings is the
result of the additional advances offset by the 32 basis point decline in
the resulting weighted average rate.

Provision for Loan Losses

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

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

Although management believes that it uses the best information
available to make such determinations and that the allowance for loan
losses is adequate at March 31, 2003, future adjustments could be
necessary if circumstances or economic conditions differ substantially
from the assumptions used in making the initial determinations. A
downturn in the local economy, employment and delays in receiving
financial information from borrowers could result in increased levels of
nonperforming assets and charge-offs, increased loan loss provisions and
reductions in income. Additionally, as an integral part of the
examination process, bank regulatory agencies periodically review the
Bank's loan loss allowance. The banking agencies could require the
recognition of additions to the loan loss allowance based on their
judgment of information available to them at the time of their
examination.

18

The allowance for loan losses increased from $2,953,000 at
December 31, 2002 to $3,018,000 at March 31, 2003. At March 31, 2003
allowance for loan losses was 1.2% of total loans compared to 1.1% of
total loans at December 31, 2002. This percentage is consistent with the
Bank's historical experience and peer banks. Management's conclusion is
that the allowance for loan losses is adequate to provide for probable
losses inherent in its loan portfolio as of the balance sheet date.

The provision for loan losses totaled $90,000 for the three months
ended March 31, 2003. The provision for the same period in 2002 was
$105,000.

For the three month period ending March 31, 2003, charge-offs
exceeded recoveries by $25,000 compared to the same period ended March 31,
2002, when charge-offs exceeded recoveries by $74,000.

An overall decrease was experienced in non-performing loans from the
December 31, 2002 total of $2,096,000 to $1,205,000 on March 31, 2003.
This decline consisted of a commercial and industrial loans decrease of
$34,000, a real estate secured loans decrease of $848,000 and an
installment loans decrease of $9,000. The real estate secured loan has
been paying to the original agreed upon terms and has been deemed by
management to meet the classification of a performing loan.

Based upon this analysis as well as the others noted above, senior
management has concluded that the allowance for loan losses remains at a
level adequate to provide for probable losses inherent in its loan
portfolio.

Other Operating Income

Other operating income for the three months ended March 31, 2003
increased $1,000. Excluding net security gains, other income decreased
$219,000. Service charges increased $75,000 due to the increase of both
the fee charged for overdrafts and the quantity of overdrafts. Insurance
commissions earned by the Bank's subsidiary, The M Group, decreased
$214,000 while earnings on bank-owned life insurance increased $4,000 from
the same period in 2002. Other income decreased $84,000.

Management has analyzed its equity portfolio for impairment that
would qualify as other than temporary. Impairment is determined using
factors such as length of time and the extent to which the market value is
less than cost; the financial condition and the near-term prospects of the
issuer; and the intent and ability of the Company to retain its investment
to allow for the market to recover. In doing so, management has
identified securities within the equity portfolio that have an other than
temporary decline in market value. Management has reserved an additional

19

$289,000, which was charged to security gains and losses, to provide for
this decline. Extracting the $289,000 charge, security gains increased
$509,000. The Company sold securities that were determined to have
attained their maximum long-term potential value which thereby resulted in
gains on securities.

Other Operating Expense

For the three months ended March 31, 2003 total other operating
expenses increased $187,000 over the same period in 2002.

Occupancy expense increased $38,000 and furniture and equipment
expense increased $78,000. Occupancy expenses experienced an overall
increase due to rent, maintenance, and utilities for the new State College
Wal-Mart Branch. The increase in furniture and equipment expense is a
result of the purchase of a Wide Area Network system. Salary expense
increased $7,000 due to the standard cost of living salary increases
offset by the decline in commissions earned by The M Group and the
retirement of an executive officer. An overall increase in other expenses
totaled $64,000 and is the result of normal operational increases.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31,
2003 resulted in an effective income tax rate of 20.76% compared to 18.78%
for the corresponding
period in 2002. This increasing effective tax rate is the result of
management's repositioning of the investment portfolio from tax-exempt
securities to taxable securities. The tax effects of the repositioning
were examined by management a part of the strategic plan.

ASSET/LIABILITY MANAGEMENT

Assets

At March 31, 2003, total assets were $494.2 million compared to
$472.2 million at December 31, 2002. Cash and due from banks increased
$6.2 million during the first three months of 2003. Investment securities
totaled $200.3 million at March 31, 2003 or a net increase of $22.7
million over the corresponding balance at December 31, 2002. During this
period, net loans decreased by $6.7 million to $248.2 million. Loans held
for resale decreased $579,000 to $2.1 million. Loan growth has been
affected by businesses and consumers reluctant to borrow in an uncertain
economic environment. The investment growth is largely attributed to
management's strategic plan to benefit from the low borrowing rates by
taking advantage of over a 200 basis point interest rate spread of
investments with similar maturity periods.

20

Deposits

At March 31, 2003 total deposits amounted to $340.8 million
representing an increase of $1 million, from total deposits at December
31, 2002. Non-interest bearing demand deposits decreased $7.1 million
while interest-bearing demand deposits increased $3.6 million. Savings
increased $3.9 million and time deposits increased $487,000.

Capital

The adequacy of the Company's capital is reviewed on an ongoing basis
with reference to the size, composition and quality of the Company's
resources and regulatory guidelines. Management seeks to maintain a level
of capital sufficient to support existing assets and anticipated asset
growth, maintain favorable access to capital markets and preserve high
quality credit ratings.

Bank holding companies are required to comply with the Federal
Reserve Board'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. Specifically, each
is required to maintain certain minimum dollar amounts and ratios of Total
risk-based, Tier I risk-based and Tier I leverage capital requirements. In
addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvements Act (FDICIA) established five capital categories
ranging from "well capitalized" to "critically undercapitalized." To be
classified as "well capitalized, "Total risk-based, Tier I risked-based
and Tier I leverage capital ratios must be at least 10%, 6%, and 5%
respectively.

At March 31, 2003 the Company was "well capitalized" with a total
capital ratio of 22.61%, a Tier I capital ratio of 21.01% and a Tier I
leverage ratio of 12.32%

Liquidity and Interest Rate Sensitivity

The asset/liability committee addresses the liquidity needs of the
Bank to see that sufficient funds are available to meet credit demands and
deposit withdrawals as well as to the placement of available funds in the
investment portfolio. In assessing liquidity requirements, equal
consideration is given to the current position as well as the future
outlook.

The following liquidity measures are monitored and kept within the
limits cited.

1. Net Loans to Total Assets, 70% maximum
21

2. Net Loans to Total Deposits, 92.5% maximum

3. Net Loans to Core Deposits, 100% maximum

4. Investments to Total Assets, 40% maximum

5. Investments to Total Deposits, 50% maximum

6. Total Liquid Assets to Total Assets, 25% minimum

7. Total Liquid Assets to Total Liabilities, 25% minimum

8. Net Core Funding Dependence, 35% maximum

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

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

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

22

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 $219.2 million. In addition to this credit arrangement the
Company has additional lines of credit with correspondent banks of $10.5
million. 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 $71.8 million as of March 31,
2003.

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.

There has been no substantial changes in the Company's GAP analyses
or simulation analyses compared to the information provided in the
Company's SEC 10-K for the period ended December 31, 2002.

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

Inflation

The asset and liability structure of a financial institution is
primarily monetary in nature, therefore, interest rates rather than
inflation have a more significant impact on the Corporation's performance.

23

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 which are not measured by a price index.

In reference to the attached financial statements, all adjustments
are of a normal recurring nature pursuant to Rule 10-01 (b) (8) of
Regulation S-X.

Item 3. 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. There has been
no substantial changes in the Company's GAP analyses or simulation
analyses compared to the information provided in the Company's SEC 10-K
for the period ended December 31, 2002. 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.

Item 4. Controls and Procedures

Within the 90 days prior to the date of this Form 10-Q, 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.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

24

None

Item 2. Changes in Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

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

None

Item 5. Other Information

None

Item 6. Exhibits and reports on Form 8-K.

(a) 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)(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.

A. Reports on Form 8-K

April 8, 2003 - First Quarter Earnings Press Release (Item 12)

April 28, 2003 - First Quarter Shareholders' Report (Item 12)

25

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

PENNS WOODS BANCORP, INC.
(Registrant)

Date: May 13, 2003 /s/Ronald A. Walko
------------------------------
Ronald A. Walko, President and
Chief Executive Officer

Date: May 13, 2003 /s/Sonya E. Scott
------------------------------
Sonya E. Scott, Secretary

26

SECTION 302 CERTIFICATION

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

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the
"Evaluation Date"); and

(c) presented in this quarterly 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:
27

(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 quarterly 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: May 13, 2003 /s/Ronald A. Walko
-----------------------------
Ronald A. Walko,
Chief Executive Officer

28

SECTION 302 CERTIFICATION

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

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the
"Evaluation Date"); and

(c) presented in this quarterly 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:
29

(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 quarterly 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: May 13, 2003 /s/Sonya E. Scott
-----------------------------
Sonya E. Scott,
Chief Financial Officer

30