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 June 30, 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 August 12, 2003 there were 3,027,842 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 3-4
June 30, 2003 and December 31, 2002

Consolidated Statement of Income (unaudited) 5-6
for the Three and Six Months ended
June 30, 2003 and 2002

Consolidated Statement of Comprehensive Income 7
(unaudited) For the Three and Six Months ended
June 30, 2003 and 2002

Consolidated Statement of Changes in Shareholders' 8
Equity (unaudited) for the Six Months ended
June 30, 2003

Consolidated Statement of Cash Flows (unaudited) 9-10
for the Six Months ended June 30, 2003 and 2002

Notes to Unaudited Consolidated Financial Statements 11-17

Item 2. Management's Discussion and Analysis of 18-28
Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosure About 29
Market Risk

Item 4. Controls and Procedures 30

Part II Other Information

Item 4. Submission of Matters to a Vote of Security
Holders 31

Item 6. Exhibits and Reports on Form 8-K 32

Signatures 33

2

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

See accompanying notes to the unaudited consolidated financial
statements.

4

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

See accompanying notes to the unaudited consolidated financial
statements.

6

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

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 rates to the unaudited consolidated financial
statements.

8

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

9

The Company paid approximately $4,916,000 and $5,515,000
interest on deposits and other borrowings during the first half
of 2003 and 2002, respectively.

The Company made income tax payments of approximately $1,100,000
and $1,095,000 during the first six months of 2003 and 2002,
respectively.

Transfers from loans to foreclosed assets held for sale amounted
to approximately $98,000 and $200,000 during the first half 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 accompanying unaudited consolidated financial statements
have been prepared in accordance with instructions to Form 10-Q
and, therefore, do not necessarily include all information which
would be included in audited financial statements. The
information furnished reflects all normal recurring adjustments
which are, in the opinion of management, necessary for the fair
statement of the results of the period. The results of
operations for the interim periods are not necessarily
indicative of the results to be expected for the full year or
any other future period. The unaudited consolidated financial
statements should be read in conjunction with Form 10-K 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.

11

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 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

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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. The adoption of
this statement is not expected to have a material effect on the
Company's financial position or results of operations.

In May 2003, the FASB issued FAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity. This statement establishes standards for how an
issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some
circumstances). Such instruments may have been previously

13

classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this
statement has not and is not expected to have a material effect
on the Company's reported equity.

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
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

14

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.

NOTE 2. 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.

15

Options to purchase 9,900 shares of common stock at the price of
$53.18 were outstanding during the three and six months ended
June 30, 2003, and 20,350 shares of common stock at the prices
of $42.00 and $53.18 per share were outstanding during the three
and six months ended June 30, 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

16

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 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.

17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

EARNINGS SUMMARY

Comparison of the Six Months Ended June 30, 2003 and 2002

Interest Income

For the six months ended June 30, 2003, total interest income
increased by $68,000 compared to the first six months of 2002.
Total interest and dividends on investments increased $622,000
and interest and fees on loans decreased $552,000. Overall, the
increase in total interest income of $68,000 is the result of an
increase of $44,599,000 in the average balance of investment
securities held for the current period relative to the same
period a year ago offset by a decrease in the return on loans of
approximately 57 basis points. Overall, interest income
generated from the net increase in volume of interest earning
assets of $47,904,000 was offset by a general decline in rates
of approximately 80 basis points.

On a tax equivalent basis, calculated utilizing the statutory
tax rate of 34%, investment security interest income increased
$633,000 for the first half of 2003 compared to the first half
of 2002. The increase of taxable interest of $1,415,000 is due
to the significant purchase of U.S. Government securities over
the past year, with the average of these securities increasing
$68,611,000, while the decrease in the average of tax-exempt
States & Political securities decreased tax equivalent interest
income $755,000. Management has repositioned the investment
portfolio from longer term assets to shorter term assets to take
advantage of the cash flow opportunities for reinvestment in
anticipation of rising rates. The net growth in the volume of
investment holdings has generated additional interest income
that has offset the 84 basis point decline in the overall
portfolios weighted average interest rates.

Within the loan portfolio, a 57 basis point decrease of the tax
equivalent return on loans was partially offset by an increase
in the average balance of loans of $3,305,000 in comparing the
six months ended June 30, 2003 to the same period for 2002.
Variable rate loans within the portfolio and other new loan

18

originations at lower effective rates have aided in the
reduction of net income compared to a year ago because of the
historically low rates. The average Prime rate during the
quarter was the lowest it had been for the past 30 years.

Interest Expense

For the six months ended June 30, 2003, total interest expense
decreased by $678,000 or 12% compared to the first six months of
2002. Low interest rates have positively impacted interest
expense. Lower rates for all deposit accounts contribute the
most substantial decrease in interest expense. Since June 30,
2003, the weighted average rate on interest paid on deposits
declined 89 basis points for the six months ended June 30, 2003
since the same period in 2002. Interest expense on savings
deposits decreased $319,000 and interest expense on time
deposits decreased $566,000 for the six months ended June 30,
2003 compared to the same period in 2002.

Favorable long-term borrowing rates offer opportunities to
reduce interest expenses over the coming years. Throughout the
first half of 2003, the Company borrowed an additional
$20 million in long-term advances through the FHLB to minimize
future borrowing costs and to enhance asset and liability
positioning. These additional borrowings were utilized by
management to take advantage of current investment opportunities
while minimizing interest rate risk. The $311,000 increase in
expense on long-term borrowings is the result of these
additional advances with average advances of $18,712,000 offset
by the 62 basis point decline in the resulting weighted average
interest rate for the first half of 2003 compared to the first
half of 2002. Interest paid on short-term borrowings decreased
$104,000 as a result of an overall decline in the weighted
average interest rate of 110 basis points while the average
balances outstanding during the six month period increased
$1,700,000.

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,

19

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 non-
performing 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 June 30, 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 non-performing
assets and charge-offs, increased loan loss provisions and
reductions in income. Additionally, as an integral part of the
examination process, bank regulatory agencies periodically
review the Bank's loan loss allowance. The banking agencies
could require the recognition of additions to the loan loss
allowance based on their judgment of information available to
them at the time of their examination.

The allowance for loan losses increased from $2,953,000 at
December 31, 2002 to $3,041,000 at June 30, 2003. At June 30,
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.

20

The provision for loan losses totaled $135,000 for the six
months ended June 30, 2003. The provision for the same period
in 2002 was $185,000. For the six month period ending June 30,
2003, charge-offs exceeded recoveries by $47,000 compared to the
same period ended June 30, 2002, when charge-offs exceeded
recoveries by $112,000. The $65,000 change in charge-offs has
prompted management to reduce the provision for loan losses.

An overall decrease was experienced in non-performing loans from
the December 31, 2002 total of $2,096,000 to $1,309,000 on
June 30, 2003. This decline consisted of a commercial and
industrial loans decrease of $44,000, a real estate secured loan
decrease of $741,000 and an installment loans decrease of
$2,000. A real estate secured loan has been paying to the
original agreed upon terms and has been deemed by management to
meet the classifications 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 six months ended June 30, 2003
increased $1,743,000. Net security gains represented an
increase of $2,042,000 resulting from management's reacting to
the opportunities available to sell investment securities
without significantly impacting the overall effective yield of
the investment portfolio. Management continues to closely
monitor the investment portfolio for other similar opportunities
which may become available. Excluding net security gains, other
income decreased $299,000. Service charges increased $105,000
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 $362,000 while
earnings on bank-owned life insurance increased $6,000 from the
same period in 2002. Other income decreased $48,000 because of
one-time life insurance proceeds of $116,000 received in the
first half of 2002 and income generated from the use of debit
cards provided $20,000 of additional other income.

21

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
$292,000, which was charged to security gains and losses for the
period ending June 30, 2003, to provide for this decline. In
the first half of 2002, management reserved an additional
$80,000 which was charged to security gains and losses.
Excluding the $292,000 for 2003 and the $80,000 charge for 2002,
security gains increased $2,254,000. 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 six months ended June 30, 2003 total other operating
expenses increased $359,000 over the same period in 2002.

Occupancy expense increased $61,000 and furniture and equipment
expense increased $136,000. 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 depreciation of a Wide
Area Network system. The salary expense decrease of $31,000 for
the period ended June 30, 2003 compared to the same period in
2002 was due to the decline in commission earned by the M Group
and the retirement of an executive officer offset by the
standard cost of living salary increases. An overall increase
in other expenses totaled $193,000 for the first half of 2003
compared to the same period in 2002 and is the result of normal
operational cost increases.

Provision for Income Taxes

The provision for income taxes for the six months ended June 30,
2003 resulted in an effective income tax rate of 24.64% compared

22

to 19.67% for the corresponding period in 2002. This increasing
effective tax rate is the result management's repositioning of
the investment portfolio from tax-exempt securities to taxable
securities and the substantial security gains taken in the first
half of 2003. The tax effects of the repositioning were
examined by management as part of the strategic plan.

Comparison of the Three Months Ended June 30, 2003 and 2002

Interest Income

During the second quarter of 2003 interest income earned was
$7,251,000 an increase of $52,000 over the same quarter in 2002.

Interest income on loans decreased $277,000 due to a decline in
average prime rates during 2003 relative to the second quarter
of 2002. The reduction of loan interest income was due to a
53 basis point decrease of the rate on loans, offset slightly by
the increase in the average loan balance.

An increase of $329,000 occurred in interest and dividends on
investments. Taxable interest increased $381,000, primarily due
to the large purchase of short-term, taxable securities in the
second quarter of 2003 and a 63 basis point rate decrease
compared to the second quarter of 2002. Non-taxable interest
decreased $54,000, the result of repositioning the balance sheet
from non-taxable securities to taxable securities, and dividends
increased $2,000.

Interest Expense

Interest expense during the second quarter of 2003 decreased by
$345,000 or 13% over interest expense incurred during the second
quarter of 2002. Interest expense on savings deposits decreased
$244,000 primarily as a result of a 99 basis point decline in
the effective weighted average interest rate for the periods.
The weighted average interest rate for time deposit decreased
69 basis points for a savings of $237,000. Short-term
borrowings interest expense decreased by both the reduction of
the borrowings average balances and a 67 basis point decline in
the interest rate. Interest paid on long-term borrowings
increased due to the substantial increase in volume and the
85 basis point decrease in the interest rate.

23

Other Operating Income

Total other operating income for the quarter ended June 30, 2003
compared to the same period in 2002 increased $1,742,000. The
increase is due to an increase of security gains of $1,822 and a
decrease of $148,000 of the insurance commissions earned by the
Bank's subsidiary, The M Group, Inc. during the second quarter
of this year. Service charges grew $30,000 because of the
increase of the overdraft fee and the quantity of overdrafts.
Earnings on bank-owned life insurance increased $2,000 and other
operating income decreased $36,000.

Other Operating Expense

Total other operating expenses increased $172,000. Salaries and
employee benefits decreased $38,000 attributed to both the
decrease on commissions earned by The M Group, Inc. and the
retirement of an executive officer. Occupancy expense increased
during the second quarter of 2003 compared to the second quarter
of 2002 by $23,000. Furniture and equipment expense increased
$58,000. Other operating expenses increased during the three
month period in 2003 when compared to the same period in 2002 by
$129,000.

Provision for Income Taxes

Income taxes increased $705,000 for the quarter ended
June 30,2003 compared to the second quarter of 2002. The
effective tax rates for the quarter ended June 30, 2003 and 2002
are 27.0% and 20.6%, respectively.

ASSET/LIABILITY MANAGEMENT

Assets

At June 30, 2003, total assets were $515.2 million compared to
$472.2 million at December 31, 2002. Cash and due from banks
increased $2.4 million during the first six months of 2003.
Investment securities totaled $219.7 million at June 30, 2003 or
a net increase of $42.1 million over the corresponding balance
at December 31, 2002. During this period, net loans decreased
by $3.0 million to $251.8 million. Loans held for resale

24

decreased $29,000 to $2.6 million. Loan growth has been
adversely affected by commercial businesses and consumers being
reluctant to incur additional debt 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.

Deposits

At June 30, 2003, total deposits amounted to $340.6 million
representing an increase of $716,000 from total deposits at
December 31, 2002. Non-interest bearing demand deposits
decreased $8.6 million and interest-bearing demand deposits
increased $6.5 million from year end 2002 to June 30, 2003.
Savings accounts increased $4.4 million and time deposits
decreased $1.6 million.

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 risk-based and
Tier I leverage capital ratios must be at least 10%, 6%, and 5%
respectively.

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At June 30, 2003, the Company was "well capitalized" with a
total risk-based capital ratio of 23.24%, a Tier I capital ratio
of 21.42% and a Tier I leverage ratio of 12.06%.

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

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.

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

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

Management monitors and determines the desirable level of
liquidity. Consideration is given to loan demand, investment
opportunities, deposit pricing and growth potential as well as
the current cost of borrowing funds. The Company has a current
borrowing capacity at the Federal Home Loan Bank of $237.9
million. 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
$71.8 million as of June 30, 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

27

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. 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.

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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.

29

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.
Based on their evaluation, the Registrant's principal
executive officer and principal financial officer have
concluded that the Registrant's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act"))
are effective as of June 30, 2003 to ensure that
information required to be disclosed by the Company in
reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported
within the time periods specified in Securities and
Exchange Commission rules and forms.

(b) Changes in internal controls. There has been no
change in the Company's internal control over
financial reporting that occurred during the
quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially
affect, the Company's internal control over
financial reporting.

30

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.
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.
Penns Woods Bancorp, Inc.'s annual meeting of the
shareholders was held on April 30, 2003. The results of the
items voted on are listed below:

31

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).

(31)(i) Section 302 Certification of Chief Executive Officer

(31)(ii) Section 302 Certification of Chief Financial Officer

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

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

(B) Reports on Form 8-K

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

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

July 8, 2003 - Second Quarter Earnings Press Release

July 29, 2003 - Second Quarter Shareholders' Report

32

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: August 12, 2003 /s/ Ronald A. Walko
----------------------------------
Ronald A. Walko, President
and Chief Executive Officer

Date: August 12, 2003 /s/ Sonya E. Scott
----------------------------------
Sonya E. Scott, Secretary

33