If the water damage is only superficial, you may be able to simply strip the outer layer or sand the surface to get rid of mold and staining. If the rot has worked its way into the paneling, you will have to dispose of the entire panel.
If the rot has worked its way into the structural wood, you will unfortunately have to cut away this rotted wood. Anything that is soft enough to be poked through with a dull knife is rotted to the point that it will only get worse, and it must be removed.
Sometimes, you will have to work all the way down to the outer body paneling. Do not be hesitant to get rid of as much as you possibly can if there is any sign of rot. Just be cautious about the structure collapsing once you start cutting out the integral beams. You may need to put in temporary supports if the weight begins to bear down once the structural wood is removed.