Community Banks, Inc. and Subsidiaries
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SECURITIES HOLDER MATTERS

     The shares of Community Banks, Inc. are traded on the American Stock
Exchange and are transferred through local and regional brokerage houses.  The
Holding Company has approximately 1,453 shareholders as of February 14, 1997.  
The following table sets forth the high and low prices within the knowledge of
management of Community Banks, Inc. at which the Capital Stock has been 
transferred during the periods indicated.  The table is based solely upon 
transactions known to management of the Holding Company and represents a portion
of the actual transfers of Capital Stock during the periods in question.

                   Price Per Share                         Price Per Share
1996                Low       High      1995                Low       High

First Quarter     $24.25     $27.50     First Quarter     $23.75     $26.00
Second Quarter     22.63      26.13     Second Quarter     25.25      26.75
Third Quarter      22.63      24.13     Third Quarter      25.25      26.75
Fourth Quarter     23.75      26.13     Fourth Quarter     25.44      27.25

     Holders of the Capital Stock of the Holding Company are entitled to such 
dividends as may be declared from time to time by the Board of Directors out of
funds legally available therefore.  Community Banks, Inc. has paid cash 
dividends per share of Common Stock during the last five years as follows:
1992 - $0.52, 1993 - $0.58, 1994 - $0.63, 1995 - $0.70 and 1996 - $0.78.  The
market prices listed above are based on historical market quotations and have
not been restated for the issuance of stock dividends.

<TABLE>
<CAPTION>

Community Banks, Inc. and Subsidiaries                                         
CONSOLIDATED BALANCE SHEETS                                                      
At December 31, 1996 and 1995                                                                                                 
(dollars in thousands except per share data)                                                                                  
                                                            1996             1995                                             

                                                                                                                              

ASSETS                                                                                                                        
<S>                                                     <C>              <C>       
Cash and due from banks..........................        $ 16,547         $ 14,870                                            
Interest-bearing time deposits in other banks....           1,397              434                                            
Investment securities, available for sale (market                                                                             
  value).........................................         145,446          117,426                                            
Federal funds sold...............................           ---              2,215                                            
Loans............................................         261,976          243,308                                            
Less:  Unearned income...........................         (11,965)         (11,671)                                           
       Allowance for loan losses.................          (2,798)          (2,574)                                           
       Net loans.................................         247,213          229,063                                            
Premises and equipment, net......................           7,848            7,657                                            
Goodwill.........................................           1,147            1,388                                            
Other real estate owned..........................             351              302                                            
Loans held for sale..............................           4,622            2,206                                            
Accrued interest receivable and other assets.....           7,947            6,261                                            
  Total assets...................................        $432,518         $381,822                                            
                                                         ========         ========                                            
LIABILITIES                                                                                                                   

Deposits:                                                                                                                     
  Demand.........................................        $ 27,345         $ 28,337                                            
  Savings........................................         150,369          133,004                                            
  Time...........................................         152,615          150,908                                            
  Time in denominations of $100,000 or more......          12,927           11,848                                            
  Total deposits.................................         343,256          324,097                                            
Short-term borrowings............................          13,217            1,016                                            
Long-term debt...................................          25,000            7,000                                            
Accrued interest payable and other liabilities...           3,306            3,709
  Total liabilities..............................         384,779          335,822                                            
                                                                                                                              
STOCKHOLDERS' EQUITY                                                                                                          
                                                                         
Preferred stock, no par value;                                              
  500,000 shares authorized;                                                                                                  
  no shares issued and outstanding...............           ---               ---                                             
Common stock, $5.00 par value; 5,000,000 shares                                                                               
  authorized; 2,888,088 and 2,611,409 shares                                                                                  
  issued in 1996 and 1995, respectively..........          14,440           13,057                                            
Surplus..........................................          13,716            8,381                                            
Retained earnings................................          19,743           22,951                                            
Net unrealized gain on investment securities                                                                                  
  available for sale, net of tax.................             261            1,664                                            
Less:  Treasury stock of 19,927 and 3,907                                                                                     
  shares at cost.................................            (421)             (53)                                           
  Total stockholders' equity.....................          47,739           46,000                                            
  Total liabilities and stockholders' equity.....        $432,518         $381,822                                            
                                                         ========         ========
     
</TABLE>
All periods reflect the combined data of Community Banks, Inc. and The 
Citizens' National Bank of Ashland.  

The accompanying notes are an integral part of the consolidated financial 
statements.                                         

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                                             
CONSOLIDATED STATEMENTS OF INCOME                                                                  
For the Years Ended December 31, 1996, 1995, and 1994                                              
(dollars in thousands except per share data)                                                       
                                                                                                            
                                                                   1996              1995              1994 
<S>                                                             <C>               <C>               <C> 
Interest Income:                                                                                   
  Interest and fees on loans.......................              $22,544           $20,819           $17,300
  Interest and dividends on investment securities:                                                 
     Taxable.......................................                6,196             5,599             5,740
     Exempt from federal income tax................                1,588             2,054             2,425
  Other interest income............................                   58                83                67
  Fed funds interest...............................                  207               157                98
     Total interest income.........................               30,593            28,712            25,630


Interest expense:                                                                                  
  Interest on deposits:                                                                            
     Savings.......................................                3,212             3,054             3,069
     Time..........................................                8,061             7,721             6,049
     Time in denominations of $100,000 or more.....                  660               588               434
  Interest on short-term borrowings and                                                            
   long-term debt..................................                  502               669               525
  Fed funds purchased and repo interest............                  252              ---               --- 
  Interest on subordinated capital notes...........                 ---               ---                  2
     Total interest expense........................               12,687            12,032            10,079
     Net interest income...........................               17,906            16,680            15,551
Provision for loan losses..........................                1,042               728               512
     Net interest income after provision for                                                                
       loan losses.................................               16,864            15,952            15,039


Other income:                                                                                      
  Trust department income..........................                  251               217               180
  Service charges on deposit accounts..............                  980               869               761
  Other service charges, commissions and fees......                  242               262               298
  Investment security gains........................                  284               140               396         
  Income on insurance premiums.....................                  653               583               396
  Gains on mortgage sales..........................                  211               346               210
  Other income.....................................                  133               293               183
     Total other income............................                2,754             2,710             2,424


Other expenses:                                                                                    
  Salaries and employee benefits..................                 6,120             5,837             5,138
  Net occupancy expense...........................                 1,813             1,672             1,500
  Operating expenses of insurance subsidiary......                   363               353               282
  Other operating expense.........................                 3,721             4,395             4,087
     Total other expenses.........................                12,017            12,257            11,007
     Income before income taxes...................                 7,601             6,405             6,456
Provision for income taxes........................                 1,969             1,591             1,462
     Net income...................................               $ 5,632           $ 4,814           $ 4,994         
                                                                 =======           =======           =======

Fully diluted earnings per share (based on average                                                 
  shares outstanding)..........................<F1>              $  1.94           $  1.66           $  1.73
                                                                 =======           =======           =======
<FN>
All periods reflect the combined data of Community Banks, Inc. and The Citizens'
National Bank of Ashland.  
<F1> Per share data for all periods has been restated to reflect stock 
     dividends.
</FN>                   
</TABLE>
The accompanying notes are an integral part of the consolidated financial 
statements.              

<TABLE>
<CAPTION
Community Banks, Inc. and Subsidiaries                                                                                        
CONSOLIDATED STATEMENTS OF CHANGES                                                                                            
IN STOCKHOLDERS' EQUITY                                                                                                       
For the Years Ended December 31, 1996, 1995, and 1994                                                                         
(dollars in thousands except per share data)                                                                                  
                                                                          
                                                                                                                   Total      
                                                      Common             Retained     Valuation     Treasury    Stockholders' 
                                                      Stock      Surplus Earnings     Allowance        Stock       Equity     
                                                                                                                              
<S>                                                    <C>      <C>      <C>          <C>            <C>         <C>
Balance, December 31, 1993..........................    $11,308  $ 8,243  $18,714                     $ (53)      $38,212     
Valuation allowance on investment securities                                                                                  
   available for sale, January 1, 1994..............                                   $ 2,246                      2,246     
Net income for 1994.................................                        4,994                                   4,994     
Cash dividends ($0.63 per share)....................                       (1,835)                                 (1,835)    
20% stock dividend (additional 337,248 shares)......      1,686            (1,686)                                            
Issuance of additional 8,436 shares.................         43       99      (13)                                    129     
Change in valuation allowance on investment                                                                                   
   securities, available for sale...................                                    (4,263)                    (4,263)    
Balance, December 31, 1994..........................     13,037    8,342   20,174       (2,017)         (53)       39,483     
Net income for 1995.................................                        4,814                                   4,814     
Cash dividends ($0.70) per share....................                       (2,033)                                 (2,033)    
Issuance of additional 4,154 shares.................         20       39       (4)                                     55     
Change in valuation allowance on investment                                                                                   
   securities, available for sale...................                                     3,681                      3,681
Balance, December 31, 1995..........................     13,057    8,381   22,951        1,664          (53)       46,000     
Net income for 1996.................................                        5,632                                   5,632     
Cash dividends ($0.78 per share)....................                       (2,260)                                 (2,260)    
10% stock dividend (additional 260,925 shares)......      1,304    5,219   (6,523)                                            
Purchase of treasury stock (additional 16,020 shares)                                                  (368)         (368)    
Issuance of additional 15,754 shares................         79      116      (57)                                    138     
Change in valuation allowance on investment                                                                                   
   securities, available for sale...................                                    (1,403)                    (1,403)    
Balance, December 31, 1996..........................    $14,440  $13,716  $19,743       $  261        $(421)      $47,739     
                                                        =======  =======  =======       ======        ======      =======     
</TABLE>
Per share data for all periods has been restated to reflect stock dividends.

All periods reflect the combined data of Community Banks, Inc. and The 
Citizens' National Bank of Ashland.                    

The accompanying notes are an integral part of the consolidated financial 
statements.                                         


<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                                                               
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                
For the Years Ended December 31, 1996, 1995, and 1994
(in thousands)                                                                                                       
                                                                          
                                                                   1996              1995               1994                    
<S>                                                             <C>               <C>               <C>   
Operating Activities:                                                                                                
  Net income..............................................       $ 5,632           $ 4,814           $ 4,994                    
  Adjustments to reconcile net income to net                                                                         
   cash provided by operating activities:                                                                            
     Provision for loan losses............................         1,042               728               512                       
     Provision for depreciation and amortization..........           937               831               772                    
     Amortization of goodwill.............................           241               241               242                       
     Investment security gains............................          (284)             (140)             (396)                     
     Loans originated for sale............................       (11,329)          (17,590)           (6,704)       
     Proceeds from sales of loans.........................         9,124            15,765            10,975  
     Gains on mortgage sales..............................          (211)             (346)             (210)                     
     Increase in other assets.............................        (1,686)             (186)           (2,564)                    
     Increase in accrued interest payable and other                                                                  
      liabilities.........................................           320               335               272                     
        Net cash provided by operating activities.........         3,786             4,452             7,893

Investing Activities:                                                                                                
  Net decrease (increase) in interest-bearing time                                                                   
   deposits in other banks................................          (963)              211               (69)
  Proceeds from sales of investment securities............         1,643               347               892
  Proceeds from maturities of investment securities.......        25,104            25,952            24,287
  Purchases of investment securities......................       (56,609)           (7,699)          (27,127)
  Net increase in total loans.............................       (19,241)          (23,230)          (22,982)                 
  Purchases of premises and equipment.....................        (1,128)           (1,491)           (1,523)                 
        Net cash used in investing activities.............       (51,194)           (5,910)          (26,522)                  

Financing Activities:                                                                                                
  Net increase in total deposits..........................        19,159            16,124            12,706
  Net increase (decrease) in short-term borrowings........        12,201           (10,693)           10,504    
  Proceeds from issuance of long-term debt................        18,000             5,000                --     
  Repayment of long-term debt.............................            --            (5,000)           (2,000)                    
  Repayment of subordinated capital notes.................            --               (15)              (16)                   
  Cash dividends..........................................        (2,260)           (2,033)           (1,835)                   
  Purchases of treasury stock.............................          (368)               --                --                     
  Proceeds from issuance of common stock..................           138                55               129
        Net cash provided by financing activities.........        46,870             3,438            19,488

        Increase (decrease) in cash and cash equivalents..          (538)            1,980               859                    

Cash and cash equivalents at beginning of year............        17,085            15,105            14,246
Cash and cash equivalents at end of year..................       $16,547           $17,085           $15,105
                                                                 =======           =======           =======                    
</TABLE>
All periods reflect the combined data of Community Banks, Inc. and The 
Citizens' National Bank of Ashland.

The accompanying notes are an integral part of the consolidated financial 
statements.                                

     Community Banks, Inc. and Subsidiaries
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     
     1.  Organization and Basis of Presentation:
     
     Community Banks, Inc. (Corporation) is a bank holding company whose
     wholly-owned subsidiaries include Community Banks, N.A. (CBNA), Community
     Banks Investments, Inc. (CBII) and Community Banks Life Insurance Company
     (CBLIC). All significant intercompany transactions have been eliminated. 
     The Corporation operates through its main office in Millersburg and through
     20 branch banking offices located in Dauphin, Northumberland, Schuylkill
     and Luzerne Counties in Pennsylvania. Community Bank's, Inc. primary source
     of revenue is derived from loans to customers, who are predominantly
     middle-income individuals.
     
     2.  Summary of Significant Accounting Policies:
     
     The more significant accounting policies of the Corporation are: 
     
     Investment Securities:
     At January 1, 1994, the Corporation adopted Statement of Financial
     Accounting Standards No. 115, "Accounting for Certain Investments in Debt
     and Equity Securities" ("SFAS 115").  This statement requires enterprises
     to classify debt and equity securities as either "held-to-maturity,"
     "available-for-sale," or "trading."  Investments for which management has
     the intent, and the corporation has the ability, to hold to maturity are
     carried at the lower of cost or market adjusted for amortization of premium
     and accretion of discount.  Amortization and accretion are calculated
     principally on the interest method.  Securities bought and held primarily
     for the purpose of selling them in the near term are classified as
     "trading" and reported at fair value.  Changes in unrealized gains and
     losses on "trading" securities are recognized in the Consolidated
     Statements of Income.  At December 31, 1996, there were no securities
     identified as "held-to-maturity" or "trading."  All other securities are
     classified as "available-for-sale" and reported at fair value.  Changes in
     unrealized gains and losses for "available-for-sale" securities, net of
     applicable taxes, are recorded as a component of shareholder's equity.
     
     Securities classified as "available-for-sale" include investments
     management intends to use as part of its asset/liability management
     strategy, and that may be sold in response to changes in interest rates,
     resultant prepayment risk and other factors.  Realized gains and losses on
     the sale of securities are recognized using the specific identification
     method and are included in Other Income in the Consolidated Statements of
     Income.
     
     Allowance for Loan Losses:
     The Corporation maintains an allowance for loan losses at an amount which,
     in management's judgement, should be adequate to absorb losses on existing
     loans that may become uncollectible. Management's judgement in determining
     the adequacy of the allowance is based on evaluations of the collectibility
     of loans. The evaluations take into consideration such factors as changes
     in the nature and volume of the loan portfolio, current economic conditions
     that may affect the borrowers' ability to pay, overall portfolio quality
     and review of specific problem loans.   
     
     Premises and Equipment:
     Premises and equipment are stated at cost, less accumulated depreciation.
     Depreciation is calculated using accelerated and straight-line methods over
     the estimated useful lives of the assets. Maintenance and repairs are
     expensed as incurred, while major additions and improvements are
     capitalized. Gain or loss on retirement or disposal of individual assets is
     recorded as income or expense in the period of retirement or disposal.
     
     Goodwill:
     Goodwill which represents the excess of purchase price, including
     acquisition costs over the fair market value of net assets acquired under
     the purchase method of accounting is amortized on a straight line basis
     over 15 years.
     
     Pension Plan:
     The Corporation has a noncontributory defined benefit pension plan covering
     substantially all employees. Pension costs are funded currently subject to
     the full funding limitation imposed under federal income tax regulations.
     
     Income Taxes:
     In accordance with Financial Accounting Standards Board Statement No. 109,
     "Accounting for Income Taxes", deferred income taxes are accounted for by
     the liability method, wherein deferred tax assets and liabilities are
     calculated on the differences between the basis of assets and liabilities
     for financial statement purposes versus tax purposes (temporary
     differences) using enacted tax rates in effect for the year in which the
     differences are expected to reverse. Tax expense in the statements of
     income is equal to the sum of taxes currently payable, including the effect
     of the alternative minimum tax, if any, plus an amount necessary to adjust
     deferred tax assets and liabilities to an amount equal to period-end
     temporary differences at prevailing tax rates. (See Note 10). 
     
     Interest Income on Loans:
     Interest income on commercial, consumer, and mortgage loans is recorded on
     the interest method. Nonaccrual loans are those on which the accrual of
     interest has ceased and where all previously accrued and unpaid interest is
     reversed. Loans, other than consumer loans, are placed on nonaccrual status
     when principal or interest is past due 90 days or more and the collateral
     may be inadequate to recover principal and interest, or immediately, if in
     the opinion of management, full collection is doubtful. Generally, the
     uncollateralized portions of consumer loans past due 90 days or more are
     charged-off. Interest accrued but not collected as of the date of placement
     on nonaccrual status is reversed and charged against current income.
     Subsequent cash payments received either are applied to the outstanding
     principal balance or recorded as interest income, depending upon
     management's assessment of the ultimate collectibility of principal and
     interest. (See also Note 5).  Loan origination fees and certain direct
     origination costs are capitalized and recognized as an adjustment of the
     yield on the related loan.
     
     Other Real Estate owned:
     Real estate acquired through foreclosure is carried at the lower of the
     recorded amount of the loan for which the foreclosed property previously
     served as collateral or the current appraised value of the property. Prior
     to foreclosure, the recorded amount of the loan is written down, if
     necessary, to the appraised value of the real estate to be acquired by
     charging the allowance for loan losses. During 1996, 1995, and 1994
     non-cash transactions related to real estate acquired through foreclosure
     totalled $460,000, $677,000, and $322,000, respectively.
     
     Subsequent to foreclosure, gains or losses on the sale of and losses on the
     periodic revaluation of real estate acquired through foreclosure are
     credited or charged to noninterest expense. Costs of maintaining and
     operating foreclosed property are expensed as incurred. Expenditures to
     improve foreclosed properties are capitalized only if expected to be
     recovered; otherwise, they are expensed.  
     
     Statement of Cash Flows:
     Cash and cash equivalents included cash and due from banks and federal
     funds sold. The Corporation made cash payments of $2,019,000, $1,656,000,
     and $1,435,000, and $12,345,000, $11,825,000, and $10,143,000 for income
     taxes and interest, respectively, in 1996, 1995, and 1994. Certain prior
     year amounts have been reclassified to conform with the current year's
     presentation.   

     
     Earnings Per Common Share:
     Net income per share is computed based upon the weighted average shares of
     common stock outstanding which amounted to 2,908,000, 2,896,193, and
     2,894,712 shares for the years ended December 31, 1996, 1995, and 1994,
     respectively.


     Use of Estimates in the Preparation of Financial Statements:
     The preparation of financial statements in accordance with
     generally accepted accounting principles requires management
     to make estimates and assumptions that affect the reported
     amounts of assets and liabilities and disclosure of
     contingent assets and liabilities at the date of the
     financial statements and reported amounts of revenues and
     expenses during the reporting period. Actual results could
     differ from those estimates. 


3. Investment Securities:

	 The amortized cost and market value of investment securities at December 
  31, 1996 and 1995 are as follows:

<TABLE>
<CAPTON>
								                                                                  		              December 31                
									                                                                       1996               1995        
								                                                                 Amortized  Market  Amortized    Market
								 	                                                                  Cost     Value     Cost       Value 
										                                                                               (in thousands)
<S>                                                                   <C>        <C>        <C>        <C>             
U.S. Treasury securities and obligations of U.S.
   government corporations and agencies.........................       $ 40,267   $ 40,432   $ 27,719   $ 28,031
Mortgage-backed U.S. government agencies........................         69,837     68,528     45,888     46,153  
Obligations of states and political subdivisions................         30,496     30,958     34,067     34,941 
Corporate securities............................................          1,101      1,123      3,991      4,123
Equity securities...............................................          3,349      4,405      3,241      4,178  
     Total......................................................       $145,050   $145,446   $114,906   $117,426
								                                                                ========   ========   ========   ========
</TABLE>

<TABLE>
<CAPTION>
  
     The amortized cost and market value of all investment securities at 
     December 31, 1996 and 1995 are as follows:
						
		    
																		     
 .								                                                           1996                                           1995
 . 						                                                          Gross     Gross                         Gross      Gross
 .					                                                Amortized Unrealized Unrealized  Market Amortized Unrealized Unrealized Market
 .						                                                  Cost     Gains     Losses      Value   Cost      Gains     Losses    Value
 .										                                                                             (in thousands)
<S>                                                   <C>       <C>     <C>        <C>        <C>       <C>     <C>      <C>
U.S. government corporations and agencies........      $ 40,267  $  242  $   (77)   $ 40,432   $ 27,719  $  364  $ (52)   $ 28,031
Mortgage-backed U.S. government agencies.........        69,837     300   (1,609)     68,528     45,888     566   (301)     46,153
Obligations of states and political subdivisions.        30,496     553      (91)     30,958     34,067     927    (53)     34,941
Corporate securities.............................         1,101      22       --       1,123      3,991     133     (1)      4,123
Equity securities................................         3,349   1,056       --       4,405      3,241     959    (22)      4,178
	 Total...................................             $145,050  $2,173  $(1,777)   $145,446   $114,906  $2,949  $(429)   $117,426
                                           						       ======== ======  =======    ========   ========  ======  =====    ========
</TABLE>

     The amortized cost and market value of all investment securities at
December 31, 1996, by contractual maturity, are shown below.  Expected 
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment 
penalties.

												
 .							                                                Amortized      Market
 .								                                                 Cost         Value
 .                                             									   (in thousands)

Due in one year or less...........................      $ 15,570      $ 15,615
Due after one year through five years.............        30,112        30,410
Due after five years through ten years............        25,419        25,699
Due after ten years...............................           763           789
 .							                                                 	71,864        72,513
Mortgage-backed securities........................        69,837        68,528
Equity securities.................................         3,349         4,405
 .							                                                $145,050      $145,446
 .                                          							      ========      ========

     Proceeds from sales of investments in debt securities in 1996 were 
$990,000.  Gross gains of $7,000 and no losses were realized.

     At December 31, 1996 and 1995, investment securities with carrying 
amounts of approximately $40,204,000 and $21,619,000 respectively, are 
pledged to collateralize public deposits and for other purposes as provided 
by law.

     Effective January 1, 1994, the Corporation adopted the provisions of 
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which requires the Corporation to
reflect securities available and held for sale at fair value on the balance 
sheet.  Upon adoption, the Corporation classified all investments held at
January 1, 1994, as available for sale and recorded the increase to fair 
value as a separate component of equity.  The increase recorded to 
stockholders' equity at January 1, 1994 was $2,246,000, net of applicable 
income taxes.


4. Loans:

   The composition of loans outstanding by lending classification is as follows:

 .                                                 							       December 31 
 .                                                  							     1996       1995  
 .                                                  							      (in thousands)

Commercial, financial and agricultural...................   $ 44,129  $ 38,251
Real-estate-construction.................................      1,816     3,283  
Real-estate-mortgage.....................................    151,299   133,389  
Personal installment.....................................     59,142    62,373  
Other....................................................      5,590     6,012  
 .                                                 						    $261,976  $243,308
 .                                                							    ========  ========

     Loans held for resale amounted to $4,622,000 and $2,206,000 at December
31, 1996 and 1995, respectively.


5. Allowance for Loan Losses:

     Changes in the allowance for loan losses are as follows:

 .                                         							       December 31           
 .                                          							   1996          1995
 .                                         							      (in thousands)

Balance, January 1...............................    $2,574        $2,347
Provision for loan losses........................     1,042           728
Loan charge-offs.................................    (1,296)         (840)  
Recoveries.......................................       478           339  
Balance, December 31.............................    $2,798        $2,574   
 .                                          							   ======        ====== 
             

 .                                              							 NONPERFORMING LOANS (a)
 .                                              							  AND OTHER REAL ESTATE  

 .                                             							       December 31
 .                                               							   1996          1995
 .                       	                       						      (in thousands)

	      
Loans past due 90 days or more
 and still accruing interest:
   Commercial, financial and agricultural.........      $   20        $  120
   Mortgages......................................         547           558
   Personal installment...........................         189           236
   Other..........................................          11            -- 
 .                                             							      767           914

Loans on which accrual of interest has been
 discontinued:
   Commercial, financial and agricultural.........         723           415   
   Mortgages......................................       1,904         1,245   
   Other..........................................         283            99    
 .                                              						    2,910         1,759
Other real estate.................................         351           302
   Total..........................................      $4,028        $2,975
 .                                              							   ======        ======
        

(a) The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing 
the collectibility of such amounts.

Impaired Loans
     The Corporation adopted FAS 114 "Accounting by Creditors for Impairment 
of a Loan", as amended by FAS 118, on January 1, 1995. Under the new standard,
a loan is considered impaired, based on current information and events, if it
is probable that the Corporation will be unable to collect the scheduled 
payments of principal or interest when due according to the contractual terms
of the loan agreement. For purposes of applying FAS 114, larger groups of 
smaller-balance loans such as residential mortgage and installment loans are
collectively evaluated for impairment. Management has established a 
smaller-dollar-value threshold of $250,000 for all loans. Loans exceeding this
threshold are evaluated in accordance with FAS 114. An insignificant delay or
shortfall in the amount of payments, when considered independent of other 
factors, would not cause a loan to be rendered impaired. Insignificant delays
or shortfalls may include, depending on specific facts and circumstances, 
those that are associated with temporary operational downturns or seasonal 
business delays.

     Management performs periodic reviews of its loans to identify impaired 
loans. The measurement of impaired loans is based on the present value of 
expected future cash flows discounted at the historical effective interest 
rate, except that all collateral-dependent loans are measured for impairment 
based on the fair value of the collateral. The adoption of FAS 114 did not 
result in an additional provision for credit losses at January 1, 1995.

     Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered 
probable. When an impaired loan or portion of impaired loan is determined to 
be uncollectible, the portion deemed uncollectible is charged against the 
related valuation allowance and subsequent recoveries, if any, are credited 
to the valuation allowance. The company does not accrue interest on impaired
loans. While a loan is considered impaired, cash payments received are applied
to principal or interest depending upon management's assessment of the
ultimate collectibility of principal and interest.

     At December 31, 1996, the Corporation recorded no investment in impaired
loans recognized in accordance with FAS 114 with no related valuation 
allowance. For the year ended December 31, 1996, the average balance of 
impaired loans was negligible. The application of FAS 114 has not had any 
effect on the comparability of the non-performing loan table in footnote 5 
between the periods presented. The company recognized no interest on impaired
loans on the cash basis. 


6. Premises and Equipment:

     Premises and equipment are comprised of the following:

 .                                                     								December 31   
 .                                             							       1996       1995
 .                                             							       (in thousands)

Banking premises......................................     $8,576     $8,438
Furniture and fixtures................................      7,221      7,340
Leasehold improvements................................        345        343   
 .                                               						     16,142     16,121  
Less accumulated depreciation and amortization........     (8,294)    (8,464)   
 .                                              							     $7,848     $7,657 
 .                                               							     ======     ======   

     Depreciation expense charged to operations amounted to approximately 
$937,000, $831,000, and $716,000, in 1996, 1995, and 1994, respectively.



7. Short-Term Borrowings and Long-Term Debt:

     Short-term borrowings consist of the following:
 .                                                     								December 31    
 .                                            							       1996        1995
 .                                            							       (in thousands)

Federal funds purchased, 5.25% and 5.69% in 1996 and 
    1995, respectively...............................     $12,700     $  550 
Treasury tax and loan note option account,
    5.04% and 5.15% in 1996 and 1995, respectively...         517        466
 .                                          							        $13,217     $1,016   
 .                                              						     =======     ======   

     Interest incurred on short-term borrowings amounted to $284,000, 
$225,000, and $115,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.

     At December 31, 1996, long-term debt consists of long-term advances from
the FHLB of Pittsburgh of $15,000,000 and repurchase agreements totalling 
$10,000,000.  The long-term advance is for a period of five years and is due
to mature in December, 2001.  Monthly payments of interest are required to be
paid to the Federal Home Loan Bank at a fixed rate, presently 6.06%, with 
principal due at maturity.  Quarterly payments of interest are required 
to be paid on the repurchase agreements at a fixed rate, presently 5.57%, with
principal due at maturity.  Interest on long-term debt amounted to $470,000, 
$444,000, and $410,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.

     Maturities on long term debt at December 31, 1996 are as follows:

     1997............................     $ 4,000,000
     1998............................     $ 3,000,000
     1999............................     $ 4,000,000
     2000............................     $ 4,000,000
     2001............................     $10,000,000 

8. Subordinated Capital Notes:

     Subordinated capital notes at December 31, 1994 bore interest at 11% and
matured annually at $15,000 through February 4, 1995. 
       

9. Pension Plan:

<TABLE>
<CAPTION>
     The following table sets forth the pension plan's funded status at and 
for the years ended December 31, 1996, 1995, and 1994.
															       
 .								                                                                      1996       1995     1994
 .                                                                     											     (in thousands)
<S>                                                                                <C>       <C>        <C>   
Actuarial present value of benefit obligations: 
     Accumulated benefit obligations, including vested
	benefits of $2,812, $2,371, and $1,903, respectively......................         $2,844    $2,389     $1,915 
 . 	                                                         									               ======    ======     ======     
Projected benefit obligation for service rendered to date.........................  $3,933    $3,420     $2,780          
Plan assets at fair value, primarily listed stocks, corporate, and U.S. bonds.....   3,626     3,114      2,550       
Plan assets in excess of projected benefit obligations............................    (307)     (306)      (230)     
Unrecognized net loss from past experience different from that assumed 
     and effects of changes in assumptions........................................   1,027       949        791          
Unrecognized net asset being recognized over 17 years.............................     (46)      (55)       (63)  
Prepaid pension costs.............................................................  $  674    $  588     $  498    
Net pension cost for 1996, 1995, and 1994 included the following components:        ======    ======     ======         
Service cost......................................................................  $  190    $  153     $  159    
Interest cost.....................................................................     238       207        175    
Actual return on plan assets......................................................    (290)     (374)       (29)  
Net amortization and deferral.....................................................      24       154       (181)  
Net pension cost..................................................................  $  162    $  140     $  124    
 .										                                                                         ======    ======     ======    
</TABLE>

     The weighted average discount rate used in determining the actuarial 
present value of the projected benefit obligation was 7.50% for 1996, and 
7.25% for 1995 and 1994.  The increase in future compensation levels used in 
determining the actuarial present value of the benefit obligation was 5.00% 
in 1996, 1995, and 1994.  The expected long-term rate of return on assets
was 9.00% in 1996, 1995, and 1994.


10. Income Taxes:

     The provision for income taxes consists of the following: 
                                  
 .                                    								     1996       1995        1994 
 .                                           									   (in thousands)
       
	 Current...................................    $1,942      $1,661     $1,531
	 Deferred..................................        27         (70)       (69)
 .	                                   							    $1,969      $1,591     $1,462
 .                                     						    ======      ======     ======
       

     As discussed in Note 2, the Corporation adopted the provisions of SFAS
No. 109 effective January 1, 1992.  

<TABLE>
<CAPTION>
     The components of the net deferred tax asset (liability) as of December
31, 1996, 1995, and 1994 were as follows:
											  
 .                                                 							       1996     1995       1994
 .                                                       								    (in thousands)
<S>                                                          <C>      <C>       <C>  
Deferred tax assets: 
     Loan loss provision...................................   $  648   $  573    $  561           
     Non-accrual loan interest income......................      183      152       123        
     Loan origination fees.................................      ---       22        57        
     Net unrealized loss on marketable securities..........      ---      ---     1,039        
     Miscellaneous.........................................       88       85       ---          
     Alternative minimum tax credit........................      ---       54        46     
     Deferred compensation.................................       73       75        68
	 Total deferred tax assets................................   $  992   $  961    $1,894
       
							   
Deferred tax liabilities:
     Depreciation..........................................   $  515   $  531    $  523        
     Accretion of discount.................................      156      131       109        
     Pension expense.......................................      216      182       145       
     Net unrealized gain on marketable equity securities...      134      857       ---      
     Miscellaneous.........................................      ---       (3)       28      
     Loan origination fees.................................       12      ---       ---
	 Total deferred tax liability.............................   $1,033   $1,698    $  805       
	 Net deferred asset (liability)...........................   $  (41)  $ (737)   $1,089
 .                                                  						      ======   ======    ======              
</TABLE>

<TABLE>
<CAPTION>
     The significant components of the deferred tax expense (benefit) in 
1996, 1995, and 1994 were as follows:
											    
 .                                          						       1996         1995       1994 
 .                                                  								      (in thousands)
<S>                                                    <C>          <C>        <C> 
	Loan origination fees..............................    $ 34         $  4       $ 33            
	Accretion of discount..............................      26           19         23         
	Loan loss provision................................     (75)         (48)       (46)        
	Non-Accrual loan interest income...................     (31)         (17)       (42)        
	Depreciation expense...............................     (17)          (3)        (9)        
	Deferred compensation..............................     ---          (13)       (10)         
	Pension expense....................................      34           37         29          
	Lease financing....................................     ---           (1)        (7)        
	Miscellaneous......................................       2          (33)       (33)        
	Alternative minimum tax credit.....................      54          (15)        (7)      
	Total deferred taxes...............................    $ 27         $(70)      $(69)        
 .                                         							       ====         ====       ====   
</TABLE>

     Income tax provisions related to securities gains were $97,000, $47,000,
and $134,000, for the years ended December 31, 1996, 1995, and 1994, 
respectively.

     The provision for income taxes differs from the amounts derived from 
applying the statutory federal tax rate of 34%.

<TABLE>
<CAPTION>
											    
 .                                                 							       1996         1995       1994 
 .                                                         								      (in thousands)      
<S>                                                          <C>         <C>         <C>  
Computed "expected" tax provision..........................   $2,585      $2,177      $2,195           
Effect of tax-exempt municipal bond and loan  
     interest, net of interest expense disallowance........     (558)       (696)       (807)     
Goodwill amortization......................................       82          82          82         
Nondeductible expense related to acquistion................      ---          99         ---    
Other, net.................................................     (110)        (71)         (8)        
Deferred compensation......................................      (30)        ---         ---       
Total provision for income taxes...........................   $1,969      $1,591      $1,462        
 .                                                							      ======      ======      ======    
</TABLE>

11. Stock Options, Preferred Stock, and Common Stock:

    The Corporation has a Long Term Incentive Plan whereby awards in the form of
Incentive Stock Options, Nonqualified Stock Options or Stock Appreciation 
Rights may be granted to certain Executive Officers and other key employees 
selected by a committee of the Board of Directors.  The price at which common
stock can be purchased pursuant to the exercise of options cannot be less than
100% in the case of Incentive Stock Options and 80% in the case of 
Nonqualified Stock Options, of the fair market value of the common stock on 
the date of the grant of the option.  Options are exercisable starting one 
year from the date of grant to the extent of 20.0% to 33.3% a year on a 
cumulative basis and expire no later than ten years after the date of grant.
Incentive stock options issued under the plan totalled 28,775, 55,992, and 
30,096 in 1996, 1995, and 1994, respectively.

<TABLE>
<CAPTION>
     A summary of the status of the Bank's Plan as of December 31, 1996, 
1995, and 1994 and changes during the years ending on those dates is 
presented below:
 . 													                                                                                              Weighted 
 .													                                                                                              Average Fair     
 .					                                                Shares      Shares        Weighted        Options    Value of Options
 .						                                               Under     Available      Average       Exercisable   Granted During
 .                                            		       Option    For Option   Exercise Price   at Year-end      The Year
<S>                                                  <C>           <C>           <C>             <C>             <C>             
Balance, December 31, 1993........................    126,190       209,668       $13.06          48,675 

Options granted...................................     30,096       (30,096)      $27.06                        

Options exercised.................................    (12,162)          ---       $12.74                                  
Options cancelled or expired......................     (3,055)        3,055       $16.02                                       

Balance, December 31, 1994........................    141,069       182,627       $16.01          64,307               

Options granted...................................     55,992       (55,992)      $23.00                          $7.46         
Options exercised.................................     (4,705)          ---       $12.32
Options cancelled or expired......................       (476)          476       $21.46                

Balance, December 31, 1995........................    191,880       127,111       $18.13          88,974   

Options granted...................................     28,775       (28,775)      $24.25                          $7.58
Options exercised.................................    (20,541)          ---       $11.91
Options cancelled or expired......................     (7,366)        7,366       $21.97            
Balance December 31, 1996.........................    192,748       105,702       $19.56         102,236     
 .                                          					      =======       =======       ======         =======                            
     
     On January 1, 1996, the Bank adopted Statement of Financial Accounting 
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123).  As 
permitted by SFAS 123, the Bank has chosen to apply APB Opinion No. 25, 
"Accounting for Stock issued to Employees" (ABP 25) and related interpretations
in accounting for its Plans.  Accordingly, no compensation cost has been 
recognized for options granted under the Plan.  Had Compensation cost for the
Bank's Plan been determined based on the fair value at the grant dates for 
awards under the Plan consistent with the method of SFAS 123, the impact on 
the Bank's net income and net income per share would not have been material.

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average 
assumptions used for grants in 1996 and 1995, respectively; dividend yield of
1%, expected volatility of 20%, risk-free interest rates of 6.14% and 7.85%, 
and expected life of 6 years.  


12. Related Parties:

     Certain directors and their business affiliates (defined as the 
beneficial ownership of at least a 10 percent interest), executive officers 
and their families are indebted to Community Banks, N.A.  At December 31, 
1996, 1995, and 1994, loans to these persons and their business affiliates 
amounted to $2,989,000, $3,402,000, and $3,927,000, respectively.  

     In the opinion of management, such loans are consistent with sound 
banking practices and are within applicable regulatory lending limitations.


</TABLE>
<TABLE>
<CAPTION>
											    
 .							                                                1996         1995       1994 
 .                                                 								      (in thousands)
<S>                                                   <C>        <C>          <C>    
	 Balance beginning of period.......................   $3,402     $3,927       $4,335            
	 Additions.........................................      365        467          624        
	 Amounts collected.................................     (778)      (992)      (1,032)      
	 Amounts written off...............................      ---        ---          ---        
	 Balance end of period.............................   $2,989     $3,402       $3,927       
 .                                         							      ======     ======       ======  
</TABLE>

13. Condensed Financial Information of Community Banks, Inc. (Parent only):
										
 .                                          							       1996        1995 
 .                                                 								(in thousands)
Condensed Balance Sheets:                                     
	 Cash and investments..............................   $   139    $   402    
	 Investment in Community Banks, N.A. ..............    44,519     42,904       
	 Investment in nonbank subsidiaries................     3,081      2,694       
	 Total assets......................................   $47,739    $46,000       
 .                                         							      =======    =======   
	 Stockholders' equity..............................    47,739     46,000       
	 Total liabilities and stockholders' equity........   $47,739    $46,000       
 .                                          						      =======    =======

<TABLE>
<CAPTION>
											  
 .                                                  					       1996       1995       1994 
Condensed Statements of Income:                                      (in thousands)
<S>                                                          <C>        <C>        <C> 
  Dividends from:
	 Community Banks, N.A. ............................          $2,260     $2,033     $1,835          
	 Nonbank subsidiaries..............................             ---        ---        ---      
Income before equity in undistributed earnings of 
    subsidiaries...........................................    2,260      2,033      1,835         
Equity in undistributed earnings of:
    Community Banks, N.A. .................................    2,985      2,532      2,697         
    Nonbank subsidiaries...................................      387        249        462        
 .                                                							       3,372      2,781      3,159         
Net income.................................................   $5,632     $4,814     $4,994        
 .                                                							      ======     ======     ======     
</TABLE>

<TABLE>
<CAPTION>
									  
Condensed Statements of Cash Flows:                                       
<S>                                                          <C>        <C>        <C> 
    Operating activities:
    Net income.............................................   $5,632     $4,814     $4,994          
	Adjustments to reconcile net cash provided by
	  operating activities:
      Undistributed earnings of:
	Community Banks, N.A. .............................          (2,985)    (2,532)    (2,697)        
	Nonbank subsidiaries...............................            (387)      (249)      (462)       
      Other liabilities....................................      (33)       ---        ---       
	Net cash provided by operating activities..........           2,227      2,033      1,835      
    Investing activities:
      Additional investment in nonbank subsidiaries........      ---        ---        ---           
      Net cash used in investment activities...............      ---        ---        ---          

Financing Activities:
    Proceeds from issuance of common stock.................      138         55        129           
      Purchase of Treasury Stock...........................     (368)       ---        ---
      Dividends paid.......................................   (2,260)    (2,033)    (1,835)       
	Net cash used by financing activities..............          (2,490)    (1,978)    (1,706)       
	Net change in  cash and cash equivalents...........            (263)        55        129         
	  Cash and cash equivalents at beginning of year...             402        347        218         
	  Cash and cash equivalents at end of year.........          $  139     $  402     $  347         
 .                                                							      ======     ======     ======         
</TABLE>


14. Dividend Restrictions:


     CBNA is subject to legal limitations as to the amount of dividends that 
can be paid to its shareholder (the Corporation).  The approval of certain 
banking regulatory authorities is required if the total of all dividends 
declared by the bank exceeds limits as defined by the regulatory authorities.
CBNA could declare dividends in 1996 without regulatory approval of $6,290,000
plus an additional amount equal to the bank's retained net profits in 1996 up
to the date of any dividend declaration.


15. Financial Instruments with Off-Balance Sheet Risk:


     The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its 
customers and to reduce its own exposure to fluctuations in interest rates.  
These financial instruments include commitments to originate loans and standby
letters of credit.  The instruments involve, to varying degrees, elements of 
credit and interest rate risk in excess of the amount recognized in the 
consolidated statement of condition.  The contract or notional amounts of 
those instruments reflect the extent of involvement the Corporation has 
in particular classes of financial instruments.


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


     Financial instruments with off-balance sheet risk at December 31, 1996,
are as follows:

 .                                       									  Contract or Notional Amount
 .                                                   										 (in thousands)

Financial instruments whose contract amounts represent credit risk:
 Commitments to originate loans..........................            $21,338
 Unused lines of credit..................................            $11,626    
 Standby letters of credit...............................            $ 1,817  
 Unadvanced portions of construction loans...............            $ 1,986

     Commitments to originate loans are agreements to lend to a customer 
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.  Since many of the commitments are expected
to expire without being drawn upon, the total commitment amount does not 
necessarily represent future cash requirements.  Lines of credit are similar 
to commitments as they have fixed expiration dates and are driven by certain 
criteria contained within the loan agreement.  Lines of credit normally do not
extend beyond a period of one year.  The Corporation evaluates each customer's
credit worthiness on a case-by-case basis.  The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower.

     Standby letters of credit are conditional commitments issued by the 
Corporation to guarantee the performance by a customer to a third party.  
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.


16. Quarterly Results of Operations (Unaudited):  

     The following is a summary of the quarterly results of operations for 
the years ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>
 .                                               							      Three Months Ended                                     
 .                                          						       1996                               1995                     
 .                    			       Mar. 31    June 30    Sept. 30   Dec. 31    Mar. 31    June 30    Sept. 30   Dec. 31
 .                                    					     (dollars in thousands except per share data)
<S>                           <C>        <C>         <C>        <C>        <C>        <C>        <C>        <C>    
Interest income..............  $7,423     $7,447      $7,798     $7,925     $6,894     $7,171     $7,291     $7,356
Interest expense.............   3,082      3,101       3,222      3,282      2,768      3,021      3,128      3,115
Net interest income..........   4,341      4,346       4,576      4,643      4,126      4,150      4,163      4,241
Provision for loan losses....     202        183         245        412        122        168        170        268
Net interest income after
 provision for loan losses:..   4,139      4,163       4,331      4,231      4,004      3,982      3,993      3,973
Other income.................     497        589         597        576        473        540        593        618
Investment security   
  gains......................     147        130           4          3         36         40         63          1
Gains on mortgage sales......      --         70          47         94         18         48         60        220
Other expenses...............   3,040      3,052       2,972      2,953      2,862      2,964      3,003      3,428
Income before income taxes...   1,743      1,900       2,007      1,951      1,669      1,646      1,706      1,384 
Income taxes.................     397        460         546        566        396        398        385        412 
Net income...................  $1,346     $1,440      $1,461     $1,385     $1,273     $1,248     $1,321     $  972             
 .                    			       ======     ======      ======     ======     ======     ======     ======     ======       

Fully diluted earnings
  per share..................  $ .46      $ .50       $ .50      $ .48      $ .44      $ .43      $ .45      $ .34     
Dividends per share..........  $.182      $.200       $.200      $.200      $.172      $.171      $.171      $.188     
</TABLE>

Per share data has been restated to include a 10% stock dividend effective May
31, 1996.


17. Fair Values of Financial Instruments:

	
     In December 1991, the Financial Accounting Standards Board released SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, which requires
disclosure of the fair value of all financial instruments.  The FASB
previously released SFAS No. 105, Disclosure of Information about Financial 
Instruments with Off-Balance-Sheet Risk and Financial Instruments with 
Concentrations of Credit Risk, which required similar disclosures relating to
off-balance-sheet financing.

     The following methodologies and assumptions were used by the Corporation
to estimate its fair value disclosures:

Cash, interest-bearing time deposits, and federal funds sold:  
     The carrying values for cash, interest-bearing time deposits, and federal
funds sold equal those assets' fair values.

Investment securities:
     Fair values for investment securities are based on quoted market prices,
where available.  If quoted market prices are not available, fair values are 
based on quoted market prices of comparable instruments.

Loans:
     For variable-rate loans that reprice frequently with no significant 
change in credit risk, fair value equals carrying value.  The fair values for
fixed-rate residential mortgage loans, consumer loans, commercial, and 
commercial real estate loans are estimated by discounting the future cash 
flows using comparable current rates at which similar loans would be made to
borrowers at similar credit risk.  The carrying value of accrued interest 
adjusted for credit risk equals its fair value.  The fair value of loans held
for sale is based on quoted market prices for similar loans sold in 
securitization transactions.

Deposit liabilities:
     The fair values of demand and savings deposits equal their carrying 
values.  Statement 107 prohibits adjusting such fair value for any value from
retaining those deposit relationships in the future.  That component, known as
a deposit intangible, is not considered in the value disclosed nor is it 
recorded in the balance sheet.  The carrying values for variable rate money
market accounts approximate their fair values at the reporting date.  Fair 
values for fixed-rate certificates of deposit are estimated using rates 
currently offered for similar deposits.

Short-term borrowings:
     The fair values of short-term borrowings approximate their carrying values.

Long-term borrowings:
     The fair values of the Corporation's long-term borrowings are estimated
using discounted cash flow analyses, based on rates available to the 
Corporation for similar types of borrowings.

Off-balance-sheet instruments:
     Fair values for the Corporation's unused commitments to originate loans
and unused lines of credit are deemed to be the same as their carrying values.

<TABLE>
<CAPTION>
     The following table summarizes the carrying values and fair values of 
financial instruments at December 31, 1996 and 1995:

 .                							                                       December 31,                   
 .                                         						      1996                      1995         
 .                                 					     Carrying       Fair        Carrying        Fair
 .                                 					       Value        Value         Value         Value
 .                                        							       (in thousands)
<S>                                         <C>         <C>            <C>          <C>           
Financial assets:
Cash, interest-bearing time deposits, 
  and federal funds sold...................  $ 17,944    $ 17,944       $ 17,519     $ 17,519           
Investment securities......................   145,446     145,446        117,426      117,426
Loans, net of unearned income..............   250,011     245,329        231,637      226,851
Less: Allowance for loan losses............    (2,798)         --         (2,574)          --          
      Net Loans............................   247,213     245,329        229,063      226,851          
Loans held for sale........................     4,622       4,622          2,206        2,206          
      Total................................  $415,225    $413,341       $366,214     $364,002      
 .                                  					     ========    ========       ========     ========         
Financial liabilities:
Deposits...................................  $343,256    $344,195       $324,097     $325,210           
Short-term borrowings......................    13,217      13,217          1,016        1,016              
Long-term debt.............................    25,000      24,561          7,000        7,061                    
      Total                                  $381,473    $381,973       $332,113     $333,287          
 .                                   				     ========    ========       ========     ========      
</TABLE>


18.  Acquisition:

     On January 12, 1996, Community Banks, Inc. completed its merger of The 
Citizens' National Bank of Ashland (Citizens).  Citizens has three banking 
offices which are located in Ashland, Gordon, and Lavelle, Pennsylvania.
Community issued 578,081 shares of common stock for all of the outstanding 
common stock of Citizens.  The transaction was accounted for as a pooling of
interests.


<TABLE>
<CAPTION>
													    
 .                                                       								1995                                1994 
 .                                                     								(dollars in thousands except per share data)
 .                                                             Community           Citizens          Community     Citizens
<S>                                                          <C>                <C>                <C>                     
     
     Total interest income..............................       $14,181            $ 2,499            $12,910     $2,641
     Provision for loan losses..........................           712                 16                462         50
     Other income.......................................         2,510                200              2,282        142
     Other expenses.....................................        10,076              2,181              9,280      1,727
     Income before income taxes.........................         5,903                502              5,450      1,006
     Provision for income taxes.........................         1,478                113              1,288        174
     Net income.........................................       $ 4,425            $   389            $ 4,162     $  832

     Fully diluted earnings per share...................       $  1.95            $ 17.68            $  1.85     $37.82
 .                                                 							       =======            =======            =======
	      
</TABLE>
							      
Per share data has been restated to reflect a 10 percent stock dividend 
effective May 31, 1996.
     
     
     
     REPORT OF INDEPENDENT ACCOUNTANTS
     
     
     
     Board of Directors and Shareholders
     Community Banks, Inc.
     Millersburg, Pennsylvania
     
     
     
     
     
	     We have audited the accompanying consolidated balance sheets of
     Community Banks, Inc. and subsidiaries (Corporation) as of
     December 31, 1996 and 1995 and the related consolidated statements of
     income, changes in stockholders' equity and cash flows for each 
     of the three years in the period ended December 31, 1996.  These financial
     statements are the responsibility of the Corporation's management.  
     Our responsibility is to express an opinion on these financial statements
     based on our audits.
     
	     We conducted our audits in accordance with generally accepted
     auditing standards.  These standards require that we plan and perform 
     the audit to obtain reasonable assurance about whether the financial
     statements are free of material misstatement.  An audit includes examining,
     on a test basis, evidence supporting the amounts and disclosures in the
     financial statements.  An audit also includes assessing the accounting 
     principles used and significant estimates made by management, as well as
     evaluating the overall financial statement presentation.  We believe that
     our audits provide a reasonable basis for our opinion.
     
	     In our opinion, the financial statements referred to above present
     fairly, in all material respects, the consolidated financial position 
     of Community Banks, Inc. and subsidiaries as of December 31, 1996 and 1995,
     and the consolidated results of their operations and cash flows for 
     each of the three years in the period ended December 31, 1996, in
     conformity with generally accepted accounting principles.
	     
	     As discussed in Note 2 to the consolidated financial statements,
     the Corporation has adopted Statement of Financial Accounting Standards No.
     115, "Accounting for Certain Investments in Debt and Equity Securities,"
     effective January 1, 1994.
     
     
     
 .                                     					      /S/  COOPERS & LYBRAND, L.L.P
     
     
     
     One South Market Square
     Harrisburg, PA 17101
     January 13, 1997
     
<TABLE>
<CAPTION>
     
Community Banks, Inc. and Subsidiaries                                                                                        
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND                                                                            
RESULTS OF OPERATIONS                                                                                                         
																       
     Management's discussion of financial condition and results of operations is based on the selected financial data         
listed below and should be read in conjunction with the Consolidated Financial Statements and Notes thereto.                  

															      
FINANCIAL HIGHLIGHTS                             1996              1995              1994              1993              1992 
							       (dollars in thousands except per share data)                   
<S>                                          <C>              <C>               <C>                <C>               <C>     
Balance Sheet Data                                                                                                            
Total assets........................          $432,518         $381,822          $368,697           $345,960          $334,616
Loans (net of unearned income and                                                                                             
  allowance for loan losses)........           247,213          229,063           206,525            184,012           175,848
Deposits............................           343,256          324,097           307,973            295,267           288,960
Shareholders' equity................            47,739           46,000            39,483             38,212            34,975
															      
Earnings Data                                                                                                                 
Net interest income.................            17,906           16,680            15,551             14,390            13,800
Provision for loan losses...........             1,042              728               512                932               858
Other income........................             2,754            2,710             2,424              2,821             2,288
Other expense.......................            12,017           12,257            11,007             10,137             9,505
Net income..........................             5,632            4,814             4,994              4,763             4,366
															      
Per Share Data                                                                                                                
Net income..........................              1.94             1.66              1.73               1.65              1.52
Cash dividends......................               .78              .70               .63                .58               .52
Book value..........................             16.64            17.64             15.15              16.91             15.54
Average shares outstanding..........         2,908,000        2,896,193         2,894,712          2,880,891         2,851,708
</TABLE>

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                 
AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL                       
AND INTEREST YIELDS                                                         
Income and Rates on a Tax Equivalent Basis<F2> for the                 
Years Ended December 31, 1996, 1995, and 1994 (dollars in thousands)   
																				  
 .						                                                1996                                1995                                1994
 .								                                                 Average                         Average                         Average
 .						                                        Interest   Rates              Interest     Rates              Interest     Rates   
 .				                               Average    Income/    Earned/  Average    Income/     Earned/  Average    Income/     Earned/  
 .				                              Balance<F3>Expense<F1> Paid<F1>Balance<F3>Expense<F1>  Paid<F1> Balance<F3>Expense<F1> Paid<F1> 
<S>                               <C>         <C>         <C>     <C>         <C>        <C>     <C>         <C>         <C>      
Assets:                                                                                                                      
 Cash and due from banks.........   $14,676                        $ 13,247                        $ 11,693
Earnings Assets:                                                                                                  
   Interest-bearing deposits in                                                                                                    
     other banks.................       978    $    58     5.93%      1,660    $    83     5.00%      2,347    $    67    2.85%
   Investment securities:                                                                                                  
     Taxable.....................    95,584      6,196     6.48      84,956      5,599     6.59      92,686      5,740    6.19
     Tax-exempt<F2>..............    28,369      2,406     8.48      36,975      3,112     8.42      42,512      3,674    8.64
   Total investment                                                                                                        
     securities..................   123,953                         121,931                         135,198                  
   Federal funds sold............     3,808        207     5.44       3,118        157     5.04       2,552         98    3.84
   Loans, net of unearned                                                                                                    
     income<F2>..................   243,840     22,639     9.28     222,624     20,918     9.40     196,751     17,362    8.82
    Total Earning Assets.........   372,579    $31,506     8.46     349,333    $29,869     8.55     336,848    $26,941    8.00
 Allowance for loans                                                                                                        
   losses........................    (2,682)                         (2,515)                         (2,278)             
 Premises, equipment and                                                                                           
    other assets.................    16,404                          15,688                          14,150           
    Total assets.................  $400,977                        $375,753                        $360,413            
 .                                  ========                        ========                        ========    
Liabilities:                                                                                                             
 Demand deposits.................    27,082                          27,494                          25,752              
 Interest bearing liabilites:                                                                                            
   Savings deposits..............   148,621      3,212     2.16     136,031      3,054     2.25     141,030      3,069    2.18
   Time deposits:                                                                                                           
     $100,000 or greater.........    12,100                          11,249                           9,271              
     Other.......................   149,982                         143,103                         131,260                
   Total time deposits...........   162,082      8,721     5.38     154,352      8,309     5.38     140,531      6,483    4.61
   Total time and savings                                                                                                 
     deposits....................   310,703                         290,383                         281,561                
   Short-term borrowings.........     5,410        252     4.66       3,891        225     5.78       2,626        115    4.38
   Long-term debt................     7,787        502     6.45       7,781        444     5.71       7,871        410    5.21
   Subordinated capital notes....        --         --       --           2         --    11.00          17          2    11.00    
    Total interest-bearing                                                                                                  
     liabilities.................   323,900    $12,687     3.92     302,057    $12,032     3.98     292,075    $10,079    3.45
Accrued interst, taxes and                                                                                                
   other liabilities..............    3,358                           3,504                           2,988               
    Total liabilities.............  354,340                         333,055                         320,815               
Stockholders' Equity..............   46,637                          42,698                          39,598                
    Total liabilities and                                                                                                 
     stockholders' equity......... $400,977                        $375,753                         $360,413             
 .                                  ========                        ========                        ========            
  Interest income to earning                                                                                         
    assets........................                         8.46%                           8.55%                          8.00%
  Interest expense to earning                                                                                           
    assets........................                         3.41                            3.44                           2.99
      Effective interest                                                                                                
	differential..............                    $18,819     5.05%               $17,837     5.11%               $16,862    5.01%
 .                                      							 =======     ====                =======     ====                =======    ====

<FN>
<F1> Amortization of net deferred fees included in interest income and rate 
     calculation.
<F2> Interest income on all tax-exempt securities and loans have been adjusted
     to tax equivalent basis utilizing a Federal income tax rate of 34%. 
<F3> Averages are a combination of monthly and daily averages.                 
</FN>
</TABLE>

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                                                                        
Management's Discussion of Financial Condition and Results of Operations                                                      
Rate/Volume Analysis <F1>                                                                                                      
 .                   For the Years Ended December 31, 1996 and 1995        
 .                                (in thousands)                              


															      
 .                                         						  1996 vs 1995                        1995 vs 1994                            
 .                                  					     Volume   Rate     Total             Volume   Rate       Total                    
<S>                                         <C>      <C>      <C>               <C>      <C>      <C>      
Increase (decrease) in interest income:                                                                                       
  Loans...................................   $1,989   $ (268)  $1,721            $2,371   $1,185   $3,556                     
  Investment securities:                                                                                                      
    Taxable...............................      691      (94)     597              (497)     356     (141)                    
    Tax-exempt............................     (728)      22     (706)             (470)     (92)    (562)                    
       Total..............................      (37)     (72)    (109)             (967)     264     (703)                    
  Federal funds sold......................       37       13       50                24       35       59                     
  Interest-bearing deposits in other                                                                                          
   banks..................................      (38)      13      (25)              (24)      40       16                     
     Total................................    1,951     (314)   1,637             1,404    1,524    2,928                     

Increase (decrease) in interest expense:                                                                                      
  Savings deposits........................      281     (123)     158              (112)      97      (15)                    
  Time deposits...........................      416       (4)     412               677    1,149    1,826                     
  Short-term borrowings...................       77      (50)      27                66       44      110
  Long-term debt and capital notes........       --       58       58               (16)      48       32                     
     Total................................      774     (119)     655               615    1,338    1,953                     
  Increase (decrease) in effective                                                                                            
   interest differential..................   $1,177   $ (195)  $  982            $  789   $  186   $  975                     
 .                                  					     ======   ======   ======            ======   ======   ======                     

<FN>
<F1>Table shows approximate effect on the effective interest differential of
volume and rate changes for the years 1996 and 1995. The effect of a change 
in average volume has been determined by applying the average yield or rate 
in the earlier period to the change in average volume during the period. The 
effect of a change in rate has been determined by applying the change in rate
during the period to the average volume of the prior period. Any resulting
unallocated amount was allocated ratably between the volume and rate 
components. Nonaccrual loans have been included in the average volume of each
period. Tax-exempt income is shown on a tax equivalent basis assuming a 
federal income tax rate of 34%. 
</FN>
</TABLE>

	  Community Banks, Inc. and Subsidiaries
	  MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
	  OPERATIONS
	  
	  
	  The earnings of Community Banks, Inc. are derived exclusively
	  from the operations of its wholly owned subsidiaries; Community
	  Banks, N.A.; Community Banks Investments, Inc.; and Community
	  Banks Life Insurance Co.
	  
	  On January 12, 1996, Community Bank's Inc. completed its merger
	  of The Citizens' National Bank of Ashland (Citizens).  Citizens
	  had three banking offices which are located in Ashland, Gordon,
	  and Lavelle, Pennsylvania.  The Company issued 578,081 shares of
	  common stock in exchange for all the outstanding shares of common
	  stock of Citizens.  At December 31, 1995 and for the year then
	  ended, Citizens had total interest earning assets, interest
	  bearing liabilities, equity capital and net income of $58.0
	  million, $51.3 million, $9.4 million and $4.8 million,
	  respectively.
	  
	  Net income was $1.94 per share in 1996 compared to $1.66 per
	  share in 1995, and $1.73 in 1994.  Net income per share in 1996
	  was 16.9% more than net income per share in 1995.  Net income per
	  share in 1995 declined 4.0% when compared to the previous year.
	  
	  Net Interest Income:
	  
	  The primary determinant of Community Banks, Inc. net income is
	  net interest income.  This is the income which remains after
	  deducting from the total income generated by earning assets the
	  interest expense applicable to funds required to support the
	  earning assets.
	  
	  Total interest income increased $1,881,000 or 6.6% in 1996,
	  compared to an increase of $3,082,000 or 12.0% in 1995, and an
	  increase of $471,000 or 1.9% in 1994.  Interest and fees on loans
	  increased $1,725,000 or 8.3% in 1996.  Most of this increase was
	  volume related and caused by an increase in average balances of
	  $21,216,000 or 9.5%.  The increase of $131,000 or 1.7% in
	  interest and dividends on investment securities was also volume
	  related.  The average balances of tax-exempt securities decreased
	  $8,606,000 or 23.3% in 1996 which resulted in a decrease in
	  tax-exempt interest income.  Interest and fees on loans increased
	  $3,519,000 or 20.3% in 1995.  This was a volume and rate related
	  change driven by an increase in average balances of $25,873,000
	  or 13.2%.  The decrease of $512,000 or 6.3% in interest and
	  dividends on investment securities was volume related.  The
	  average balance of tax-exempt securities decreased $5,537,000 or
	  13.0% in 1995 which resulted in a decrease in tax-exempt interest
	  income.  Factors contributing to the 1994 change included a
	  volume related increase in interest and fees on loans of $545,000
	  and a rate related decrease of $16,000 in interest and dividends
	  on investment securities.  
	  
	  Total interest expense increased $655,000 or 5.4% in 1996 and
	  $1,953,000 or 19.4% in 1995, after decreasing $690,000 or 6.4% in
	  1994.  A volume related increase of $158,000 or 5.2% occurred in
	  savings interest expense.  Materially affecting the 1996 increase
	  was an increase of $412,000 or 5.0% in time deposit interest
	  expense.  All of the increase in time deposit interest expense
	  was caused by increased volume.  An increase of $85,000 in
	  borrowed funds interest also affected total interest expense in
	  1996.  Material factors affecting the 1995 increase were
	  increases of $1,826,000 or 28.2% in total time deposit interest
	  expense and an increase of $144,000 in interest expense of
	  short-term borrowings and long-term debt.  Although the average
	  balances of savings accounts decreased $4,999,000 or 3.5%, this
	  decrease was essentially offset by an increase in the interest
	  rates paid on these deposits.  Material factors affecting the
	  1994 decrease were decreases of $116,000 in savings interest
	  expense and $608,000 in time deposit interest expense.  

	  Average interest-bearing deposits represented 92.0% of average
	  total deposits in 1996 compared to 91.4% in 1995 and 91.6% in
	  1994.
	  
	  Net interest income increased $1,226,000 or 7.4% in 1996,
	  compared to $1,129,000 or 7.3% in 1995 and $1,161,000 or 10.8% in
	  1994.  Average earning assets increased $23,246,000 or 6.7% in
	  1996 compared to $12,485,000 or 3.7% in 1995 and $13,386,000 or
	  4.1% in 1994.  Average interest-bearing liabilities increased
	  $21,843,000 or 7.2% in 1996 compared to $21,196,000 or 7.5% in
	  1995 and $3,796,000 or 1.4% in 1994.
	  
	  Net Interest Income Margin:
	  
	  Net interest income margin for 1996 was 5.05% compared to 5.11%
	  in 1995 and 5.01% in 1994.  Interest income to earning assets
	  decreased from 8.55% in 1995 to 8.46% in 1996.  Interest expense
	  to earning assets also decreased from 3.44% to 3.41%.  Most
	  interest rates applicable to earning assets and interest-bearing
	  liabilities increased in 1995.  In general, declines occurred in
	  1994. 
	  
	  Provision for Loan Losses:
	  
	  Net loan charge-offs for 1996 were $818,000 compared to $501,000
	  in 1995 and $286,000 in 1994.  The provision for loan losses
	  charged to income was $1,042,000 in 1996 compared to $728,000 in
	  1995 and $512,000 in 1994.  Total non-performing loans
	  approximated $3,677,000, $2,673,000, and $2,064,000, as of
	  December 31, 1996, 1995, and 1994, respectively.  Non-performing
	  residential real estate and commercial loans totalled
	  approximately $2,451,000 and $743,000, respectively, at year-end
	  1996.  Total delinquencies as a percentage of total loans
	  approximated 5.1%, 4.8%, and 4.5% at December 31, 1996, 1995, and
	  1994, respectively.
	  
	  Other Income and Other Expenses:
	  
	  Other income net of security gains decreased $100,000 or 3.9% in
	  1996 compared to an increase of $542,000 or 26.7% in 1995 and a
	  decrease of $638,000 or 23.9% in 1994.  The increases in trust
	  department income and service charges on deposit accounts which
	  occurred in 1996 resulted from management's renewed emphasis on
	  these functions.  Investment security gains in 1996 were
	  associated primarily with equity securities held by Community
	  Banks Investments, Inc.  No investment security losses were
	  recognized in 1996.  Increased income on insurance premiums are a
	  reflection of increased loan demand and increased activity at
	  Community Banks Life Insurance Co.  Gains on mortgage sales
	  declined in 1996 as a result of decreased demand for fixed-rate
	  real estate loans.  The market values of loans held for sale
	  approximated their carrying values at year ends 1996, 1995, and
	  1994.  Affecting the apparent change in other income from 1995 to
	  1996 were tax refunds and non-recurring income recognized in
	  1995.  The most notable change in other income in 1995 was the
	  decrease in investment security gains.  No investment security
	  losses were recognized in 1995. 
	   
	  Other expenses decreased $240,000 or 2.0% in 1996 compared to
	  increases of  $1,250,000 or 11.4% in 1995, and $870,000 or 8.6%
	  in 1994.  The 1996 increases in salaries and benefits of $283,000
	  or 4.8% and net occupancy expense of $141,000 or 8.4% were
	  affected by the opening of new banking offices.  The increase in
	  operating expenses of insurance subsidiary was impacted by
	  additional claims recognized at Community Banks Life Insurance
	  Co.  The decline of $574,000 in other operating expense in 1996
	  was affected by reduced FDIC insurance premiums and legal and
	  professional fees.  Increases of $699,000 or 13.6% in salaries
	  and employee benefits and $172,000 or 11.5% in net occupancy
	  expense affected the 1995 increase in total other expenses. 
	  Three new banking offices were established in 1995.  The increase
	  of $308,000 in other operating expense was affected by increases
	  in legal and professional fees.  Increases of $471,000 or 10.1%
	  in salaries and benefits and $203,000 or 15.7% in occupancy
	  expense affected the 1994 increase.     
	  
	  Provision for Income Taxes:
	  
	  The relationship of the provision for income taxes to income
	  approximated 24.8%, 25.9%, and 22.6% in 1996, 1995, and 1994,
	  respectively.  Significantly impacting these changes were
	  reductions in tax-exempt investment security income recognized in
	  1996 and 1995.  Although the provision for income taxes
	  essentially remained unchanged from 1993 to 1994, the
	  relationship to pre-tax income declined slightly due in part to
	  additional tax-free income.  
	  
	  These factors contributed to an increase in net income for 1996
	  of $818,000 or 17.0%, a decrease of $180,000 or 3.6% in 1995, and
	  an increase of $231,000 or 4.8% in 1994.
	    
	  Balance Sheet Data:
	  
	  Earning assets represented 92.8% of total assets at year-end 1996
	  compared to 92.7% at year-end 1995.  Increases in short-term
	  borrowings and long-term debt of $30,201,000 in 1996 were
	  reflected in increases in earning assets, most notably investment
	  securities.  Changes in the composition of earning assets reflect
	  management's attempt to respond to fluctuating loan demand and
	  corresponding policies relating to liquidity and asset/liability
	  management. 
	  
	  Effective January 1, 1994, the Corporation adopted the provisions
	  of Statement of Financial Accounting Standards No. 115,
	  "Accounting for Certain Investments in Debt and Equity
	  Securities", which requires the Corporation to reflect securities
	  available and held for sale at fair value on the balance sheet.
	  Upon adoption, the Corporation classified all investments held at
	  January 1, 1994, as available for sale and recorded the increase
	  to fair value as a separate component of equity.  The increase
	  recorded to stockholders' equity at January 1, 1994 was
	  $2,246,000, net of applicable income taxes.
	  
	  Under the Corporation's current policy, if management has the
	  intent and the Corporation has the ability at the time of
	  purchase to hold securities until maturity or on a long-term
	  basis, securities are classified as investments and carried at
	  amortized historical cost.  Securities to be held for indefinite
	  periods of time and not intended to be held to maturity or on a
	  long-term basis are classified as available for sale and carried
	  at the lower of cost or market value.  Securities held for
	  indefinite periods of time include securities that management
	  intends to use as part of its asset/liability management strategy
	  and that may be sold in response to changes in interest rates,
	  resultant prepayment risk and other factors related to interest
	  rate and resultant prepayment risk changes.
	  
	  At December 31, 1996 and 1995, management classified investment
	  securities with book and market values of $145,050,000 and
	  $145,446,000 and $114,906,000 and $117,426,000, respectively, as
	  available for sale.  Gross unrealized gains and losses relating
	  to investment securities were $2,173,000 and $1,777,000 and
	  $2,949,000 and $429,000, respectively, at year-end 1996 and 1995.
	  The Corporation owned no securities below investment grade at
	  year-end 1996 and 1995.  No securities were considered held for
	  sale or for trading purposes at December 31, 1996 and December
	  31, 1995.
	  
	  At December 31, 1996 and 1995, the unrealized gains on
	  investments available for sale, net of tax were $261,000 and
	  $1,664,000, respectively, and were accordingly reflected in
	  shareholders equity.  These fluctuations are deemed to be
	  temporary in nature and result from changes in interest
	  rates.    
	  
	  Net loans increased 7.9% from December 31, 1995 to December 31,
	  1996.  Commercial and real estate loans increased 15.4% and
	  12.0%, and personal and other loans decreased 5.3%, during the
	  period.  New banking offices opened in 1995 and 1996 and reduced
	  demand for personal and other loans affected these increases.

	  The following table sets forth information regarding nonaccrual
	  loans, other real estate owned, and loans which are 90 days or
	  more delinquent but accruing interest at the dates indicated.
	  
	  
 .                                  						  December 31              
 .                     			       1996    1995   1994     1993   1992 
 .                           					     (dollars in thousands)
	  
	  Nonaccrual loans..........  $2,910  $1,759  $1,245  $1,353 $1,072
	  
	      
	  Other real estate owned...     351     302     338     381    167
	  Accruing loans contractually    
	   past due 90 days or more..    767     914     819     722  1,819
	      Total.................  $4,028  $2,975  $2,402  $2,456 $3,058
 .                     				      ======  ======  ======  ====== ======
		   
	   Ratio of nonaccrual loans,
	   other real estate owned,  
	   and accruing loans contractu-
	   ally past due 90 days or
	   more to total assets......     .93%    .78%   .65%    .71%  .91%
	  
	  
	  
	  
	  As discussed in Note 5 to the Financial statements, the
	  Corporation adopted FAS 114 "Accounting by Creditors for
	  Impairment of a Loan", as amended by FAS 118, on January 1, 1995.
	  The adoption of FAS 114 did not result in an additional provision
	  for credit losses.  Management performs periodic reviews of its
	  loans to identify risks in the loan portfolio.  As a result of
	  these periodic reviews, problem loans and potential problem loans
	  are identified and the likelihood of collectibility is assessed.
	  Based upon the results of these reviews, which also consider
	  other pertinent data, management determines an appropriate
	  allowance for loan losses.  Other relevant factors include past
	  loss experience, current economic conditions, and the growth and
	  composition of the loan portfolio.  The allowances for loan
	  losses is maintained at a level believed by management to be
	  adequate to absorb potential losses in the respective portfolios.
	  The allowance for loan losses to loans net of unearned income
	  approximated 1.12%, 1.11%, 1.12%, 1.14%, and 1.06%, at year-end,
	  1996, 1995, 1994, 1993, and 1992, respectively. 
	  
	  At December 31, 1996, management is not aware of any loans or
	  lending relationships that are expected to deteriorate in the
	  next year.  In addition, the Corporation is not aware of any
	  significant environmental liability related to real estate owned
	  or in-foreclosure procedures.
	  
	  The increase of $191,000 or 2.5% in premises and equipment was
	  affected by the previously noted new banking locations.  Goodwill
	  is being amortized over fifteen years.  The balance of loans held
	  for sale at December 31, 1996 included student loans totalling
	  $4,153,000.  Affecting the increase of $1,686,000 in accrued
	  interest receivable and other assets were increases in accrued
	  interest receivable and deferred taxes of $190,000 and $338,000,
	  respectively.  In addition, the premium paid for deposits
	  acquired at the new Valley View, Pennsylvania banking office
	  approximated $703,000 at December 31, 1996.
	  
		
	  Total deposits increased $19,159,000 or 5.9% in 1996 with most of
	  the increase occurring in savings deposits.  As previously noted,
	  management chose to increase short-term and long-term borrowings
	  $30,201,000 in 1996.  Affecting the decrease of $403,000 in
	  accrued interest payable and other liabilities was a decrease in
	  deferred taxes.
	  
	  
	  Liquidity:
	  
	  The primary functions of asset/liability management are the
	  assurance of adequate liquidity and maintenance of an appropriate
	  balance between interest-sensitive earning assets and
	  interest-bearing liabilities.  Liquidity management refers to the
	  ability to meet the cash flow requirements of depositors and
	  borrowers.
	  
	  A continuous review of net liquid assets is conducted to assure
	  appropriate cash flow to meet needs and obligations in a timely
	  manner. 
	  
	  The Corporation's primary funding requirement is loan demand. 
	  The loan demand is primarily funded through deposit growth.
	  Generally, any deposit growth not used in funding loan demand is
	  invested in short-term, interest-bearing deposits or longer term
	  investments.  These short-term investments and shorter term
	  investment portfolio securities are a source of liquidity to fund
	  loan demand.
	  
	  For the years ended December 31, 1996, 1995 and 1994, financing
	  activities provided cash of $46,870,000, $3,438,000, and
	  $19,488,000, respectively.  Short-term borrowings and long-term
	  debt accounted for the largest portion of this funding source in
	  1996.  Deposits accounted for the largest portion of this funding
	  source amounting to $16,124,000, and $12,706,000 for the years
	  ended December 31, 1995 and 1994, respectively.
	  
	  Net cash used in investing activities totalled $51,194,000,
	  $5,910,000, and $26,522,000 for the years ended December 31,
	  1996, 1995 and 1994, respectively.  The primary uses of funds in
	  1996 were purchases of investment securities of $56,609,000 as
	  most of the proceeds from maturities of investment securities
	  were used to fund loan demand.  The primary uses of funds in 1995
	  were purchases of investment securities of $7,699,000 and
	  increases in loans of $23,230,000.  In 1994, investment
	  securities purchased and net increases in loans represented most
	  of the investing activities.

	   
	  Forward Outlook:  
	  
	  Management is unaware of any regulatory recommendations which, if
	  implemented, would have a material effect on the liquidity,
	  capital resources, or operations of the Corporation.  Adequate
	  loan demand is anticipated for the remainder of 1997 and
	  management will continue to carefully evaluate this demand based
	  on the creditworthiness of the borrower and the relative strength
	  of the economy in the Corporation's market.  
	  
	  Effects on Inflation:
	  
	  All business enterprises are affected by the constantly changing
	  economic environment.  Changes in the economy, however, affect
	  the banking industry differently than other industries.  A bank's
	  assets and liabilities are primarily monetary in nature and
	  values are established without regard to future price changes. 
	  
	  Also, banks, unlike industrial corporations are not required to
	  provide for large capital expenditures in the form of premises,
	  equipment and inventory.  Interest rate changes and the actions
	  of the Federal Reserve Board have a greater impact on a bank's 
	  operations than do the effects of inflation.  Although occasional
	  deviations may occur, it is management's policy to generally
	  attempt to  maintain rate-sensitive assets at a level
	  approximating rate-sensitive liabilities.  Based on a one-year
	  parameter, this relationship approximated 98% at December 31,
	  1996.
	  
	  Accordingly, management anticipates that any additional decrease
	  in interest rates will positively impact earnings of the
	  Corporation.  Conversely, management may not be able to increase
	  rates on certain earning assets as rapidly as those of
	  interest-bearing liabilities if a significant increase in
	  interest rates would occur.  This may result in a decline in the
	  net interest margin of the Corporation. 
	  
	  Capital Strength:
	  
	  The current economic and regulatory environment has placed an
	  increased emphasis on capital strength.  Risk-based capital
	  guidelines recognize the relative degree of credit risk
	  associated with various assets by setting lower capital
	  requirements for some assets which clearly have less credit risk
	  than others.  Capital guidelines require banks to hold 4% Tier 1
	  and 8% Total Risk-based capital.  Following is a summary of
	  significant capital ratios at the dates indicated.
	  
	  

 . 
 .                         				Regulatory      December 31,   
 .                          				  Minimum     1996        1995 
       
 .                                   					  (dollars in thousands)


     Core (Tier 1) Capital          ---      $46,331    $42,948

     Leverage ratio (A)             4.0%       10.7%      11.2%  

     Risk-based Capital Ratios:

     Tier 1 capital ratio (B)       4.0%       17.0%      17.5%  

     Total risk-based capital 
      ratio (C)                     8.0%       18.0%      18.6%  
 

     (A)  Core capital divided by total assets less    
	  intangible assets.

     (B)  Core capital divided by year-end risk-adjusted 
	  assets, as defined by risk-based capital 
	  guidelines.

     (C)  Total capital divided by risk-adjusted assets,
	  as defined by risk-based guidelines.

As shown by the table, the Bank's capital ratios exceeded
regulatory minimums in 1996 and 1995.  The core capital ratio
decreased from 17.5% to 17.0%, and the total capital ratio
decreased from 18.6% to 18.0%, well above the regulatory minimums
of 4.0% for core and 8.0% for total capital.  These changes were
impacted by the Corporation's retention of earnings during the
year.