**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-K**

**[      X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF**

**THE      SECURITIES EXCHANGE ACT OF 1934**

**For      the fiscal year ended December 31, 2006 **

**or**

**[      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE      SECURITIES EXCHANGE ACT OF 1934 **

**Commission      File Number **
**001-11663**

**COMMUNITY      BANKS, INC.**

**(Exact      name of registrant as specified in its charter)**

| **Pennsylvania**                                            |   | **23-2251762**                                          |
|-------------------------------------------------------------|--------|---------------------------------------------------------|
| **(State                of Incorporation)**                 |   | **(I.R.S.                Employer Identification No.)** |
|                                                        |   |                                                    |
| **777                East Park Drive, Harrisburg, PA**      |   | **17111**                                               |
| **(Address                of principal executive offices)** |   | **(Zip                Code)**                           |

**Registrant’s      telephone number, including area code: **
**(717)      920-5800**

**Securities      registered pursuant to Section 12 (b) of the Act:**

| **Title                of Each Class**                  |   | **Name                of Each Exchange on Which Registered** |
|---------------------------------------------------------|--------|--------------------------------------------------------------|
| **Common                Stock, par value $5 per share** |   | **NASDAQ                Global Select Market**               |

**Securities      registered pursuant to Section 12 (g) of the Act: **
**None**

| Indicate                by check mark if the registrant is a well-known seasoned issuer,                as                defined in Rule 405 of the Securities Act. | Yes |   |   | No | X |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|--------|--------|----|---|

| Indicate                by check mark if the registrant is not required to file reports pursuant                to Section 13 or Section 15(d) of the Act. | Yes |   |   | No | X |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|--------|--------|----|---|

| such                filing requirements for the past 90 days. | Yes | X |   | No |   |
|---------------------------------------------------------------|-----|---|--------|----|--------|

| Indicate                by check mark whether the registrant is a large accelerated filer,                an                accelerated filer, or a non-accelerated filer. See definition of                “accelerated filer and larger accelerated filer” in Rule 12b-2 of the                Exchange Act. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Large                accelerated filer                                                                                                                                                                                                                                                                                     |   |   | Accelerated                filer | X |   | Non-accelerated                filer |   |

| Indicate                by check mark whether the registrant is a shell company (as defined                in                Rule 12b-2 of the Act). | Yes |   |   | No | X |
|------------------------------------------------------------------------------------------------------------------------------------------------------|-----|--------|--------|----|---|

**Documents      Incorporated by Reference:**

----

----

**COMMUNITY      BANKS, INC. **

**FORM      10-K**

**INDEX**

| **PART                I**   |                                                                                                                                             | **Page**               |
|-----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
|                        |                                                                                                                                             |                   |
| Item                1       | Business                                                                                                                                         | 4                - 10  |
| Item                1A      | Risk                Factors                                                                                                                      | 10                - 12 |
| Item                1B      | Unresolved                Staff Comments                                                                                                         | 13                     |
| Item                2       | Properties                                                                                                                                       | 13                     |
| Item                3       | Legal                Proceedings                                                                                                                 | 13                     |
| Item                4       | Submission                of Matters to a Vote of Security                Holders                                                                | 13                     |
|                        |                                                                                                                                             |                   |
|                        |                                                                                                                                             |                   |
| **PART                II**  |                                                                                                                                             |                   |
|                        |                                                                                                                                             |                   |
| Item                5       | Market                for Registrant’s Common Equity, Related Stockholder                Matters and Issuer Purchases of Equity Securities | 14                - 15 |
| Item                6       | Selected                Financial Data                                                                                                           | 16                     |
| Item                7       | Management’s                Discussion and Analysis of Financial Condition                and Results of Operations                        | 17                - 54 |
| Item                7A      | Quantitative                and Qualitative Disclosures About Market                Risk                                                         | 55                - 57 |
| Item                8       | Financial                Statements and Supplementary                Data                                                                        | 58                - 90 |
| Item                9       | Changes                in and Disagreements with Accountants on Accounting                and Financial Disclosure                               | 91                     |
| Item                9A      | Controls                and Procedures                                                                                                           | 91                     |
| Item                9B      | Other                Information                                                                                                                 | 91                     |
|                        |                                                                                                                                             |                   |
|                        |                                                                                                                                             |                   |
| **PART                III** |                                                                                                                                             |                   |
|                        |                                                                                                                                             |                   |
| Item                10      | Directors,                Executive Officers and Corporate                Governance                                                             | 94                     |
| Item                11      | Executive                Compensation                                                                                                            | 94                     |
| Item                12      | Security                Ownership of Certain Beneficial Owners and                Management and Related Stockholder Matters                     | 94                     |
| Item                13      | Certain                Relationships and Related Transactions, and                Director Independence                                          | 94                     |
| Item                14      | Principal                Accounting Fees and Services                                                                                            | 94                     |
|                        |                                                                                                                                             |                   |
|                        |                                                                                                                                             |                   |
| **PART                IV**  |                                                                                                                                             |                   |
|                        |                                                                                                                                             |                   |
| Item                15      | Exhibits,                Financial Statement                Schedules                                                                            | 95                - 96 |
|                        |                                                                                                                                             |                   |
|                        |                                                                                                                                             |                   |
| **SIGNATURES**              |                                                                                                                                             | 97                - 98 |
|                        |                                                                                                                                             |                   |
|                        |                                                                                                                                             |                   |

----

**PART      I**

**Item      1. Business****:**

**General**

*Business      Overview*

| **Pennsylvania                Counties** |   | **Number                of****Offices** |   | **Deposits                at****June                30, 2006** |   |
|------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------------------------------|--------|
|                                     |   |                                    |   |                                                           |   | (in                thousands) |   |
| York                                     |   |                                    | 20     |                                                           | $      | 595,412 |   |
| Lancaster                                |   |                                    | 12     |                                                           |   | 547,810 |   |
| Dauphin                                  |   |                                    | 11     |                                                           |   | 293,887 |   |
| Berks                                    |   |                                    | 6      |                                                           |   | 286,328 |   |
| Schuylkill                               |   |                                    | 7      |                                                           |   | 195,910 |   |
| Adams                                    |   |                                    | 3      |                                                           |   | 132,978 |   |
| Luzerne                                  |   |                                    | 3      |                                                           |   | 109,338 |   |
| Cumberland                               |   |                                    | 5      |                                                           |   | 78,208 |   |
| Northumberland                           |   |                                    | 2      |                                                           |   | 68,581 |   |
| Chester                                  |   |                                    | 2      |                                                           |   | 63,075 |   |
| Snyder                                   |   |                                    | 1      |                                                           |   | 17,736 |   |
|                                     |   |                                    |   |                                                           |   |   |   |
| **Maryland                Counties**     |   |                                    |   |                                                           |   |   |   |
|                                     |   |                                    |   |                                                           |   |   |   |
| Carroll                                  |   |                                    | 2      |                                                           | $      | 25,105 |   |

----

*Non-banking      subsidiaries*

*Operating      Segments*

*Employees*

----

*History      and Pending Acquisitions*

----

*Competition*

| **Pennsylvania                Counties** |   | **Branches                of Other Institutions Located in County** |   | **Total                Deposits within County****(in                thousands)** |   | **Community’s                Share of Market (%)** |   | **Rank                within Market** |   |
|------------------------------------------|--------|---------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------|--------|
|                                     |   |                                                                |   |                                                                             |   |                                                     |   |                                  |   |
| York                                     |   |                                                                | 156    |                                                                             | $      | 5,888,860                                                |   |                                  | 10     |   |   | 4 |   |
| Lancaster                                |   |                                                                | 203    |                                                                             |   | 8,103,302                                                |   |                                  | 7      |   |   | 5 |   |
| Dauphin                                  |   |                                                                | 105    |                                                                             |   | 4,272,070                                                |   |                                  | 7      |   |   | 9 |   |
| Berks                                    |   |                                                                | 144    |                                                                             |   | 6,864,002                                                |   |                                  | 4      |   |   | 7 |   |
| Schuylkill                               |   |                                                                | 73     |                                                                             |   | 1,860,886                                                |   |                                  | 11     |   |   | 4 |   |
| Adams                                    |   |                                                                | 32     |                                                                             |   | 1,170,286                                                |   |                                  | 11     |   |   | 4 |   |
| Luzerne                                  |   |                                                                | 130    |                                                                             |   | 5,218,371                                                |   |                                  | 2      |   |   | 11 |   |
| Cumberland                               |   |                                                                | 104    |                                                                             |   | 3,682,476                                                |   |                                  | 2      |   |   | 11 |   |
| Northumberland                           |   |                                                                | 34     |                                                                             |   | 1,172,803                                                |   |                                  | 6      |   |   | 9 |   |
| Chester                                  |   |                                                                | 201    |                                                                             |   | 8,638,784                                                |   |                                  | 1      |   |   | 21 |   |
| Snyder                                   |   |                                                                | 20     |                                                                             |   | 500,042                                                  |   |                                  | 4      |   |   | 6 |   |
| **Maryland                Counties**     |   |                                                                |   |                                                                             |   |                                                     |   |                                  |   |   |   |   |   |
|                                     |   |                                                                |   |                                                                             |   |                                                     |   |                                  |   |   |   |   |   |
| Carroll                                  |   |                                                                | 63     |                                                                             | $      | 2,585,676                                                |   |                                  | 1      |   |   | 14 |   |

*Concentrations,      Seasonality*

*Environmental      Compliance*

----

**Supervision      and Regulation **

*Regulation      of the Holding Company*

*Regulation      of the Bank*

*FDIC      Insurance Assessment*

----

*Capital      Adequacy*

*Monetary      and Fiscal Policy*

**Compliance      with Legislation**

----

*Sarbanes-Oxley      Act of 2002 *

*USA      Patriot Act *

**Item      1A. Risk Factors**

*Future      loan losses may exceed Community’s allowance for loan      losses*
*.*

----

*Rapidly      changing interest rate environments could reduce Community’s net interest      margin, net interest income, fee income and net income.*

*Community’s      profitability depends significantly on economic conditions in its local      markets.*

*The      financial services industry is very competitive*

*Supervision,      Regulation and Compliance*

*Acquisitions*

----

*Goodwill      Impairment*

*Ability      to Pay Dividends *

*Community’s      stock price can be volatile*
*.*

----

**Item      1B. Unresolved Staff Comments**

**Item      2. Properties**

**Item      3.**** ****Legal      Proceedings:**

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

----

**PART      II**

**Item      5****.****Market      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases      of Equity Securities:**

**Market      Information**

|                          | **2006**                           |           | **2005**      |
|-------------------------------|------------------------------------|----------------|---------------|
|                          | **Price                Per Share** | **Dividends**  |          | **Price                Per Share** | **Dividends** |
|                          | **Low**                            | **High**       | **Declared**  |   | **Low** | **High** | **Declared** |
|                          |                               |           |          |   |   |   |   |
| First                Quarter  | **$****25.67**                     | **$****27.85** | **$****0.19** |   | $22.57 | $27.15 | $0.16 |
| Second                Quarter | **$****24.38**                     | **$****27.39** | **$****0.20** |   | $21.94 | $25.24 | $0.18 |
| Third                Quarter  | **$****24.58**                     | **$****27.29** | **$****0.20** |   | $25.39 | $27.48 | $0.18 |
| Fourth                Quarter | **$****25.74**                     | **$****28.48** | **$****0.20** |   | $23.90 | $28.42 | $0.19 |

**Issuer      Purchases of Equity Securities**

|             |   | **Total                Number of Shares****Purchased** |   | **Average                Price****Paid****Per                Share** |   | **Total                Number of Shares Purchased****as                part of Publicly Announced Plans or Programs** |   | **Capacity                to****Purchase****More                Shares Under Repurchase Program** |   |
|------------------|--------|--------------------------------------------------------|--------|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|
|             |   |                                                   |   |                                                                 |   |                                                                                                                  |   |                                                                                              |   |
| 10/1/06-10/31/06 |   |                                                   | 1,963  |                                                                 | $      | 27.06                                                                                                                 |   |                                                                                              | 1,963  |   |   | 53,900 |   |
| 11/1/06-11/30/06 |   |                                                   | 450    |                                                                 | $      | 27.16                                                                                                                 |   |                                                                                              | 450    |   |   | 53,900 |   |
| 12/1/06-12/31/06 |   |                                                   | 299    |                                                                 | $      | 28.34                                                                                                                 |   |                                                                                              | 299    |   |   | 53,900 |   |

| 1. | In                July 2003, Community registered 50,000 shares of its common stock                for                purchase by employees pursuant to the 401(k) savings plan and the                Board of                Directors authorized the repurchase of shares of Community common                stock to                fund the plan. No timetable was set for these                repurchases. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2. | In                the fourth quarter of 2005, Community announced a plan to repurchase                787,500 (restated for 5% stock dividend in 2006) of its shares. No                expiration date was given for the repurchase. As of December 31,                2006,                53,900 shares remain to be purchased pursuant to this plan.                                                          |
| 3. | During                the fourth quarter of 2006, no plan or program expired and Community                did                not determine to terminate any repurchase                program.                                                                                                                                                                                                                    |

----

**STOCK      PERFORMANCE GRAPH**

----

**Item      6.**** ****Selected      Financial Data:**

|                                                                |   | **At                or for the Year Ended December 31,**        |           |
|---------------------------------------------------------------------|--------|-----------------------------------------------------------------|----------------|
|                                                                |   | **2006**                                                        |           | **2005                *** |   | **2004** |   | **2003** |   | **2002** |   |
|                                                                |   | (dollars                in thousands except for per share data) |           |
| **BALANCE                SHEET DATA**                               |   |                                                            |           |   |   |   |   |   |   |   |   |
| At                Period End:                                       |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment                securities                                |   | **$**                                                           | **659,136**    |   | $ | 628,585 |   | $ | 619,110 |   | $ | 646,961 |   | $ | 667,801 |   |
| Total                loans                                          |   |                                                            | **2,370,889**  |   |   | 2,237,065 |   |   | 1,217,456 |   |   | 1,084,678 |   |   | 916,051 |   |
| Total                assets                                         |   |                                                            | **3,496,370**  |   |   | 3,332,430 |   |   | 1,954,799 |   |   | 1,861,063 |   |   | 1,680,362 |   |
| Total                deposits                                       |   |                                                            | **2,513,182**  |   |   | 2,294,367 |   |   | 1,305,537 |   |   | 1,230,685 |   |   | 1,132,913 |   |
| Long-term                debt                                       |   |                                                            | **315,079**    |   |   | 430,719 |   |   | 404,662 |   |   | 411,422 |   |   | 320,533 |   |
| Stockholders’                equity                           |   |                                                            | **486,161**    |   |   | 476,673 |   |   | 152,341 |   |   | 143,406 |   |   | 129,162 |   |
| Average:                                                            |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                assets                                         |   |                                                            | **3,403,421**  |   |   | 2,668,605 |   |   | 1,941,096 |   |   | 1,780,679 |   |   | 1,580,046 |   |
| Total                stockholders’ equity                     |   |                                                            | **475,710**    |   |   | 318,768 |   |   | 145,750 |   |   | 135,773 |   |   | 119,352 |   |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **EARNINGS                DATA:**                                   |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income                                  |   |                                                            | **106,900**    |   |   | 82,645 |   |   | 56,557 |   |   | 52,514 |   |   | 50,488 |   |
| Provision                for loan losses                            |   |                                                            | **2,050**      |   |   | 2,300 |   |   | 3,100 |   |   | 2,500 |   |   | 3,350 |   |
| Net                interest income after provision for loan losses  |   |                                                            | **104,850**    |   |   | 80,345 |   |   | 53,457 |   |   | 50,014 |   |   | 47,138 |   |
| Other                income                                         |   |                                                            | **34,967**     |   |   | 26,437 |   |   | 23,213 |   |   | 20,463 |   |   | 13,975 |   |
| Other                expense                                        |   |                                                            | **84,885**     |   |   | 75,069 |   |   | 49,993 |   |   | 45,718 |   |   | 39,300 |   |
| Provision                for income taxes                           |   |                                                            | **13,901**     |   |   | 6,072 |   |   | 4,879 |   |   | 4,359 |   |   | 3,367 |   |
| Net                income                                           |   |                                                            | **41,031**     |   |   | 25,641 |   |   | 21,798 |   |   | 20,400 |   |   | 18,446 |   |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PER                SHARE DATA:**                                  |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                             |   |                                                            | **1.74**       |   |   | 1.38 |   |   | 1.70 |   |   | 1.59 |   |   | 1.45 |   |
| Diluted                earnings per share                           |   |                                                            | **1.72**       |   |   | 1.35 |   |   | 1.65 |   |   | 1.54 |   |   | 1.42 |   |
| Cash                dividends declared                              |   |                                                            | **0.79**       |   |   | 0.71 |   |   | 0.64 |   |   | 0.60 |   |   | 0.52 |   |
| Book                value                                           |   |                                                            | **20.67**      |   |   | 19.81 |   |   | 11.86 |   |   | 11.17 |   |   | 10.16 |   |
| Average                diluted shares outstanding                   |   |                                                            | **23,918,486** |   |   | 18,975,425 |   |   | 13,203,653 |   |   | 13,122,240 |   |   | 13,115,886 |   |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PROFITABILITY                RATIOS:**                            |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Return                on average assets                             |   |                                                            | **1.21**       | **%** |   | 0.96 | % |   | 1.12 | % |   | 1.15 | % |   | 1.17 | % |
| Return                on average stockholders’ equity         |   |                                                            | **8.63**       | **%** |   | 8.04 | % |   | 14.96 | % |   | 15.03 | % |   | 15.46 | % |
| Net                interest margin (FTE)                            |   |                                                            | **3.88**       | **%** |   | 3.76 | % |   | 3.44 | % |   | 3.50 | % |   | 3.78 | % |
| Efficiency                ratio                                     |   |                                                            | **57.33**      | **%** |   | 57.51 | % |   | 60.42 | % |   | 60.59 | % |   | 56.92 | % |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CAPITAL                AND LIQUIDITY RATIOS:**                    |   |                                                            |           |   |   |   |   |   |   |   |   |   |
| Stockholders’                equity to total assets           |   |                                                            | **13.90**      | **%** |   | 14.30 | % |   | 7.79 | % |   | 7.71 | % |   | 7.69 | % |
| Average                equity to average assets                     |   |                                                            | **13.98**      |   |   | 11.95 | % |   | 7.51 | % |   | 7.62 | % |   | 7.55 | % |
| Dividend                payout ratio                                |   |                                                            | **45.52**      |   |   | 52.42 | % |   | 37.69 | % |   | 37.35 | % |   | 36.07 | % |
| Net                loans to assets                                  |   |                                                            | **67.13**      | **%** |   | 66.36 | % |   | 61.47 | % |   | 57.25 | % |   | 53.10 | % |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **ASSET                QUALITY RATIOS:**                            |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                for loan losses to total loans outstanding |   |                                                            | **1.00**       | **%** |   | 1.03 | % |   | 1.18 | % |   | 1.22 | % |   | 1.35 | % |
| Allowance                for loan losses to non-accrual loans       |   |                                                            | **188**        | **%** |   | 253 | % |   | 266 | % |   | 162 | % |   | 131 | % |
| Non-accrual                loans to total loans outstanding         |   |                                                            | **0.53**       | **%** |   | 0.41 | % |   | 0.45 | % |   | 0.76 | % |   | 1.04 | % |
| Non-performing                assets to total assets                |   |                                                            | **0.36**       | **%** |   | 0.32 | % |   | 0.38 | % |   | 0.70 | % |   | 0.63 | % |
| Net                charge-offs to average loans outstanding         |   |                                                            | **0.06**       | **%** |   | 0.05 | % |   | 0.16 | % |   | 0.17 | % |   | 0.35 | % |

----

**Item      7.**** ****Management’s      Discussion and Analysis of Financial Condition and      Results of Operations:**

**INTRODUCTION**

**Purpose      of this Presentation**

**Presentation      Format**

**Background**

----

**GAAP      REPORTING ISSUES**

**Forward-Looking      Statements**

**Critical      Accounting Policies**

| §   | Allowance                for Loan Losses: Adequacy of Allowance |
|--------------------|-----------------------------------------------------------------|

| §   | Purchase                Accounting for Business                Combinations |
|--------------------|-----------------------------------------------------------------------------|

| §   | “Other                than Temporary” Impairment of Investment                Securities |
|--------------------|------------------------------------------------------------------------------------------------------|

| ·   | *Adequacy                of Allowance* |
|--------------------|----------------------------------------|

----

| *·  * | *Purchase                Accounting for Business                Combinations* |
|----------------------|-------------------------------------------------------------------------------|

| ·   | *Other                than Temporary Impairment of Investment                Securities* |
|--------------------|------------------------------------------------------------------------------------------|

**GAAP      versus Non-GAAP**

----

| **Traditional                GAAP Measures**  |   |   **Adjustments**                                                                                                       |   | **Comparable                Non-GAAP Measures**                                                |
|-----------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
|                                          |   |                                                                                                                              |   |                                                                                           |
| **Balance                Sheet:**             |   |                                                                                                                              |   |                                                                                           |
| Average                Assets                 |   | Excludes                Intangible Assets from Assets                                                                             |   | Average                “Tangible” Assets                                           |
| Average                Equity                 |   | Excludes                Intangible Assets from Equity                                                                             |   | Average                “Tangible” Equity                                           |
| Equity                to Assets               |   | Excludes                Intangible Assets from Equity and Assets                                                                  |   | “Tangible”                Equity to Assets                                         |
| Book                Value per Share           |   | Excludes                Intangible Assets from Equity                                                                             |   | “Tangible”                Book Value per Share                                     |
|                                          |   |                                                                                                                              |   |                                                                                           |
| **Performance:**                              |   |                                                                                                                              |   |                                                                                           |
| Net                Income / EPS               |   | Excludes                After-Tax Effect of Mergers & Acquisitions (M&A) Expense and Other                Special Charges |   | “Core”                Net Income / EPS                                             |
| Net                Income / EPS               |   | Excludes                After-Tax Effect of CDI Amortization, M&A Expense, and Other Special                Charges           |   | “Tangible”                or “Operating” Income / EPS                  |
| Return                on Average Assets (ROA) |   | “Tangible”                Net Income divided by Average “Tangible” Assets                                 |   | Operating                Return on Average “Tangible” Assets (ROTA)                |
| Return                on Average Equity (ROE) |   | “Tangible”                Net Income divided by Average “Tangible” Equity                                 |   | Operating                Return on Average “Tangible” Equity                (ROTE) |

**2006      PERFORMANCE OVERVIEW AND SUMMARY**

**Executive      Overview**

----

**2006      Economic Conditions and Yield Curve Dynamics**

*higher*

**2006      Performance Summary**

| *·  * | *Net                Interest Income* |
|----------------------|--------------------------------------|

----

| *·  * | *Provision                for Credit Losses* |
|----------------------|----------------------------------------------|

| *·  * | *Non-interest                Income* |
|----------------------|--------------------------------------|

| *·  * | *Non-interest                Expenses* |
|----------------------|----------------------------------------|

| ·   | *Comparative                Performance Measures* |
|--------------------|---------------------------------------------------|

----

**PERFORMANCE      COMPONENTS**

**Net      Interest Income**

|                                        |   | **2006**         |        | **2005**                        |   | **Change**       |   |
|---------------------------------------------|--------|------------------|-------------|---------------------------------|--------|------------------|--------|
|                                        |   |  **Amount** |        | **Yield                / Rate** |   |  **Amount** |   | **Yield                / Rate** |   |  **Amount** |   | **Yield                / Rate** |   |
|                                        |   |             |        |                            |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income              |   | **$**            | **205,436** |                            |   | **6.95**         | **%**  | $ | 149,456 |   |   | 6.26 | % | $ | 55,980 |   |   | 0.69 | % |
| Interest                expense             |   |             | **90,734**  |                            |   | **3.56**         | **%**  |   | 59,648 |   |   | 2.90 | % |   | 31,086 |   |   | 0.66 | % |
| Net                interest income          |   | **$**            | **114,702** |                            |   |             |   | $ | 89,808 |   |   |   |   | $ | 24,894 |   |   |   |   |
|                                        |   |             |        |                            |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread              |   |             |        |                            |   | **3.39**         | **%**  |   |   |   |   | 3.36 | % |   |   |   |   | 0.03 | % |
| Impact                of non-interest funds |   |             |        |                            |   | **0.49**         | **%**  |   |   |   |   | 0.40 | % |   |   |   |   | 0.09 | % |
|                                        |   |             |        |                            |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest margin          |   |             |        |                            |   | **3.88**         | **%**  |   |   |   |   | 3.76 | % |   |   |   |   | 0.12 | % |

| ***·  *** | *Overview--2006                versus 2005* |
|--------------------------|---------------------------------------------|

***six***
***twelve***

| ***·  *** |  *Yield                Curve Dynamics: Quantitative                Comparisons* |
|--------------------------|--------------------------------------------------------------------------------------|

----

***and***

----

| *·  * | *Quarterly                Net Interest Income Performance: 2006 /                2005* |
|----------------------|----------------------------------------------------------------------------------------|

|                               |   | **2006**                          |       |
|------------------------------------|--------|-----------------------------------|------------|
|                               |   | **Fourth                Quarter** |       | **Third                Quarter** |   | **Second                Quarter** |   | **First                Quarter** |   |
| Asset                yield         |   |                              | **7.05**   | **%** |   | **7.08** | **%** |   | **6.93** | **%** |   | **6.74** | **%** |
| Funding                cost        |   |                              | **3.85**   | **%** |   | **3.66** | **%** |   | **3.46** | **%** |   | **3.24** | **%** |
| Interest                spread     |   |                              | **3.20**   | **%** |   | **3.42** | **%** |   | **3.47** | **%** |   | **3.50** | **%** |
| Net                interest margin |   |                              | **3.71**   | **%** |   | **3.90** | **%** |   | **3.94** | **%** |   | **3.98** | **%** |
|                               |   |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net                interest income |   | **$**                             | **28,089** |   | **$** | **28,854** |   | **$** | **28,917** |   | **$** | **28,842** |   |

|                               |   | 2005                                         Post-combination                                                                            Pre-combination |   |
|------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                               |   | Fourth                Quarter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | Third                Quarter |   | Second                Quarter |   | First                Quarter |   |
| Asset                yield         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 6.53   | % |   | 6.25 | % |   | 6.06 | % |   | 6.04 | % |
| Funding                cost        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 3.00   | % |   | 2.76 | % |   | 2.97 | % |   | 2.86 | % |
| Interest                spread     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 3.53   | % |   | 3.49 | % |   | 3.09 | % |   | 3.18 | % |
| Net                interest margin |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 3.96   | % |   | 3.89 | % |   | 3.46 | % |   | 3.55 | % |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income |   | $                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 28,571 |   | $ | 28,208 |   | $ | 16,650 |   | $ | 16,379 |   |

| ·   | Results                in the first                half of 2005,                which included only historical Community, revealed a trend of compressing                interest spreads driven primarily by an increasing cost of funds.                While                net interest margin compressed, increases in loan volume produced                only                modest increases in net interest                income. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Coincident                with the mid-year 2005 merger of Blue Ball, Community incurred a                merger,                conversion and restructuring charge of $8.2 million, the largest                portion                of which resulted from the expense associated with the restructuring                of                Community’s wholesale borrowings. The restructuring portion of this                charge, which resulted in a prepayment penalty of $6 million, facilitated                the prepayment of $60 million of FHLB term advances. These advances                had a                weighted average cost of 6.29%, well in excess of the Corporation’s                incremental wholesale borrowing rate, and contributed to the reduction                in                aggregate funding cost from 2.97% in the second quarter of 2005 to                2.76%                in the initial, post-merger third quarter of 2005. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                third                and fourth quarters of 2005                represented the first two quarterly periods of post-merger, combined                results. Despite the benefits of the mid-year restructuring effort,                rising                short term interest rates and the reduced slope of the yield curve                exerted                concurrent upward pricing pressure on both rate sensitive earning                asset                yields and funding costs. Due to robust loan growth, overall net                interest                income continued to increase, but at a modest                pace. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | The                first                half of 2006                produced trends similar to those in the second half of 2005: (1)                rising                short-term interest rates; (2) an increasingly “flat” yield curve; (3)                slightly slower loan growth; and (4) parallel increases in both earning                asset yields and funding costs. The increase in funding costs, however,                was disproportionately being driven by the steadily increasing velocity                and volume of re-pricing for maturing time deposits. These re-pricings                were occurring at interest rates disparately higher than those on                the                maturing balances, largely due to: (1) the influence of yield curve                dynamics on incremental rate offerings, most particularly those for                maturities under two years and (2) associated competitive pressures. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | While                the 2006                third quarter                results mirrored those in the first half of that year, supplemental                trends                continued to emerge. Growth in low-cost core deposit balances was                being                curtailed by consumer preferences for the now measurably higher rates                offered on short-term time deposits. Additionally, steadily increasing                volumes of maturing time deposits were being re-priced at new rates                that                were far higher than the original rate offerings on the maturing                balances. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | By                the fourth                quarter of 2006,                many of these same underlying trends were exacerbated. The beginning                of                the quarter marked the end of favorable re-pricing opportunities                for                rate-sensitive earning assets. At the same time, the relative composition                of funding sources continued to migrate toward an increasing dependency                on                higher-cost, short-term time deposits. By the fourth quarter, time                deposits comprised 49.1% of funding                sources. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                           |   | **Change                from Previous Quarter—Increase / (Decrease)** |                      |
|------------------------------------------------|--------|-----------------------------------------------------------------------------|---------------------------|
|                                           |   | [*expressed                in basis points-bp*]                             |                      |
|                                           |   |                                                                        |                      |
|                                           |   | **Fourth                Quarter**                                           |                      | **Third                Quarter** |   | **Second                Quarter** |   | **First                Quarter** |   |
| Earning                Asset yield             |   |                                                                        | **(                3 bp** | **)** |   | **15                bp** |   |   | **19                bp** |   |   | **21                bp** |   |
| Funding                cost - time deposits    |   |                                                                        | **26                bp**  |   |   | **25                bp** |   |   | **29                bp** |   |   | **25                bp** |   |
|                                           |   |                                                                        |                      |   |   |   |   |   |   |   |   |   |   |
| %                of funding from time deposits |   |                                                                        | **49.1**                  | **%** |   | **47.9** | **%** |   | **47.5** | **%** |   | **43.9** | **%** |

| *·  * | *Interest                Income / Earning Assets* |
|----------------------|---------------------------------------------------|

*total*

----

| *·  * | *Interest                Expense / Funding Sources* |
|----------------------|-----------------------------------------------------|

| *·  * | *Interest                Spread / Net Interest Margin* |
|----------------------|--------------------------------------------------------|

***interest      spread***
***Net      interest margin***

**Provision      for Credit Losses**

----

**Non-Interest      Income (excluding investment gains) **

| §   | Instinctively,                the additional six months of Ball activity would ordinarily be expected                to                account for a minimum increase of 25% between the two years, after                giving                effect to both (1) the relatively similar contributions of non-interest                income for the pre-merger companies and; (2) the mid-year 2005 merger                timing. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| §   | The                mid-May, 2006 acquisition of the Wiley Insurance Agency, a small                south-central Pennsylvania insurance agency, combined with the                mid-September addition of the acquired trust assets of a competing                bank,                fueled incremental growth in both insurance commissions and income                from                trust services. As expected, each of these operations also resulted                in                increases in expenses that are described in the section marked as                “Non-Interest Expenses”. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| §   | The                successful coordination and consolidation of the previously separate,                pre-merger fee businesses, such as retail investment sales and the                overdraft honors programs, provided an additional boost in both revenues                and improved operational delivery. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| §   | Finally,                Community experienced two favorable events involving the acceleration                of                discount accretion from purchase accounting adjustments that had                arisen at                the PennRock merger date. These two occurrences produced “one-off”                revenues that were reflected in the first and third quarters of 2006.                First quarter results included a nonrecurring gain attributed to                the early                retirement of certain FHLB advances that had been scheduled to re-price                at                higher floating rates. In the third quarter, Community recognized                a gain                on the sale of loans that had been acquired in the Blue Ball merger.                The                basis of these loans had been adjusted at acquisition for contractually                required payments that were not considered collectible. These two                occurrences contributed approximately $927,000 to aggregate increases                in                non-interest income. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                       |   |     |       |     |   | **Change** |       |
|------------------------------------------------------------|--------|----------|------------|----------|--------|------------|------------|
|                                                       |   | **2006** |       | **2005** |   | **Amount** | ** ** | ** %** |   |
| Investment                management and trust services    |   | **$**    | **4,394**  |     | $      | 2,692      |       | $ | 1,702 |   |   | 63 | % |
| Service                charges on deposit accounts         |   |     | **11,507** |     |   | 9,413      |       |   | 2,094 |   |   | 22 | % |
| Other                service charges, commissions and fees |   |     | **7,272**  |     |   | 5,452      |       |   | 1,820 |   |   | 33 | % |
| Insurance                premium income and commissions    |   |     | **4,120**  |     |   | 3,350      |       |   | 770 |   |   | 23 | % |
| Mortgage                banking activities                 |   |     | **2,172**  |     |   | 2,354      |       |   | (182 | ) |   | (8 | )% |
| Earnings                on investment in life insurance    |   |     | **2,725**  |     |   | 2,063      |       |   | 662 |   |   | 32 | % |
| Other                income                                |   |     | **2,045**  |     |   | 854        |       |   | 1,191 |   |   | 139 | % |
|                                                       |   |     |       |     |   |       |       |   |   |   |   |   |   |
|                                                       |   |     | **34,235** |     |   | 26,178     |       |   | 8,057 |   |   | 31 | % |
|                                                       |   |     |       |     |   |       |       |   |   |   |   |   |   |
| Investment                security gains                   |   |     | **732**    |     |   | 259        |       |   | 473 |   |   | 183 | % |
|                                                       |   |     |       |     |   |       |       |   |   |   |   |   |   |
| Total                non-interest income                   |   | **$**    | **34,967** |     | $      | 26,437     |       | $ | 8,530 |   |   | 32 | % |

----

**Non-Interest      Expenses**

|                                                |   |     |       |     |   | **Change** |       |
|-----------------------------------------------------|--------|----------|------------|----------|--------|------------|------------|
|                                                |   | **2006** |       | **2005** |   | **Amount** | ** ** | ** %** |   |
| Salaries                and benefits                |   | **$**    | **46,434** |     | $      | 36,998     |       | $ | 9,436 |   |   | 26 | % |
| Occupancy                and equipment expense      |   |     | **14,117** |     |   | 11,355     |       |   | 2,762 |   |   | 24 | % |
| Marketing                expense                    |   |     | **1,752**  |     |   | 2,036      |       |   | (284 | ) |   | (14 | )% |
| Telecommunications                expense           |   |     | **2,243**  |     |   | 1,359      |       |   | 884 |   |   | 65 | % |
| Amortization                of intangibles          |   |     | **2,639**  |     |   | 1,424      |       |   | 1,215 |   |   | 85 | % |
| Other                expenses                       |   |     | **17,700** |     |   | 13,692     |       |   | 4,008 |   |   | 29 | % |
|                                                |   |     |       |     |   |       |       |   |   |   |   |   |   |
| Subtotal                                            |   |     | **84,885** |     |   | 66,864     |       |   | 18,021 |   |   | 27 | % |
|                                                |   |     |       |     |   |       |       |   |   |   |   |   |   |
| Merger,                conversion and restructuring |   |     | **---**    |     |   | 8,205      |       |   | (8,205 | ) |   | --- |   |
|                                                |   |     |       |     |   |       |       |   |   |   |   |   |   |
|                                                |   | **$**    | **84,885** |     | $      | 75,069     |       | $ | 9,816 |   |   | 13 | % |

----

| *·  * | *Overview—Operating                Expense (excluding merger, conversion and                restructuring)* |
|----------------------|-------------------------------------------------------------------------------------------------------------------|

| *·  * | *Salary                and Benefits* |
|----------------------|--------------------------------------|

*mandates*

----

| *·  * | *Occupancy                and Equipment Expense* |
|----------------------|--------------------------------------------------|

| *·  * | *Marketing                Expenses* |
|----------------------|-------------------------------------|

| *·  * | *Telecommunication                Expense* |
|----------------------|--------------------------------------------|

| ·   | *Amortization                of Intangibles* |
|--------------------|----------------------------------------------|

----

| *·  * | *Other                Expenses* |
|----------------------|---------------------------------|

| *·  * | *Income                Taxes* |
|----------------------|-------------------------------|

**BALANCE      SHEET**

**Overview**

*Average*
*Average*

**Investments**

----

| *·  * | *Investment                Classification* |
|----------------------|--------------------------------------------|

| *·  * | *2006                Investment Activity and Funding                Trends* |
|----------------------|-----------------------------------------------------------------------------|

| *·  * | *Other                Than Temporary Impairment* |
|----------------------|--------------------------------------------------|

| o   | The                length of time and the extent to which the fair value has been less                than                cost, |
|---------------|---------------------------------------------------------------------------------------------------------------------------------|

| o   | The                financial condition and near-term prospects of the issuer,                and |
|---------------|--------------------------------------------------------------------------------------------------|

| o   | The                intent and ability of the Corporation to retain its investment in                the                issuer for a period of time sufficient to allow for any anticipated                recovery in fair value. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| *·  * | *Investment                Summary* |
|----------------------|-------------------------------------|

|                                                     |   | **2006**                    |        | **2005**          |   | **2004**                    |   |
|----------------------------------------------------------|--------|-----------------------------|-------------|-------------------|--------|-----------------------------|--------|
|                                                     |   | **Amortized**** Cost** |        | **Fair****Value** |   | **Amortized**** Cost** |   | **Fair****Value** |   | **Amortized**** Cost** |   | **Fair****Value** |   |
|                                                     |   |                        |        |              |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                government and federal agency        |   | **$**                       | **128,660** |              | $      | 126,772                     |   | $ | 125,938 |   | $ | 123,124 |   | $ | 126,056 |   | $ | 125,541 |   |
| Mortgage-backed,                primarily federal agency |   |                        | **204,887** |              |   | 201,972                     |   |   | 186,871 |   |   | 182,813 |   |   | 178,437 |   |   | 179,314 |   |
| State                and municipal                       |   |                        | **219,949** |              |   | 225,590                     |   |   | 209,077 |   |   | 213,475 |   |   | 180,110 |   |   | 186,366 |   |
| Corporate                                                |   |                        | **42,403**  |              |   | 42,558                      |   |   | 40,351 |   |   | 40,220 |   |   | 58,928 |   |   | 60,043 |   |
| Equity                                                   |   |                        | **63,035**  |              |   | 62,589                      |   |   | 68,909 |   |   | 68,486 |   |   | 67,085 |   |   | 67,846 |   |
| Total                                                    |   | **$**                       | **658,934** |              | $      | 659,481                     |   | $ | 631,146 |   | $ | 628,118 |   | $ | 610,616 |   | $ | 619,110 |   |

**Maturity      Distribution of Securities**

|                                                |   |  **Within                One Year** |   | **One****Through****Five                Years** |   | **Five****Through****Ten                Years** |   |  **After****Ten                Years** |    |   **Total** |   |  **Average****Maturity** |   | **Weighted****Average****Yield(a)** |    |
|-----------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|---------------------------------------------|---------|-----------------------|--------|-------------------------------|--------|-------------------------------------|---------|
| U.S.                Government and federal agencies |   | $                                        | 1,130  |                                            | $      | 76,370                                          |   | $                                           | 79,935  |                  | $      | 176,111                       |   | $                                   | 333,546 |   |   | 10yr.                8mos. |   |   | 4.95 | % |
| State                and municipal                  |   |                                     | ---    |                                            |   | 1,866                                           |   |                                        | 22,318  |                  |   | 195,765                       |   |                                | 219,949 |   |   | 15yr.                0mos. |   |   | 6.84 | % |
| Other                                               |   |                                     | ---    |                                            |   | 16,382                                          |   |                                        | 9,000   |                  |   | 17,021                        |   |                                | 42,403  |   |   | 12yr.                1 mos. |   |   | 7.00 | % |
| Total                                               |   | $                                        | 1,130  |                                            | $      | 94,618                                          |   | $                                           | 111,253 |                  | $      | 388,897                       |   | $                                   | 595,898 |   |   | 12yr.                4 mos. |   |   | 5.80 | % |
|                                                |   |                                     |   |                                            |   |                                            |   |                                        |    |                  |   |                          |   |                                |    |   |   |   |   |   |   |   |
| Percentage                of total                  |   |                                     | 0.19   | %                                               |   | 15.88                                           | %      |                                        | 18.67   | %                     |   | 65.26                         | %      |                                | 100.00  | % |   |   |   |   |   |   |
|                                                |   |                                     |   |                                            |   |                                            |   |                                        |    |                  |   |                          |   |                                |    |   |   |   |   |   |   |   |
| Weighted                average yield (a)           |   |                                     | 4.35   | %                                               |   | 5.11                                            | %      |                                        | 5.33    | %                     |   | 6.10                          | %      |                                | 5.80    | % |   |   |   |   |   |   |

**Loans**

*acquired*
*organic*
*absolute*

----

|                                   |   |     |          |     |   | **Change** |   |
|----------------------------------------|--------|----------|---------------|----------|--------|------------|--------|
|                                   |   | **2006** |          | **2005** |   | **Amount** |   |  **%** |   |
|                                   |   |     |          |     |   |       |   |   |   |   |   |   |   |
| Commercial                             |   | **$**    | **830,141**   |     | $      | 592,556    |   | $ | 237,585 |   |   | 40 | % |
| Commercial                real estate  |   |     | **820,181**   |     |   | 562,852    |   |   | 257,329 |   |   | 46 | % |
| Residential                real estate |   |     | **151,329**   |     |   | 128,120    |   |   | 23,209 |   |   | 18 | % |
| Consumer                               |   |     | **522,567**   |     |   | 431,477    |   |   | 91,090 |   |   | 21 | % |
| Total                                  |   | **$**    | **2,324,218** |     | $      | 1,715,005  |   | $ | 609,213 |   |   | 36 | % |

*2005*
*2006*

|                                   |   | **Fourth                Quarter** |          | **Fourth                Quarter** |   | **Change** |       |
|----------------------------------------|--------|-----------------------------------|---------------|-----------------------------------|--------|------------|------------|
|                                   |   | **2006**                          |          | **2005**                          |   | **Amount** | ** ** | ** %** |   |
|                                   |   |                              |          |                              |   |       |       |   |   |   |   |   |   |
| Commercial                             |   | **$**                             | **840,982**   |                              | $      | 766,532    |       | $ | 74,450 |   |   | 10 | % |
| Commercial                real estate  |   |                              | **822,007**   |                              |   | 779,459    |       |   | 42,548 |   |   | 5 | % |
| Residential                real estate |   |                              | **150,132**   |                              |   | 154,716    |       |   | (4,584 | ) |   | (3 | )% |
| Consumer                               |   |                              | **540,653**   |                              |   | 502,064    |       |   | 38,589 |   |   | 8 | % |
| Total                                  |   | **$**                             | **2,353,774** |                              | $      | 2,202,771  |       | $ | 151,003 |   |   | 7 | % |

----

**Allowance      for Loan Losses and Credit Quality**

|                                                          |   | **2006** |       | **2005** |   | **2004** |   |
|---------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
|                                                          |   |     |       |     |   |     |   |   |   |   |
| Balance                at January 1,                          |   | **$**    | **22,965** |     | $      | 14,421   |   | $ | 13,178 |   |
| Loans                charged off                              |   |     | **(2,290** | **)**    |   | (2,323   | )      |   | (2,910 | ) |
| Recoveries                                                    |   |     | **901**    |     |   | 1,499    |   |   | 1,053 |   |
| Provision                charged to operations                |   |     | **2,050**  |     |   | 2,300    |   |   | 3,100 |   |
| Allowance                established for acquired credit risk |   |     | **---**    |     |   | 7,068    |   |   | --- |   |
| Balance                at December 31,                        |   | **$**    | **23,626** |     | $      | 22,965   |   | $ | 14,421 |   |
|                                                          |   |     |       |     |   |     |   |   |   |   |
| Allowance                for credit losses to loans           |   |     | **1.00**   | **%**    |   | 1.03     | %      |   | 1.18 | % |

| *·  * | *Loan                Quality Metrics* |
|----------------------|---------------------------------------|

----

|                                                                                    |   | **2006** |          | **2005** |   | **2004**  |   | **2003** |      | **2002** |   |
|-----------------------------------------------------------------------------------------|--------|----------|---------------|----------|--------|-----------|--------|----------|-----------|----------|--------|
| Loans                at year-end                                                        |   | **$**    | **2,370,889** |     | $      | 2,237,065 |   | $        | 1,217,456 |     | $      | 1,084,678 |   | $ | 916,051 |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Average                loans balance                                                    |   | **$**    | **2,324,218** |     | $      | 1,715,005 |   | $        | 1,156,514 |     | $      | 1,004,781 |   | $ | 894,132 |   |
| Balance,                allowance for loan losses, January 1                            |   | **$**    | **22,965**    |     | $      | 14,421    |   | $        | 13,178    |     | $      | 12,343 |   | $ | 12,132 |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Loans                charged off:                                                       |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural                                   |   |     | **576**       |     |   | 321       |   |     | 300       |     |   | 253 |   |   | 1,878 |   |
| Real                estate-commercial mortgage                                          |   |     | **676**       |     |   | 963       |   |     | 1,087     |     |   | 1,336 |   |   | 1,337 |   |
| Real                estate-retail mortgage                                              |   |     | **91**        |     |   | 119       |   |     | 160       |     |   | 212 |   |   | 110 |   |
| Consumer                and other                                                       |   |     | **947**       |     |   | 920       |   |     | 1,363     |     |   | 1,038 |   |   | 855 |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Total                                                                                   |   |     | **2,290**     |     |   | 2,323     |   |     | 2,910     |     |   | 2,839 |   |   | 4,180 |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Loans                recovered:                                                         |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural                                   |   |     | **86**        |     |   | 286       |   |     | 324       |     |   | 240 |   |   | 644 |   |
| Real                estate-commercial mortgage                                          |   |     | **420**       |     |   | 703       |   |     | 240       |     |   | 606 |   |   | 7 |   |
| Real                estate-retail mortgage                                              |   |     | **15**        |     |   | 68        |   |     | 17        |     |   | 83 |   |   | 18 |   |
| Consumer                and other                                                       |   |     | **380**       |     |   | 442       |   |     | 472       |     |   | 245 |   |   | 372 |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Total                                                                                   |   |     | **901**       |     |   | 1,499     |   |     | 1,053     |     |   | 1,174 |   |   | 1,041 |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Net                charge-offs                                                          |   |     | **(1,389**    | **)**    |   | (824      | )      |     | (1,857    | )        |   | (1,665 | ) |   | (3,139 | ) |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Provision                for loan losses                                                |   |     | **2,050**     |     |   | 2,300     |   |     | 3,100     |     |   | 2,500 |   |   | 3,350 |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Allowance                established for acquired credit risk                           |   |     | **---**       |     |   | 7,068     |   |     | ---       |     |   | --- |   |   | --- |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Balance,                allowance for loan losses,December                31            |   | **$**    | **23,626**    |     | $      | 22,965    |   | $        | 14,421    |     | $      | 13,178 |   | $ | 12,343 |   |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Net                charge-offs to loans at year end                                     |   |     | **0.06**      | **%**    |   | 0.04      | %      |     | 0.15      | %        |   | 0.15 | % |   | 0.34 | % |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Net                charge-offs to average loans                                         |   |     | **0.06**      | **%**    |   | 0.05      | %      |     | 0.16      | %        |   | 0.17 | % |   | 0.35 | % |
|                                                                                    |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Balance                of allowance for loan losses to                loans at year end |   |     | **1.00**      | **%**    |   | 1.03      | %      |     | 1.18      | %        |   | 1.22 | % |   | 1.35 | % |

| *·  * | *Allowance                for Loan Losses Ratio* |
|----------------------|--------------------------------------------------|

----

| ·   | *Management                Process* |
|--------------------|-------------------------------------|

|                                                  |   | **2006** |       | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
|-------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|----------|--------|----------|--------|
| **Loans:**                                            |   |     |       |     |   |     |   |     |   |     |   |
| Commercial,                financial and agricultural |   | **$**    | **16,668** |     | $      | 13,632   |   | $        | 7,899  |     | $      | 7,090 |   | $ | 6,305 |   |
| Real                estate-construction               |   |     | **---**    |     |   | ---      |   |     | ---    |     |   | --- |   |   | --- |   |
| Real                estate-mortgage                   |   |     | **2,012**  |     |   | 2,186    |   |     | 2,099  |     |   | 2,313 |   |   | 1,936 |   |
| Consumer                                              |   |     | **3,580**  |     |   | 3,520    |   |     | 3,202  |     |   | 2,184 |   |   | 1,767 |   |
| Unallocated                                           |   |     | **1,366**  |     |   | 3,627    |   |     | 1,221  |     |   | 1,591 |   |   | 2,335 |   |
|                                                  |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Balance                                               |   | **$**    | **23,626** |     | $      | 22,965   |   | $        | 14,421 |     | $      | 13,178 |   | $ | 12,343 |   |

----

| ·   | *Risk                Elements* |
|--------------------|--------------------------------|

|                                                                     |   | **2006** |       | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|----------|--------|----------|--------|
| Loans                on which accrual of interest has been discontinued: |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural                    |   | **$**    | **3,139**  |     | $      | 1,834    |   | $        | 1,748  |     | $      | 3,066 |   | $ | 2,257 |   |
| Construction                loans                                        |   |     | **147**    |     |   | ---      |   |     | ---    |     |   | --- |   |   | --- |   |
| Mortgages                                                                |   |     | **8,902**  |     |   | 7,105    |   |     | 2,894  |     |   | 4,054 |   |   | 6,609 |   |
| Other                                                                    |   |     | **357**    |     |   | 121      |   |     | 786    |     |   | 1,031 |   |   | 527 |   |
| Total                non-accrual loans                                   |   |     | **12,545** |     |   | 9,060    |   |     | 5,428  |     |   | 8,151 |   |   | 9,393 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Foreclosed                real estate                                    |   |     | **37**     |     |   | 1,447    |   |     | 2,094  |     |   | 4,865 |   |   | 1,183 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Total                non-performing assets                               |   |     | **12,582** |     |   | 10,507   |   |     | 7,522  |     |   | 13,016 |   |   | 10,576 |   |
| Loans                past due 90 days or more:                           |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural                    |   |     | **95**     |     |   | ---      |   |     | ---    |     |   | 4 |   |   | 97 |   |
| Mortgages                                                                |   |     | **564**    |     |   | 6        |   |     | ---    |     |   | 40 |   |   | 770 |   |
| Consumer                and other                                        |   |     | **---**    |     |   | 16       |   |     | ---    |     |   | 46 |   |   | 94 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
|                                                                     |   |     | **659**    |     |   | 22       |   |     | ---    |     |   | 90 |   |   | 961 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Total                risk elements                                       |   | **$**    | **13,241** |     | $      | 10,529   |   | $        | 7,522  |     | $      | 13,106 |   | $ | 11,537 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Ending                allowance for loan losses                          |   | **$**    | **23,626** |     | $      | 22,965   |   | $        | 14,421 |     | $      | 13,178 |   | $ | 12,343 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Ending                allowance to non-accrual loans                     |   |     | **188**    | **%**    |   | 253      | %      |     | 266    | %        |   | 162 | % |   | 131 | % |

----

| *·  * | *Overall                Assessment* |
|----------------------|-------------------------------------|

**Intangible      Assets**

**Deposits**

|                                      |   |     |          |     |   | **Change** |       |
|-------------------------------------------|--------|----------|---------------|----------|--------|------------|------------|
|                                      |   | **2006** |          | **2005** |   | **Amount** | ** ** | **%** |   |
|                                      |   |     |          |     |   |       |       |   |   |   |   |   |   |
| Demand                                    |   | **$**    | **352,814**   |     | $      | 271,319    |       | $ | 81,495 |   |   | 30 | % |
| Savings                & NOW accounts |   |     | **849,473**   |     |   | 683,316    |       |   | 166,157 |   |   | 24 | % |
| Time                                      |   |     | **969,525**   |     |   | 701,776    |       |   | 267,749 |   |   | 38 | % |
| Time                $100,000 or more      |   |     | **233,380**   |     |   | 150,820    |       |   | 82,560 |   |   | 55 | % |
|                                      |   | **$**    | **2,405,192** |     | $      | 1,807,231  |       | $ | 597,961 |   |   | 33 | % |

----

*2005*
*2006*

|                                      |   | **Fourth                Quarter** |          | **Fourth                Quarter** |   | **Change** |       |
|-------------------------------------------|--------|-----------------------------------|---------------|-----------------------------------|--------|------------|------------|
|                                      |   | **2006**                          |          | **2005**                          |   | **Amount** | ** ** | ** %** |   |
|                                      |   |                              |          |                              |   |       |       |   |   |   |   |   |   |
| Demand                                    |   | **$**                             | **342,766**   |                              | $      | 358,822    |       | $ | (16,056 | ) |   | (4 | )% |
| Savings                & NOW accounts |   |                              | **876,404**   |                              |   | 848,320    |       |   | 28,084 |   |   | 3 | % |
| Time                                      |   |                              | **1,010,249** |                              |   | 869,096    |       |   | 141,153 |   |   | 16 | % |
| Time                $100,000 or more      |   |                              | **267,747**   |                              |   | 186,514    |       |   | 81,233 |   |   | 44 | % |
|                                      |   | **$**                             | **2,497,166** |                              | $      | 2,262,752  |       | $ | 234,414 |   |   | 10 | % |

|  Average                Balances:    |   | **Fourth                Quarter**** 2006** |    | **Fourth                Quarter**** 2005** |   |
|-------------------------------------------|--------|-------------------------------------------------|---------|-------------------------------------------------|--------|
|                                      |   |                                            |    |                                            |   |   |   |
| Demand                                    |   |                                            | **14**  | **%**                                           |   | 16 | % |
| Savings                & NOW accounts |   |                                            | **35**  | **%**                                           |   | 38 | % |
| Time                                      |   |                                            | **40**  | **%**                                           |   | 38 | % |
| Time                $100,000 or more      |   |                                            | **11**  | **%**                                           |   | 8 | % |
|                                      |   |                                            | **100** | **%**                                           |   | 100 | % |

| 1)   | The                realization of an inflection point on short-term, time deposit rate                offerings that provided sufficient stimulus for consumers to move                incremental “core “funding into time deposits; |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2)   | Increased                competitive pressures on time deposit pricing,                and; |
|----------------|---------------------------------------------------------------------------------------------|

| 3)   | Higher                incremental re-pricing of scheduled runoff from existing time deposit                relationships. |
|----------------|---------------------------------------------------------------------------------------------------------------------------|

----

| **Remaining                Time to Maturity:** |   |   |    |
|------------------------------------------------|--------|--------|---------|
| Less                than three months          |   | $      | 78,874  |   |
| Three                months to six months      |   |   | 72,211  |   |
| Six                months to twelve months     |   |   | 45,027  |   |
| More                than twelve months         |   |   | 71,267  |   |
|                                           |   | $      | 267,379 |   |

**Borrowed      Funds**

**Capital      Adequacy**

| *·  * | *Capital                Management Policy* |
|----------------------|--------------------------------------------|

----

| ·   | *Regulatory                Guidelines* |
|--------------------|----------------------------------------|

|                                          |   | **December                31,****2006** |     | **“Well****Capitalized”** |   | **“Regulatory****Minimums”** |   |
|-----------------------------------------------|--------|-----------------------------------------|----------|---------------------------------------|--------|------------------------------------------|--------|
| Leverage                ratio                 |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Community                Banks, Inc.          |   |                                    | **8.7**  | **%**                                 |   | 5                                        | %      |   | 4 | % |
| Bank                only                      |   |                                    | **8.3**  | **%**                                 |   | 5                                        | %      |   | 4 | % |
|                                          |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Tier                1 capital ratio           |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Community                Banks, Inc.          |   |                                    | **10.6** | **%**                                 |   | 6                                        | %      |   | 4 | % |
| Bank                only                      |   |                                    | **10.1** | **%**                                 |   | 6                                        | %      |   | 4 | % |
|                                          |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Total                risk-based capital ratio |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Community                Banks, Inc.          |   |                                    | **11.5** | **%**                                 |   | 10                                       | %      |   | 8 | % |
| Bank                only                      |   |                                    | **11.0** | **%**                                 |   | 10                                       | %      |   | 8 | % |

| *·  * | *Capital                Management* |
|----------------------|-------------------------------------|

----

**ASSET/LIABILITY      MANAGEMENT AND LIQUIDITY**

**Liquidity**

**Rate      “Shock” Simulation**

----

|  **Simultaneous****Rate****“Shock”** | **Annual****Change****in                Net Interest****Income** |   **%****Change** |
|-------------------------------------------------------|------------------------------------------------------------------|-----------------------------|
|                                                  |                                                             |                        |
| +300bp                                                | -                $7.9 million                                    | -                7.54%      |
| +200bp                                                | -                $4.7 million                                    | -                4.52%      |
| +100bp                                                | -                $2.3 million                                    | -                2.18%      |
| -100bp                                                | +                $1.0 million                                    | +                1.00%      |
| -200bp                                                | +                $0.2 million                                    | +                0.19%      |

**GAP      and EVE**

|  **Interval**          | **Cumulative                GAP****(Expressed                as % of Assets)** |
|-----------------------------|--------------------------------------------------------------------------------|
|                        |                                                                           |
| 0-90                days    | +4.29%                                                                         |
|                        |                                                                           |
| 91-180                days  | -4.76%                                                                         |
|                        |                                                                           |
| 181-365                days | -9.23%                                                                         |

----

**CONTRACTUAL      OBLIGATIONS**

|                                          |   | **Payments                due by period** |      |
|-----------------------------------------------|--------|-------------------------------------------|-----------|
|  **Dollars                in thousands** |   |  **Total**                           |      | **Less                than****1                year** |   | **1-3****years** |   | **3-5****years** |   | **More                than****5                years** |   |
|                                          |   |                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term                debt                 |   | $                                         | 315,079   |   | $ | 68,177 |   | $ | 62,852 |   | $ | 70,054 |   | $ | 113,996 |   |
| Operating                lease obligations    |   |                                      | 40,141    |   |   | 2,234 |   |   | 4,261 |   |   | 4,095 |   |   | 29,551 |   |
| Subordinated                debt              |   |                                      | 51,548    |   |   | --- |   |   | --- |   |   | --- |   |   | 51,548 |   |
| Time                deposits                  |   |                                      | 1,265,510 |   |   | 881,596 |   |   | 280,904 |   |   | 101,566 |   |   | 1,444 |   |
|                                          |   |                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |   | $                                         | 1,672,278 |   | $ | 952,007 |   | $ | 348,017 |   | $ | 175,715 |   | $ | 196,539 |   |

**OFF-BALANCE-SHEET      COMMITMENTS**

**REGULATORY      MATTERS**

**INFLATION**

----

**PERFORMANCE      REVIEW: 2005 VERSUS 2004**

**Overview**

**Interest      Income / Earning Assets**

**Interest      Expense / Funding Sources**
* *

----

**Interest      Spread / Net Interest Margin**

**Provision      for Credit Losses**

**Non-Interest      Income **

|                                                       |   |     |       |     |   | **Change** |       |
|------------------------------------------------------------|--------|----------|------------|----------|--------|------------|------------|
|                                                       |   | **2005** |       | **2004** |   | **Amount** | ** ** | ** %** |   |
| Investment                management and trust services    |   | **$**    | **2,692**  |     | $      | 1,510      |       | $ | 1,182 |   |   | 78 | % |
| Service                charges on deposit accounts         |   |     | **9,413**  |     |   | 7,120      |       |   | 2,293 |   |   | 32 | % |
| Other                service charges, commissions and fees |   |     | **5,452**  |     |   | 3,357      |       |   | 2,095 |   |   | 62 | % |
| Insurance                premium income and commissions    |   |     | **3,350**  |     |   | 3,260      |       |   | 90 |   |   | 3 | % |
| Mortgage                banking activities                 |   |     | **2,354**  |     |   | 2,665      |       |   | (311 | ) |   | (12 | )% |
| Earnings                on investment in life insurance    |   |     | **2,063**  |     |   | 1,593      |       |   | 470 |   |   | 30 | % |
| Other                income                                |   |     | **854**    |     |   | 1,238      |       |   | (384 | ) |   | (31 | )% |
|                                                       |   |     |       |     |   |       |       |   |   |   |   |   |   |
|                                                       |   |     | **26,178** |     |   | 20,743     |       |   | 5,435 |   |   | 26 | % |
|                                                       |   |     |       |     |   |       |       |   |   |   |   |   |   |
| Investment                security gains                   |   |     | **259**    |     |   | 2,470      |       |   | (2,211 | ) |   | (90 | )% |
|                                                       |   |     |       |     |   |       |       |   |   |   |   |   |   |
| Total                non-interest income                   |   | **$**    | **26,437** |     | $      | 23,213     |       | $ | 3,224 |   |   | 14 | % |

----

**Non-Interest      Expenses**

|                                                |   |   |       |   |   | **Change** |   |
|-----------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|
|                                                |   |   | **2005**   |   |   | **2004**   |   |   | **Amount** |   | ** ** | **% ** |   |
| Salary                and benefits                  |   | **$**  | **36,998** |   | $      | 28,337     |   | $ | 8,661 |   |   | 31 | % |
| Occupancy                and equipment expense      |   |   | **11,355** |   |   | 8,287      |   |   | 3,068 |   |   | 37 | % |
| Marketing                expense                    |   |   | **2,036**  |   |   | 2,325      |   |   | (289 | ) |   | (12 | )% |
| Telecommunications                expense           |   |   | **1,359**  |   |   | 1,285      |   |   | 74 |   |   | 6 | % |
| Amortization                of intangibles          |   |   | **1,424**  |   |   | 161        |   |   | 1,263 |   |   | 784 | % |
| Other                expenses                       |   |   | **13,692** |   |   | 9,598      |   |   | 4,094 |   |   | 43 | % |
|                                                |   |   |       |   |   |       |   |   |   |   |   |   |   |
| Subtotal                                            |   |   | **66,864** |   |   | 49,993     |   |   | 16,871 |   |   | 34 | % |
|                                                |   |   |       |   |   |       |   |   |   |   |   |   |   |
| Merger,                conversion and restructuring |   |   | **8,205**  |   |   | ---        |   |   | 8,205 |   |   | --- |   |
|                                                |   |   |       |   |   |       |   |   |   |   |   |   |   |
|                                                |   | **$**  | **75,069** |   | $      | 49,993     |   | $ | 25,076 |   |   | 50 | % |

----

| ·   | Distribution                of Assets, Liabilities and Stockholders’ Equity; Interest Rates and                Interest Differential |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Rate/Volume                Analysis - Tax Equivalent Basis |
|--------------------|------------------------------------------------------------|

| ·   | Loan                Account Composition as of December 31, 2006, 2005, 2004, 2003, and                2002. |
|--------------------|-------------------------------------------------------------------------------------------------------------|

| ·   | Maturities                and Sensitivity to Changes in Interest Rates for Commercial, Financial,                and Agricultural Loans as of December 31,                2006. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **Distribution                of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and                Interest Differential**                                                                                      |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income                and Rates on a Tax Equivalent Basis (b) for the Years Ended December                31,                2006, 2005, and 2004**                                                                                |   |
|                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                 |   | **2006** |   | **2005** |   | **2004** |   |
|                                                                                                                                                                                                                                 |   |   **Average****Balance(c)** |   |  **Interest****Income/****Expense(a)** |   | **Average****Rates****Earned/****Paid                (a)** |   |   **Average****Balance(c)** |   |  **Interest****Income/****Expense(a)** |   | **Average****Rates****Earned/****Paid                (a)** |   |   **Average****Balance(c)** |   |  **Interest****Income/****Expense(a)** |   | **Average****Rates****Earned/****Paid                (a)** |   |
| **Assets:**                                                                                                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earning                assets:                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                deposits in other banks                                                                                                                                                                              |   | $ | 31,312 |   | $ | 1,527 |   |   | 4.88 | % | $ | 39,241 |   | $ | 1,315 |   |   | 3.35 | % | $ | 2,325 |   | $ | 20 |   |   | 0.86 | % |
|                        Investment securities:                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                                                                                                                                              |   |   | 362,540 |   |   | 18,874 |   |   | 5.21 |   |   | 392,962 |   |   | 17,904 |   |   | 4.56 |   |   | 456,478 |   |   | 19,624 |   |   | 4.30 |   |
| Tax-exempt                (b)                                                                                                                                                                                                        |   |   | 229,520 |   |   | 16,609 |   |   | 7.24 |   |   | 221,960 |   |   | 16,514 |   |   | 7.44 |   |   | 209,170 |   |   | 15,856 |   |   | 7.58 |   |
| Total                investment securities                                                                                                                                                                                      |   |   | 592,060 |   |   | 35,483 |   |   | 5.99 |   |   | 614,922 |   |   | 34,418 |   |   | 5.60 |   |   | 665,648 |   |   | 35,480 |   |   | 5.33 |   |
| Federal                funds sold                                                                                                                                                                                                    |   |   | 7,453 |   |   | 377 |   |   | 5.06 |   |   | 19,732 |   |   | 583 |   |   | 2.95 |   |   | 7,801 |   |   | 117 |   |   | 1.50 |   |
| Loans                (b) (d)                                                                                                                                                                                                         |   |   | 2,324,218 |   |   | 168,049 |   |   | 7.23 |   |   | 1,714,536 |   |   | 113,140 |   |   | 6.60 |   |   | 1,156,107 |   |   | 70,721 |   |   | 6.12 |   |
|                   Total earning assets                                                                                                                                                                                     |   |   | 2,955,043 |   |   | 205,436 |   |   | 6.95 |   |   | 2,388,431 |   |   | 149,456 |   |   | 6.26 |   |   | 1,831,881 |   |   | 106,338 |   |   | 5.80 |   |
|                   Cash and due from banks                                                                                                                                                                                  |   |   | 60,929 |   |   |   |   |   |   |   |   | 48,721 |   |   |   |   |   |   |   |   | 37,316 |   |   |   |   |   |   |   |
|                   Allowance for loan losses                                                                                                                                                                                |   |   | (23,889 | ) |   |   |   |   |   |   |   | (18,903 | ) |   |   |   |   |   |   |   | (14,156 | ) |   |   |   |   |   |   |
|                   Premises, equipment,  and                other assets                                                                                                                                               |   |   | 411,338 |   |   |   |   |   |   |   |   | 250,356 |   |   |   |   |   |   |   |   | 86,055 |   |   |   |   |   |   |   |
| Total                assets                                                                                                                                                                                                          |   | $ | 3,403,421 |   |   |   |   |   |   |   | $ | 2,668,605 |   |   |   |   |   |   |   | $ | 1,941,096 |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities:**                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                deposits                                                                                                                                                                                                      |   | $ | 235,991 |   |   | 1,441 |   |   | 0.61 |   | $ | 206,678 |   |   | 1,027 |   |   | 0.50 |   | $ | 167,428 |   |   | 413 |   |   | 0.25 |   |
| Money                market deposits                                                                                                                                                                                                 |   |   | 265,750 |   |   | 7,753 |   |   | 2.92 |   |   | 181,279 |   |   | 3,668 |   |   | 2.02 |   |   | 62,591 |   |   | 377 |   |   | 0.60 |   |
| NOW                accounts                                                                                                                                                                                                          |   |   | 347,732 |   |   | 8,430 |   |   | 2.42 |   |   | 295,359 |   |   | 4,809 |   |   | 1.63 |   |   | 265,949 |   |   | 3,484 |   |   | 1.31 |   |
| Time                deposits:                                                                                                                                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| $100,000                or greater                                                                                                                                                                                                   |   |   | 233,380 |   |   |   |   |   |   |   |   | 150,820 |   |   |   |   |   |   |   |   | 111,879 |   |   |   |   |   |   |   |
| Other                                                                                                                                                                                                                                |   |   | 969,525 |   |   |   |   |   |   |   |   | 701,776 |   |   |   |   |   |   |   |   | 510,046 |   |   |   |   |   |   |   |
| Total                time deposits                                                                                                                                                                                                   |   |   | 1,202,905 |   |   | 49,026 |   |   | 4.08 |   |   | 852,596 |   |   | 26,927 |   |   | 3.16 |   |   | 621,925 |   |   | 18,249 |   |   | 2.93 |   |
| Total                interest-bearing deposits                                                                                                                                                                                       |   |   | 2,052,378 |   |   |   |   |   |   |   |   | 1,535,912 |   |   |   |   |   |   |   |   | 1,117,893 |   |   |   |   |   |   |   |
| Short-term                borrowings                                                                                                                                                                                                 |   |   | 66,264 |   |   | 3,021 |   |   | 4.56 |   |   | 49,494 |   |   | 1,479 |   |   | 2.99 |   |   | 59,303 |   |   | 739 |   |   | 1.25 |   |
| Long-term                debt                                                                                                                                                                                                        |   |   | 382,214 |   |   | 17,380 |   |   | 4.55 |   |   | 443,509 |   |   | 19,700 |   |   | 4.44 |   |   | 394,944 |   |   | 18,382 |   |   | 4.65 |   |
| Subordinated                debt                                                                                                                                                                                                     |   |   | 49,853 |   |   | 3,683 |   |   | 7.39 |   |   | 30,928 |   |   | 2,038 |   |   | 6.59 |   |   | 30,928 |   |   | 1,598 |   |   | 5.17 |   |
| Total                interest-bearing  liabilities                                                                                                                                                                              |   |   | 2,550,709 |   |   | 90,734 |   |   | 3.56 |   |   | 2,059,843 |   |   | 59,648 |   |   | 2.90 |   |   | 1,603,068 |   |   | 43,242 |   |   | 2.70 |   |
| Demand                deposits                                                                                                                                                                                                       |   |   | 352,814 |   |   |   |   |   |   |   |   | 271,319 |   |   |   |   |   |   |   |   | 178,084 |   |   |   |   |   |   |   |
| Accrued                interest, taxes and other liabilities                                                                                                                                                                         |   |   | 24,188 |   |   |   |   |   |   |   |   | 18,675 |   |   |   |   |   |   |   |   | 14,194 |   |   |   |   |   |   |   |
| Total                liabilities                                                                                                                                                                                                     |   |   | 2,927,711 |   |   |   |   |   |   |   |   | 2,349,837 |   |   |   |   |   |   |   |   | 1,795,346 |   |   |   |   |   |   |   |
| Stockholders’                equity                                                                                                                                                                                            |   |   | 475,710 |   |   |   |   |   |   |   |   | 318,768 |   |   |   |   |   |   |   |   | 145,750 |   |   |   |   |   |   |   |
| Total                liabilities and  stockholders’                equity                                                                                                                                                 |   | $ | 3,403,421 |   |   |   |   |   |   |   | $ | 2,668,605 |   |   |   |   |   |   |   | $ | 1,941,096 |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                                                                                                                                                                     |   |   |   |   | 6.95 | % |   |   |   |   |   |   |   | 6.26 | % |   |   |   |   |   |   |   | 5.80 | % |
| Interest                expense to earning assets                                                                                                                                                                                    |   |   |   |   | 3.07 |   |   |   |   |   |   |   |   | 2.50 |   |   |   |   |   |   |   |   | 2.36 |   |
|                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Effective                interest differential                                                                                                                                                                                       | $      | 114,702 |   |   | 3.88 | % |   |   |   | $ | 89,808 |   |   | 3.76 | % |   |   |   | $ | 63,096 |   |   | 3.44 | % |
|                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)                Loan fees are included in interest income and rate                calculations.                                                                                                                                   |
| (b)                Interest income on all tax-exempt securities and loans have been                adjusted                to a tax equivalent basis utilizing a Federal tax rate of 35% in                each                year. |
| (c)                Averages are a combination of monthly and daily                averages.                                                                                                                                          |
| (d)                Includes non-accrual loans.                                                                                                                                                                                       |

----

| **Rate/Volume                Analysis-Tax Equivalent Basis (a)**            |   |
|-----------------------------------------------------------------------------|--------|
| **For                the Years Ended December 31, 2006, 2005 and 2004**     |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   | **2006                vs. 2005** |   | **2005                vs. 2004** |   |
|                                                                        |   | **Volume** |   | **Rate** |   | **Total** |   | **Volume** |   | **Rate** |   | **Total** |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   | **Favorable                (Unfavorable)** |
| **Increase                (decrease) in interest income:**                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                                       |   | **$** | **43,266** |   | **$** | **11,643** |   | **$** | **54,909** |   | $ | 36,473 |   | $ | 5,946 |   | $ | 42,419 |   |
| Investment                securities                                   |   |   | **(1,311** | **)** |   | **2,376** |   |   | **1,065** |   |   | (1,889 | ) |   | 827 |   |   | (1,062 | ) |
| Federal                funds sold                                           |   |   | **(483** | **)** |   | **277** |   |   | **(206** | **)** |   | 286 |   |   | 180 |   |   | 466 |   |
| Interest-bearing                deposits in other   banks         |   |   | **(303** | **)** |   | **515** |   |   | **212** |   |   | 1,095 |   |   | 200 |   |   | 1,295 |   |
| Total                                                                       |   |   | **41,169** |   |   | **14,811** |   |   | **55,980** |   |   | 35,965 |   |   | 7,153 |   |   | 43,118 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Increase)                decrease in interest expense:                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                deposits                                             |   |   | **(2,687** | **)** |   | **(5,433** | **)** |   | **(8,120** | **)** |   | (1,992 | ) |   | (3,238 | ) |   | (5,230 | ) |
| Time                deposits                                                |   |   | **(12,946** | **)** |   | **(9,153** | **)** |   | **(22,099** | **)** |   | (7,197 | ) |   | (1,481 | ) |   | (8,678 | ) |
| Short-term                borrowings                                        |   |   | **(604** | **)** |   | **(938** | **)** |   | **(1,542** | **)** |   | 140 |   |   | (880 | ) |   | (740 | ) |
| Long-term                debt                                               |   |   | **2,778** |   |   | **(458** | **)** |   | **2,320** |   |   | (2,185 | ) |   | 867 |   |   | (1,318 | ) |
| Subordinated                debt                                            |   |   | **(1,373** | **)** |   | **(272** | **)** |   | **(1,645** | **)** |   | --- |   |   | (440 | ) |   | (440 | ) |
| Total                                                                       |   |   | **(14,832** | **)** |   | **(16,254** | **)** |   | **(31,086** | **)** |   | (11,234 | ) |   | (5,172 | ) |   | (16,406 | ) |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Increase                (decrease) in effective interest  differential |   | **$** | **26,337** |   | **$** | **(1,443** | **)** | **$** | **24,894** |   | $ | 24,731 |   | $ | 1,981 |   | $ | 26,712 |   |

----

| **LOAN                ACCOUNT COMPOSITION**           |   |
|-------------------------------------------------------|--------|
| **as                of December 31**                  |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |   | **2006** |   | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
|                                                  |   |   | Amount  |   |   | Percent |   |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |   | Amount |   |   | Percent |   |
| Commercial,                financial and agricultural |   | **$** | **865,355** |   |   | **36.5** | **%** | $ | 782,946 |   |   | 35.0 | % | $ | 409,105 |   |   | 33.7 | % | $ | 367,444 |   |   | 33.9 | % | $ | 295,506 |   |   | 32.2 | % |
| Real                estate-construction               |   |   | **7,290** |   |   | **0.3** |   |   | 4,532 |   |   | 0.2 |   |   | 8,703 |   |   | 0.7 |   |   | 7,338 |   |   | 0.7 |   |   | 2,615 |   |   | 0.3 |   |
| Real                estate-commercial mortgage        |   |   | **815,028** |   |   | **34.4** |   |   | 793,969 |   |   | 35.5 |   |   | 356,871 |   |   | 29.3 |   |   | 283,661 |   |   | 26.2 |   |   | 246,533 |   |   | 26.9 |   |
| Real                estate-retail mortgage            |   |   | **141,826** |   |   | **6.0** |   |   | 149,525 |   |   | 6.7 |   |   | 83,979 |   |   | 6.9 |   |   | 91,485 |   |   | 8.4 |   |   | 106,882 |   |   | 11.7 |   |
| Consumer-home                equity lines of credit   |   |   | **92,163** |   |   | **3.9** |   |   | 113,133 |   |   | 5.1 |   |   | 53,921 |   |   | 4.4 |   |   | 38,299 |   |   | 3.5 |   |   | 28,169 |   |   | 3.1 |   |
| Consumer-installment                and other         |   |   | **449,227** |   |   | **18.9** |   |   | 392,960 |   |   | 17.5 |   |   | 304,877 |   |   | 25.0 |   |   | 296,451 |   |   | 27.3 |   |   | 236,346 |   |   | 25.8 |   |
| Total                loans                            |   |   | **2,370,889** |   |   | **100.0** | **%** |   | 2,237,065 |   |   | 100.0 | % |   | 1,217,456 |   |   | 100.0 | % |   | 1,084,678 |   |   | 100.0 | % |   | 916,051 |   |   | 100.0 | % |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                for loan losses              |   |   | **(23,626** | **)** |   |   |   |   | (22,965 | ) |   |   |   |   | (14,421 | ) |   |   |   |   | (13,178 | ) |   |   |   |   | (12,343 | ) |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans,                net                             |   | **$** | **2,347,263** |   |   |   |   | $ | 2,214,100 |   |   |   |   | $ | 1,203,035 |   |   |   |   | $ | 1,071,500 |   |   |   |   | $ | 903,708 |   |   |   |   |

| **MATURITIES                AND SENSITIVITY TO CHANGES IN INTEREST** |   |
|----------------------------------------------------------------------|--------|
| **RATES                FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL**  |   |
| **AND                REAL-ESTATE CONSTRUCTION LOANS**                |   |
| **as                of December 31, 2006**                           |   |
|                                                                 |   |   |   |   |   |   |   |   |   |
|                                                                 |   | **Maturity                Distribution** |   |
|                                                                 |   | **One                Year****or                Less** |   | **One                to****Five                Years** |   | **Over                Five****Years** |   |  **Total** |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial,                financial and agricultural                |   | $ | 178,055 |   | $ | 278,675 |   | $ | 408,625 |   | $ | 865,355 |   |
| Real                estate-construction                              |   |   | 1,015 |   |   | 2,202 |   |   | 4,073 |   |   | 7,290 |   |
| Real                estate-commercial mortgage                       |   |   | 63,703 |   |   | 204,770 |   |   | 546,555 |   |   | 815,028 |   |
|                                                                 |   | $ | 242,773 |   | $ | 485,647 |   | $ | 959,253 |   | $ | 1,687,673 |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                 |   | **Interest                Sensitivity**  |   |   |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                 |   |   | **Variable**  |   |   | **Fixed** |   |   | **Total** |   |   |   |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Due                in one year or less                               |   | $ | 145,580 |   | $ | 97,193 |   | $ | 242,773 |   |   |   |   |
| Due                after one year                                    |   |   | 1,086,632 |   |   | 358,268 |   |   | 1,444,900 |   |   |   |   |
|                                                                 |   | $ | 1,232,212 |   | $ | 455,461 |   | $ | 1,687,673 |   |   |   |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| **RECONCILIATION                  OF GAAP TO NON-GAAP MEASURES**              |   |
|-------------------------------------------------------------------------------|--------|
|                                                                          |   |   |   |   |   |   |   |
|                                                                          |   | **2006** |   | **2005** |   | **2004** |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Income                  statement data:**                                   |   |   |   |   |   |   |   |   |   |   |
| **Net                  income**                                               |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                   |   | **$** | **41,031** |   | $ | 25,641 |   | $ | 21,798 |   |
| Amortization                  of core deposit and other intangible assets (1) |   |   | **1,715** |   |   | 1,153 |   |   | 105 |   |
| Merger,                  conversion and restructuring expenses (1)            |   |   | **---** |   |   | 5,333 |   |   | --- |   |
| Net                  operating (tangible) income                              |   | **$** | **42,746** |   | $ | 32,127 |   | $ | 21,903 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Earnings                  per share**                                       |   |   |   |   |   |   |   |   |   |   |
| Diluted                  earnings per common share                            |   | **$** | **1.72** |   | $ | 1.35 |   | $ | 1.65 |   |
| Amortization                  of core deposit and other intangible assets (1) |   |   | **0.07** |   |   | 0.06 |   |   | 0.01 |   |
| Merger,                  conversion and restructuring expenses (1)            |   |   | **---** |   |   | 0.28 |   |   | --- |   |
| Diluted                  operating (tangible) earnings per share              |   | **$** | **1.79** |   | $ | 1.69 |   | $ | 1.66 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Balance                  sheet data:**                                      |   |   |   |   |   |   |   |   |   |   |
| **Average                  assets**                                           |   |   |   |   |   |   |   |   |   |   |
| Average                  assets                                               |   | **$** | **3,403,421** |   | $ | 2,668,605 |   | $ | 1,941,096 |   |
| Goodwill                                                                      |   |   | **(245,652** | **)** |   | (123,412 | ) |   | (3,405 | ) |
| Core                  deposit and other intangible assets                     |   |   | **(13,368** | **)** |   | (8,236 | ) |   | (1,492 | ) |
| Average                  tangible assets                                      |   | **$** | **3,144,401** |   | $ | 2,536,957 |   | $ | 1,936,199 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  return on average tangible assets**              |   |   | **1.36** | **%** |   | 1.27 | % |   | 1.13 | % |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Average                  equity**                                           |   |   |   |   |   |   |   |   |   |   |
| Average                  equity                                               |   | **$** | **475,710** |   | $ | 318,768 |   | $ | 145,750 |   |
| Goodwill                                                                      |   |   | **(245,652** | **)** |   | (123,412 | ) |   | (3,405 | ) |
| Core                  deposit and other intangible assets                     |   |   | **(13,368** | **)** |   | (8,236 | ) |   | (1,492 | ) |
| Deferred                  taxes                                               |   |   | **1,744** |   |   | 862 |   |   | --- |   |
| Average                  tangible equity                                      |   | **$** | **218,434** |   | $ | 187,982 |   | $ | 140,853 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  return on average tangible equity**              |   |   | **19.57** | **%** |   | 17.09 | % |   | 15.55 | % |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **At                  end of year:**                                          |   |   |   |   |   |   |   |   |   |   |
| **Total                  assets**                                             |   |   |   |   |   |   |   |   |   |   |
| Total                  assets                                                 |   | **$** | **3,496,370** |   | $ | 3,332,430 |   | $ | 1,954,799 |   |
| Goodwill                                                                      |   |   | **(246,383** | **)** |   | (244,827 | ) |   | (3,570 | ) |
| Core                  deposit and other intangible assets                     |   |   | **(13,023** | **)** |   | (14,253 | ) |   | (1,481 | ) |
| Total                  tangible assets                                        |   | **$** | **3,236,964** |   | $ | 3,073,350 |   | $ | 1,949,748 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Total                  equity**                                             |   |   |   |   |   |   |   |   |   |   |
| Total                  equity                                                 |   | **$** | **486,161** |   | $ | 476,673 |   | $ | 152,341 |   |
| Goodwill                                                                      |   |   | **(246,383** | **)** |   | (244,827 | ) |   | (3,570 | ) |
| Core                  deposit and other intangible assets                     |   |   | **(13,023** | **)** |   | (14,253 | ) |   | (1,481 | ) |
| Deferred                  taxes                                               |   |   | **1,591** |   |   | 1,734 |   |   | --- |   |
| Total                  tangible equity                                        |   | **$** | **228,346** |   | $ | 219,327 |   | $ | 147,290 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Tangible                  book value at end of period**                     |   | **$** | **9.71** |   | $ | 9.12 |   | $ | 11.46 |   |
| **Tangible                  equity to assets**                                |   |   | **7.05** | **%** |   | 7.14 | % |   | 7.55 | % |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
|  (1)                  Net of related tax effect                          |   |   |   |   |   |   |   |   |   |   |

----

**Item      7A.**** ****Quantitative      and Qualitative Disclosures About Market Risk**

----

| **Interest                Rate Sensitivity**             |   |             |    |               |   |                      |   |                                       |    |      |   |
|----------------------------------------------------------|--------|------------------|---------|--------------------|--------|---------------------------|--------|--------------------------------------------|---------|-----------|--------|
|  **Dollars                in thousands**            |   | **1-90****days** |    | **90-180****days** |   | **180-365**** days** |   | **1                year or**** more** |    | **Total** |   |
|                                                     |   |             |    |               |   |                      |   |                                       |    |      |   |   |   |   |   |   |
| **Assets**                                               |   |             |    |               |   |                      |   |                                       |    |      |   |   |   |   |   |   |
| Interest-bearing                deposits in other banks  |   | $                | 3,561   |               | $      | ---                       |   | $                                          | ---     |      | $      | --- |   | $ | 3,561 |   |
| Investment                securities                     |   |             | 76,200  |               |   | 14,770                    |   |                                       | 50,599  |      |   | 517,567 |   |   | 659,136 |   |
| Loans(1)                                                 |   |             | 736,576 |               |   | 101,391                   |   |                                       | 193,994 |      |   | 1,338,928 |   |   | 2,370,889 |   |
| Earning                assets                            |   |             | 816,337 |               |   | 116,161                   |   |                                       | 244,593 |      |   | 1,856,495 |   |   | 3,033,586 |   |
| Non-earning                assets                        |   |             | 630     |               |   | 630                       |   |                                       | 1,142   |      |   | 460,382 |   |   | 462,784 |   |
| Total                assets                              |   | $                | 816,967 |               | $      | 116,791                   |   | $                                          | 245,735 |      | $      | 2,316,877 |   | $ | 3,496,370 |   |
| **Liabilities**                                          |   |             |    |               |   |                      |   |                                       |    |      |   |   |   |   |   |   |
| Savings,                money market and NOW accounts    |   | $                | 259,685 |               | $      | 38,324                    |   | $                                          | 76,624  |      | $      | 504,711 |   | $ | 879,344 |   |
| Time                                                     |   |             | 183,445 |               |   | 298,679                   |   |                                       | 205,003 |      |   | 311,004 |   |   | 998,131 |   |
| Time                in denominations of $100,000 or more |   |             | 78,874  |               |   | 72,211                    |   |                                       | 45,027  |      |   | 71,267 |   |   | 267,379 |   |
| Short-term                borrowings                     |   |             | 108,927 |               |   | ---                       |   |                                       | ---     |      |   | --- |   |   | 108,927 |   |
| Long-term                debt                            |   |             | 1,963   |               |   | 12,956                    |   |                                       | 53,259  |      |   | 246,901 |   |   | 315,079 |   |
| Subordinated                debt                         |   |             | 23,196  |               |   | ---                       |   |                                       | ---     |      |   | 28,352 |   |   | 51,548 |   |
| Interest                bearing liabilities              |   |             | 656,090 |               |   | 422,170                   |   |                                       | 379,913 |      |   | 1,162,235 |   |   | 2,620,408 |   |
| Other                liabilities and equity              |   |             | 11,050  |               |   | 11,050                    |   |                                       | 22,100  |      |   | 831,762 |   |   | 875,962 |   |
| Total                liabilities and equity              |   | $                | 667,140 |               | $      | 433,220                   |   | $                                          | 402,013 |      | $      | 1,993,997 |   | $ | 3,496,370 |   |
|                                                     |   |             |    |               |   |                      |   |                                       |    |      |   |   |   |   |   |   |
| (1)                includes non-accrual loans            |   |             |    |               |   |                      |   |                                       |    |      |   |   |   |   |   |   |

| **Interest                Sensitivity GAP**                                 |   |             |    |               |   |                      |   |
|-----------------------------------------------------------------------------|--------|------------------|---------|--------------------|--------|---------------------------|--------|
| **Dollars                in thousands**                                     |   | **1-90****days** |    | **90-180****Days** |   | **180-365**** days** |   |
|                                                                        |   |             |    |               |   |                      |   |   |   |   |
| Periodic                                                                    |   | $                | 149,827 |               | $      | (316,429                  | )      | $ | (156,278 | ) |
| Cumulative                                                                  |   |             |    |               |   | (166,602                  | )      |   | (322,880 | ) |
| Cumulative                GAP as a percentageof                total assets |   |             | 4.3     | %                  |   | (4.8                      | )%     |   | (9.2 | )% |

----

----

**Item      8. Financial Statements and Supplementary      Data:**

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      BALANCE SHEETS**

**At      December 31, 2006 and 2005**

**(Dollars      in thousands except per share data)**

|                                                                                                               |   | **2006** |          | **2005** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|----------|---------------|----------|--------|
| **ASSETS**                                                                                                         |   |     |          |     |   |
|                                                                                                               |   |     |          |     |   |   |   |
| Cash                and due from banks                                                                             |   | **$**    | **73,608**    |     | $      | 76,820 |   |
| Interest-bearing                deposits in other banks                                                            |   |     | **3,561**     |     |   | 4,423 |   |
| Investment                securities, available for sale                                                           |   |     | **636,066**   |     |   | 605,555 |   |
| Investment                securities, held to maturity (fair valueapproximates                $23,415 and $22,563) |   |     | **23,070**    |     |   | 23,030 |   |
| Loans,                net of allowance for loan losses of $23,626 and $22,965                                      |   |     | **2,347,263** |     |   | 2,214,100 |   |
| Premises                and equipment, net                                                                         |   |     | **46,335**    |     |   | 43,283 |   |
| Goodwill                and other intangible assets                                                                |   |     | **259,406**   |     |   | 259,080 |   |
| Accrued                interest receivable and other assets                                                        |   |     | **107,061**   |     |   | 106,139 |   |
| Total                assets                                                                                        |   | **$**    | **3,496,370** |     | $      | 3,332,430 |   |
|                                                                                                               |   |     |          |     |   |   |   |
| **LIABILITIES**                                                                                                    |   |     |          |     |   |   |   |
|                                                                                                               |   |     |          |     |   |   |   |
| Deposits:                                                                                                          |   |     |          |     |   |   |   |
| Non-interest                bearing                                                                                |   | **$**    | **368,329**   |     | $      | 375,835 |   |
| Interest                bearing                                                                                    |   |     | **2,144,853** |     |   | 1,918,532 |   |
| Total                deposits                                                                                      |   |     | **2,513,182** |     |   | 2,294,367 |   |
| Short-term                borrowings                                                                               |   |     | **108,927**   |     |   | 87,253 |   |
| Long-term                debt                                                                                      |   |     | **315,079**   |     |   | 430,719 |   |
| Subordinated                debt                                                                                   |   |     | **51,548**    |     |   | 30,928 |   |
| Accrued                interest payable and other liabilities                                                      |   |     | **21,473**    |     |   | 12,490 |   |
| Total                liabilities                                                                                   |   |     | **3,010,209** |     |   | 2,855,757 |   |
|                                                                                                               |   |     |          |     |   |   |   |
| **STOCKHOLDERS’                EQUITY**                                                                      |   |     |          |     |   |   |   |
|                                                                                                               |   |     |          |     |   |   |   |
| Preferred                stock, no par value; 500,000 shares                                                       |   |     |          |     |   |   |   |
| authorized;                no shares issued and outstanding                                                        |   |     | **---**       |     |   | --- |   |
| Common                stock-$5.00 par value; 50,000,000 shares                                                     |   |     |          |     |   |   |   |
| authorized;                24,478,000 and 23,314,000 shares issued                                                 |   |     | **122,391**   |     |   | 116,572 |   |
| Surplus                                                                                                            |   |     | **373,142**   |     |   | 347,827 |   |
| Retained                Earnings                                                                                   |   |     | **17,609**    |     |   | 27,031 |   |
| Accumulated                other comprehensive income (loss), net of tax                                           |   |     | **(1,806**    | **)**    |   | (3,779 | ) |
| Treasury                stock; 959,000 and 399,000 shares, at cost                                                 |   |     | **(25,175**   | **)**    |   | (10,978 | ) |
| Total                stockholders’ equity                                                                    |   |     | **486,161**   |     |   | 476,673 |   |
| Total                liabilities and stockholders’ equity                                                    |   | **$**    | **3,496,370** |     | $      | 3,332,430 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      STATEMENTS OF INCOME**

**For      the Years Ended December 31, 2006, 2005, and 2004 **

**(Dollars      in thousands except per share data)**

** **
** **

|                                                               |   | **2006** |        | **2005** |   | **2004** |   |
|--------------------------------------------------------------------|--------|----------|-------------|----------|--------|----------|--------|
| **INTEREST                INCOME:**                                |   |     |        |     |   |     |   |   |   |   |
| Loans,                including fees                               |   | **$**    | **166,061** |     | $      | 111,757  |   | $ | 69,732 |   |
| Investment                securities:                              |   |     |        |     |   |     |   |   |   |   |
| Taxable                                                            |   |     | **18,143**  |     |   | 17,198   |   |   | 18,999 |   |
| Tax                exempt                                          |   |     | **9,089**   |     |   | 9,087    |   |   | 8,847 |   |
| Dividends                                                          |   |     | **2,438**   |     |   | 2,353    |   |   | 2,084 |   |
| Other                                                              |   |     | **1,903**   |     |   | 1,898    |   |   | 137 |   |
| Total                interest income                               |   |     | **197,634** |     |   | 142,293  |   |   | 99,799 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| **INTEREST                EXPENSE:**                               |   |     |        |     |   |     |   |   |   |   |
| Deposits                                                           |   |     | **66,650**  |     |   | 36,431   |   |   | 22,523 |   |
| Short-term                borrowings                               |   |     | **3,021**   |     |   | 1,479    |   |   | 739 |   |
| Long-term                debt                                      |   |     | **17,380**  |     |   | 19,700   |   |   | 18,382 |   |
| Subordinated                debt                                   |   |     | **3,683**   |     |   | 2,038    |   |   | 1,598 |   |
| Total                interest expense                              |   |     | **90,734**  |     |   | 59,648   |   |   | 43,242 |   |
| Net                interest income                                 |   |     | **106,900** |     |   | 82,645   |   |   | 56,557 |   |
| Provision                for loan losses                           |   |     | **2,050**   |     |   | 2,300    |   |   | 3,100 |   |
| Net                interest income after provision for loan losses |   |     | **104,850** |     |   | 80,345   |   |   | 53,457 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| **NON-INTEREST                INCOME:**                            |   |     |        |     |   |     |   |   |   |   |
| Investment                management and trust services            |   |     | **4,394**   |     |   | 2,692    |   |   | 1,510 |   |
| Service                charges on deposit accounts                 |   |     | **11,507**  |     |   | 9,413    |   |   | 7,120 |   |
| Other                service charges, commissions and fees         |   |     | **7,272**   |     |   | 5,452    |   |   | 3,357 |   |
| Investment                security gains                           |   |     | **732**     |     |   | 259      |   |   | 2,470 |   |
| Insurance                premium income and commissions            |   |     | **4,120**   |     |   | 3,350    |   |   | 3,260 |   |
| Mortgage                banking activities                         |   |     | **2,172**   |     |   | 2,354    |   |   | 2,665 |   |
| Earnings                on investment in life insurance            |   |     | **2,725**   |     |   | 2,063    |   |   | 1,593 |   |
| Other                                                              |   |     | **2,045**   |     |   | 854      |   |   | 1,238 |   |
| Total                non-interest income                           |   |     | **34,967**  |     |   | 26,437   |   |   | 23,213 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| **NON-INTEREST                EXPENSES:**                          |   |     |        |     |   |     |   |   |   |   |
| Salaries                and employee benefits                      |   |     | **46,434**  |     |   | 36,998   |   |   | 28,337 |   |
| Net                occupancy and equipment expense                 |   |     | **14,117**  |     |   | 11,355   |   |   | 8,287 |   |
| Merger,                conversion and restructuring expenses       |   |     | **---**     |     |   | 8,205    |   |   | --- |   |
| Marketing                expense                                   |   |     | **1,752**   |     |   | 2,036    |   |   | 2,325 |   |
| Telecommunications                expense                          |   |     | **2,243**   |     |   | 1,359    |   |   | 1,285 |   |
| Amortization                of intangibles                         |   |     | **2,639**   |     |   | 1,424    |   |   | 161 |   |
| Other                                                              |   |     | **17,700**  |     |   | 13,692   |   |   | 9,598 |   |
| Total                non-interest expenses                         |   |     | **84,885**  |     |   | 75,069   |   |   | 49,993 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| Income                before income taxes                          |   |     | **54,932**  |     |   | 31,713   |   |   | 26,677 |   |
| Income                taxes                                        |   |     | **13,901**  |     |   | 6,072    |   |   | 4,879 |   |
| Net                income                                          |   | **$**    | **41,031**  |     | $      | 25,641   |   | $ | 21,798 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| **EARNINGS                PER SHARE:**                             |   |     |        |     |   |     |   |   |   |   |
| Basic                                                              |   | **$**    | **1.74**    |     | $      | 1.38     |   | $ | 1.70 |   |
| Diluted                                                            |   | **$**    | **1.72**    |     | $      | 1.35     |   | $ | 1.65 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**For      the Years Ended December 31, 2006, 2005, and 2004**

**(Dollars      in thousands except per share data)**

|                                                                                                           |   | **Outstanding** |       | **Common** |   |        |   | **Retained** |        | **Accumulated****Other****Comprehensive** |   | **Treasury** |   | **Total**  |       |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|------------|--------|-------------|--------|--------------|-------------|-------------------------------------------|--------|--------------|--------|------------|------------|
|                                                                                                           |   | **Shares**      |       | **Stock**  |   | **Surplus** |   | **Earnings** |        | **Income                (Loss)**          |   | **Stock**    |   | **Equity** |       |
| **Balance,                December 31, 2003**                                                                  |   |            | 11,648     |       | $      | 59,256      |   | $            | 57,563      |                                      | $      | 24,297       |   | $          | 6,596      |   | $ | (4,306 | ) | $ | 143,406 |   |
| Comprehensive                income:                                                                           |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   |   |   |
| Net                income                                                                                      |   |            |       |       |   |        |   |         |        |                                      |   | 21,798       |   |       |       |   |   |   |   |   | 21,798 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | (3,140     | ) |   |   |   |   | (3,140 | ) |
| Change                in unfunded pension liability, net of tax                                                |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | (245       | ) |   |   |   |   | (245 | ) |
| Total                comprehensive income                                                                      |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   | 18,413 |   |
| Cash                dividends ($.64 per share)                                                                 |   |            |       |       |   |        |   |         |        |                                      |   | (8,215       | )      |       |       |   |   |   |   |   | (8,215 | ) |
| 5%                stock dividend                                                                               |   |            | 584        |       |   | 2,949       |   |         | 15,103      |                                      |   | (18,110      | )      |       |       |   |   |   |   |   | (58 | ) |
| Purchases                of treasury stock                                                                     |   |            | (144       | )          |   |        |   |         |        |                                      |   |         |   |       |       |   |   | (4,151 | ) |   | (4,151 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan         |   |            | 148        |       |   | (98         | )      |         |        |                                      |   | (1,636       | )      |       |       |   |   | 4,042 |   |   | 2,308 |   |
| Tax                benefits from employee stock transactions                                                   |   |            |       |       |   |        |   |         | 638         |                                      |   |         |   |       |       |   |   |   |   |   | 638 |   |
| **Balance,                December 31, 2004**                                                                  |   |            | 12,236     |       |   | 62,107      |   |         | 73,304      |                                      |   | 18,134       |   |       | 3,211      |   |   | (4,415 | ) |   | 152,341 |   |
| Comprehensive                income:                                                                           |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   |   |   |
| Net                income                                                                                      |   |            |       |       |   |        |   |         |        |                                      |   | 25,641       |   |       |       |   |   |   |   |   | 25,641 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | (7,043     | ) |   |   |   |   | (7,043 | ) |
| Change                in unfunded pension liability, net of tax                                                |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | 53         |   |   |   |   |   | 53 |   |
| Total                comprehensive income                                                                      |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   | 18,651 |   |
| Cash                dividends ($.71 per share)                                                                 |   |            |       |       |   |        |   |         |        |                                      |   | (13,440      | )      |       |       |   |   |   |   |   | (13,440 | ) |
| Purchases                of treasury stock                                                                     |   |            | (598       | )          |   |        |   |         |        |                                      |   |         |   |       |       |   |   | (16,489 | ) |   | (16,489 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan         |   |            | 423        |       |   | 193         |   |         | 873         |                                      |   | (2,980       | )      |       |       |   |   | 9,926 |   |   | 8,012 |   |
| Tax                benefits from employee stock transactions                                                   |   |            |       |       |   |        |   |         | 514         |                                      |   |         |   |       |       |   |   |   |   |   | 514 |   |
| Acquisition                of PennRock Financial Services Corp.:                                               |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   |   |   |
| Common                stock issued                                                                             |   |            | 10,854     |       |   | 54,272      |   |         | 269,733     |                                      |   |         |   |       |       |   |   |   |   |   | 324,005 |   |
| Fair                value of stock options                                                                     |   |            |       |       |   |        |   |         | 3,079       |                                      |   |         |   |       |       |   |   |   |   |   | 3,079 |   |
| Other                                                                                                          |   |            |       |       |   |        |   |         | 324         |                                      |   | (324         | )      |       |       |   |   |   |   |   | --- |   |
| **Balance,                December 31, 2005**                                                                  |   |            | 22,915     |       |   | 116,572     |   |         | 347,827     |                                      |   | 27,031       |   |       | (3,779     | ) |   | (10,978 | ) |   | 476,673 |   |
| Comprehensive                income:                                                                           |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   |   |   |
| Net                income                                                                                      |   |            |       |       |   |        |   |         |        |                                      |   | **41,031**   |   |       |       |   |   |   |   |   | **41,031** |   |
| Unrealized                gain on securities, net of reclassification adjustment and tax                effect |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | **1,790**  |   |   |   |   |   | **1,790** |   |
| Change                in unfunded pension liability, net of tax                                                |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | **183**    |   |   |   |   |   | **183** |   |
| Total                comprehensive income                                                                      |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   | **43,004** |   |
| Cash                dividends ($.79 per share)                                                                 |   |            |       |       |   |        |   |         |        |                                      |   | **(18,676**  | **)**  |       |       |   |   |   |   |   | **(18,676** | **)** |
| 5%                stock dividend                                                                               |   |            | **1,133**  |       |   | **5,820**   |   |         | **24,162**  |                                      |   | **(29,982**  | **)**  |       |       |   |   |   |   |   | **---** |   |
| Purchases                of treasury stock                                                                     |   |            | **(668**   | **)**      |   |        |   |         |        |                                      |   |         |   |       |       |   |   | **(17,922** | **)** |   | **(17,922** | **)** |
| Exercise                of common stock options and issuances under stock purchase                plan         |   |            | **139**    |       |   | **(1**      | **)**  |         |        |                                      |   | **(1,795**   | **)**  |       |       |   |   | **3,725** |   |   | **1,929** |   |
| Compensation                and tax benefits from employee stock transactions                                  |   |            |       |       |   |        |   |         | **1,153**   |                                      |   |         |   |       |       |   |   |   |   |   | **1,153** |   |
| **Balance,                December 31, 2006**                                                                  |   |            | **23,519** |       | **$**  | **122,391** |   | **$**        | **373,142** |                                      | **$**  | **17,609**   |   | **$**      | **(1,806** | **)** | **$** | **(25,175** | **)** | **$** | **486,161** |   |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**For      the Years Ended December 31, 2006 2005, and 2004**

| (Dollars                in thousands)                                        |   | **2006** |         | **2005** |   | **2004** |   |
|------------------------------------------------------------------------------|--------|----------|--------------|----------|--------|----------|--------|
| **Operating                Activities:**                                     |   |     |         |     |   |     |   |   |   |   |
| Net                income                                                    |   | **$**    | **41,031**   |     | $      | 25,641   |   | $ | 21,798 |   |
| Adjustments                to reconcile net income to net cash               |   |     |         |     |   |     |   |   |   |   |
| provided                by operating activities:                             |   |     |         |     |   |     |   |   |   |   |
| Provision                for loan losses                                     |   |     | **2,050**    |     |   | 2,300    |   |   | 3,100 |   |
| Deferred                income tax expense (benefit)                         |   |     | **(251**     | **)**    |   | 1,559    |   |   | (481 | ) |
| Depreciation                and amortization                                 |   |     | **7,293**    |     |   | 5,344    |   |   | 3,310 |   |
| Stock                option expense                                          |   |     | **655**      |     |   | ---      |   |   | --- |   |
| Net                amortization of securities                                |   |     | **351**      |     |   | 983      |   |   | 1,106 |   |
| Realized                gains on sales of available-for-sale securities, net |   |     | **(732**     | **)**    |   | (259     | )      |   | (2,470 | ) |
| Loans                originated for sale                                     |   |     | **(12,452**  | **)**    |   | (8,163   | )      |   | (10,959 | ) |
| Proceeds                from sales of loans held for sale                    |   |     | **11,738**   |     |   | 7,324    |   |   | 15,923 |   |
| Gains                on loan sales                                           |   |     | **(689**     | **)**    |   | (225     | )      |   | (1,125 | ) |
| Earnings                on investment in life insurance                      |   |     | **(2,725**   | **)**    |   | (2,063   | )      |   | (1,593 | ) |
| Net                change in other assets                                    |   |     | **1,525**    |     |   | 6,489    |   |   | 3,646 |   |
| Net                change in accrued interest payable and other liabilities  |   |     | **9,265**    |     |   | (16,385  | )      |   | (2,982 | ) |
| Tax                benefits from employee stock transactions                 |   |     | **---**      |     |   | 514      |   |   | 638 |   |
| Net                cash provided by operating activities                     |   |     | **57,059**   |     |   | 23,059   |   |   | 29,911 |   |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| **Investing                Activities:**                                     |   |     |         |     |   |     |   |   |   |   |
| Net                change in interest-bearing deposits in other banks        |   |     | **862**      |     |   | 3,740    |   |   | 1,515 |   |
| Activity                in available-for-sale securities:                    |   |     |         |     |   |     |   |   |   |   |
| Sales                                                                        |   |     | **68,804**   |     |   | 307,874  |   |   | 119,390 |   |
| Maturities,                prepayments and calls                             |   |     | **65,652**   |     |   | 69,654   |   |   | 125,440 |   |
| Purchases                                                                    |   |     | **(161,829** | **)**    |   | (125,286 | )      |   | (220,501 | ) |
| Activity                in held to maturity securities:                      |   |     |         |     |   |     |   |   |   |   |
| Maturities,                prepayments and calls                             |   |     | **(34**      | **)**    |   | ---      |   |   | --- |   |
| Purchases                                                                    |   |     | **---**      |     |   | (23,020  | )      |   | --- |   |
| Net                increase in total loans                                   |   |     | **(135,620** | **)**    |   | (178,220 | )      |   | (144,509 | ) |
| Proceeds                from sale of loans                                   |   |     | **1,267**    |     |   | ---      |   |   | 4,556 |   |
| Investment                in life insurance                                  |   |     | **---**      |     |   | ---      |   |   | (5,000 | ) |
| Additions                to premises and equipment                           |   |     | **(7,706**   | **)**    |   | (6,892   | )      |   | (4,206 | ) |
| Cash                acquired in acquisition                                  |   |     | **---**      |     |   | 34,564   |   |   | --- |   |
| Other                                                                        |   |     | **(2,965**   | **)**    |   | (3,646   | )      |   | (325 | ) |
| Net                cash provided (used) by investing activities              |   |     | **(171,569** | **)**    |   | 78,768   |   |   | (123,640 | ) |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| **Financing                Activities:**                                     |   |     |         |     |   |     |   |   |   |   |
| Net                increase in deposits                                      |   |     | **218,815**  |     |   | 106,755  |   |   | 74,852 |   |
| Net                change in short-term borrowings                           |   |     | **21,674**   |     |   | (50,873  | )      |   | (5,648 | ) |
| Proceeds                from issuance of long-term debt                      |   |     | **55,000**   |     |   | 50,000   |   |   | 35,000 |   |
| Proceeds                from subordinated debt                               |   |     | **20,620**   |     |   | ---      |   |   | --- |   |
| Repayment                of long-term debt                                   |   |     | **(170,640** | **)**    |   | (152,458 | )      |   | (16,760 | ) |
| Cash                dividends and cash paid in lieu of fractional shares     |   |     | **(18,676**  | **)**    |   | (13,440  | )      |   | (8,273 | ) |
| Payments                to acquire treasury stock                            |   |     | **(17,922**  | **)**    |   | (16,489  | )      |   | (4,151 | ) |
| Tax                benefits from employee stock transactions                 |   |     | **498**      |     |   | ---      |   |   | --- |   |
| Proceeds                from issuance of common stock                        |   |     | **1,929**    |     |   | 8,012    |   |   | 2,308 |   |
| Net                cash provided (used) by financing activities              |   |     | **111,298**  |     |   | (68,493  | )      |   | 77,328 |   |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| Net                change in cash and cash equivalents                       |   |     | **(3,212**   | **)**    |   | 33,334   |   |   | (16,401 | ) |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| Cash                and cash equivalents at beginning of period              |   |     | **76,820**   |     |   | 43,486   |   |   | 59,887 |   |
| Cash                and cash equivalents at end of period                    |   | **$**    | **73,608**   |     | $      | 76,820   |   | $ | 43,486 |   |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| Cash                paid during the year for:                                |   |     |         |     |   |     |   |   |   |   |
| Interest                                                                     |   | **$**    | **90,001**   |     | $      | 57,452   |   | $ | 42,426 |   |
| Income                taxes                                                  |   | **$**    | **15,160**   |     | $      | 3,623    |   | $ | 3,738 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES:**

**ORGANIZATION      AND BASIS OF PRESENTATION:**

**USE      OF ESTIMATES:**

**CASH      FLOWS INFORMATION:**

**SIGNIFICANT      GROUP CONCENTRATIONS OF CREDIT RISK:**

**INVESTMENT      SECURITIES:**

----

**LOANS      HELD FOR SALE:**

**LOANS      AND REVENUE RECOGNITION:**

**ALLOWANCE      FOR LOAN LOSSES:**

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

*“Accounting      for Certain Loans or Debt Securities Acquired in a Transfer.”*

**PREMISES      AND EQUIPMENT:**

----

**GOODWILL      AND OTHER INTANGIBLE ASSETS:**

**FORECLOSED      REAL ESTATE:**

**RETIREMENT      PLANS:**

*“Employers’      Accounting for Defined Benefit Pension and Other Postretirement      Plans,”*

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

**INCOME      TAXES:**

**STOCK-BASED      COMPENSATION:**

*Accounting      for Stock-Based Compensation*
*Share-Based      Payments*

**EARNINGS      PER SHARE:**

|                                                         |   | **2006** |       | **2005** |   | **2004** |   |
|--------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Net                income                                    |   | **$**    | **41,031** |     | $      | 25,641   |   | $ | 21,798 |   |
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Weighted                average shares outstanding (basic)   |   |     | **23,645** |     |   | 18,645   |   |   | 12,843 |   |
| Effect                of dilutive stock options              |   |     | **273**    |     |   | 330      |   |   | 361 |   |
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Weighted                average shares outstanding (diluted) |   |     | **23,918** |     |   | 18,975   |   |   | 13,204 |   |
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Per                share information:                        |   |     |       |     |   |     |   |   |   |   |
| Basic                earnings per share                      |   | **$**    | **1.74**   |     | $      | 1.38     |   | $ | 1.70 |   |
| Diluted                earnings per share                    |   |     | **1.72**   |     |   | 1.35     |   |   | 1.65 |   |

----

**COMPREHENSIVE      INCOME:**

*Reporting      Comprehensive Income.”*

|                                                             |   | **2006** |      | **2005** |   | **2004** |   |
|------------------------------------------------------------------|--------|----------|-----------|----------|--------|----------|--------|
|                                                             |   |     |      |     |   |     |   |
| Unrealized                holding gains (losses)                 |   |     |      |     |   |     |   |   |   |   |
| on                available-for-sale securities                  |   | **$**    | **3,486** |     | $      | (10,576  | )      | $ | (2,362 | ) |
| Reclassification                adjustments for                  |   |     |      |     |   |     |   |   |   |   |
| gains                included in net income                      |   |     | **(732**  | **)**    |   | (259     | )      |   | (2,470 | ) |
| Net                unrealized gains (losses)                     |   |     | **2,754** |     |   | (10,835  | )      |   | (4,832 | ) |
| Tax                effect                                        |   |     | **(964**  | **)**    |   | 3,792    |   |   | 1,692 |   |
|                                                             |   |     |      |     |   |     |   |   |   |   |
| Net-of-tax                amount                                 |   |     | **1,790** |     |   | (7,043   | )      |   | (3,140 | ) |
|                                                             |   |     |      |     |   |     |   |   |   |   |
| (Increase)                decrease in unfunded pension liability |   |     | **282**   |     |   | 82       |   |   | (377 | ) |
| Tax                effect                                        |   |     | **(99**   | **)**    |   | (29      | )      |   | 132 |   |
|                                                             |   |     |      |     |   |     |   |   |   |   |
| Net-of-tax                amount                                 |   |     | **183**   |     |   | 53       |   |   | (245 | ) |
|                                                             |   |     |      |     |   |     |   |   |   |   |
|                                                             |   | **$**    | **1,973** |     | $      | (6,990   | )      | $ | (3,385 | ) |

|                                                         |   | **2006** |       | **2005** |   |
|--------------------------------------------------------------|--------|----------|------------|----------|--------|
| Net                unrealized gain (loss) on                 |   |     |       |     |   |   |   |
| available-for-sale                securities                 |   | **$**    | **434**    |     | **$**  | **(2,320** | **)** |
| Tax                effect                                    |   |     | **(152**   | **)**    |   | **812** |   |
| Net-of-tax                amount                             |   |     | **282**    |     |   | **(1,508** | **)** |
|                                                         |   |     |       |     |   |   |   |
| Unfunded                pension liability                    |   |     | **(3,213** | **)**    |   | **(3,494** | **)** |
| Tax                effect                                    |   |     | **1,125**  |     |   | **1,223** |   |
| Net-of-tax                amount                             |   |     | **(2,088** | **)**    |   | **(2,271** | **)** |
|                                                         |   |     |       |     |   |   |   |
| Accumulated                other comprehensive income (loss) |   | **$**    | **(1,806** | **)**    | **$**  | **(3,779** | **)** |

**SEGMENT      REPORTING:**

**TRANSFERS      OF FINANCIAL ASSETS:**

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

**OFF-BALANCE      SHEET CREDIT RELATED FINANCIAL INSTRUMENTS:**

**RECLASSIFICATIONS:**

**NEW      ACCOUNTING PRONOUNCEMENTS:**

***SFAS      No. 155***
**      - **

***FASB      Interpretation No. 48***

***EITF      06-4***
**      - **
*Accounting      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement      Split Dollar Life Insurance Arrangements.*

----

***SFAS      No. 157***
**      - **
*Fair      Value Measurements,”*

***SFAS      No. 159***
**      - **
*The      Fair Value Option for Financial Assets and Financial Liabilities-Including      an      Amendment of FASB Statement No. 115*

**2.      ACQUISITIONS:**

***PennRock      Financial Services Corp***
*.*

|                                                                                                 |   | (dollars                in thousands, except per share data) |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
| Community                common stock issued (restated for 5% stock dividend in                2006) |   |                                                         |   |   |   | 11,397,157 |   |   |   |   |
| Average                purchase price per Community common share                                     |   |                                                         |   |   | $ | 28.4286 |   |   |   |   |
|                                                                                                 |   |                                                         |   |   |   |   |   | $ | 324,005 |   |
| Transaction                costs                                                                     |   |                                                         |   |   |   |   |   |   | 6,065 |   |
| Fair                value of vested employee stock options                                           |   |                                                         |   |   |   |   |   |   | 3,079 |   |
| Total                Purchase Price                                                                  |   |                                                         |   |   | 333,149 |   |
| Net                Assets Acquired:                                                                  |   |                                                         |   |   |   |   |
| PennRock                stockholders’ equity                                                   |   |                                                         |   |   |   | 103,690 |   |   |   |   |
| PennRock                goodwill and intangibles                                                     |   |                                                         |   |   |   | (10,037 | ) |   |   |   |
| Adjustments                to reflect assets acquired at fair value:                                 |   |                                                         |   |   |   |   |   |   |   |   |
| Investments                                                                                          |   |                                                         |   |   |   | (6,330 | ) |   |   |   |
| Loans                (14 year weighted average life)                                                 |   |                                                         |   |   |   | (1,757 | ) |   |   |   |
| Core                deposit intangible (10 year accelerated amortization)                            |   |                                                         |   |   |   | 13,135 |   |   |   |   |
| Bank                premises (35 year weighted average life)                                         |   |                                                         |   |   |   | (3,482 | ) |   |   |   |
| Deferred                tax assets (12 year weighted average life)                                   |   |                                                         |   |   |   | 539 |   |   |   |   |
| Adjustments                to reflect liabilities acquired at fair value:                            |   |                                                         |   |   |   |   |   |   |   |   |
| Time                deposits (2 year weighted average life)                                          |   |                                                         |   |   |   | (2,110 | ) |   |   |   |
| FHLB                advances (2.5 year weighted average life)                                        |   |                                                         |   |   |   | (1,515 | ) |   |   |   |
|                                                                                                 |   |                                                         |   |   |   |   |   |   | 92,133 |   |
| Goodwill                resulting from merger                                                        |   |                                                         |   |   |   |   |   | $ | 241,016 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**2.      ACQUISITIONS (Continued):**

***Wiley      Insurance Agency and Sentry Trust Company***

**Pending      acquisitions:**

***BUCS      Financial Corp***

***East      Prospect State Bank***

----

**3.      INVESTMENT SECURITIES:**

|                                                     |   | **2006**                    |        | **2005**                         |   |
|----------------------------------------------------------|--------|-----------------------------|-------------|----------------------------------|--------|
|                                                     |   |  **Amortized****Cost** |        | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   |  **Fair****Value** |   |  **Amortized****Cost** |   | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   |  **Fair****Value** |   |
| Securities                Available-For-Sale             |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt                securities:                          |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                Government and federal agency        |   | **$**                       | **128,660** |                             | **$**  | **34** |   | **$** | **(1,922** | **)** | **$** | **126,772** |   | $ | 125,938 |   | $ | --- |   | $ | (2,814 | ) | $ | 123,124 |   |
| Mortgage-backed,                primarily federal agency |   |                        | **204,887** |                             |   | **361** |   |   | **(3,276** | **)** |   | **201,972** |   |   | 186,871 |   |   | 102 |   |   | (4,160 | ) |   | 182,813 |   |
| State                and municipal                       |   |                        | **196,879** |                             |   | **5,642** |   |   | **(346** | **)** |   | **202,175** |   |   | 186,047 |   |   | 5,899 |   |   | (1,034 | ) |   | 190,912 |   |
| Corporate                                                |   |                        | **42,403**  |                             |   | **465** |   |   | **(310** | **)** |   | **42,558** |   |   | 40,351 |   |   | 830 |   |   | (961 | ) |   | 40,220 |   |
| Total                debt securities                     |   |                        | **572,829** |                             |   | **6,502** |   |   | **(5,854** | **)** |   | **573,477** |   |   | 539,207 |   |   | 6,831 |   |   | (8,969 | ) |   | 537,069 |   |
| Equity                securities                         |   |                        | **63,035**  |                             |   | **151** |   |   | **(597** | **)** |   | **62,589** |   |   | 68,909 |   |   | 789 |   |   | (1,212 | ) |   | 68,486 |   |
| Total                securities available-for-sale       |   | **$**                       | **635,864** |                             | **$**  | **6,653** |   | **$** | **(6,451** | **)** | **$** | **636,066** |   | $ | 608,116 |   | $ | 7,620 |   | $ | (10,181 | ) | $ | 605,555 |   |
|                                                     |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                Held-to-Maturity               |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State                and municipal                       |   | **$**                       | **23,070**  |                             | **$**  | **351** |   | **$** | **(6** | **)** | **$** | **23,415** |   | $ | 23,030 |   | $ | --- |   | $ | (467 | ) | $ | 22,563 |   |

|                                                     |   | **2006**                               |        | **2005**                             |   |
|----------------------------------------------------------|--------|----------------------------------------|-------------|--------------------------------------|--------|
|                                                     |   | **Less                Than 12 Months** |        | **12                Months or More** |   | **Less                Than 12 Months** |   | **12                Months or More** |   |
|                                                     |   | **Fair****Value**                      |        | **Unrealized                Losses** |   | **Fair****Value** |   | **Unrealized                Losses** |   | **Fair****Value** |   | **Unrealized****Losses** |   | **Fair****Value** |   | **Unrealized                Losses** |   |
| Securities                Available-For-Sale             |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt                securities:                          |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                Government and federal agency        |   | **$**                                  | **41,228**  |                                 | **$**  | **(97** | **)** | **$** | **69,729** |   | **$** | **(1,824** | **)** | $ | 87,614 |   | $ | (1,036 | ) | $ | 34,838 |   | $ | (1,777 | ) |
| Mortgage-backed,                primarily federal agency |   |                                   | **22,767**  |                                 |   | **(330** | **)** |   | **125,068** |   |   | **(2,946** | **)** |   | 128,799 |   |   | (2,589 | ) |   | 44,646 |   |   | (1,572 | ) |
| State                and municipal                       |   |                                   | **20,826**  |                                 |   | **(154** | **)** |   | **13,036** |   |   | **(192** | **)** |   | 37,103 |   |   | (722 | ) |   | 8,806 |   |   | (312 | ) |
| Corporate                                                |   |                                   | **5,116**   |                                 |   | **(32** | **)** |   | **12,884** |   |   | **(278** | **)** |   | 9,270 |   |   | (396 | ) |   | 6,116 |   |   | (565 | ) |
| Total                debt securities                     |   |                                   | **89,937**  |                                 |   | **(613** | **)** |   | **220,717** |   |   | **(5,240** | **)** |   | 262,786 |   |   | (4,743 | ) |   | 94,406 |   |   | (4,226 | ) |
| Equity                securities                         |   |                                   | **26,572**  |                                 |   | **(308** | **)** |   | **2,237** |   |   | **(290** | **)** |   | 26,919 |   |   | (808 | ) |   | 1,497 |   |   | (404 | ) |
|                                                     |   | **$**                                  | **116,509** |                                 | **$**  | **(921** | **)** | **$** | **222,954** |   | **$** | **(5,530** | **)** | $ | 289,705 |   | $ | (5,551 | ) | $ | 95,903 |   | $ | (4,630 | ) |
|                                                     |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                Held-to-Maturity               |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State                and municipal                       |   | **$**                                  | **353**     |                                 | **$**  | **(1** | **)** | **$** | **1,451** |   | **$** | **(5** | **)** | $ | 22,563 |   | $ | (467 | ) | $ | --- |   | $ | --- |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**3.      INVESTMENT SECURITIES (Continued):**

|                                           |   | **Available                for Sale** |    | **Held                to Maturity** |   |
|------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                           |   | **Amortized****Cost**                 |    | **Fair****Value**                   |   | **Amortized****Cost** |   | **Fair****Value** |   |
|                                           |   | (in                thousands)         |
| Within                1 year                   |   | $                                     | 1,130   |                                | $      | 1,126 |   | $ | --- |   | $ | --- |   |
| Over                1 year and through 5 years |   |                                  | 89,958  |                                |   | 89,285 |   |   | --- |   |   | --- |   |
| Over                5 years through 10 years   |   |                                  | 81,626  |                                |   | 80,785 |   |   | 511 |   |   | 512 |   |
| Over                10 years                   |   |                                  | 195,228 |                                |   | 200,309 |   |   | 22,559 |   |   | 22,903 |   |
|                                           |   |                                  | 367,942 |                                |   | 371,505 |   |   | 23,070 |   |   | 23,415 |   |
| Mortgage-backed                securities      |   |                                  | 204,887 |                                |   | 201,972 |   |   | --- |   |   | --- |   |
|                                           |   | $                                     | 572,829 |                                | $      | 573,477 |   | $ | 23,070 |   | $ | 23,415 |   |

**4.      LOANS:**

|                                    |   | **2006** |          | **2005** |   |
|-----------------------------------------|--------|----------|---------------|----------|--------|
| Commercial                              |   | **$**    | **865,355**   |     | $      | 782,946 |   |
| Real                estate-construction |   |     | **7,290**     |     |   | 4,532 |   |
| Real                estate-mortgage     |   |     |          |     |   |   |   |
| Residential                             |   |     | **141,826**   |     |   | 149,525 |   |
| Commercial                              |   |     | **815,028**   |     |   | 793,969 |   |
| Consumer                                |   |     | **541,390**   |     |   | 506,093 |   |
|                                    |   | **$**    | **2,370,889** |     | $      | 2,237,065 |   |

|                                                          |   | **2006** |       | **2005** |   | **2004** |   |
|---------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
| Balance,                January 1                             |   | **$**    | **22,965** |     | $      | 14,421   |   | $ | 13,178 |   |
| Provision                for loan losses                      |   |     | **2,050**  |     |   | 2,300    |   |   | 3,100 |   |
| Loan                charge-offs                               |   |     | **(2,290** | **)**    |   | (2,323   | )      |   | (2,910 | ) |
| Recoveries                                                    |   |     | **901**    |     |   | 1,499    |   |   | 1,053 |   |
| Allowance                established for acquired credit risk |   |     | **---**    |     |   | 7,068    |   |   | --- |   |
| Balance,                December 31                           |   | **$**    | **23,626** |     | $      | 22,965   |   | $ | 14,421 |   |

----

|                                                                      |   | **2006** |       | **2005** |   |
|---------------------------------------------------------------------------|--------|----------|------------|----------|--------|
| Loans                on which accrual of interest has been discontinued   |   | **$**    | **12,545** |     | $      | 9,060 |   |
| Foreclosed                real estate                                     |   |     | **37**     |     |   | 1,447 |   |
|                                                                      |   |     |       |     |   |   |   |
| Total                non-performing assets                                |   |     | **12,582** |     |   | 10,507 |   |
|                                                                      |   |     |       |     |   |   |   |
| Loans                past due 90 days or more and still accruing interest |   |     | **659**    |     |   | 22 |   |
|                                                                      |   |     |       |     |   |   |   |
| Total                risk elements                                        |   | **$**    | **13,241** |     | $      | 10,529 |   |

|                                                         |   | **2006** |       | **2005** |   |
|--------------------------------------------------------------|--------|----------|------------|----------|--------|
| Impaired                loans without a valuation allowance  |   | **$**    | **6,215**  |     | $      | 3,120 |   |
| Impaired                loans with a valuation allowance     |   |     | **4,336**  |     |   | 4,164 |   |
| Total                impaired loans                          |   | **$**    | **10,551** |     | $      | 7,284 |   |
|                                                         |   |     |       |     |   |   |   |
| Valuation                allowance related to impaired loans |   | **$**    | **2,301**  |     | $      | 1,848 |   |

**5.      PREMISES AND EQUIPMEN**

|                                                          |   | **2006** |        | **2005** |   |
|---------------------------------------------------------------|--------|----------|-------------|----------|--------|
|                                                          |   |     |        |     |   |   |   |
| Banking                premises                               |   | **$**    | **46,213**  |     | $      | 41,684 |   |
| Furniture,                fixtures, and equipment             |   |     | **29,872**  |     |   | 28,526 |   |
| Leasehold                improvements                         |   |     | **2,385**   |     |   | 2,206 |   |
| Construction-in-progress                                      |   |     | **1,274**   |     |   | 1,746 |   |
|                                                          |   |     | **79,744**  |     |   | 74,162 |   |
| Less                accumulated depreciation and amortization |   |     | **(33,409** | **)**    |   | (30,879 | ) |
|                                                          |   |     |        |     |   |   |   |
|                                                          |   | **$**    | **46,335**  |     | $      | 43,283 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**5.      PREMISES AND EQUIPMENT (Continued):**

| 2007       |   | $      | 2,234  |   |
|------------|--------|--------|--------|--------|
| 2008       |   |   | 2,118  |   |
| 2009       |   |   | 2,143  |   |
| 2010       |   |   | 2,077  |   |
| 2011       |   |   | 2,018  |   |
| Thereafter |   |   | 29,551 |   |
|       |   |   |   |   |
|       |   | $      | 40,141 |   |

| **6.  ** | **GOODWILL                AND OTHER INTANGIBLE                ASSETS:** |
|--------------------|-------------------------------------------------------------------------|

|                                        |   | **2006** |        | **2005** |   | **2004** |   |
|---------------------------------------------|--------|----------|-------------|----------|--------|----------|--------|
|                                        |   |     |        |
| Balance                at beginning of year |   | **$**    | **244,827** |     | $      | 3,570    |   | $ | 3,231 |   |
| Goodwill                acquired            |   |     | **1,556**   |     |   | 241,257  |   |   | 339 |   |
| Balance                at end of year       |   | **$**    | **246,383** |     | $      | 244,827  |   | $ | 3,570 |   |

|                        |   | **2006**  |       | 2005                                        |   |
|-----------------------------|--------|-----------|------------|---------------------------------------------|--------|
|                        |   | **Gross** |       | **Accumulated                Amortization** |   | **Net** |   | Gross |   | Accumulated                Amortization |   | Net |   |
|                        |   |      |       |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Core                deposit |   | **$**     | **14,236** |                                        | **$**  | **4,128** |   | **$** | **10,108** |   | $ | 14,236 |   | $ | 1,786 |   | $ | 12,450 |   |
| Other                       |   |      | **3,478**  |                                        |   | **563** |   |   | **2,915** |   |   | 2,069 |   |   | 265 |   |   | 1,804 |   |
| Total                       |   | **$**     | **17,714** |                                        | **$**  | **4,691** |   | **$** | **13,023** |   | $ | 16,305 |   | $ | 2,051 |   | $ | 14,254 |   |

| 2007 |   | $      | 2,450 |   |
|------|--------|--------|-------|--------|
| 2008 |   |   | 2,200 |   |
| 2009 |   |   | 1,975 |   |
| 2010 |   |   | 1,725 |   |
| 2011 |   |   | 1,500 |   |

----

**7.      DEPOSITS:**

|                                         |   | **2006** |          | **2005** |   |
|----------------------------------------------|--------|----------|---------------|----------|--------|
|                                         |   |     |          |     |   |   |   |
| Non-interest                bearing deposits |   | **$**    | **368,329**   |     | $      | 375,835 |   |
| Savings                deposits              |   |     | **229,311**   |     |   | 243,174 |   |
| Money                market deposits         |   |     | **250,733**   |     |   | 288,418 |   |
| NOW                accounts                  |   |     | **399,299**   |     |   | 310,517 |   |
| Time                deposits                 |   |     | **1,265,510** |     |   | 1,076,423 |   |
|                                         |   |     |          |     |   |   |   |
| Total                                        |   | **$**    | **2,513,182** |     | $      | 2,294,367 |   |

| 2007       |   | $      | 881,596   |   |
|------------|--------|--------|-----------|--------|
| 2008       |   |   | 210,213   |   |
| 2009       |   |   | 70,691    |   |
| 2010       |   |   | 85,794    |   |
| 2011       |   |   | 15,771    |   |
| Thereafter |   |   | 1,445     |   |
|       |   |   |      |   |
|       |   | $      | 1,265,510 |   |

**8.      SHORT-TERM BORROWINGS AND LONG-TERM DEBT:**

|                                                          |   | **2006** |        | **Rate** |   | **2005** |   | **Rate** |   | **2004** |   | **Rate** |   |
|---------------------------------------------------------------|--------|----------|-------------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                          |   |     |        |     |   |     |   |     |   |     |   |     |   |
| Securities                sold under agreements to repurchase |   | **$**    | **72,201**  |     |   | **4.87** | **%**  | $        | 62,631 |     |   | 4.78     | %      | $ | 25,472 |   |   | 1.81 | % |
| Treasury                tax and loan note                     |   |     | **1,256**   |     |   | **5.04** | **%**  |     | 1,804  |     |   | 3.98     | %      |   | 1,926 |   |   | 1.94 | % |
| FHLB                borrowings                                |   |     | **35,470**  |     |   | **5.41** | **%**  |     | 17,818 |     |   | 4.23     | %      |   | 19,718 |   |   | 2.21 | % |
| Other                                                         |   |     | **---**     |     |   | **---**  |   |     | 5,000  |     |   | 5.54     | %      |   | --- |   |   | --- |   |
|                                                          |   | **$**    | **108,927** |     |   |     |   | $        | 87,253 |     |   |     |   | $ | 47,116 |   |   |   |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**8.      SHORT-TERM BORROWINGS AND LONG-TERM DEBT (Continued):**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | **2006** |        | **2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|
| Outstanding                advances from the FHLB of Pittsburgh are currently fixed rate and                mature                from 2007 to 2016. The advances are collateralized by FHLB stock,                certain                first mortgage loans and both agency and mortgage-backed securities.                The                advance rates range from 2.70% to 6.35%, with a weighted average                interest                rate of 4.65%. Advances totaling $229 million are convertible advances.                Under the terms of these arrangements, the FHLB retains the option                to                convert the advances from fixed to variable rate. If the FHLB were                to                convert their options, Community has the ability to prepay the advances                at                no penalty. At the current time no advances have been converted,                and                remain at a fixed rate of interest. |   | **$**    | **314,795** |     | $      | 430,428 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |     |        |     |   |   |   |
| Other                long-term debt has an interest rate of 4% and matures in                2017.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     | **284**     |     |   | 291 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | **$**    | **315,079** |     | $      | 430,719 |   |

| 2007       |   | $      | 68,177  |   |
|------------|--------|--------|---------|--------|
| 2008       |   |   | 12,833  |   |
| 2009       |   |   | 50,019  |   |
| 2010       |   |   | 45,025  |   |
| 2011       |   |   | 25,029  |   |
| Thereafter |   |   | 113,996 |   |
|       |   | $      | 315,079 |   |

----

**9.      SUBORDINATED DEBT:**

|  Issuance                Trust                                         |   |  Issuance                date  |                         |  Preferred                security amount  |   |  Rate  |   |  Repricing                date  |                                              |  Rate                @ repricing  |   |  Call                date  |   |  Maturity  |                                              |
|----------------------------------------------------------------------------------|--------|------------------------------------------|------------------------------|------------------------------------------------------|--------|------------------|--------|-------------------------------------------|---------------------------------------------------|---------------------------------------------|--------|--------------------------------------|--------|----------------------|---------------------------------------------------|
| CMTY                Capital Trust I                                         |   |                                     | December                2002 |                                                 | $      | 15,500           |   |                                      | 3-month                LIBOR+                3.35 | %                                           |   | Quarterly                            |   |                 | 3-month                LIBOR+                3.35 | % |   | 1/7/2008 |   |   | 1/7/2033 |   |
|  CMTY                Statutory  Capital                Trust II   |   |                                     | December                2003 |                                                 |   | 15,400           |   |                                      | 3-month                LIBOR+                2.84 | %                                           |   | Quarterly                            |   |                 | 3-month                LIBOR+                2.84 | % |   | 12/16/2008 |   |   | 12/16/2033 |   |
|  CMTY                Statutory  Capital                Trust III  |   |                                     | January                2006  |                                                 |   | 10,300           |   |                                      | 6.35                                              | %                                           |   | 3/15/2011                            |   |                 | 3-month                LIBOR+                1.40 | % |   | 3/15/2011 |   |   | 3/15/2036 |   |
|  CMTY                Statutory  Capital                Trust IV   |   |                                     | January                2006  |                                                 |   | 10,300           |   |                                      | 6.44                                              | %                                           |   | 3/15/2016                            |   |                 | 3-month                LIBOR+                1.40 | % |   | 3/15/2016 |   |   | 3/15/2036 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**10.      INCOME TAXES:**

|     |   | **2006** |       | **2005** |   | **2004** |   |
|----------|--------|----------|------------|----------|--------|----------|--------|
| Current  |   | **$**    | **14,152** |     | $      | 4,513    |   | $ | 5,360 |   |
| Deferred |   |     | **(251**   | **)**    |   | 1,559    |   |   | (481 | ) |
|     |   | **$**    | **13,901** |     | $      | 6,072    |   | $ | 4,879 |   |

|                                                         |   | **2006** |       | **2005** |   | **2004** |   |
|--------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
| Provision                on pre-tax income at statutory rate |   | **$**    | **19,226** |     | $      | 11,100   |   | $ | 9,337 |   |
| Tax-exempt                interest income                    |   |     | **(4,017** | **)**    |   | (3,740   | )      |   | (3,409 | ) |
| Earnings                on investment in insurance           |   |     | **(865**   | **)**    |   | (656     | )      |   | (514 | ) |
| Other,                net                                    |   |     | **(443**   | **)**    |   | (632     | )      |   | (535 | ) |
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Total                provision for income taxes              |   | **$**    | **13,901** |     | $      | 6,072    |   | $ | 4,879 |   |

|                                                            |   | **2006** |       | **2005** |   |
|-----------------------------------------------------------------|--------|----------|------------|----------|--------|
| Deferred                tax assets:                             |   |     |       |     |   |
| Allowance                for loan losses                        |   | **$**    | **8,268**  |     | $      | 8,038 |   |
| Unfunded                pension adjustment                      |   |     | **1,124**  |     |   | 1,223 |   |
| Deferred                loan fees                               |   |     | **585**    |     |   | 340 |   |
| Deferred                compensation                            |   |     | **2,092**  |     |   | 1,856 |   |
| Alternative                minimum tax                          |   |     | **---**    |     |   | 900 |   |
| Unrealized                loss on available for sale securities |   |     | **---**    |     |   | 812 |   |
| Other                                                           |   |     | **492**    |     |   | 658 |   |
| Total                deferred tax assets                        |   |     | **12,561** |     |   | 13,827 |   |
|                                                            |   |     |       |     |   |   |   |
| Deferred                tax liabilities                         |   |     |       |     |   |   |   |
| Depreciation                                                    |   |     | **616**    |     |   | 842 |   |
| Unrealized                gain on available for sale securities |   |     | **152**    |     |   | --- |   |
| Prepaid                pension cost                             |   |     | **850**    |     |   | 785 |   |
| Prepaid                expenses                                 |   |     | **402**    |     |   | 529 |   |
| Purchase                accounting adjustments                  |   |     | **629**    |     |   | 802 |   |
| Other                                                           |   |     | **290**    |     |   | 505 |   |
| Total                deferred tax liabilities                   |   |     | **2,939**  |     |   | 3,463 |   |
|                                                            |   |     |       |     |   |   |   |
| Net                deferred tax asset                           |   | **$**    | **9,622**  |     | $      | 10,364 |   |

----

**11.      COMMITMENTS AND CONTINGENCIES:**

|                                                     |   | **Contract                Amount** |        |
|----------------------------------------------------------|--------|------------------------------------|-------------|
|                                                     |   | **2006**                           |        | **2005** |   |
| Commitments                to fund loans                 |   | **$**                              | **161,707** |   | $ | 99,988 |   |
| Unused                lines of credit                    |   | **$**                              | **450,540** |   | $ | 365,076 |   |
| Standby                letters of credit                 |   | **$**                              | **84,213**  |   | $ | 100,523 |   |
| Unadvanced                portions of construction loans |   | **$**                              | **138,525** |   | $ | 129,845 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**12.      REGULATORY MATTERS:**

|                                          |   | **As                of December 31, 2006** |        |
|-----------------------------------------------|--------|--------------------------------------------|-------------|
|                                          |   | **Actual**                                 |        | **Regulatory                Minimum** |   | **“Well                Capitalized”** |   |
|                                          |   | **Amount**                                 |        | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| Leverage                ratio                 |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | **$**                                      | **279,023** |   |   | **8.7** | **%** | **$** | **127,740** |   |   | **4** | **%** | **$** | **159,674** |   |   | **5** | **%** |
| Bank                only                      |   | **$**                                      | **265,765** |   |   | **8.4** | **%** | **$** | **127,212** |   |   | **4** | **%** | **$** | **159,015** |   |   | **5** | **%** |
|                                          |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier                1 capital ratio           |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | **$**                                      | **279,023** |   |   | **10.7** | **%** | **$** | **104,235** |   |   | **4** | **%** | **$** | **156,353** |   |   | **6** | **%** |
| Bank                only                      |   | **$**                                      | **265,765** |   |   | **10.2** | **%** | **$** | **104,118** |   |   | **4** | **%** | **$** | **156,177** |   |   | **6** | **%** |
|                                          |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                risk-based capital ratio |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | **$**                                      | **302,649** |   |   | **11.6** | **%** | **$** | **208,470** |   |   | **8** | **%** | **$** | **260,588** |   |   | **10** | **%** |
| Bank                only                      |   | **$**                                      | **289,391** |   |   | **11.1** | **%** | **$** | **208,237** |   |   | **8** | **%** | **$** | **260,296** |   |   | **10** | **%** |

----

|                                          |   | **As                of December 31, 2005** |    |
|-----------------------------------------------|--------|--------------------------------------------|---------|
|                                          |   | **Actual**                                 |    | **Regulatory                Minimum** |   | **“Well                Capitalized”** |   |
|                                          |   | **Amount**                                 |    | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| Leverage                ratio                 |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | $                                          | 249,692 |   |   | 8.2 | % | $ | 122,231 |   |   | 4 | % | $ | 152,789 |   |   | 5 | % |
| Bank                only                      |   | $                                          | 242,696 |   |   | 8.0 | % | $ | 121,777 |   |   | 4 | % | $ | 152,221 |   |   | 5 | % |
|                                          |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier                1 capital ratio           |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | $                                          | 249,692 |   |   | 10.1 | % | $ | 99,207 |   |   | 4 | % | $ | 148,811 |   |   | 6 | % |
| Bank                only                      |   | $                                          | 242,696 |   |   | 9.8 | % | $ | 99,498 |   |   | 4 | % | $ | 149,247 |   |   | 6 | % |
|                                          |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                risk-based capital ratio |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | $                                          | 272,657 |   |   | 11.0 | % | $ | 198,414 |   |   | 8 | % | $ | 248,018 |   |   | 10 | % |
| Bank                only                      |   | $                                          | 265,661 |   |   | 10.7 | % | $ | 198,996 |   |   | 8 | % | $ | 248,746 |   |   | 10 | % |

**13.      PENSION PLAN:**

| **(dollars                in thousands)**                                                                    |   | **2006** |     | **2005** |   | **2004**            |   |
|--------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|---------------------|--------|
| Components                of net periodic benefit cost:                                                      |   |     |     |     |   |                |   |
| Interest                cost on projected benefit obligation                                                 |   | **$**    | **409**  |     | $      | 414                 |   | $ | 416 |   |
| Expected                return on plan assets                                                                |   |     | **(469** | **)**    |   | (448                | )      |   | (249 | ) |
| Net                amortization and deferral:                                                                |   |     |     |     |   |                |   |   |   |   |
| Net                loss                                                                                      |   |     | **273**  |     |   | 284                 |   |   | 252 |   |
| Gain                (loss) deferred                                                                          |   |     | **---**  |     |   | 16                  |   |   | (161 | ) |
| Pension                cost                                                                                  |   | **$**    | **213**  |     | $      | 266                 |   | $ | 258 |   |
|                                                                                                         |   |     |     |     |   |                |   |   |   |   |
| Increase                (decrease) in minimum liability included in othercomprehensive                income |   | **$**    | **(282** | **)**    | $      | (                82 | )      | $ | 377 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**13.      PENSION PLAN (Continued):**

| **(dollars                in thousands)**                                       |   | **2006** |       | **2005** |   |
|---------------------------------------------------------------------------------|--------|----------|------------|----------|--------|
|                                                                            |   |     |       |     |   |
| Change                in benefit obligation:                                    |   |     |       |     |   |
| Benefit                obligation at beginning of year                          |   | **$**    | **7,654**  |     | $      | 7,400 |   |
| Interest                cost                                                    |   |     | **409**    |     |   | 414 |   |
| Benefits                paid                                                    |   |     | **(399**   | **)**    |   | (379 | ) |
| Change                in assumptions                                            |   |     | **(234**   | **)**    |   | 242 |   |
| Experience                (gain) loss                                           |   |     | **121**    |     |   | (23 | ) |
| Benefit                obligation at end of year                                |   |     | **7,551**  |     |   | 7,654 |   |
| Change                in plan assets:                                           |   |     |       |     |   |   |   |
| Fair                value of plan assets at beginning of year                   |   |     | **6,401**  |     |   | 5,794 |   |
| Actual                return on plan assets                                     |   |     | **364**    |     |   | 448 |   |
| Employer                contributions                                           |   |     | **400**    |     |   | 538 |   |
| Benefits                paid                                                    |   |     | **(399**   | **)**    |   | (379 | ) |
| Fair                value of plan assets at end of year                         |   |     | **6,766**  |     |   | 6,401 |   |
|                                                                            |   |     |       |     |   |   |   |
| Funded                status, end of year                                       |   |     | **(785**   | **)**    |   | (1,253 | ) |
| Unrecognized                net cost                                            |   |     | **3,213**  |     |   | 3,494 |   |
| Recognition                of additional minimum liability                      |   |     | **(3,213** | **)**    |   | (3,494 | ) |
| Accrued                pension liability                                        |   | **$**    | **(785**   | **)**    | $      | (1,253 | ) |
|                                                                            |   |     |       |     |   |   |   |
| Amounts                recognized in the consolidated balance sheet consist of: |   |     |       |
| Prepaid                benefit cost                                             |   | **$**    | **2,428**  |     | $      | 2,241 |   |
| Accumulated                other comprehensive income adjustment                |   |     | **(3,213** | **)**    |   | (3,494 | ) |
| Net                accrued pension liability                                    |   | **$**    | **(785**   | **)**    | $      | (1,253 | ) |
|                                                                            |   |     |       |     |   |   |   |
| Accumulated                benefit obligation                                   |   | **$**    | **7,551**  |     | $      | 7,654 |   |

|                                                    |   | **2006** |     | **2005** |   | **2004** |   |
|---------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Discount                rate                            |   |     | **5.75** | **%**    |   | 5.50     | %      |   | 5.75 | % |
| Expected                long-term return on plan assets |   |     | **7.5**  | **%**    |   | 7.5      | %      |   | 8.5 | % |
| Annual                salary increase                   |   |     | **n/a**  |     |   | n/a      |   |   | n/a |   |

----

| 2007                             |   | $      | 406   |   |
|----------------------------------|--------|--------|-------|--------|
| 2008                             |   |   | 408   |   |
| 2009                             |   |   | 432   |   |
| 2010                             |   |   | 443   |   |
| 2011                             |   |   | 445   |   |
| Years                2012 - 2016 |   |   | 2,528 |   |

|                                   |   | **Target****Asset** |   |      |   |  **At                December 31,** |   |
|----------------------------------------|--------|---------------------|--------|-----------|--------|------------------------------------------|--------|
|                                   |   | **Allocation**      |   | **Range** |   | **2006**                                 |   | **2005** |   |
| Equity                                 |   |                | 60     | %         |   | 50-70                                    | %      |   | **67** | **%** |   | 61 | % |
| Fixed                income            |   |                | 35     | %         |   | 25-45                                    | %      |   | **28** | **%** |   | 31 | % |
| Cash                and/or equivalents |   |                | 5      | %         |   | 2-10                                     | %      |   | **5** | **%** |   | 8 | % |
|                                   |   |                |   |      |   |                                     |   |   |   |   |   |   |   |
|                                   |   |                | 100    | %         |   |                                     |   |   |   |   |   |   |   |

|                            |   | **Targeted****Asset****Allocation** |   |   **Benchmarks** |   | **10                yrs (12/31/06)****Annualized****Returns** |   | **15                yrs (12/31/06)****Annualized****Returns** |   |
|---------------------------------|--------|-------------------------------------|--------|----------------------------|--------|---------------------------------------------------------------|--------|---------------------------------------------------------------|--------|
| Equities                        |   |                                | 60     | %                          |   | S&P                500                                    |   |                                                          | 8.42   | % |   | 10.64 | % |
| Fixed                income     |   |                                | 35     | %                          |   | Lehman                Bros Aggregate                          |   |                                                          | 6.24   | % |   | 6.50 | % |
| Cash                equivalents |   |                                | 5      | %                          |   | 3                mo T-Bill                                    |   |                                                          | 3.76   | % |   | 3.99 | % |
|                            |   |                                |   |                       |   |                                                          |   |                                                          |   |   |   |   |   |
| Total                pension    |   |                                | 100    | %                          |   |                                                          |   |                                                          | 7.42   | % |   | 8.86 | % |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**14.      STOCK-BASED PLANS:**

*Accounting      for Stock Issued to Employees,” *
*Accounting      for Stock Based Compensation.” *

|                                                            |   | **December                31,****2005** |   | **December                31,****2004** |   |
|-----------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                                                            |   |                                    |   |                                    |   |
| Net                income, as reported                          |   | $                                       | 25,641 |                                    | $      | 21,798 |   |
| Deduct:                Total stock-based compensation           |   |                                    |   |                                    |   |   |   |
| expense                determined under fair value based        |   |                                    |   |                                    |   |   |   |
| method                for all awards, net of related tax effect |   |                                    | (1,488 | )                                       |   | (1,418 | ) |
| Pro                forma net income                             |   | $                                       | 24,153 |                                    | $      | 20,380 |   |
|                                                            |   |                                    |   |                                    |   |   |   |
| Earnings                per share:                              |   |                                    |   |                                    |   |   |   |
| Basic                - as reported                              |   | $                                       | 1.38   |                                    | $      | 1.70 |   |
| Basic                - pro forma                                |   | $                                       | 1.30   |                                    | $      | 1.59 |   |
|                                                            |   |                                    |   |                                    |   |   |   |
| Diluted                - as reported                            |   | $                                       | 1.35   |                                    | $      | 1.65 |   |
| Diluted                - pro forma                              |   | $                                       | 1.27   |                                    | $      | 1.54 |   |

*Share-Based      Payments,”*

----

|                                           |   | **2006** |     | **2005** |   | **2004** |   |
|------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Dividend                yield                  |   |     | **2.7**  | **%**    |   | 2.7      | %      |   | 2.4 | % |
| Volatility                                     |   |     | **26**   | **%**    |   | 23       | %      |   | 33 | % |
| Risk-free                interest rate         |   |     | **4.5**  | **%**    |   | 4.4      | %      |   | 4.0 | % |
| Expected                life (years)           |   |     | **6.3**  |     |   | 7.4      |   |   | 7.8 |   |
| Resulting                grant-date fair value |   | **$**    | **6.85** |     | $      | 6.28     |   | $ | 9.00 |   |

|                                      |   | **2006**                                                                     |      | **2005**                                                                             |   | **2004**                                                                     |   |
|-------------------------------------------|--------|------------------------------------------------------------------------------|-----------|--------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|
|                                      |   |  **Shares                Under****Option                (000’s)** |      | **Weighted****Average****Exercise                Price****Per                Share** |   |  **Shares                Under****Option                (000’s)** |   | **Weighted****Average****Exercise                Price****Per                Share** |   |  **Shares****Under****Option                (000’s)** |   | **Weighted****Average****Exercise                Price****Per                Share** |   |
| Balance,                beginning of year |   |                                                                         | **1,110** |                                                                                 | **$**  | **20.03**                                                                    |   |   | 1,126 |   | $ | 19.47 |   |   | 1,077 |   | $ | 17.05 |   |
| Issued                                    |   |                                                                         | **255**   |                                                                                 |   | **27.41**                                                                    |   |   | 14 |   |   | 25.72 |   |   | 203 |   |   | 27.51 |   |
| Exercised                                 |   |                                                                         | **(126**  | **)**                                                                                |   | **13.57**                                                                    |   |   | (268 | ) |   | 14.11 |   |   | (149 | ) |   | 12.70 |   |
| Exchanged                in merger        |   |                                                                         | **---**   |                                                                                 |   | **---**                                                                      |   |   | 239 |   |   | 15.74 |   |   | --- |   |   | --- |   |
| Forfeited                                 |   |                                                                         | **(1**    | **)**                                                                                |   | **25.57**                                                                    |   |   | (1 | ) |   | 19.04 |   |   | (5 | ) |   | 21.96 |   |
| Balance,                end of year       |   |                                                                         | **1,238** |                                                                                 | **$**  | **22.20**                                                                    |   |   | 1,110 |   | $ | 20.03 |   |   | 1,126 |   | $ | 19.47 |   |

|                                                                          |   | **Options                Outstanding**      |   | **Options                Exercisable**                    |   |
|-------------------------------------------------------------------------------|--------|---------------------------------------------|--------|-----------------------------------------------------------|--------|
|     **Range                of exercise prices per share** |   | **Vested****(in                thousands)** |   |   **Unvested****(in                thousands)** |   | **Weighted****Average****Exercise****Price****Per                Share** |   | **Weighted****Average****Remaining****Contractual****Life                in Years** |   |   **Number****Exercisable****(in                thousands)** |   | **Weighted****Average****Exercise****Price****Per                Share** |   |
| Under                $8.69                                                    |   |                                        | 33     |                                                      |   | --- |   | $ | 7.68 |   |   | 1.1 |   |   | 33 |   | $ | 7.68 |   |
| $8.69                - $14.47                                                 |   |                                        | 208    |                                                      |   | --- |   | $ | 13.40 |   |   | 3.0 |   |   | 208 |   | $ | 13.40 |   |
| $14.48                - $17.37                                                |   |                                        | 59     |                                                      |   | --- |   | $ | 14.80 |   |   | 1.7 |   |   | 59 |   | $ | 14.80 |   |
| $17.38                - $20.26                                                |   |                                        | 265    |                                                      |   | 26 |   | $ | 19.14 |   |   | 5.5 |   |   | 265 |   | $ | 19.05 |   |
| $20.27                - $28.95                                                |   |                                        | 393    |                                                      |   | 254 |   | $ | 27.82 |   |   | 6.8 |   |   | 393 |   | $ | 28.09 |   |
| $7.33                - $28.95                                                 |   |                                        | 958    |                                                      |   | 280 |   | $ | 22.20 |   |   | 5.5 |   |   | 958 |   | $ | 20.87 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**14.      STOCK-BASED PLANS (Continued):**

|                                               |   |  Shares                UnderOption |   | Weighted-average                grant-datefair                value |   |
|----------------------------------------------------|--------|-----------------------------------------|--------|---------------------------------------------------------------------|--------|
| Unvested                options, December 31, 2005 |   |                                    | 81     |                                                                | $      | 5.59 |   |
| Granted                                            |   |                                    | 255    |                                                                |   | 3.37 |   |
| Vested                                             |   |                                    | (55    | )                                                                   |   | 3.37 |   |
| Canceled                                           |   |                                    | (1     | )                                                                   |   | 6.54 |   |
| Unvested                options, December 31, 2006 |   |                                    | 280    |                                                                | $      | 3.54 |   |

**15.      RELATED PARTY TRANSACTIONS:**

----

**16.      FAIR VALUES OF FINANCIAL INSTRUMENTS:**

*Cash      and due from banks, interest-bearing deposits, and federal funds      sold:*
** **

*Investment      securities:*

*Accrued      interest receivable and payable:*

*Loans*

*Deposits*

*Short-term      borrowings:*

*Long-term      debt and subordinated debentures*

*Off-balance      sheet instruments*

|                                                                                                     |   | **2006**                           |          | **2005**                       |   |
|----------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------------|--------------------------------|--------|
|                                                                                                     |   |  **Carrying**** Amount** |          | **Estimated****Fair****Value** |   |  **Carrying****Amount** |   | **Estimated****Fair****Value** |   |
|                                                                                                     |   | **(in                thousands)**  |          |
| **Financial                assets:**                                                                     |   |                               |          |                           |   |   |   |   |   |   |   |   |   |
| Cash                and due from banks, interest-bearing deposits, and federal funds                sold |   | **$**                              | **77,169**    |                           | **$**  | **77,169** |   | $ | 81,243 |   | $ | 81,243 |   |
| Investment                securities                                                                     |   |                               | **659,136**   |                           |   | **659,481** |   |   | 628,585 |   |   | 628,118 |   |
| Net                loans                                                                                 |   |                               | **2,347,263** |                           |   | **2,336,467** |   |   | 2,214,100 |   |   | 2,207,179 |   |
| Accrued                interest receivable                                                               |   |                               | **14,537**    |                           |   | **14,537** |   |   | 13,316 |   |   | 13,316 |   |
|                                                                                                     |   |                               |          |                           |   |   |   |   |   |   |   |   |   |
| **Financial                liabilities:**                                                                |   |                               |          |                           |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                 |   | **$**                              | **2,513,182** |                           | **$**  | **2,451,375** |   | $ | 2,294,367 |   | $ | 2,292,606 |   |
| Short-term                borrowings                                                                     |   |                               | **108,927**   |                           |   | **108,927** |   |   | 87,253 |   |   | 87,253 |   |
| Long-term                debt                                                                            |   |                               | **315,079**   |                           |   | **316,150** |   |   | 430,719 |   |   | 435,065 |   |
| Subordinated                debt                                                                         |   |                               | **51,548**    |                           |   | **49,745** |   |   | 30,928 |   |   | 30,928 |   |
| Accrued                interest payable                                                                  |   |                               | **7,034**     |                           |   | **7,034** |   |   | 6,301 |   |   | 6,301 |   |
| Off-balance                sheet instruments                                                             |   |                               | **---**       |                           |   | **---** |   |   | --- |   |   | --- |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**17.      CONDENSED FINANCIAL INFORMATION OF COMMUNITY BANKS, INC. (PARENT      ONLY)**

| **(in                thousands)**                               |   | **2006** |        | **2005** |   |
|-----------------------------------------------------------------|--------|----------|-------------|----------|--------|
|                                                            |   |     |        |
| **Condensed                Balance Sheets:**                    |   |     |        |     |   |   |   |
| Cash                                                            |   | **$**    | **1,916**   |     | $      | 1,579 |   |
| Interest                bearing deposits in other banks         |   |     | **784**     |     |   | 53 |   |
| Investment                securities, available for sale        |   |     | **2,704**   |     |   | 2,338 |   |
| Investment                in banking subsidiary                 |   |     | **522,770** |     |   | 499,508 |   |
| Investment                in nonbank subsidiaries               |   |     | **6,807**   |     |   | 6,440 |   |
| Other                assets                                     |   |     | **3,146**   |     |   | 3,382 |   |
| Total                assets                                     |   | **$**    | **538,127** |     | $      | 513,300 |   |
|                                                            |   |     |        |     |   |   |   |
| Short-term                borrowings                            |   | **$**    | **---**     |     | $      | 5,000 |   |
| Long-term                debt                                   |   |     | **51,548**  |     |   | 30,928 |   |
| Other                liabilities                                |   |     | **418**     |     |   | 699 |   |
| Stockholders’                equity                       |   |     | **486,161** |     |   | 476,673 |   |
| Total                liabilities and stockholders’ equity |   | **$**    | **538,127** |     | $      | 513,300 |   |

|                                                                                |   | **2006** |        | **2005** |   | **2004** |   |
|-------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|----------|--------|
| **Condensed                Statements of Income:**                                  |   |     |        |     |   |     |   |
| Dividends                from:                                                      |   |     |        |     |   |     |   |   |   |   |
| Banking                subsidiary                                                   |   | **$**    | **24,000**  |     | $      | 19,000   |   | $ | --- |   |
| Nonbank                subsidiaries                                                 |   |     | **---**     |     |   | 2,263    |   |   | --- |   |
| Other                income (expense)                                               |   |     | **(3,059**  | **)**    |   | (2,693   | )      |   | (1,215 | ) |
| Income(loss)                before equity in undistributed earnings of subsidiaries |   |     | **20,941**  |     |   | 18,570   |   |   | (1,215 | ) |
| Equity                in undistributed earnings of:                                 |   |     |        |     |   |     |   |   |   |   |
| Banking                subsidiary                                                   |   |     | **19,361**  |     |   | 8,915    |   |   | 21,861 |   |
| Nonbank                subsidiaries                                                 |   |     | **729**     |     |   | (1,844   | )      |   | 1,152 |   |
|                                                                                |   |     | **20,090**  |     |   | 7,071    |   |   | 23,013 |   |
| Net                income                                                           |   | **$**    | **41,031**  |     | $      | 25,641   |   | $ | 21,798 |   |
|                                                                                |   |     |        |     |   |     |   |   |   |   |
| **Condensed                Statements of Cash Flows:**                              |   |     |        |     |   |     |   |   |   |   |
| **Operating                activities:**                                            |   |     |        |     |   |     |   |   |   |   |
| Net                income                                                           |   | **$**    | **41,031**  |     | $      | 25,641   |   | $ | 21,798 |   |
| Adjustments                to reconcile net cash provided by operating activities:  |   |     |        |     |   |     |
| Undistributed                earnings of:                                           |   |     |        |     |   |     |   |   |   |   |
| Banking                subsidiary                                                   |   |     | **(19,361** | **)**    |   | (8,915   | )      |   | (21,861 | ) |
| Nonbank                subsidiaries                                                 |   |     | **(729**    | **)**    |   | 1,844    |   |   | (1,152 | ) |
| Other,                net                                                           |   |     | **832**     |     |   | 709      |   |   | 391 |   |
| Net                cash provided (used) by operating activities                     |   |     | **21,773**  |     |   | 19,279   |   |   | (824 | ) |
| **Investing                activities:**                                            |   |     |        |     |   |     |   |   |   |   |
| Purchases                of investment securities                                   |   |     | **(2,785**  | **)**    |   | (1,073   | )      |   | (2,706 | ) |
| Proceeds                from maturities and sales of investment securities          |   |     | **1,931**   |     |   | ---      |   |   | 18,661 |   |
| Payments                for investments in and advances to subsidiaries             |   |     | **(913**    | **)**    |   | (3,966   | )      |   | --- |   |
| Investment                in unconsolidated trust subsidiaries                      |   |     | **(620**    | **)**    |   | ---      |   |   | --- |   |
| Net                cash provided (used) by investing activities                     |   |     | **(2,387**  | **)**    |   | (5,039   | )      |   | 15,955 |   |
| **Financing                activities:**                                            |   |     |        |     |   |     |   |   |   |   |
| Net                change in short-term borrowings                                  |   |     | **(5,000**  | **)**    |   | 5,000    |   |   | (2,000 | ) |
| Proceeds                from issuance of subordinated debt                          |   |     | **20,620**  |     |   | ---      |   |   | --- |   |
| Proceeds                from issuance of common stock                               |   |     | **1,929**   |     |   | 8,012    |   |   | 2,308 |   |
| Payments                to acquire treasury stock                                   |   |     | **(17,922** | **)**    |   | (16,489  | )      |   | (4,151 | ) |
| Cash                dividends and cash paid in lieu of fractional shares            |   |     | **(18,676** | **)**    |   | (13,440  | )      |   | (8,273 | ) |
| Net                cash used by financing activities                                |   |     | **(19,049** | **)**    |   | (16,917  | )      |   | (12,116 | ) |
|                                                                                |   |     |        |     |   |     |   |   |   |   |
| Net                change in cash and cash equivalents                              |   |     | **337**     |     |   | (2,677   | )      |   | 3,015 |   |
| Cash                and cash equivalents at beginning of period                     |   |     | **1,579**   |     |   | 4,256    |   |   | 1,241 |   |
| Cash                and cash equivalents at end of period                           |   | **$**    | **1,916**   |     | $      | 1,579    |   | $ | 4,256 |   |

----

**18.      QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):**

|                                                                                                                                 |   | **Three                Months Ended**                            |       |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|------------|
|                                                                                                                                 |   | **2006**                                                         |       | **2005** |   |
|                                                                                                                                 |   | **Dec.                31**                                       |       | **Sept.                30** |   | **June                30** |   | **Mar.                31** |   | **Dec.                31** |   | **Sept.                30 (1)** |   | **June                30** |   | **Mar.                31** |   |
|                                                                                                                                 |   | **(dollars                in thousands, except per share data)** |       |
| Interest                income                                                                                                       |   | **$**                                                            | **51,364** |   | **$** | **50,443** |   | **$** | **48,938** |   | **$** | **46,889** |   | $ | 45,242 |   | $ | 43,478 |   | $ | 27,390 |   | $ | 26,183 |   |
| Interest                expense                                                                                                      |   |                                                             | **25,273** |   |   | **23,505** |   |   | **21,931** |   |   | **20,025** |   |   | 18,593 |   |   | 17,081 |   |   | 12,481 |   |   | 11,493 |   |
| Net                interest income                                                                                                   |   |                                                             | **26,091** |   |   | **26,938** |   |   | **27,007** |   |   | **26,864** |   |   | 26,649 |   |   | 26,397 |   |   | 14,909 |   |   | 14,690 |   |
| Provision                for loan losses                                                                                             |   |                                                             | **650**    |   |   | **250** |   |   | **650** |   |   | **500** |   |   | 600 |   |   | 400 |   |   | 750 |   |   | 550 |   |
| Net                interest income after provision for loan losses                                                                   |   |                                                             | **25,441** |   |   | **26,688** |   |   | **26,357** |   |   | **26,364** |   |   | 26,049 |   |   | 25,997 |   |   | 14,159 |   |   | 14,140 |   |
| Investment                security gains, net                                                                                        |   |                                                             | **415**    |   |   | **28** |   |   | **6** |   |   | **283** |   |   | 12 |   |   | 29 |   |   | 167 |   |   | 51 |   |
| Mortgage                banking activities                                                                                           |   |                                                             | **591**    |   |   | **533** |   |   | **580** |   |   | **468** |   |   | 631 |   |   | 660 |   |   | 548 |   |   | 515 |   |
| Other                income                                                                                                          |   |                                                             | **8,194**  |   |   | **8,279** |   |   | **7,957** |   |   | **7,633** |   |   | 7,120 |   |   | 7,177 |   |   | 4,883 |   |   | 4,644 |   |
| Other                expenses                                                                                                        |   |                                                             | **22,482** |   |   | **21,172** |   |   | **20,698** |   |   | **20,533** |   |   | 20,180 |   |   | 20,836 |   |   | 13,189 |   |   | 12,659 |   |
| Merger,                conversion and restructuring expenses                                                                         |   |                                                             | **---**    |   |   | **---** |   |   | **---** |   |   | **---** |   |   | --- |   |   | 248 |   |   | 7,957 |   |   | --- |   |
| Income                (loss) before income taxes                                                                                     |   |                                                             | **12,159** |   |   | **14,356** |   |   | **14,202** |   |   | **14,215** |   |   | 13,632 |   |   | 12,779 |   |   | (1,389 | ) |   | 6,691 |   |
| Income                taxes                                                                                                          |   |                                                             | **2,759**  |   |   | **3,798** |   |   | **3,698** |   |   | **3,646** |   |   | 2,671 |   |   | 2,447 |   |   | (250 | ) |   | 1,204 |   |
| Net                income (loss)                                                                                                     |   | **$**                                                            | **9,400**  |   | **$** | **10,558** |   | **$** | **10,504** |   | **$** | **10,569** |   | $ | 10,961 |   | $ | 10,332 |   | $ | (1,139 | ) | $ | 5,487 |   |
|                                                                                                                                 |   |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings (loss) per share                                                                                       |   | **$**                                                            | **0.40**   |   | **$** | **0.45** |   | **$** | **0.44** |   | **$** | **0.44** |   | $ | 0.45 |   | $ | 0.42 |   | $ | (0.09 | ) | $ | 0.43 |   |
| Diluted                earnings (loss) per share                                                                                     |   | **$**                                                            | **0.40**   |   | **$** | **0.45** |   | **$** | **0.44** |   | **$** | **0.44** |   | $ | 0.45 |   | $ | 0.42 |   | $ | (0.09 | ) | $ | 0.42 |   |
| Cash                dividends declared                                                                                               |   | **$**                                                            | **0.20**   |   | **$** | **0.20** |   | **$** | **0.20** |   | **$** | **0.19** |   | $ | 0.19 |   | $ | 0.18 |   | $ | 0.18 |   | $ | 0.16 |   |
| (1)                Results beginning with the quarter ended September 30, 2005 include                PennRock acquired July 1, 2005 |

**19.      **
**MERGER,      CONVERSION AND RESTRUCTURING EXPENSES **

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**Report      of Independent Registered Public Accounting Firm**

*Internal      Control—Integrated Framework*

|  Beard                Miller Company LLP |   |
|-----------------------------------------------|--------|
| Harrisburg,                Pennsylvania       |   |
| March                5, 2007                  |   |

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**Ite****m      9.**** ****Changes      in and Disagreements With Accountants on Accounting and Financial      Disclosure:**** **

**Item      9A.**** ****Controls      and Procedures:**

**Item      9B.**** ****Other      Information:**

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**Management’s      Report on Internal Controls**

| ·   | maintain                records that accurately reflect the company’s transactions; |
|--------------------|-------------------------------------------------------------------------------------------|

| ·   | prepare                financial statement and footnote disclosures in accordance with GAAP                that                can be relied upon by external users; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | prevent                and detect unauthorized acquisition, use, or disposition of the company’s                assets that could have a material effect on the financial                statements. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Community      Banks, Inc. • 777 East Park Drive, 2**
**nd**

**      Floor • Harrisburg, PA 17111 • Phone 717-920-5800**

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**Report      of Independent Registered Public Accounting Firm**

*Management’s      Report on Internal Control*
*Internal      Control—Integrated Framework*

*Internal      Control—Integrated Framework*
*Internal      Control—Integrated Framework*

|  Beard                Miller Company LLP |   |
|-----------------------------------------------|--------|
| Harrisburg,                Pennsylvania       |   |
| March                5, 2007                  |   |

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**PART      III**

**Item      10.**** ****Directors,      Executive Officers and Corporate Governance:**

**Item      11****.****Executive      Compensation****:**

**Item      12.**** ****Security      Ownership of Certain Beneficial Owners and Management and Related Stockholder      Matters:**

**Item      13.**** ****Certain      Relationships and Related Transactions, and Director      Independence :**

**Item      14****.****Principal      Accounting Fees and Services:**

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**PART      IV**

**Item      15.**** ****Exhibits,      Financial Statements Schedules:**

| (a)    | The                following documents are filed as part of this report. |
|--------|--------------------------------------------------------------------------|
|   | 1.                                                                       | Financial                Statements - The following consolidated financial statements of Community                Banks, Inc. and Subsidiaries are incorporated herein by reference                in                response to Item 8 above: |
|   |                                                                     |   |
|   | (i)                                                                      | Consolidated                Balance Sheets at December 31, 2006 and 2005 |
|   | (ii)                                                                     | Consolidated                Statements of Income for the Years Ended December 31, 2006, 2005                and                2004 |
|   | (iii)                                                                    | Consolidated                Statements of Changes in Stockholders’ Equity for the Years Ended December                2006, 2005, and 2004. |
|   | (iv)                                                                     | Consolidated                Statements of Cash Flows for the Years Ended December 31, 2006, 2005                and                2004. |
|   | (v)                                                                      | Notes                to Consolidated Financial Statements |
|   | (vi)                                                                     | Report                of Beard Miller Company LLP, Independent Registered Public Accounting                Firm |
|   |                                                                     |   |
|   | 2.                                                                       | Financial                Statements Schedules - All financial statement schedules for which                provision is made in the applicable accounting regulations of the                Securities and Exchange Commission are not required under the related                instructions or are inapplicable and have therefore been                omitted. |
|   |                                                                     |   |
|   | 3.                                                                       | Exhibits |
|   |                                                                     |   |
|   | 2.1                                                                      | Amended                and Restated Agreement by and between Community Banks, Inc. and BUCS                Financial Corp, dated as of February 1, 2007, not including schedules.                Community will furnish the omitted schedules to the Commission upon                request. (Incorporated by reference to Appendix A to the prospectus/proxy                statement forming a part of Community’s registration statement number                333-139152 on Form S-4/A filed with the Commission on February 1,                2007) |
|   | 2.2                                                                      | Agreement                and Plan of Merger by and between Community Banks, Inc. and CommunityBanks                and East Prospect State Bank dated as of September 12, 2006 and amended                and restated as of December 29, 2006 not including schedules. Community                will furnish the omitted schedules to the Commission upon request.                (Incorporated by reference to Annex A to the proxy statement/prospectus                forming a part of Community’s registration statement number 333-139301 on                Form S-4/A filed with the Commission on January 26,                2007 |
|   | 2.3                                                                      | Merger                Agreement by and between PennRock Financial Services Corp. and Community                Banks, Inc., dated November 16, 2004, not including schedules. Community                will furnish the omitted schedules to the Securities and Exchange                Commission upon request. (Incorporated by reference to Exhibit 10.1                to                Community’s Current Report on Form 8-K, filed with the Commission on                November 22, 2004) |
|   | 3(i)                                                                     | Amended                and Restated Articles of Incorporation. (Incorporated by reference                to                Appendix A to Community’s 2006 Proxy Statement filed with the Commission                on March 31, 2006).) |
|   | 3(ii)                                                                    | Amended                Bylaws (Incorporated by reference to Exhibit 3(ii), attached to                Community’s Current Report on Form 8-K, filed with the Commission on                December 14, 2006) |
|   | 4                                                                        | Instruments                defining the rights of the holders of trust capital securities and                sold by                Community in December 2002, December 2003 and January 2006 are not                attached, as the amount of such securities is less than 10% of the                consolidated assets of Community and its subsidiaries, and the securities                have not been registered. Community agrees to provide copies of such                instruments to the Commission upon request. |
|   | 10.1                                                                     | 2000                Directors’ Stock Option Plan (Incorporated by reference to Exhibit 4 to                Community’s registration statement no. 333-37232 on Form S-8, filed on May                17, 2000) * |
|   | 10.2                                                                     | 1998                Long-Term Incentive Plan (Incorporated by reference to Exhibit 4                to                Community’s registration statement no. 333-57121 on Form S-8 filed on June                18, 1998) * |
|   | 10.3                                                                     | Form                of Stock Option Agreement - Directors Stock Option Plan (Incorporated                by                reference to Exhibit 10.3 to Community’s Annual Report on Form 10-K for                the year ended December 31, 2002, filed with the Commission on March                28,                2003) * |
|   | 10.4                                                                     | Form                of Stock Option Agreement - Long-Term Incentive Plan (Incorporated                by                reference to Exhibit 10.4 to Community’s Annual Report on Form 10-K for                the year ended December 31, 2002, filed with the Commission on March                28,                2003) * |
|   | 10.5                                                                     | Form                of First Amendment to Stock Option Agreement entered into with Messrs.                Dunklebarger, Holt, Lawley, Leo and Seibert (Incorporated by reference                to                Exhibit 10.1 to Community’s Current Report on Form 8-K, filed with the                Commission on January 31, 2007) * |
|   | 10.6                                                                     | Employment                Agreement for Eddie L. Dunklebarger (Incorporated by reference to                Exhibit                10.1 to Community’s Quarterly Report on Form 10-Q for the quarter ended                September 30, 2004, filed with the Commission on November 9, 2004)                * |
|   | 10.7                                                                     | Employment                Agreement for Donald F. Holt (Incorporated by reference to Exhibit                10.2 to                Community’s Quarterly Report on Form 10-Q for the quarter ended September                30, 2004, filed with the Commission on November 9, 2004) * |

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|   |   |                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.8   | Employment                Agreement for Robert W. Lawley (Incorporated by reference to Exhibit                10.3                to Community’s Quarterly Report on Form 10-Q for the quarter ended                September 30, 2004, filed with the Commission on November 9, 2004)                *                        |
|   | 10.9   | Employment                Agreement for Anthony N. Leo (Incorporated by reference to Exhibit                10.4 to                Community’s Quarterly Report on Form 10-Q for the quarter ended September                30, 2004, filed with the Commission on November 9, 2004) *                                         |
|   | 10.10  | Employment                Agreement for Jeffrey M. Seibert (Incorporated by reference to Exhibit                10.5 to Community’s Quarterly Report on Form 10-Q for the quarter ended                September 30, 2004, filed with the Commission on November 9, 2004)                *                                     |
|   | 10.11  | Amended                and Restated Salary Continuation Agreement of Eddie L. Dunklebarger                (Incorporated by reference to Exhibit 10.1 to Community’s Quarterly Report                on Form 10-Q for the quarter ended March 31, 2004, filed with the                Commission on May 10, 2004) *             |
|   | 10.12  | Salary                Continuation Agreement of Donald F. Holt (Incorporated by reference                to                Exhibit 10.2 to Community’s Quarterly Report on Form 10-Q for the quarter                ended March 31, 2004, filed with the Commission on May                10, 2004) *                          |
|   | 10.13  | Amended                and Restated Salary Continuation Agreement of Robert W. Lawley                (Incorporated by reference to Exhibit 10.3 to Community’s Quarterly Report                on Form 10-Q for the quarter ended March 31, 2004, filed with the                Commission on May 10, 2004) *                  |
|   | 10.14  | Amended                and Restated Salary Continuation Agreement of Anthony N. Leo (Incorporated                by reference to Exhibit 10.4 to Community’s Quarterly Report on Form 10-Q                for the quarter ended March 31, 2004, filed with the Commission on                May 10,                2004) *     |
|   | 10.15  | Amended                and Restated Salary Continuation Agreement of Jeffrey M. Seibert                (Incorporated by reference to Exhibit 10.5 to Community’s Quarterly Report                on Form 10-Q for the quarter ended March 31, 2004, filed with the                Commission on May 10, 2004) *                |
|   | 10.16  | Rights                Agreement between Community Banks, Inc. and CommunityBanks, dated                February                28, 2002 (Incorporated by reference to Exhibit 1 to Community’s                registration on Form 8-A, filed on February 27, 2002)                                                            |
|   | 10.17  | Community                Banks, Inc. 401(k) Plan (Incorporated by reference to Exhibit 10.15                to                Community’s Annual Report on Form 10-K for the year ended December 31,                2002, filed with the Commission on March 28, 2003) *                                                       |
|   | 10.18  | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Eddie L.                Dunklebarger (Incorporated by reference to Exhibit to 3.2, attached                to                Community’s Quarterly Report on Form 10-Q for the quarter ended September                30, 2003) *             |
|   | 10.19  | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Donald F.                Holt                (Incorporated by reference to Exhibit to 10.6, attached to Community’s                Quarterly Report on Form 10-Q for the quarter ended March 31, 2004)                *                       |
|   | 10.20  | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Robert W.                Lawley                (Incorporated by reference to Exhibit to 3.2, attached to Community’s                Quarterly Report on Form 10-Q for the quarter ended September 30,                2003)                *   |
|   | 10.21  | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Anthony                N. Leo                (Incorporated by reference to Exhibit to 3.2, attached to Community’s                Quarterly Report on Form 10-Q for the quarter ended September                30, 2003) *                    |
|   | 10.22  | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Jeffrey                M.                Seibert (Incorporated by reference to Exhibit to 3.2, attached to                Community’s Quarterly Report on Form 10-Q for the quarter ended                September                30, 2003) * |
|   | 10.23  | Employment                and Consulting Agreement with Melvin Pankuch (Incorporated by reference                to                Exhibit 10.7 to Community’s registration statement on Form S-4, filed on                April 1, 2005) *                                                                                    |
|   | 10.24  | Community                Banks, Inc. Substitute PennRock Financial Services Corp. Stock Incentive                Plan of 2002 (Incorporated by reference to Exhibit 4 to Community’s                registration statement no. 333-126508 on Form S-8, filed on July                11, 2005) *                                |
|   | 10.25  | Community                Banks, Inc. Substitute PennRock Financial Services Corp. Omnibus                Stock                Plan (Incorporated by reference to Exhibit 4 to Community’s registration                statement no. 333-126507 on Form S-8, filed on July 11, 2005)                *                           |
|   | 21     | Subsidiaries                of the Registrant (See Part I, Item 1 - “Business Overview” and                “Non-banking Subsidiaries”)                                                                                                                                                                       |
|   | 23.1   | Consent                of Independent Registered Public Accounting Firm - Beard Miller Company                LLP                                                                                                                                                                                                                    |
|   | 24     | Powers                of Attorney (included on signature page)                                                                                                                                                                                                                                                                       |
|   | 31.1   | Rule                13a-14(a)/15d-14(a) Certification (Chief Executive                Officer)                                                                                                                                                                                                                                       |
|   | 31.2   | Rule                13a-14(a)/15d-14(a) Certification (Chief Financial                Officer)                                                                                                                                                                                                                                       |
|   | 32     | Section                1350 Certifications (Chief Executive Officer and Chief Financial                Officer)                                                                                                                                                                                                                      |

| (b)   | Exhibits                - The exhibits required to be filed as part of this report are submitted                as a separate section of this                report. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (c)   | Financial                Statements Schedules - None                required. |
|-----------------|-------------------------------------------------------------------------------|

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**SIGNATURES**

| /S/    | (Eddie                L. Dunklebarger) | President,                Chairman, Chief Executive Officer (Principal Executive Officer) and                Director                                           | 3/16/07 |
|--------|----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|   | (Eddie                L. Dunklebarger) |                                                                                                                                                            |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Donald                F. Holt)        | Executive                Vice President and Chief                Financial Officer(Principal                Financial Officer and Principal Accounting Officer) | 3/16/07 |
|   | (Donald                F. Holt)        |                                                                                                                                                            |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Ronald                E. Boyer)       | Director                                                                                                                                                        | 3/16/07 |
|   | (Ronald                E. Boyer)       |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Sandra                J, Bricker)     | Director                                                                                                                                                        | 3/16/07 |
|   | (Sandra                J. Bricker)     |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Peter                DeSoto)          | Director                                                                                                                                                        | 3/16/07 |
|   | (Peter                DeSoto)          |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Aaron                S. Kurtz)        | Director                                                                                                                                                        | 3/16/07 |
|   | (Aaron                S. Kurtz)        |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Scott                J. Newkam)       | Director                                                                                                                                                        | 3/16/07 |
|   | (Scott                J. Newkam)       |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Melvin                Pankuch)        | Director                                                                                                                                                        | 3/16/07 |
|   | (Melvin                Pankuch)        |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Robert                W. Rissinger)   | Director                                                                                                                                                        | 3/16/07 |
|   | (Robert                W. Rissinger)   |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Christine                Sears)       | Director                                                                                                                                                        | 3/16/07 |
|   | (Christine                Sears)       |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |
| /S/    | (Allen                Shaffer)         | Director                                                                                                                                                        | 3/16/07 |
|   | (Allen                Shaffer)         |                                                                                                                                                            |    |
|   |                                   |                                                                                                                                                            |    |

----

|   |                              |     |    |
|--------|-----------------------------------|----------|---------|
|   |                              |     |    |
|   |                              |     |    |
| /S/    | (James                A. Ulsh)    | Director | 3/16/07 |
|   | (James                A. Ulsh)    |     |    |
|   |                              |     |    |
| /S/    | (Dale                M. Weaver)   | Director | 3/16/07 |
|   | (Dale                M. Weaver)   |     |    |
|   |                              |     |    |
| /S/    | (Glenn                H. Weaver)  | Director | 3/16/07 |
|   | (Glenn                H. Weaver)  |     |    |
|   |                              |     |    |
| /S/    | (Robert                K. Weaver) | Director | 3/16/07 |
|   | (Robert                K. Weaver) |     |    |

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