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


The shares of Community Banks, Inc. are traded on the American Stock Exchange 
and are transferred through local and regional brokerage houses.  The Holding
Company has approximately 1,507 shareholders as of February 14, 1998. The 
following table sets forth the high and low prices within the knowledge of 
management of Community Banks, Inc. at which the Capital Stock has been 
transferred during the periods indicated. The table is based solely upon 
transactions known to management of the Holding Company and represents a 
portion of the actual transfers of Capital Stock during the periods
in question.                                                                 


                    Price Per Share                         Price Per Share   
1997               Low       High          1996             Low      High       

First Quarter.... $25.75    $36.00      First Quarter.... $24.25    $27.50
Second Quarter...  29.75     36.00      Second Quarter...  22.63     26.13
Third Quarter....  32.88     38.75      Third Quarter....  22.63     24.13
Fourth Quarter...  38.00     45.25      Fourth Quarter...  23.75     26.13




Holders of the Capital Stock of the Holding Company are entitled to such 
dividends as may be declared from time to time by the Board of Directors out
of funds legally available therefore. Community Banks, Inc. has paid cash 
dividends per share of Common Stock during the last five years as follows: 
1993-$0.55, 1994-$0.60, 1995-$0.67, 1996-$0.74, and 1997-$0.83. The
market prices listed above are based on historical market quotations and have 
not been restated for the issuance of stock dividends.
                                                                                

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries 
CONSOLIDATED BALANCE SHEETS
At December 31, 1997 and 1996
(dollars in thousands except per share data)                                  
                                                            1997             1996


ASSETS                                                                     
<S>                                                  <C>                 <C>  
Cash and due from banks..........................      $ 18,719            $ 16,547 
Interest-bearing time deposits in other banks....         2,034               1,397
Investment securities, available for sale (market                             
  value).........................................       161,401             145,446
Federal funds sold...............................         2,100                 --- 
Loans............................................       272,949             261,976
Less:  Unearned income...........................       (11,799)            (11,965)
       Allowance for loan losses.................        (2,921)             (2,798)
       Net loans.................................       258,229             247,213
Premises and equipment, net......................         9,165               7,848
Goodwill.........................................           906               1,147
Other real estate owned..........................           481                 351
Loans held for sale..............................         2,641               4,622
Accrued interest receivable and other assets.....         7,374               7,947
  Total assets...................................     $ 463,050            $432,518
                                                      =========            ========
LIABILITIES                                                               
                                                                        
Deposits:                                                                   
  Demand.........................................      $ 30,071            $ 27,345
  Savings........................................       158,604             150,369
  Time...........................................       153,204             152,615
  Time in denominations of $100,000 or more......        15,693              12,927
  Total deposits.................................       357,572             343,256
Short-term borrowings............................           752              13,217
Long-term debt...................................        46,000              25,000
Accrued interest payable and other liabilities...         5,366               3,306
  Total liabilities..............................       409,690             384,779
                                                                             
STOCKHOLDERS' EQUITY                                                         
                                                                          
Preferred stock, no par value;                                           
  500,000 shares authorized;                                                
  no shares issued and outstanding...............           ---                 ---  
Common stock, $5.00 par value; 5,000,000 shares                              
  authorized; 3,080,173 and 2,888,088 shares                                
  issued in 1997 and 1996, respectively..........        15,401              14,440 
Surplus..........................................        18,533              13,716
Retained earnings................................        17,864              19,743 
Net unrealized gain on investment securities                               
  available for sale, net of tax.................         2,678                 261
Less:  Treasury stock of 43,868 and 19,927                                
  shares at cost.................................        (1,116)               (421)
  Total stockholders' equity.....................        53,360              47,739 
  Total liabilities and stockholders' equity.....     $ 463,050            $432,518
                                                      =========            ========

</TABLE>
The accompanying notes are an integral part of the consolidated financial 
statements.                                                                    
                 
<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                                             
CONSOLIDATED STATEMENTS OF INCOME                                                                  
For the Years Ended December 31, 1997, 1996, and 1995                                              
(dollars in thousands except per share data)                                                       
                                                                                                            
                                                                   1997              1996              1995 
<S>                                                            <C>               <C>               <C>    
Interest Income:                                                                                   
  Interest and fees on loans.......................              $23,505           $22,544           $20,819
  Interest and dividends on investment securities:                                                 
     Taxable.......................................                8,647             6,196             5,599
     Exempt from federal income tax................                1,585             1,588             2,054
  Other interest income............................                   74                58                83
  Fed funds interest...............................                  124               207               157
     Total interest income.........................               33,935            30,593            28,712


Interest expense:                                                                                  
  Interest on deposits:                                                                            
     Savings.......................................                3,279             3,212             3,054
     Time..........................................                8,154             8,061             7,721
     Time in denominations of $100,000 or more.....                  747               660               588
  Interest on short-term borrowings and                                                            
   long-term debt..................................                1,294               502               669
  Fed funds purchased and repo interest............                1,080               252               ---
     Total interest expense........................               14,554            12,687            12,032
     Net interest income...........................               19,381            17,906            16,680
Provision for loan losses..........................                  717             1,042               728
     Net interest income after provision for                                                                
       loan losses.................................               18,664            16,864            15,952


Other income:                                                                                      
  Trust department income..........................                  317               251               217
  Service charges on deposit accounts..............                1,031               980               869
  Other service charges, commissions and fees......                  223               242               262
  Investment security gains........................                  749               284               140         
  Income on insurance premiums.....................                  576               653               583
  Gains on mortgage sales..........................                  219               211               346
  Other income.....................................                  260               133               293
     Total other income............................                3,375             2,754             2,710


Other expenses:                                                                                    
  Salaries and employee benefits..................                 6,679             6,120             5,837
  Net occupancy expense...........................                 1,910             1,813             1,672
  Operating expenses of insurance subsidiary......                   365               363               353
  Other operating expense.........................                 4,489             3,721             4,395
     Total other expenses.........................                13,443            12,017            12,257
     Income before income taxes...................                 8,596             7,601             6,405
Provision for income taxes........................                 2,626             1,969             1,591
     Net income...................................               $ 5,970           $ 5,632           $ 4,814         
                                                                 =======           =======           =======

Basic earnings per share.......................<F1>              $  1.98           $  1.87           $  1.60
                                                                 =======           =======           =======

Diluted earnings per share.....................<F1>              $  1.94           $  1.84           $  1.58
                                                                 =======           =======           =======

<FN>
<F1> Per share data for all periods has been restated to reflect stock 
     dividends.                   
</FN>
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.              

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                                                                        
CONSOLIDATED STATEMENTS OF CHANGES                                                                                            
IN STOCKHOLDERS' EQUITY                                                                                                       
For the Years Ended December 31, 1997, 1996, and 1995                                                                         
(dollars in thousands except per share data)                                                                                  
                                                                                                                         
                                                                                                                   Total
                                                      Common             Retained     Valuation     Treasury    Stockholders'
                                                      Stock      Surplus Earnings     Allowance        Stock       Equity 
                                                                                                                      
<S>                                                    <C>      <C>      <C>          <C>             <C>        <C>   
Balance, December 31, 1994..........................    $13,037  $ 8,342  $20,174      $(2,017)        $(53)      $39,483
Net income for 1995.................................                        4,814                                   4,814
Cash dividends ($0.67 per share)....................                       (2,033)                                 (2,033)
Issuance of additional 4,154 shares.................         20       39       (4)                                     55
Change in valuation allowance on investment                                                                            
   securities, available for sale...................                                     3,681                      3,681
Balance, December 31, 1995..........................     13,057    8,381   22,951        1,664          (53)       46,000
Net income for 1996.................................                        5,632                                   5,632
Cash dividends ($0.74 per share)....................                       (2,260)                                 (2,260)
10% stock dividend (additional 260,925 shares)......      1,304    5,219   (6,523)                                     
Purchases of treasury stock (16,020 shares).........                                                   (368)         (368)
Issuance of additional 15,754 shares................         79      116      (57)                                    138
Change in valuation allowance on investment                                                                             
   securities, available for sale...................                                    (1,403)                    (1,403)
Balance, December 31, 1996..........................     14,440   13,716   19,743          261         (421)       47,739
Net income for 1997.................................                        5,970                                   5,970
Cash dividends ($0.83 per share)....................                       (2,530)                                 (2,530)
5% stock dividend (additional 143,628 shares).......        723    3,905   (4,628)                                     
Purchases of treasury stock (22,945 shares).........                                                   (695)         (695)
Issuance of additional 47,461 shares................        238      912     (691)                                    459
Change in valuation allowance on investment                                                                             
   securities, available for sale...................    _______  _______  _______        2,417      _______         2,417
Balance, December 31, 1997..........................    $15,401  $18,533  $17,864      $ 2,678      $(1,116)      $53,360
                                                        =======  =======  =======      =======      =======       =======
</TABLE>
Per share data for all periods has been restated to reflect stock dividends.
                                                  

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

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                                                               
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                
For the Years Ended December 31, 1997, 1996, and 1995
(in thousands)                                                                                                       
                                                                                                            
                                                                   1997              1996               1995                    
<S>                                                             <C>               <C>               <C>    
Operating Activities:                                                                                                
  Net income..............................................       $ 5,970           $ 5,632           $ 4,814 
  Adjustments to reconcile net income to net                                                                
   cash provided by operating activities:                                                                            
     Provision for loan losses............................           717             1,042               728
     Provision for depreciation and amortization..........           991               937               831
     Amortization of goodwill.............................           241               241               241
     Investment security gains............................          (749)             (284)             (140)
     Loans originated for sale............................        (9,831)          (11,329)          (17,590)
     Proceeds from sales of loans.........................        12,030             9,124            15,765 
     Gains on mortgage sales..............................          (219)             (211)             (346)
     Increase in other assets.............................           573            (1,686)             (186)
     Increase in accrued interest payable and other                                                      
      liabilities.........................................           815               320               335
        Net cash provided by operating activities.........        10,538             3,786             4,452

Investing Activities:                                                          
  Net decrease (increase) in interest-bearing time                                                        
   deposits in other banks................................          (637)             (963)              211
  Proceeds from sales of investment securities............        12,182             1,643               347
  Proceeds from maturities of investment securities.......        31,450            25,104            25,952
  Purchases of investment securities......................       (55,175)          (56,609)           (7,699)
  Net increase in total loans.............................       (11,863)          (19,241)          (23,230)
  Purchases of premises and equipment.....................        (2,308)           (1,128)           (1,491)
        Net cash used in investing activities.............       (26,351)          (51,194)           (5,910)

Financing Activities:                                                                                     
  Net increase in total deposits..........................        14,316            19,159            16,124
  Net increase (decrease) in short-term borrowings........       (12,465)           12,201           (10,693)
  Proceeds from issuance of long-term debt................        25,000            18,000             5,000 
  Repayment of long-term debt.............................        (4,000)              ---            (5,000)
  Repayment of subordinated capital notes.................           ---               ---               (15)
  Cash dividends..........................................        (2,530)           (2,260)           (2,033)
  Purchases of treasury stock.............................          (695)             (368)              --- 
  Proceeds from issuance of common stock..................           459               138                55
        Net cash provided by financing activities.........        20,085            46,870             3,438
        Increase (decrease) in cash and cash equivalents..         4,272              (538)            1,980

Cash and cash equivalents at beginning of year............        16,547            17,085            15,105
Cash and cash equivalents at end of year..................       $20,819           $16,547           $17,085
                                                                 =======           =======           =======
</TABLE>

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

     Community Banks, Inc. and Subsidiaries
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     
     1.  Organization and Basis of Presentation:
     
        Community Banks, Inc. (Corporation) is a bank holding company whose
     wholly-owned subsidiaries include Community Banks, N.A. (CBNA), Community
     Banks Investments, Inc. (CBII) and Community Banks Life Insurance Company
     (CBLIC). All significant intercompany transactions have been eliminated. 
     The Corporation operates through its main office in Millersburg and through
     21 branch banking offices located in Dauphin, Northumberland, Schuylkill
     and Luzerne Counties in Pennsylvania. Community Banks, Inc.'s primary
     source of revenue is derived from loans to customers, who are predominantly
     middle-income individuals.
     
     2.  Summary of Significant Accounting Policies:
     
        The significant accounting policies of the Corporation are: 
     
                                Investment Securities:
        The corporation classifies debt and equity securities as either
     "held-to-maturity," "available-for-sale," or "trading."  Investments for
     which management has the intent, and the corporation has the ability, to
     hold to maturity are carried at the lower of cost or market adjusted for
     amortization of premium and accretion of discount.  Amortization and
     accretion are calculated principally on the interest method.  Securities
     bought and held primarily for the purpose of selling them in the near term
     are classified as "trading" and reported at fair value. Changes in
     unrealized gains and losses on "trading" securities are recognized in the
     Consolidated Statements of Income.  At December 31, 1997, there were no
     securities identified as "held-to-maturity" or "trading."  All other
     securities are classified as "available-for-sale" and reported at fair
     value. Changes in unrealized gains and losses for "available-for-sale"
     securities, net of applicable taxes, are recorded as a component of
     shareholder's equity.
     
        Securities classified as "available-for-sale" include investments
     management intends to use as part of its asset/liability management
     strategy, and that may be sold in response to changes in interest rates,
     resultant prepayment risk and other factors. Realized gains and losses on
     the sale of securities are recognized using the specific identification
     method and are included in Other Income in the Consolidated Statements of
     Income.
     
                              Allowance for Loan Losses:
        The Corporation maintains an allowance for loan losses at an amount
     which, in management's judgement, should be adequate to absorb losses on
     existing loans that may become uncollectible. Management's judgement in
     determining the adequacy of the allowance is based on evaluations of the
     collectibility of loans. The evaluations take into consideration such
     factors as changes in the nature and volume of the loan portfolio, current
     economic conditions that may affect the borrowers' ability to pay, overall
     portfolio quality and review of specific problem loans.   
     
                               Premises and Equipment:
        Premises and equipment are stated at cost, less accumulated
     depreciation. Depreciation is calculated using accelerated and
     straight-line methods over the estimated useful lives of the assets.
     Maintenance and repairs are expensed as incurred, while major additions and
     improvements are capitalized. Gain or loss on retirement or disposal of
     individual assets is recorded as income or expense in the period of
     retirement or disposal.
     
     
                                      Goodwill:
        Goodwill which represents the excess of purchase price, including
     acquisition costs over the fair market value of net assets acquired under
     the purchase method of accounting is amortized on a straight line basis
     over 15 years.
     
                                    Pension Plan:
        The Corporation has a noncontributory defined benefit pension plan
     covering substantially all employees. Pension costs are funded currently
     subject to the full funding limitation imposed under federal income tax
     regulations.
     
                                    Income Taxes:
        Deferred income taxes are accounted for by the liability method, wherein
     deferred tax assets and liabilities are calculated on the differences
     between the basis of assets and liabilities for financial statement
     purposes versus tax purposes (temporary differences) using enacted tax
     rates in effect for the year in which the differences are expected to
     reverse. Tax expense in the statements of income is equal to the sum of
     taxes currently payable, including the effect of the alternative minimum
     tax, if any, plus an amount necessary to adjust deferred tax assets and
     liabilities to an amount equal to period-end temporary differences at
     prevailing tax rates. (See Note 10). 
     
                              Interest Income on Loans:
        Interest income on commercial, consumer, and mortgage loans is recorded
     on the interest method. Nonaccrual loans are those on which the accrual of
     interest has ceased and where all previously accrued and unpaid interest is
     reversed. Loans, other than consumer loans, are placed on nonaccrual status
     when principal or interest is past due 90 days or more and the collateral
     may be inadequate to recover principal and interest, or immediately, if in
     the opinion of management, full collection is doubtful. Generally, the
     uncollateralized portions of consumer loans past due 90 days or more are
     charged-off. Interest accrued but not collected as of the date of placement
     on nonaccrual status is reversed and charged against current income.
     Subsequent cash payments received either are applied to the outstanding
     principal balance or recorded as interest income, depending upon
     management's assessment of the ultimate collectibility of principal and
     interest. (See also Note 5).  Loan origination fees and certain direct
     origination costs are capitalized and recognized as an adjustment of the
     yield on the related loan.
     
                               Other Real Estate Owned:
        Real estate acquired through foreclosure is carried at the lower of the
     recorded amount of the loan for which the foreclosed property previously
     served as collateral or the current appraised value of the property. Prior
     to foreclosure, the recorded amount of the loan is written down, if
     necessary, to the appraised value of the real estate to be acquired by
     charging the allowance for loan losses. During 1997, 1996, and 1995
     non-cash transactions related to real estate acquired through foreclosure
     totalled $361,000, $460,000, and $677,000, respectively.
     
        Subsequent to foreclosure, gains or losses on the sale of and losses on
     the periodic reevaluation of real estate acquired through foreclosure are
     credited or charged to noninterest expense. Costs of maintaining and
     operating foreclosed property are expensed as incurred. Expenditures to
     improve foreclosed properties are capitalized only if expected to be
     recovered; otherwise, they are expensed.  
     
                               Statement of Cash Flows:
        Cash and cash equivalents included cash and due from banks and federal
     funds sold. The Corporation made cash payments of $1,965,000, $2,019,000,
     and $1,656,000, and $14,453,000, $12,345,000, and $11,825,000 for income
     taxes and interest, respectively, in 1997, 1996, and 1995. Certain prior
     year amounts have been reclassified to conform with the current year's
     presentation.   
     
                              Earnings Per Common Share:
        The corporation has adopted Statement of Accounting Standards (SFAS)
     128-Earnings Per Share and SFAS 129-Disclosure of Information of Capital
     Structure.  SFAS 128 establishes standards for computing and presenting
     earnings per share (EPS) and applies to entities with publicly held common
     stock or potential common stock.  This statement simplifies the standards
     for computing earnings per share previously found in Accounting Principles
     Board (APB) Opinion No. 15-Earnings Per Share.  It replaces the
     presentation of primary EPS with a presentation of basic EPS.  It also
     requires dual presentation of basic and diluted EPS on the face of the
     income statement for all entities with complex capital structures and
     requires a reconciliation of the numerator and denominator of the basic EPS
     computation to the numerator and denominator of the diluted EPS
     computation.
     
        In conjunction with its project to supersede the provisions of APB
     Opinion No. 15-Earnings Per Share, the Financial Accounting Standards Board
     (FASB) issued SFAS 129-Disclosure of Information of Capital Structure. 
     SFAS 129 establishes standards for disclosing information about an entity's
     capital structure. This Statement continues the previous requirements to
     disclose certain information about an entity's capital structure.
     
                          Recent Accounting Pronouncements:
        Statement of Financial Accounting Standards (SFAS) 130 "Reporting
     Comprehensive Income" establishes standards for reporting and display of
     comprehensive income and its components (revenues, expenses, gains, and
     losses) in a full set of general-purpose financial statements.  This
     Statement requires that all items that are required to be recognized under
     accounting standards as components of comprehensive income be reported in a
     financial statement that is displayed with the same prominence as other
     financial statements.  This Statement does not require a specific format
     for that financial statement but requires that an enterprise display an
     amount representing total comprehensive income for the period in that
     financial statement.  This Statement is effective for fiscal years
     beginning after December 15, 1997.  Reclassification of financial
     statements for earlier periods provided for comparitive purposes is
     required. As SFAS 130 does not discuss the recognition or measurement of
     comprehensive income, the adoption of SFAS 130 will not have a material
     effect on the Corporation's financial condition or results of operations.
     
        SFAS 131 "Disclosure About Segments of an Enterprise and Related
     Information" establishes standards for the way that public business
     enterprises report information about operating segments in annual financial
     statements and requires that those enterprises report selected information
     about operating segments in interim financial reports issued to
     shareholders.  It also establishes standards for related disclosures about
     products and services, geographic areas, and major customers.  This
     Statement is effective for financial statements for periods beginning after
     December 15, 1997 with comparative information for earlier years to be
     restated. Adoption of SFAS 131 will not have a material effect on the
     Corporation's financial condition or results of operations.
     
        The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standards No. 132, "Employers' Disclosure about Pensions and
     Other Postretirement Benefits" in January 1998.  SFAS 132 revises current
     note disclosure requirements for employers' pensions and other retiree
     benefits.  It does not address recognition or measurement issues.  SFAS 132
     is effective for fiscal years beginning after December 15, 1997.  Adoption
     of SFAS 132 will not have a material effect on the Corporation's financial
     condition or results of operations. 

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





3. Investment Securities:

<TABLE>
<CAPTION>
        The amortized cost and market value of all investment securities at December 31, 1997 and 1996 are as follows:
                                                
                    
                                                                                                                
                                                                  1997                                 1996
                                                             Gross     Gross                       Gross      Gross
                                                Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
                                                    Cost     Gains     Losses   Value   Cost       Gains      Losses   Value
                                                                                (in thousands)
<S>                                              <C>       <C>     <C>      <C>       <C>       <C>     <C>       <C>   
U.S. government corporations and agencies........ $ 39,814  $  279  $  (19)  $ 40,074  $ 40,267  $  242  $   (77)  $ 40,432
Mortgage-backed U.S. government agencies.........   82,723     827    (202)    83,348    69,837     300   (1,609)    68,528
Obligations of states and political subdivisions.   29,337     699     (17)    30,019    30,496     553      (91)    30,958
Corporate securities.............................    1,015      22     ---      1,037     1,101      22       ---     1,123
Equity securities..............................      4,455   2,468     ---      6,923     3,349   1,056       ---     4,405
                                                      
         Total................................... $157,344  $4,295  $ (238)  $161,401  $145,050  $2,173  $(1,777)  $145,446
                                                   ======== ======  ======   ========  ========  ======  =======   ========
        
</TABLE>
     The amortized cost and market value of all investment securities at 
December 31, 1997, by contractual maturity, are shown below.  Expected 
maturities will differ from contractual maturities because borrowers may have 
the right to call or prepay obligations with or without call or prepayment 
penalties.

                                                                             
                                                       Amortized      Market
                                                         Cost         Value
                                                           (in thousands)

Due in one year or less..........................      $  3,899      $  3,903
Due after one year through five years............        25,029        25,450
Due after five years through ten years...........        27,136        27,479
Due after ten years..............................        14,102        14,298
                                                         70,166        71,130
Mortgage-backed securities.......................        82,723        83,348
Equity securities................................         4,455         6,923
                                                       $157,344      $161,401
                                                       ========      ========   

     Proceeds from sales of investments in debt securities were $10,976,000 and
$990,000 in 1997 and 1996, respectively.  No sales occurred in 1995.  Gross 
gains and losses of $23,000 were recognized in 1997.  Gross gains of $7,000 
and no losses occurred in 1996.      

     At December 31, 1997 and 1996, investment securities with carrying amounts
of approximately $66,966,000 and $40,204,000 respectively, were pledged to 
collateralize public deposits and for other purposes as provided by law.

     Equity securities include Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) stock which represents equity interests in the FHLB and the FRB, 
however, they do not have a readily determinable fair value because ownership is
restricted and can be sold back only to the FHLBs, FRB, or to another member 
institution. 




4. Loans:

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

                                                             December 31
                                                           1997       1996  
                                                            (in thousands)

Commercial, financial and agricultural.................$ 39,559     $ 44,129  
Real-estate-construction...............................   1,276        1,816    
Real-estate-mortgage................................... 170,582      151,299    
Personal installment...................................  53,599       59,142    
Other..................................................   7,933        5,590
                                                       $272,949     $261,976  
                                                       ========     ========  

     Loans held for resale amounted to $2,641,000 and $4,622,000 at December 
31, 1997 and 1996, respectively. These loans are primarily fixed-rate mortgages.




5. Allowance for Loan Losses:

     Changes in the allowance for loan losses are as follows:

                                                    December 31                 
                                           1997            1996           1995
                                                   (in thousands)

Balance, January 1....................   $2,798          $2,574         $2,347
Provision for loan losses... .........      717           1,042            728
Loan charge-offs......................     (930)         (1,296)          (840)
Recoveries............................      336             478            339
Balance, December 31..................   $2,921          $2,798         $2,574
                                         ======          ======         ======
     



                                                    NONPERFORMING LOANS (a)
                                                     AND OTHER REAL ESTATE  
                                                         December 31           
                                                     1997            1996
                                                        (in thousands)

              
Loans past due 90 days or more
 and still accruing interest:
   Commercial, financial and agricultural.....      $   53        $   20      
   Mortgages..................................         405           547    
   Personal installment.......................          72           189   
   Other......................................          21            11     
                                                       551           767        

Loans on which accrual of interest has been
 discontinued:
   Commercial, financial and agricultural.....         762           723 
   Mortgages..................................       1,716         1,904
   Other......................................         300           283 
                                                     2,778         2,910        
Other real estate.............................         481           351    
   Total......................................      $3,810        $4,028        
                                                    ======        ======        




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

Impaired Loans
     Loans are considered impaired, based on current information and events, 
if it is probable that the Corporation will be unable to collect the 
scheduled payments of principal or interest when due according to the 
contractual terms of the loan agreement. Larger groups of smaller-balance 
loans such as residential mortgage and installment loans are collectively 
evaluated for impairment. Management has established a smaller-dollar-value 
threshold of $250,000 for all loans. Loans exceeding this threshold are 
evaluated in accordance with accounting standards and the bank's lending 
policy. An insignificant delay or shortfall in the amount of payments, when 
considered independent of other factors, would not cause a loan to be 
rendered impaired. Insignificant delays or shortfalls may include, depending
on specific facts and circumstances, those that are associated with temporary
operational downturns or seasonal business delays.

     Management performs periodic reviews of its loans to identify impaired 
loans. The measurement of impaired loans is based on the present value of 
expected future cash flows discounted at the historical effective interest 
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. 

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

     At December 31, 1997, the Corporation recorded no investment in impaired 
loans with no related valuation allowance. For the years ended December 31,  
1997, 1996, and 1995, the average balance of impaired loans was negligible. 
The company recognized no interest on impaired loans on the cash basis. 




6. Premises and Equipment:

     Premises and equipment are comprised of the following:

                                                            December 31    
                                                         1997        1996 
                                                          (in thousands)  

Banking premises....................................   $10,286      $8,576     
Furniture and fixtures..............................     7,767       7,221  
Leasehold improvements..............................       345         345  
                                                        18,398      16,142   
Less accumulated depreciation and amortization......    (9,233)     (8,294)
                                                       $ 9,165      $7,848
                                                       =======      ======   

     Depreciation expense charged to operations amounted to approximately 
$991,000, $937,000, and $831,000 in 1997, 1996, and 1995, respectively. 



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

     Short-term borrowings consist of the following:
                                                                December 31    
                                                               1997      1996  
                                                               (in thousands)

Federal funds purchased, 5.25% in 1996............           ---      $12,700
Treasury tax and loan note option account,
    5.25% and 5.04% in 1997 and 1996, respectively....   $   752          517
                                                         $   752      $13,217 
                                                         =======      ======= 

     Interest incurred on fed funds purchased and othershort-term borrowings 
amounted to $143,000, $252,000, and $225,000 for the years ended December 
31, 1997, 1996, and 1995, respectively.

     At December 31, 1997, long-term debt consists of long-term advances from
the FHLB of Pittsburgh of $26,000,000 and repurchase agreements totalling 
$20,000,000.  The long-term advance is for a period of five years and is due
to mature in December, 2002.  Monthly payments of interest are required to be
paid to the Federal Home Loan Bank at variable and fixed rates presently 
5.83%, with principal due at maturity.  Quarterly payments of interest are  
required to be paid on the repurchase agreements at a fixed rate, presently 
5.76%, with principal due at maturity.  Interest on long-term debt and 
repurchase agreements amounted to $2,231,000, $502,000, and $444,000 for the 
years ended December 31, 1997, 1996, and 1995, respectively.

     Maturities on long term debt at December 31, 1997 are as follows:

     1998............................     $ 3,000,000
     1999............................     $ 4,000,000
     2000............................     $ 4,000,000
     2001............................     $10,000,000
     2002............................     $25,000,000 



8. Pension Plan:

<TABLE>
<CAPTION>
     The following table sets forth the pension plan's funded status at and for the years ended December 31, 1997,
1996, and 1995.
                                                                                                                               
                                                                                     1997       1996      1995 
<S>                                                                               <C>         <C>       <C>   
Actuarial present value of benefit obligations: 
     Accumulated benefit obligations, including vested
        benefits of $3,301, $2,812, and $2,371, respectively...................... $3,378      $2,844    $2,389      
                                                                                   ======      ======    ======     
Projected benefit obligation for service rendered to date......................... $4,461      $3,933    $3,420               
Plan assets at fair value, primarily listed stocks, corporate, and U.S. bonds.....  4,473       3,626     3,114            
Plan assets in excess of projected benefit obligations............................     12        (307)     (306)         
Unrecognized net loss from past experience different from that assumed 
     and effects of changes in assumptions........................................    775       1,027       949               
Unrecognized net asset being recognized over 17 years.............................    (62)        (46)      (55)      
Prepaid pension costs............................................................. $  725      $  674    $  588         
Net pension cost for 1997, 1996, and 1995 included the following components:       ======      ======    ======              
Service cost...................................................................... $  221      $  190    $  153         
Interest cost.....................................................................    293         238       207         
Actual return on plan assets......................................................   (609)       (290)     (374)      
Net amortization and deferral.....................................................    298          24       154       
Net pension cost.................................................................. $  203      $  162    $  140         
                                                                                   ======      ======    ======         
</TABLE>
     The weighted average discount rate used in determining the actuarial 
present value of the projected benefit obligation was 7.00% for 1997, 7.50% 
for 1996 and 7.25% for 1995.  The increase in future compensation levels used 
in determining the actuarial present value of the benefit obligation was 4.5% 
in 1997, and 5.0% for 1996 and 1995.  The expected long-term rate of return on
assets was 9.0% in 1997, 1996, and 1995.


9.  Earnings Per Share:
<TABLE>
<CAPTION>
The following table sets forth the calculation of Basic and Fully Diluted Earnings Per Share for the years ended below:


                                          For the Year Ended 1997    For the Year Ended 1996    For the Year Ended 1995    
                                                          Per-Share                  Per-Share                  Per-Share
                                         Income   Shares   Amount   Income   Shares   Amount   Income   Shares   Amount
                                                            (in thousands except for per share data)                         
<S>                                     <C>       <C>      <C>     <C>       <C>      <C>     <C>       <C>      <C>   
Basic EPS:                                  

Income available to common 
   stockholders........................  $5,970    3,019    $1.98   $5,632    3,011    $1.87   $4,814    3,011    $1.60
                                                            =====                      =====                      =====    
Effect of Dilutive Securities:

Incentive stock options 
   outstanding.........................               61                         42                         29              

Diluted EPS:

Income available to common
   stockholders + assumed conversion...  $5,970    3,080    $1.94   $5,632    3,053    $1.84   $4,814    3,040    $1.58    
                                         ======    =====    =====   ======    =====    =====   ======    =====    =====      
</TABLE>

   As discussed in Note 2 to the consolidated financial statements, the 
Corporation has adopted Statement of Financial Accounting Standards (SFAS) 
No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of Information of 
Capital Structure", effective January 1, 1997.                               
              



10. Income Taxes:

     The provision for income taxes consists of the following:              

                                             1997        1996        1995 
                                                     (in thousands)
       
Current.................................    $2,725      $1,942      $1,661    
Deferred................................       (99)         27         (70) 
                                            $2,626      $1,969      $1,591   
                                            ======      ======      ======  

    

     The components of the net deferred tax asset (liability) as of December 31,
1997, 1996, and 1995 were as follows:
                                                                               
                                              1997     1996       1995
                                                   (in thousands)

Deferred tax assets: 
     Loan loss provision..................  $  645     $  648     $573        
     Non-accrual loan interest income.....     264        183      152        
     Loan origination fees................     ---        ---       22        
     Miscellaneous........................      83         88       88        
     Alternative minimum tax credit.......     ---        ---       54         
     Deferred compensation................     176         73       75    
         Total deferred tax assets........   1,168        992      964        
                                                           
Deferred tax liabilities:
     Depreciation.........................  $  487     $  515   $  531      
     Accretion of discount................     239        156      131      
     Pension expense......................     246        216      182      
     Net unrealized gain on marketable
          equity securities...............   1,379        134      857          
     Loan origination fees................       4         12      ---    
         Total deferred tax liability.....   2,355      1,033    1,701       
         Net deferred asset (liability).... $(1,187)    $  (41)  $ (737)     
                                            =======     ======   ======     
 
     The significant components of the deferred tax expense (benefit) in 1997,
1996, and 1995 were as follows:
                                                                              
                                              1997         1996       1995 
                                                      (in thousands)

        Loan origination fees.............. $  (8)         $ 34         $  4   
        Accretion of discount..............    83            26           19   
        Loan loss provision................     3           (75)         (48)  
        Non-Accrual loan interest income...   (81)          (31)         (17) 
        Depreciation expense...............   (28)          (17)          (3) 
        Deferred compensation..............  (103)          ---          (13) 
        Pension expense....................    30            34           37  
        Lease financing....................   ---           ---           (1) 
        Miscellaneous......................     5             2          (33)
        Alternative minimum tax credit.....   ---            54          (15) 
        Total deferred taxes............... $ (99)         $ 27         $(70) 
                                            ======          ====         ====

     Income tax provisions related to securities gains were $255,000, $97,000, 
and $47,000, for the years ended December 31, 1997, 1996, and 1995, 
respectively.

     The provision for income taxes differs from the amounts derived from 
applying the statutory federal tax rate of 34%.
                                                                               
                                                   1997       1996      1995 
                                                            (in thousands)

Computed "expected" tax provision.................$2,923     $2,585    $2,177
Effect of tax-exempt municipal bond and loan  
  interest, net of interest expense disallowance..  (524)      (558)     (696)
Goodwill amortization.............................    82         82        82
Nondeductible expense related to acquisition......   161        ---        99
Other, net........................................   160       (110)      (71)
Deferred compensation.............................  (176)       (30)      ---
Total provision for income taxes..................$2,626     $1,969      $1,591
                                                  =======    ======      ======
    



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

    The Corporation has a Long Term Incentive Plan whereby awards in the form 
of Incentive Stock Options, Nonqualified Stock Options or Stock Appreciation 
Rights may be granted to certain Executive Officers and other key employees 
selected by a committee of the Board of Directors.  The price at which common
stock can be purchased pursuant to the exercise of options cannot be less 
than 100% in the case of Incentive Stock Options and 80% in the case of 
Nonqualified Stock Options, of the fair market value of the common stock on 
the date of the grant of the option.  Options are exercisable starting one year
from the date of grant to the extent of 20.0% to 33.3% a year on a cumulative
basis and expire no later than ten years after the date of grant.  Incentive 
stock options issued under the plan totalled 31,150, 28,775, and 55,992, in 
1997, 1996, and 1995, respectively.

<TABLE>
<CAPTION>
     A summary of the status of the Bank's Plan as of December 31, 1997, 1996, 
and 1995 and changes during the years ending on those dates is presented below:
                                                                                                 Weighted  
                                                                                                Average Fair
                                           Shares      Shares        Weighted        Options    Value of Options
                                           Under      Available       Average      Exercisable  Granted During
                                           Option    For Option   Exercise Price   at Year-end      The Year
<S>                                       <C>           <C>           <C>            <C>             <C>
Balance, December 31, 1994.............    150,769       187,843       $16.01          64,307  

Options granted........................     55,992       (55,992)      $23.00                          $7.46
Options exercised......................     (4,705)            -       $12.32   
Options cancelled or expired...........       (476)          476       $21.46                
Balance, December 31, 1995.............    201,580       132,327       $18.13          88,974

Options granted........................     28,775       (28,775)      $24.25                          $7.58
Options exercised......................    (20,541)          ---       $11.91
Options cancelled or expired...........     (7,366)        7,366       $21.97  
Balance December 31, 1996..............    202,448       110,918       $19.56         102,236
                                                                             
Options granted........................     31,150       (31,150)      $41.13                         $13.91
Options exercised......................    (61,257)          ---       $15.89
Options cancelled or expired...........       (875)          875       $25.77               
Balance December 31, 1997..............    171,466        80,643       $23.67          83,005 
                                           =======       =======       ======          ======

</TABLE>
     
On January 1, 1996, the Bank adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" (SFAS 123).  As permitted 
by SFAS 123, the Bank has chosen to apply APB Opinion No. 25, "Accounting
for Stock issued to Employees" (APB 25) and related interpretations in 
accounting for its Plans.  Accordingly, no compensation cost has been 
recognized for options granted under the Plan.  Had Compensation cost for the 
Bank's Plan been determined based on the fair value at the grant dates for 
awards under the Plan consistent with the method of SFAS 123, the impact on 
the Bank's net income and net income per share would not have been material.

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average 
assumptions used for grants in 1997 and 1996, respectively; dividend yield of 
1%, expected volatility of 20%, risk-free interest rates of 6.14% and 6.14%, 
and expected life of 6 years.  

12. Related Parties:

     Certain directors and their business affiliates (defined as the beneficial
ownership of at least a 10 percent interest),executive officers and their 
families are indebted to Community Banks, N.A.  At December 31, 1997, 1996, 
and 1995, loans to these persons and their business affiliates amounted to 
$2,478,000, $2,989,000 and $3,402,000, respectively.  

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

                                                                               
                                                1997         1996       1995 
                                                        (in thousands)

Balance beginning of period.................  $ 2,989       $3,402     $3,927  
Additions...................................    1,877          365        467 
Amounts collected...........................   (2,388)        (778)      (992) 
Amounts written off.........................      ---          ---        ---
Balance end of period.......................  $ 2,478       $2,989     $3,402 
                                              =======       ======     ======



13. Condensed Financial Information of Community Banks, Inc. (Parent Only):
                                                                                
                                                           1997        1996 
                                                            (in thousands)
Condensed Balance Sheets:                                     
         Cash and investments..........................   $   137    $   139
         Investment in Community Banks, N.A............    48,085     43,330
         Investment in nonbank subsidiaries............     4,652      3,081  
         Other assets..................................     1,292      1,562
         Total assets..................................   $54,166    $48,112
                                                          =======    =======
         Other liabilities.............................       806        373   
         Stockholders' equity..........................    53,360     47,739   
         Total liabilities and stockholders' equity....   $54,166    $48,112  
                                                          =======    =======

                                                                               
                                                  1997       1996       1995 
Condensed Statements of Income:                         (in thousands)
    Dividends from:
         Community Banks, N.A. ................  $2,530      $2,260     $2,033 
         Other expense.........................    (948)       (379)      (360)
Income before equity in undistributed earnings of 
    subsidiaries...............................   1,582       1,881      1,673 
Equity in undistributed earnings of:
    Community Banks, N.A. .....................   3,720       3,364      2,892
    Nonbank subsidiaries.......................     668         387        249
                                                  4,388       3,751      3,141 
Net income.....................................  $5,970      $5,632     $4,814 
                                                 ======      ======     ======
                                                                          
Condensed Statements of Cash Flows:                                       
    Operating activities:
    Net income.................................  $5,970      $5,632     $4,814 
        Adjustments to reconcile net cash provided by
          operating activities:
      Undistributed earnings of:
        Community Banks, N.A. .................  (3,720)     (3,364)    (2,892)
        Nonbank subsidiaries...................    (668)       (387)      (249)
      Other, net...............................   1,182         346        360
        Net cash provided by operating activities 2,764       2,227      2,033 
    Investing activities:
      Additional investment in nonbank 
                           subsidiaries........     ---         ---        ---
      Net cash used in investment activities...     ---         ---        --- 

Financing Activities:
    Proceeds from issuance of common stock.....     459         138         55 
       Purchase of Treasury Stock..............    (695)       (368)       ---
       Dividends paid..........................  (2,530)     (2,260)    (2,033)
        Net cash used by financing activities..  (2,766)     (2,490)    (1,978)
        Net change in  cash and cash equivalents     (2)       (263)        55
          Cash and cash equivalents at 
                           beginning of year...     139         402        347
          Cash and cash equivalents at
                           end of year......... $   137      $  139     $  402
                                                =======      ======     ======

14. Regulatory Restrictions of Banking Subsidiaries:


     CBNA is subject to legal limitations as to the amount of dividends that 
can be paid to its shareholder (the Corporation).  The approval of certain 
banking regulatory authorities is required if the total of all dividends 
declared by the bank exceeds limits as defined by the regulatory authorities.  
CBNA could declare dividends in 1998 without regulatory approval of $6,618,000
plus an additional amount equal to the bank's retained net profits in 1998 up
to the date of any dividend declaration.

     Included in cash and due from banks are balances required to be maintained
by subsidiary banking companies on deposit with the Federal Reserve.  The 
amounts of such reserves are based on percentages of certain deposit types and 
totalled $175,000 at December 31, 1997 and 1996. 



15. Financial Instruments with Off-Balance Sheet Risk:


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

     Financial instruments with off-balance sheet risk at December 31, 1997, 
are as follows:

                                                    Contract or Notional Amount
                                                               (in thousands)

Financial instruments whose contract amounts represent credit risk:
  Commitments to originate loans.........................            $23,438  
  Unused lines of credit.................................            $12,215    
  Standby letters of credit..............................            $ 2,512  
  Unadvanced portions of construction loans..............                ---

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

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


16. Quarterly Results of Operations (Unaudited):  

<TABLE>
<CAPTION>
     The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996:

                                                              Three Months Ended                                     
                                         1997                               1996
                            Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
                                             (dollars in thousands except per share data)
<S>                         <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
Interest income............  $8,127  $8,275  $8,754  $8,779  $7,423  $7,447  $7,798  $7,925
Interest expense...........   3,435   3,494   3,784   3,841   3,082   3,101   3,222   3,282
Net interest income........   4,692   4,781   4,970   4,938   4,341   4,346   4,576   4,643
Provision for loan losses..     240     140     140     197     202     183     245     412
Net interest income after
 provision for loan losses:   4,452   4,641   4,830   4,741   4,139   4,163   4,331   4,231
Other income...............     621     570     636     581     497     589     597     576
Investment security   
  gains....................     296     123     ---     330     147     130       4       3
Gains on mortgage sales....      40      62      31      85     ---      70      47      94
Other expenses.............   3,134   3,237   3,273   3,799   3,040   3,052   2,972   2,953
Income before income taxes.   2,275   2,159   2,224   1,938   1,743   1,900   2,007   1,951
Income taxes...............     651     621     630     724     397     460     546     566
Net income.................  $1,624  $1,538  $1,594  $1,214  $1,346  $1,440  $1,461  $1,385
                             ======  ======  ======  ======  ======  ======  ======  ======

Basic earnings per share...   $ .54  $ .51    $ .53   $ .40  $ .44   $ .48   $ .49   $ .46
Diluted earnings
  per share................   $ .53  $ .50    $ .52   $ .39  $ .44   $ .47   $ .48   $ .45
Dividends per share........   $ .20  $ .21    $ .21   $ .21  $ .17   $ .19   $ .19   $ .19

Per share data has been restated to reflect stock dividends.


17. Fair Values of Financial Instruments:

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

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

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

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

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

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

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

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


</TABLE>
<TABLE>
<CAPTION>
    The following table summarizes the carrying values and fair values of financial instruments at December 31, 1997 and 1996:


                                                              December 31,                   
                                                      1997                      1996         
                                             Carrying       Fair        Carrying        Fair
                                               Value        Value         Value         Value
                                                               (in thousands)
<S>                                         <C>         <C>            <C>         <C>  
Financial assets:
Cash, interest-bearing time deposits, 
  and federal funds sold...................  $ 22,853    $ 22,853       $ 17,944    $ 17,944                  
Investment securities......................   161,401     161,401        145,446     145,446       
Loans, net of unearned income..............   261,150     255,660        250,011     245,329        
Less: Allowance for loan losses............    (2,921)        ---         (2,798)        ---                
      Net Loans............................   258,229     255,660        247,213     245,329               
Loans held for sale........................     2,641       2,641          4,622       4,622              
      Total................................  $445,124    $442,555       $415,225    $413,341           
                                             ========    ========       ========    ========              
Financial liabilities:
Deposits...................................  $357,572    $358,148       $343,256    $344,195                
Short-term borrowings......................       752         752         13,217      13,217                   
Long-term debt.............................    46,000      46,059         25,000      24,561                           
      Total                                  $404,324    $404,959       $381,473    $381,973               
                                             ========    ========       ========    ========           

</TABLE>



18.  Subsequent Event-Acquisition:

     On October 28, 1997 Community Banks, Inc. (Community) signed a definitive 
agreement to acquire The Peoples State Bank (Peoples), a Pennsylvania bank 
located in York and Adams County, with $257 million in assets and $192 million
in deposits at December 31, 1997.  Community will acquire Peoples and its 
subsidiaries for approximately 1,329,000 shares of its common stock based on 
an exchange ratio of .889 shares of Community common stock for each share of 
Peoples common stock.  The acquisition requires shareholder and regulatory 
approval prior to consummation and is not expected to close until the second
quarter of 1998.  The acquisition will be accounted for under the pooling-of-
interests method of accounting, accordingly upon consummation the financial 
statements of Community will be restated to include the consolidated accounts 
of Peoples.

<TABLE>
     A summary of unaudited pro forma combined financial information for Community and Peoples follows:                          


                                                                                                                     
     Year Ended December 31                                            1997                       1996               
                                                                (dollars in thousands except per share data)

                                                                            Community/                   Community/
                                                              Community       Peoples      Community       Peoples
                                                             As Reported     Combined     As Reported     Combined 
<S>                                                          <C>             <C>           <C>            <C>       
     Net interest income................................       $19,381        $27,864       $17,906        $24,607         
     Provision for loan losses and lease losses.........           717          1,317         1,042          1,567 
     Other Income.......................................         3,375          4,229         2,754          3,171
     Other Expenses.....................................        13,443         19,360        12,017         16,534 
     
     Income before taxes................................         8,596         11,416         7,601          9,677
     Taxes..............................................         2,626          3,491         1,969          2,693
     
     Net income.........................................       $ 5,970        $ 7,925       $ 5,632        $ 6,984
                                                               =======        =======       =======        =======
     Basic Earnings Per Share...........................       $  1.98        $  1.82       $  1.87        $  1.61          
     Diluted Earnings Per Share.........................       $  1.94        $  1.80       $  1.84        $  1.60
                                                               =======        =======       =======        =======    
</TABLE>
          
     
     REPORT OF INDEPENDENT ACCOUNTANTS
     
     
     
     Board of Directors and Shareholders
     Community Banks, Inc.
     Millersburg, Pennsylvania
     
     
     
     
     
             We have audited the accompanying consolidated balance sheets of
     Community Banks, Inc. and subsidiaries (Corporation) as of
     December 31, 1997 and 1996 and the related consolidated statements of
     income, changes in stockholders' equity and cash flows for each 
     of the three years in the period ended December 31, 1997.  These financial
     statements are the responsibility of the Corporation's management.  
     Our responsibility is to express an opinion on these financial statements
     based on our audits.
     
             We conducted our audits in accordance with generally accepted
     auditing standards.  These standards require that we plan and perform 
     the audit to obtain reasonable assurance about whether the financial
     statements are free of material misstatement.  An audit includes examining,
     on a test basis, evidence supporting the amounts and disclosures in the
     financial statements.  An audit also includes assessing the accounting 
     principles used and significant estimates made by management, as well as
     evaluating the overall financial statement presentation.  We believe that
     our audits provide a reasonable basis for our opinion.
     
             In our opinion, the financial statements referred to above present
     fairly, in all material respects, the consolidated financial position 
     of Community Banks, Inc. and subsidiaries as of December 31, 1997 and 1996,
     and the consolidated results of their operations and cash flows for 
     each of the three years in the period ended December 31, 1997, in
     conformity with generally accepted accounting principles.
             
     
     
     
                                                   COOPERS & LYBRAND, L.L.P
     
     
     
     One South Market Square
     Harrisburg, PA 17101
     January 13, 1998

     
Community Banks, Inc. and Subsidiaries                                      
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND                           
RESULTS OF OPERATIONS                                                         

<TABLE>
<CAPTION>
     Management's discussion of financial condition and results of operations is based on the selected financial data         
listed below and should be read in conjunction with the Consolidated Financial Statements and Notes thereto.                  

                                                                                                                              
FINANCIAL HIGHLIGHTS                             1997              1996              1995              1994              1993 
                                                         (dollars in thousands except per share data) 
<S>                                         <C>               <C>              <C>               <C>                <C>       
Balance Sheet Data                                                                                                            
Total assets........................          $463,050          $432,518         $381,822          $368,697           $345,960
Loans (net of unearned income and                                                                                             
  allowance for loan losses)........           258,229           247,213          229,063           206,525            184,012
Deposits............................           357,572           343,256          324,097           307,973            295,267
Shareholders' equity................            53,360            47,739           46,000            39,483             38,212
                                                                                                                              
Earnings Data                                                                                                                 
Net interest income.................            19,381            17,906           16,680            15,551             14,390
Provision for loan losses...........               717             1,042              728               512                932
Other income........................             3,375             2,754            2,710             2,424              2,821
Other expense.......................            13,443            12,017           12,257            11,007             10,137
Net income..........................             5,970             5,632            4,814             4,994              4,763
                                                                                                                              
Per Share Data                                                                                                                
Basic net income....................              1.98              1.87             1.60              1.66               1.59
Diluted net income..................              1.94              1.84             1.58              1.64               1.57
Cash dividends......................               .83               .74              .67               .60                .55
Book value..........................             17.57             16.64            17.64             15.15              16.91
Average shares outstanding..........         3,080,166         3,053,400        3,041,003         3,039,448          3,024,936

</TABLE>

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                        
AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL                            
AND INTEREST YIELDS                                                         
Income and Rates on a Tax Equivalent Basis <F2> for the                        
Years Ended December 31, 1997, 1996, and 1995 (dollars in thousands)        
                                                                                               
                                               1997                                1996                                1995
                                                       Average                       Average                        Average
                                             Interest   Rates              Interest  Rates              Interest    Rates
                                   Average    Income/   Earned/  Average    Income/  Earned/  Average    Income/    Earned/
                                  Balance<F3>Expense<F1>Paid<F1>Balance<F3>Expense<F1>Paid<F1>Balance<F3>Expense<F1>Paid<F1>
<S>                                <C>       <C>       <C>    <C>       <C>        <C>     <C>         <C>        <C> 
 Cash and due from banks.........    $14,803                    $14,676                      $ 13,247    
 Earnings Assets:                                                                                                 
   Interest-bearing deposits in                                                                                        
     other banks.................      1,387  $    74   5.34%       978   $    58    5.93%      1,660    $    83    5.00%   
   Investment securities:                                                                                             
     Taxable.....................    126,751    8,647   6.82     95,584     6,196    6.48      84,956      5,599    6.59    
     Tax-exempt <F2>.............     28,500    2,402   8.43     28,369     2,406    8.48      36,975      3,112    8.42    
   Total investment                                                                                                  
     securities..................    155,251                    123,953                       121,931               
   Federal funds sold............      2,158      124   5.75      3,808       207    5.44       3,118        157    5.04    
   Loans, net of unearned                                                                                           
     income <F2>.................    253,600   23,608   9.31    243,840    22,639    9.28     222,624     20,918    9.40    
    Total Earning Assets.........    412,396  $34,855   8.45    372,579   $31,506    8.46     349,333    $29,869    8.55    
 Allowance for loans                                                                                             
   losses........................     (2,956)                    (2,682)                       (2,515)                           
 Premises, equipment and                                                                                         
    other assets.................     20,598                     16,404                        15,688                            
    Total assets.................   $444,841                   $400,977                      $375,753                            
                                    ========                   ========                      ========                            
Liabilities:                                                                                              
 Demand deposits.................     26,570                     27,082                        27,494                            
 Interest bearing liabilites:                                                                             
   Savings deposits..............    156,805    3,279   2.09    148,621     3,212    2.16     136,031      3,054    2.25    
   Time deposits:                                                                                           
     $100,000 or greater.........     14,078                     12,100                        11,249                            
     Other.......................    152,402                    149,982                       143,103                            
   Total time deposits...........    166,480    8,901   5.35    162,082     8,721    5.38     154,352      8,309    5.38    
   Total time and savings                                                                                        
     deposits....................    323,285                    310,703                       290,383                            
   Short-term borrowings.........      2,704      143   5.29      5,410       252    4.66       3,891        225    5.78    
   Long-term debt................     37,967    2,231   5.88      7,787       502    6.45       7,781        444    5.71    
   Subordinated capital notes....         --       --     --         --       --      --            2         --   11.00    
    Total interest-bearing                                                                                          
     liabilities.................    363,956  $14,554   4.00    323,900   $12,687    3.92     302,057    $12,032    3.98    
Accrued interst, taxes and                                                                                           
   other liabilities..............     4,105                      3,358                         3,504                            
    Total liabilities.............   394,631                    354,340                       333,055                            
Stockholders' Equity..............    50,210                     46,637                        42,698                            
    Total liabilities and                                                                           
     stockholders' equity.........  $444,841                   $400,977                      $375,753        
                                    ========                   ========                      ========        
  Interest income to earning                                                                                             
    assets........................                      8.45%                        8.46%                          8.55%
  Interest expense to earning                                                                                        
    assets........................                      3.53                         3.41                           3.44
      Effective interest                                                                                               
        differential..............            $20,301   4.92%             $18,819    5.05%               $17,837    5.11%
                                               =======  =====             =======    ====                =======    ====


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

<TABLE>
<CAPTION>
Community Banks, Inc. and Subsidiaries                                        
Management's Discussion of Financial Condition and Results of Operations     
Rate/Volume Analysis <F1>                                                   
For the Years Ended December 31, 1997 and 1996                                
(in thousands)                                                               


                                                                                                                              
                                                  1997 vs 1996                        1996 vs 1995      
                                             Volume   Rate     Total             Volume   Rate       Total
<S>                                         <C>      <C>      <C>               <C>      <C>      <C> 
Increase (decrease) in interest income:                                                                                       
  Loans...................................   $  897   $   72   $  969            $1,989   $ (268)  $1,721                     
  Investment securities:                                                                                                      
    Taxable...............................    2,111      340    2,451               691      (94)     597                     
    Tax-exempt............................       11      (15)      (4)             (728)      22     (706)                    
       Total..............................    3,019      397    3,416               (37)     (72)    (109)                    
  Federal funds sold......................      (94)      11      (83)               37       13       50                     
  Interest-bearing deposits in other                                                                                          
   banks..................................       22       (6)      16               (38)      13      (25)                    
     Total................................    2,947      402    3,349             1,951     (314)   1,637                     

Increase (decrease) in interest expense:                                                                                      
  Savings deposits........................      173     (106)      67               281     (123)     158                     
  Time deposits...........................      230      (50)     180               416       (4)     412                     
  Short-term borrowings...................     (139)      30     (109)               77      (50)      27
  Long-term debt and capital notes........    1,777      (48)   1,729                --       58       58                     
     Total................................    2,041     (174)   1,867               774     (119)     655                     
  Increase (decrease) in effective                                                                                            
   interest differential..................   $  906   $  576   $1,482            $1,177   $ (195)  $  982                     
                                             ======   ======   ======            ======   ======   ======                     

<FN>
<F1> Table shows approximate effect on the effective interest differential of
volume and rate changes for the years 1997 and 1996. The effect of a change 
in average volume has been determined by applying the average yield or rate    
in the earlier period to the change in average volume during the period. The 
effect of a change in rate has been determined by applying the change in rate
during the period to the average volume of the prior period. Any resulting  
unallocated amount was allocated ratably between the volume and rate components.
Nonaccrual loans have been included in the average volume of each period. 
Tax-exempt income is shown on a tax equivalent basis assuming a federal 
income tax rate of 34%.
</FN>
</TABLE>

     
          Community Banks, Inc. and Subsidiaries
          MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
          OPERATIONS
          
          
          The earnings of Community Banks, Inc. (Corporation) are derived
          exclusively from the operations of its wholly owned subsidiaries;
          Community Banks, N.A.; Community Banks Investments, Inc.; and
          Community Banks Life Insurance Co.
          
          Diluted net income was $1.94 per share in 1997 compared to $1.84
          per share in 1996, and $1.58 in 1995.  Net income per share in
          1997 was 5.4% more than net income per share in 1996. Net income
          per share in 1996 increased 16.5% compared to the previous year.
          
          Net Interest Income:
          
          The primary determinant of the Corporation's net income is net
          interest income.  This is the income which remains after
          deducting from the total income generated by earning assets the
          interest expense applicable to funds required to support the
          earning assets.
          
          Total interest income increased $3,342,000 or 10.9% in 1997,
          compared to an increase of $1,881,000 or 6.6% in 1996, and an
          increase of $3,082,000 or 12.0% in 1995.  Interest and fees on
          loans increased $961,000 or 4.3% in 1997.  Most of this increase
          was volume related and caused by an increase in average balances
          of $9,760,000 or 4.0%.  The increase of $2,448,000 or 31.4% in
          interest and dividends on investment securities was volume
          related.  The average balances of tax-exempt securities increased
          $131,000 or 0.5% in 1997. Interest and fees on loans increased
          $1,725,000 or 8.3% in 1996.  This was primarily a volume related
          change driven by an increase in average balances of $21,216,000
          or 9.5%.  The increase of $131,000 or 1.7% in interest and
          dividends on investment securities was volume related.  The
          average balance of tax-exempt securities decreased $8,606,000 or
          23.3% in 1996 which resulted in a decrease in tax-exempt interest
          income.  Factors contributing to the 1995 change included a
          volume related increase in interest and fees on loans of
          $3,519,000 and a volume related decrease of $512,000 in interest
          and dividends on investment securities.  
          
          Total interest expense increased $1,867,000 or 14.7% in 1997 and
          $655,000 or 5.4% in 1996, after increasing $1,953,000 or 19.4% in
          1995.  A volume related increase of $67,000 or 2.1% occurred in
          savings interest expense. Also affecting the 1997 increase was an
          increase of $180,000 or 2.1% in time deposit interest expense. 
          All of the increase in time deposit interest expense was caused
          by increased volume.  An increase of $1,620,000 or 114.9% in
          borrowed funds interest significantly affected total interest
          expense in 1997.  Material factors affecting the 1996 increase
          were increases of $412,000 or 5.0% in total time deposit interest
          expense and an increase of $158,000 or 5.2% in savings interest
          expense. The average balances of savings accounts increased
          $12,590,000 or 8.5%. This increase was partially offset by a
          decrease in the interest rates paid on these deposits.  Material
          factors affecting the 1995 change were increases of $1,826,000 or
          28.2% in total time deposit interest expense and $144,000 or
          27.4% in interest expense of borrowings.  

          Average interest-bearing deposits represented 92.4% of average
          total deposits in 1997 compared to 92.0% in 1996 and 91.4% in
          1995.
          
          Net interest income increased $1,475,000 or 8.2% in 1997,
          compared to $1,226,000 or 7.4% in 1996 and $1,129,000 or 7.3% in
          1995.  Average earning assets increased $39,817,000 or 10.7% in
          1997 compared to $23,246,000 or 6.7% in 1996 and $12,485,000 or
          3.7% in 1995.  Average interest-bearing liabilities increased
          $40,056,000 or 12.4% in 1997 compared to $21,843,000 or 7.2% in
          1996 and $21,196,000 or 7.5% in 1995.
          
          Net Interest Income Margin:
          
          Net interest income margin for 1997 was 4.92% compared to 5.05%
          in 1996 and 5.11% in 1995.  Interest income to earning assets
          decreased from 8.46% in 1996 to 8.45% in 1997.  Interest expense
          to earning assets increased from 3.41% to 3.53%.  
          
          Provision for Loan Losses:
          
          Net loan charge-offs for 1997 were $594,000 compared to $818,000
          in 1996 and $501,000 in 1995.  The provision for loan losses
          charged to income was $717,000 in 1997 compared to $1,042,000 in
          1996 and $728,000 in 1995.  Total non-performing loans
          approximated $3,329,000, $3,677,000, and $2,673,000, as of
          December 31, 1997, 1996, and 1995, respectively.  Non-performing
          residential real estate and commercial loans totalled
          approximately $2,121,000 and $815,000, respectively, at year-end
          1997.  Total delinquencies as a percentage of total loans
          approximated 4.5%, 5.1%, and 4.8% at December 31, 1997, 1996, and
          1995, respectively.
          
          Other Income and Other Expenses:
          
          Other income net of security gains increased $156,000 or 6.3% in
          1997 compared to an increase of $100,000 or 3.9% in 1996 and a
          increase of $542,000 or 26.7% in 1995.  The increases in trust
          department income and service charges on deposit accounts which
          occurred in 1997 and 1996 resulted from management's renewed
          emphasis on these functions.  Investment security gains in 1997
          and 1996 were associated primarily with equity securities held by
          Community Banks Investments, Inc.  No investment security losses
          were recognized in 1997.  Decreased income on insurance premiums
          are a reflection of decreased consumer loan demand and reduced
          activity at Community Banks Life Insurance Co.  Gains on mortgage
          sales increased slightly in 1997 as a result of increased demand
          for fixed-rate real estate loans.  The market values of loans
          held for sale approximated their carrying values at year ends
          1997, 1996, and 1995.  
           
          Other expenses increased $1,426,000 or 11.9% in 1997 compared to
          decreases of  $240,000 or 2.0% in 1996, and $1,250,000 or 11.4%
          in 1995.  The 1997 increases in salaries and benefits of $559,000
          or 9.1% and net occupancy expense of $97,000 or 5.4% were
          affected by the opening of new banking offices. Also affecting
          salaries and benefits was the recognition of certain retirement
          plan obligations.. The increase of $768,000 or 20.6% in other
          operating expense in 1997 was affected by increased FDIC
          insurance premiums and the recognition of $470,000 of expense
          associated with the pending acquisition of the Peoples State
          Bank. Increases of $283,000 or 4.8% in salaries and employee
          benefits and $111,000 or 8.4% in net occupancy expense affected
          the 1996 increase in total other expenses. Three new banking
          offices established in 1995 contributed to these changes.     
          
          Provision for Income Taxes:
          
          The relationship of the provision for income taxes to income
          approximated 30.5%, 25.9%, and 24.8% in 1997, 1996, and 1995,
          respectively.  Significantly impacting these changes were
          reductions in tax-exempt investment security income recognized in
          1997, 1996 and 1995.    
          
          These factors contributed to an increase in net income for 1997
          of $338,000 or 6.0%, an increase of $818,000 or 17.0% in 1996,
          and a decrease of $180,000 or 3.6% in 1995.
            
          Balance Sheet Data:
          
          Earning assets represented 92.7% of total assets at year-end 1997
          compared to 92.8% at year-end 1996.  Increases in deposits and
          long-term debt in 1997 were reflected in increases in earning
          assets, most notably investment securities.  Changes in the
          composition of earning assets reflect management's attempt to
          respond to fluctuating loan demand and corresponding policies
          relating to liquidity and asset/liability management. 
          
          Under the Corporation's current policy, if management has the
          intent and the Corporation has the ability at the time of
          purchase to hold securities until maturity or on a long-term
          basis, securities are classified as held-to-maturity investments
          and carried at amortized historical cost.  Securities to be held
          for indefinite periods of time and not intended to be held to
          maturity or on a long-term basis are classified as available for
          sale and carried at the lower of cost or market value. 
          Securities held for indefinite periods of time include securities
          that management intends to use as part of its asset/liability
          management strategy and that may be sold in response to changes
          in interest rates, resultant prepayment risk and other factors
          related to interest rate and resultant prepayment risk changes.
          
          At December 31, 1997 and 1996, management classified investment
          securities with book and market values of $157,344,000 and
          $161,401,000 and $145,050,000 and $145,446,000, respectively, as
          available for sale.  Gross unrealized gains and losses relating
          to investment securities were $4,295,000 and $238,000 and
          $2,173,000 and $1,777,000, respectively, at year-end 1997 and
          1996. The Corporation owned no securities below investment grade
          at year-end 1997 and 1996.  No securities were considered held
          for sale or for trading purposes at December 31, 1997 and
          December 31, 1996.
          
          At December 31, 1997 and 1996, the unrealized gains on
          investments available for sale, net of tax were $2,678,000 and
          $261,000, respectively, and were accordingly reflected in
          shareholders equity.      
          
          Net loans increased 4.5% from December 31, 1996 to December 31,
          1997. Real estate loans increased 12.2%, while commercial and
          personal loans decreased during the period.  New banking offices
          opened in 1995 and 1996 and reduced demand for commercial and
          personal loans affected these changes.

          The following table sets forth information regarding nonaccrual
          loans, other real estate owned, and loans which are 90 days or
          more delinquent but accruing interest at the dates indicated.
          
          
                                                  December 31              
                                       1997    1996   1995     1994   1993 
                                             (dollars in thousands)
          
          Nonaccrual loans..........  $2,778  $2,910  $1,759  $1,245 $1,353
          Other real estate owned...     481     351     302     338    381
          Accruing loans contractually    
           past due 90 days or more..    551     767     914     819    722
              Total.................  $3,810  $4,028  $2,975  $2,402 $2,456
                                      ======  ======  ======  ====== ======
          
                   
           Ratio of nonaccrual loans,
           other real estate owned,  
           and accruing loans contractu-
           ally past due 90 days or
           more to total assets......    .82%   .93%    .78%   .65%    .71%
          
          
          
          
          As discussed in Note 5 to the financial statements, management
          performs periodic reviews of its loans to identify risks in the
          loan portfolio.  As a result of these periodic reviews, problem
          loans and potential problem loans are identified and the
          likelihood of collectibility is assessed. Based upon the results
          of these reviews, which also consider other pertinent data,
          management determines an appropriate allowance for loan losses. 
          Other relevant factors include past loss experience, current
          economic conditions, and the growth and composition of the loan
          portfolio.  The allowance for loan losses is maintained at a
          level believed by management to be adequate to absorb potential
          losses in the respective portfolios. The allowance for loan
          losses to loans net of unearned income approximated 1.12%, 1.12%,
          1.11%, 1.12%, and 1.14% at year-end, 1997, 1996, 1995, 1994, and
          1993, respectively. 
          
          At December 31, 1997, management is not aware of any loans or
          lending relationships that are expected to deteriorate in the
          next year.  In addition, the Corporation is not aware of any
          significant environmental liability related to real estate owned
          or in-foreclosure procedures.
          
          The increase of $1,317,000 or 16.8% in premises and equipment was
          affected by new banking locations.  Goodwill is being amortized
          over fifteen years.  The balance of loans held for sale at
          December 31, 1997 included student loans totalling $1,831,000.  
                
          Total deposits increased $14,316,000 or 4.2% in 1997 with most of
          the increase occurring in savings deposits.  As previously noted,
          management chose to reduce short-term borrowings and increase
          long-term debt. Affecting the increase of $2,060,000 or 62.3% in
          accrued interest payable and other liabilities was an increase in
          deferred tax liabilities.
          
          
          Liquidity:
          
          The primary functions of asset/liability management are the
          assurance of adequate liquidity and maintenance of an appropriate
          balance between interest-sensitive earning assets and
          interest-bearing liabilities.  Liquidity management refers to the
          ability to meet the cash flow requirements of depositors and
          borrowers.
          
          A continuous review of net liquid assets is conducted to assure
          appropriate cash flow to meet needs and obligations in a timely
          manner. 
          
          The Corporation's primary funding requirement is loan demand. 
          The loan demand is primarily funded through deposit growth.
          Generally, any deposit growth not used in funding loan demand is
          invested in short-term, interest-bearing deposits or longer term
          investments.  These short-term investments and shorter term
          investment portfolio securities are a source of liquidity to fund
          loan demand.
          
          For the years ended December 31, 1997, 1996 and 1995, financing
          activities provided cash of $20,085,000, $46,870,000, and
          $3,438,000, respectively. Deposit growth and long-term debt
          accounted for the largest portion of this funding source in
          1997.  Deposits and borrowings represented the largest funding
          sources in 1996 while deposits were the primary source in 1995.
          
          Net cash used in investing activities totalled $26,221,000, 
          $51,194,000, and $5,910,000 for the years ended December 31,
          1997, 1996 and 1995, respectively.  The primary uses of funds in
          1997 were purchases of investment securities of $55,175,000 and
          net increases in total loans of $11,863,000. The primary uses of
          funds in 1996 were purchases of investment securities of
          $56,609,000 and increases in net loans of $19,241,000.  In 1995,
          investment securities purchased and net increases in loans also
          represented most of the investing activities.

           
          Forward Outlook:  
          
          Management is unaware of any regulatory recommendations which, if
          implemented, would have a material effect on the liquidity,
          capital resources, or operations of the Corporation.  Adequate
          loan demand is anticipated for the remainder of 1998 and
          management will continue to carefully evaluate this demand based
          on the creditworthiness of the borrower and the relative strength
          of the economy in the Corporation's market.  
          
          Effects on Inflation:
          
          All business enterprises are affected by the constantly changing
          economic environment.  Changes in the economy, however, affect
          the banking industry differently than other industries.  A bank's
          assets and liabilities are primarily monetary in nature and
          values are established without regard to future price changes. 
          
          Also, banks, unlike industrial corporations are not required to
          provide for large capital expenditures in the form of premises,
          equipment and inventory.  Interest rate changes and the actions
          of the Federal Reserve Board have a greater impact on a bank's 
          operations than do the effects of inflation.  Although occasional
          deviations may occur, it is management's policy to generally
          attempt to  maintain rate-sensitive assets at a level
          approximating rate-sensitive liabilities.  Based on a one-year
          parameter, this relationship approximated 93% at December 31,
          1997.
          
          Accordingly, management anticipates that any additional decrease
          in interest rates will positively impact earnings of the
          Corporation.  Conversely, management may not be able to increase
          rates on certain earning assets as rapidly as those of
          interest-bearing liabilities if a significant increase in
          interest rates would occur.  This may result in a decline in the
          net interest margin of the Corporation. 
          
          Capital Strength:
          
          The current economic and regulatory environment has placed an
          increased emphasis on capital strength.  Risk-based capital
          guidelines recognize the relative degree of credit risk
          associated with various assets by setting lower capital
          requirements for some assets which clearly have less credit risk
          than others.  Capital guidelines require banks to hold 4% Tier 1
          and 8% Total Risk-based capital.  Following is a summary of
          significant capital ratios at the dates indicated.


                                Regulatory      December 31,   
                                  Minimum     1997        1996 
       
                                          (dollars in thousands)


     Core (Tier 1) Capital          ---      $49,776    $46,331

     Leverage ratio (A)             4.0%        10.8%      10.7% 

     Risk-based Capital Ratios:

     Tier 1 capital ratio (B)       4.0%        17.1%      17.0% 
     
     Total risk-based capital 
      ratio (C)                     8.0%        17.9%      18.0%

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

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

     (C)  Total capital divided by risk-adjusted assets,
          as defined by risk-based guidelines.
          
          As shown by the table, the Bank's capital ratios exceeded
          regulatory minimums in 1997 and 1996.  The core capital ratio
          increased from 17.0% to 17.1%, and the total capital ratio
          decreased from 18.0% to 17.9%, well above the regulatory minimums
          of 4.0% for core and 8.0% for total capital.  These changes were
          impacted by the Corporation's retention of earnings during the
          year. 
                 


          Impact of the Year 2000 Issue:
          
          The Year 2000 Issue is the result of computer programs being
          written using two digits rather than four to define the
          applicable year. Any of the Corporation's computer programs that
          have date-sensitive software may recognize a date using "00" as
          the year 1900 rather than the year 2000. This could result in a
          system failure or miscalculations causing disruptions of
          operations, including among other things, a temporary inability
          to process transactions, send invoices, or engage in similar
          normal business activities.
          
          Based on a recent assessment, the Corporation determined that it
          will be required to modify or replace significant portions of its
          software so that its computer systems will properly utilize dates
          beyond December 31, 1999. The Corporation presently believes that
          with modifications to existing software and conversions to new
          software, the Year 2000 Issue can be mitigated. However, if such
          modifications are not made, or are not completed timely, the Year
          2000 Issue could have a material impact on the operations of the
          Corporation.
          
          The Corporation has initiated formal communications with all of
          its significant suppliers and large customers to determine the
          extent to which the Corporation is vulnerable to those third
          parties' failure to remediate their own Year 2000 Issue. The
          Corporation's total Year 2000 project cost and estimates to
          complete are based on presently available information. However,
          there can be no guarantee that the systems of other companies on
          which the Corporation's systems rely will be timely converted, or
          that a failure to convert by another company, or a conversion
          that is incompatible with the Corporation's systems, would not
          have material adverse effect on the Corporation. The Corporation
          has determined it has no exposure to contingencies related to the
          Year 2000 Issue for the products it has sold.
          
          The Corporation will utilize both internal and external resources
          to reprogram resources, or replace, and test the software for
          Year 2000 modifications. The Corporation plans to complete the
          Year 2000 project within one year or not later than December 31,
          1998. Cost incurred to date as well as for the 1998 fiscal year
          for the Year 2000 project are considered normal operating costs
          by the Corporation. All Year 2000 conversion software and
          modifications are being delivered and executed by the
          Corporation's various software vendors in which the Corporation
          deals with for its many different computer processing and
          transaction functions. The Corporation does not anticipate
          significant expenses incurred or charged to the Year 2000 Issue
          due to its many software, maintenance, and licensing agreements
          with its software vendors.
          
          The costs of the project and the date on which the Corporation
          plans to complete the Year 2000 modifications are based on
          management's best estimates, which were derived utilizing
          numerous assumptions of future events including the continued
          availability of certain resources, third party modification plans
          and other factors. However, there can be no guarantee that these
          estimates will be achieved and actual results could differ
          materially from those plans. Specific factors that might cause
          such material differences include, but are not limited to, the
          availability and cost of personnel trained in this area, the
          ability to locate and correct all relevant computer codes, and
          similar uncertainties. 
          
          
          
          Recent Accounting Pronouncements:
          
          The Financial Accounting Standards Board issued Statement of
          Financial Accounting Standards No. 130 "Reporting Comprehensive
          Income" (SFAS 130) in 1997. SFAS 130 establishes standards for
          reporting and display of comprehensive income and its components,
          which includes all change in stockholders' equity during a period
          except those resulting from investments by owners and
          distributions to owners. SFAS 130 requires that comprehensive
          income be reported in the financial statements with the same
          prominence as other items currently reported in the financial
          statements. SFAS 130 is effective for fiscal years beginning
          after December 15, 1997. As SFAS 130 does not discuss the
          recognition or measurement of comprehensive income, the adoption
          of SFAS 130 will not have a material effect on the Corporation's
          financial condition or results of operations.
          
          The Financial Accounting Standards Board issued Statement of
          Financial Accounting Standards No. 131, "Disclosure About
          Segments of an Enterprise and Related Information" (SFAS 131) in
          1997. SFAS 131 establishes standards for disclosures about
          products, services, geographic areas, and major customers. SFAS
          131 is effective for fiscal years beginning after December 15,
          1997. Adoption of SFAS 131 will not have a material effect on the
          Corporation's financial condition or results of operations.
          
          The Financial Accounting Standards Board issued Statement of
          Financial Accounting Standards No. 132, "Employers' Disclosure
          about Pensions and Other Postretirement Benefits" (SFAS 132) in
          January, 1998. SFAS 132 revises current note disclosure
          requirements for employers' pensions and other retiree benefits.
          It does not address recognition or measurement issues. SFAS 132
          is effective for fiscal years beginning after December 15, 1997.
          Adoption of SFAS 132 will not have a material effect on the
          Corporation's financial Condition or results of
          operations.