SECURITIES AND EXCHANGE COMMISSION
                                         
                             Washington, D.C.  20549
                                         
                                    FORM 10-Q
                                         
    QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                                         
                                     OF 1934
                                         
                                         
                     For the Quarter Ended September 30, 1996
                                         
                                         
                                   No. 0-15786             
                             (Commission File Number)
                                         
                                         
                              COMMUNITY BANKS, INC.                       
              (Exact Name of Registrant as Specified in its Charter)
                                         
   
          PENNSYLVANIA                                       23-2251762       
    (State of Incorporation)                          (IRS Employer ID Number)
   
          
          150 Market Street, Millersburg, PA                 17061         
      (Address of Principal Executive Offices)              (Zip Code)
                                         
                                         
                                  (717) 692-4781           
                         (Registrant's Telephone Number)
                                         
                                         
   
   
   Indicate by check mark whether the registrant (1) has filed all reports 
   required to be filed by Sections 12, 13, or 15 (d) of the Securities
   Exchange Act of 1934 during the preceding 12 months (or for such shorter
   period that the registrant was required to file such reports) and (2) has
   been subject to such filing requirements for the past 90 days.
   
   
                                                   Yes  X     No     
   
              Number of Shares Outstanding as of September 30, 1996.
                                         
      CAPITAL STOCK-COMMON                                    2,866,267      
       (Title of Class)                                 (Outstanding Shares)
   
   
   
   
   
   
     
                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                        
                                   Index 10-Q
                                        
     
     Part I
     
     Financial Information.............................................1
     
     Consolidated Balance Sheets.......................................2
     
     Consolidated Statements of Income.................................3
     
     Consolidated Statements of Cash Flows.............................4
     
     Notes to Consolidated Financial Statements........................5-8
     
     Management's Discussion and Analysis of Financial
        Condition and Results of Operation.............................9-11
     
     
     
     Part II
     
     Other information and Signatures..................................12
     
     
     
     
     
     
     
     
     
     
     
                         PART I - FINANCIAL INFORMATION
                                        
                     COMMUNITY BANKS, INC. and SUBSIDIARIES
                                        
                                        
     The following financial information sets forth the operations of
     Community Banks, Inc. and Subsidiaries for the three month and nine
     month periods ending September 30, 1996 and 1995.
     
     
     In the opinion of management, the following Consolidated Balance
     Sheets and related Consolidated Statements of Income and Cash Flows
     reflect all adjustments (consisting of normal recurring accrual
     adjustments) necessary to present fairly the financial position and
     results of operations for such periods.
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
                                             
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
                                       -1-
     
     




   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED BALANCE SHEETS
   (unaudited)
   (dollars in thousands except per share data)
   
                                              
                                              September 30,       December 31,
                                                  1996                1995    
                                               
                                   
   ASSETS                     
   
   Cash and due from banks...................     $ 18,388         $ 14,870
   Interest-bearing time deposits in other 
      banks..................................          790              434
   Investment securities, available for sale
      (market value).........................      128,634          117,426
   Federal funds sold........................         ---             2,215
   Loans.....................................      259,258          243,308
   Less:  Unearned income....................      (12,082)         (11,671)
          Allowance for loan losses..........       (2,622)          (2,574)
          Net loans..........................      244,554          229,063 
   Premises and equipment, net...............        7,827            7,657
   Goodwill..................................        1,208            1,388
   Other real estate owned...................          417              302
   Loans held for sale.......................        2,448            2,206
   Accrued interest receivable and other         
      assets.................................        7,173            6,261
    
      Total assets...........................     $411,439         $381,822 
                                                  ========         ========
   
   LIABILITIES
   
   Deposits:
      Demand.................................     $ 26,842         $ 28,337
      Savings................................      153,738          133,004
      Time...................................      148,316          150,908
      Time in denominations of $100,000 or
       more..................................       12,248           11,848  
      Total deposits.........................      341,144          324,097
   Short-term borrowings.....................       12,989            1,016 
   Long-term debt............................        7,000            7,000
   Accrued interest payable and other 
      liabilities............................        3,168            3,709
      
      Total liabilities......................      364,301          335,822
   
   
   STOCKHOLDERS' EQUITY
   
   Preferred stock, no par value; 500,000
      shares authorized; no shares issued
      and outstanding........................        ---              ---
   Common stock-$5.00 par value; 5,000,000
      shares authorized; 2,882,194 and
      2,611,409 shares issued in 1996 and
      1995, respectively.....................       14,411           13,057
   Surplus...................................        7,160            8,381
   Retained earnings.........................       25,511           22,951
   Net unrealized gain on investment 
    securities available for sale, net of tax          380            1,664  
   Less:  Treasury stock of 15,927 and 3,907 
      shares, respectively, at cost..........         (324)             (53) 
      Total stockholders' equity.............       47,138           46,000 
      Total liabilities and stockholders'
       equity................................     $411,439         $381,822
                                                  ========         ========
   
   All periods reflect the combined data of Community Banks, Inc. and the
   Citizens' National Bank of Ashland.
   
   The accompanying notes are an integral part of the consolidated financial
   statements.
                                    
                                     -2-
   
<TABLE>

   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF INCOME
   (unaudited)
   (dollars in thousands except per share data)
<CAPTION>   
   
                                                        Three Months Ended          Nine Months Ended
                                                          September 30                September 30,        
                                                          1996       1995            1996      1995        
<S>                                                 <C>          <C>            <C>           <C>   
Interest income:
   Interest and fees on loans.................      $    5,719   $    5,352     $   16,704    $   15,336
   Interest and dividends on investment 
    securities:
        Taxable...............................           1,676        1,376          4,510         4,253
        Exempt from federal income tax........             382          494          1,215         1,595
   Other interest income......................              21           69            239           172
        Total interest income.................           7,798        7,291         22,668        21,356 
   
   Interest expense:
   Interest on deposits:  
        Savings...............................             826          753          2,396         2,315 
        Time..................................           1,995        2,058          6,062         5,627
        Time in denominations of $100,000 or
         more.................................             163          152            483           430 
   Interest on short-term borrowings and
    long-term debt............................             238          165            464           545
        Total interest expense................           3,222        3,128          9,405         8,917
        Net interest income...................           4,576        4,163         13,263        12,439
   Provision for loan losses..................             245          170            630           460
        Net interest income after provision 
         for loan losses......................           4,331        3,993         12,633        11,979
   
   Other income:
        Trust department income...............              65           59            197           157 
        Service charges on deposit accounts...             249          230            715           643
        Other service charges, commissions
         and fees.............................              56           61            167           211
        Investment security gains ............               4           63            281           139
        Income on insurance premiums..........             189          168            486           431
        Gains on mortgage sales...............              47           60            117           126  
        Other income..........................              38           75            118           164
             Total other income...............             648          716          2,081         1,871
   Other expenses:
        Salaries and employee benefits........           1,541        1,438          4,595         4,194     
        Net occupancy expense.................             448          418          1,367         1,174
        Operating expense of insurance
          subsidiary..........................              63           43            250           247
        Other operating expense...............             920        1,104          2,852         3,214
             Total other expense..............           2,972        3,003          9,064         8,829
             Income before income taxes.......           2,007        1,706          5,650         5,021
   Provision for income taxes.................             546          385          1,403         1,179
             Net income.......................      $    1,461   $    1,321      $   4,247     $   3,842 
                                                    ==========   ==========      =========     =========
   Average number of fully diluted shares         
    outstanding...............................       2,911,458    2,896,127      2,913,262     2,894,660
                                                    ==========    =========      =========     =========
   Earnings per share: 
      Primary.................................      $      .51   $      .46      $    1.48     $    1.34
      Fully diluted...........................      $      .50   $      .46      $    1.46     $    1.33
   Dividends paid per share...................      $      .20   $      .17      $     .58     $     .52
   
   Per share data has been adjusted to reflect a 10 percent stock dividend
   payable May 30, 1996.
   
   All periods reflect the combined data of Community Banks, Inc. and the
   Citizens' National Bank of Ashland.
   
   The accompanying notes are an integral part of the consolidated financial 
   statements.
                                       -3-      
  </TABLE> 
   
   
   Community Banks, Inc. and Subsidiaries
   CONSOLIDATED STATEMENTS OF CASH FLOWS
   (unaudited)
   (dollars in thousands)
   
                                                           Nine Months Ended
                                                              September 30  
                                                            1996       1995   
   
   
   Operating Activities:
      Net income......................................   $ 4,247      $ 3,842 
      Adjustments to reconcile net income to net
       cash provided by operating activities:
         Provision for loan losses....................       630          460
         Provision for depreciation and amortization..       700          651
         Amortization of goodwill.....................       180          181
         Investment security gains....................      (281)        (139)
         Loans originated for sale....................    (6,034)      (6,603) 
         Proceeds from sales of loans.................     5,909        4,422
         Gains on mortgage sales......................      (117)        (126)
         Increase in other assets.....................      (912)         (89)
         Increase in accrued interest payable  
          and other liabilities.......................       119          503  
           Net cash provided by operating activities..     4,441        3,102  
   
   Investing Activities:
      Net decrease (increase) in interest-bearing time                    
       deposits in other banks........................      (356)          70
      Proceeds from sales of investment           
       securities.....................................     1,092          347
      Proceeds from maturities of investment 
       securities.....................................    20,109       15,391
      Purchases of investment securities..............   (34,072)      (1,077) 
      Net increase in total loans.....................   (16,236)     (17,893)
      Purchases of premises and equipment.............      (870)        (949)
           Net cash used by investing activities......   (30,333)      (4,111)
   Financing Activities:
      Net increase in total deposits..................    17,047       10,736  
      Net increase (decrease) in short-term borrowings    11,973       (7,783)
      Net increase in long-term debt..................       ---        --- 
      Repayment of subordinated capital notes.........       ---          (15)
      Cash dividends..................................    (1,686)      (1,488)
      Proceeds from issuance of common stock..........       132           55
      Purchases of treasury stock.....................      (271)        --- 
           Net cash provided by financing activities..    27,195        1,505
       
           Increase in cash and cash
            equivalents...............................     1,303          496
            
            
   Cash and cash equivalents at beginning of period...    17,085       15,105
   Cash and cash equivalents at end of period.........   $18,388      $15,601 
                                                         =======      =======
   
   
   All periods reflect the combined data of Community Banks, Inc. and the
   Citizens' National Bank of Ashland.
   
   The accompanying notes are an integral part of the consolidated financial
   statements.
   
                                      -4-      
   
   
   
   
   
                                           
   Community Banks, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (unaudited)
   (dollars in thousands)
                                          
   
   1.  Accounting Policies
             The information contained in this report is unaudited and is
   subject to future adjustments. However, in the opinion of management, the
   information reflects all adjustments necessary for a fair statement of
   results for the three month and nine month periods ended September 30, 1996
   and 1995.
   
             The accounting policies of Community Banks, Inc. and subsidiaries,
   as applied in the consolidated interim financial statements presented herein,
   are substantially the same as those followed on an annual basis as presented
   on page 9 of the 1995 Annual Report to shareholders, except for the adoption
   of Statements of Financial Accounting Standards No. 114 and 118 effective
   January 1, 1995, which had no impact on the provision for loan losses or the
   allowance for loan losses.    
   
   
   2.  Investment Securities
            The amortized cost and estimated market values of investment
   securities at September 30, 1996 and December 31, 1995, were as follows:
   
   
                                                           1996
                                                           
                                                                                
                                                                  Estimated
                                                Amortized           Market
                                                  Cost              Value  
   
   U.S. Treasury securities and obligations
    of U.S. government corporations and
     agencies...............................    $ 40,181          $ 40,120
   Mortgage-backed U.S. government 
    agencies................................      51,071            50,492
   Obligations of states and political
    subdivisions............................      30,172            30,542
   Corporate securities.....................       3,310             3,329  
   Equity securities........................       3,323             4,151 
         Total..............................    $128,057          $128,634 
                                                ========          ======== 
   
   
                                                           1995
                                                                          
   U.S. Treasury securities and obligations 
    of U.S. government corporations and
     agencies...............................    $ 27,719          $ 28,031
   Mortgage-backed U.S. government 
    agencies................................      45,888            46,153
   Obligations of states and political
    subdivisions............................      34,067            34,941
   Corporate securities.....................       3,990             4,123   
   Equity securities........................       3,241             4,178
         Total..............................    $114,905          $117,426
                                                ========          ======== 
                                       
                                       -5-           
   
                                       





                                      

   
   
   
   
   3.  Allowance for loan losses
            Changes in the allowance for loan losses are as follows:
   
                                          Nine months ended    Year Ended
                                            September 30       December 31,
                                                1996               1995     
   
   Balance, January 1..................       $2,574               $2,347
   Provision for loan losses...........          630                  728
   Loan charge-offs....................         (929)                (825)
   Recoveries..........................          347                  324
   
   Balance, September 30, 1996 and 
    December 31, 1995..................       $2,622               $2,574
                                              ======               ======
   
                   NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
   
                                            September 30,        December 31,
                                                1996                 1995     
   
   Loans past due 90 days or more
    and still accruing interest:
      Commercial, financial and 
       agricultural...................         $   65               $  120
      Mortgages.......................            606                  558
      Personal installment............            165                  236
      Other...........................             22                  ---
                                                  858                  914
   
   Loans renegotiated with the borrowers         NONE                 NONE
   
   Loans on which accrual of interest
    has been discontinued:
      Commercial, financial and
       agricultural....................           282                  415 
      Mortgages........................         1,139                1,245 
      Other............................           264                   99
                                                1,685                1,759
    
   Other real estate...................           417                  302
      Total............................        $2,960               $2,975  
                                               ======               ======     
   
   (a)  The determination to discontinue the accrual of interest on
   nonperforming loans is made on the individual case basis. Such factors as
   the character and size of the loan, quality of the collateral and the
   historical creditworthiness of the borrower and/or guarantors are considered
   by management in assessing the collectibility of such amounts.  
   
   Impaired Loans
        The Corporation adopted FAS 114 "Accounting by Creditors for Impairment
   of a Loan", as amended by FAS 118, on January 1, 1995. Under the new
   standard, a loan is considered impaired, based on current information and
   events, if it is probable that the Corporation will be unable to collect the
   scheduled payments of principal or interest when due according to the
   contractual terms of the loan agreement. For purposes of applying FAS 114,
   larger groups of smaller-balance loans such as residential mortgage and
   installment loans are collectively evaluated for impairment. Management has
   established a smaller-dollar-value threshold of $250,000 for all loans.
   Loans exceeding this threshold are evaluated in accordance with FAS 114. An
   insignificant delay or shortfall in the amount of payments, when considered 
   
                                      -6-
   
   
   
   independent of other factors, would not cause a loan to be rendered
   impaired. Insignificant delays or shortfalls may include, depending on
   specific facts and circumstances, those that are associated with temporary
   operational downturns or seasonal business delays.
   
        Management performs periodic reviews of its loans to identify impaired
   loans. The measurement of impaired loans is based on the present value of
   expected future cash flows discounted at the historical effective interest
   rate, except that all collateral-dependent loans are measured for impairment
   based on the fair value of the collateral. The adoption of FAS 114 did not
   result in an additional provision for credit losses at January 1, 1995.
   
        Loans continue to be classified as impaired unless they are brought
   fully current and the collection of scheduled interest and principal is
   considered probable. When an impaired loan or portion of an 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 September 30, 1996, the Corporation recorded no investment in
   impaired loans recognized in accordance with FAS 114 and no related FAS 114
   valuation allowance. For the nine month period ended September 30, 1996, the
   average balance of impaired loans was negligible. The application of FAS 114
   has not had any effect on the comparability of the non-performing loan table
   in footnote 3 between the periods presented. The company recognized no
   interest on impaired loans on the cash basis.  
                                         
   
   4.  Statement of Cash Flows
            Cash and cash equivalents include cash and due from banks and
   federal funds sold. The company made cash payments of $1,479,000 and
   $1,087,000, and $9,114,000 and $8,378,000 for income taxes and interest,
   respectively, for each of the nine month periods ended September 30, 1996
   and 1995.
   
            Excluded from the consolidated statements of cash flows for the
   periods ended September 30, 1996 and 1995 was the effect of certain non-cash
   activities. The company acquired real estate through foreclosure totalling
   $650,000 and $563,000, respectively. The company also recorded a decrease in
   deferred tax liabilities of $660,000 in 1996, and a decrease of $1,039,000
   in deferred tax assets in 1995. In addition, an increase in deferred tax
   liabilities of $235,000 was recognized in 1995. These variations related to
   the effects of changes in the net unrealized gain (loss) on investment
   securities available for sale.
   
   
   5.  Merger
            On January 12, 1996, Community Banks, Inc., (Community) completed
   its merger of Citizens National Bank of Ashland (Citizens). Citizens has
   three banking offices which are located in Ashland, Gordon, and Lavelle,
   Pennsylvania. Community issued 578,081 shares of common stock for all of the
   outstanding common stock of Citizens. This transaction was accounted for as 
   
   
                                      -7-
   
   
   
   
   
   
   
   
   
   
   a pooling of interests and combined unaudited financial information is as
   follows:
   
   
                                 Nine Months Ended September 30, 1995 
                            (dollars in thousands except per share data)
              
                              Community          Citizens'          Combined
   
   Interest income            $18,121             $3,235            $21,356
   Interest expense             7,554              1,363              8,917
   Net interest income         10,567              1,872             12,439 
   Loan loss provision            460                ---                460
   Other income                 1,737                134              1,871
   Other expense                7,497              1,332              8,829
   Income before taxes          4,347                674              5,021 
   Taxes                        1,063                116              1,179 
   
                                                                               
   Net income                 $ 3,284             $  558            $ 3,842 
                            ===============================================
   
   Earnings per common share:
   
      Net income               $ 1.45              $0.88             $ 1.33  
   
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                    -8-
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      



                                       



   
   
   
   
   
                    Community Banks, Inc. and Subsidiaries
                     Management's Discussion and Analysis
               of Financial Condition and Results of Operations
                                       
   Results of Operations
                                       
        Net interest income after provision for loan losses for the first
   nine months of 1996 was $654,000 or 5.5% greater than net interest
   income after provision for loan losses for the first nine months of
   1995. Total interest income increased $1,312,000 or 6.1% during the
   period while total interest expense increased $488,000 or 5.5%. Average
   earning assets were approximately 5.2% greater during the first nine
   months of 1996 than the first nine months of 1995. Average loan balances
   increased 9.8% while average investment securities decreased
   approximately 3.0% in 1996. Average interest-bearing liabilities
   increased approximately 6.0%. The average yields realized on earning
   assets approximated 8.2%  during the first nine months of 1996 and 1995.
   The average costs of interest-bearing liabilities approximated 3.9% and
   for the same periods. Net interest margins on a tax equivalent basis
   approximated 5.1% for the first nine months of 1996 and 1995. The
   provision for loan losses charged to income increased 37.0% in 1996.
   Total loans past due 90 days and still accruing interest, non-performing
   loans, and other real estate approximated $2,960,000 and $2,975,000,
   respectively, as of September 30, 1996 and December 31, 1995.  
   
        Total other income for the first nine months of 1996 was $210,000
   or 11.2% more than total other income for the first nine months of 1995.
   Affecting this change were security gains of $281,000 and $139,000 
   recognized in 1996 and 1995, respectively. Gains recognized on mortgage
   sales totalled $117,000 and $126,000, respectively in 1996 and 1995.
   Loans held for sale are comprised for the most part of fixed-rate real
   estate and education loans extended specifically for resale. Demand for
   these products has been lower in 1996 than 1995. Loans held for sale as
   of September 30, 1996 totalled $2,448,000. The market value of these
   loans approximated book value at that time. Total other expenses for the
   first nine months of 1996 increased $235,000 or 2.7%. Contributing
   factors were increases of $401,000 or 9.6% in salaries and employee
   benefits and $193,000 in net occupancy expense. Affecting these
   increases were three new banking offices located in Hazleton,
   Rutherford, and Valley View, Pennsylvania.  
   
        The provision for income taxes increased $224,000 for the first
   nine months of 1996 in comparison to the first nine months of 1995.
   Affecting this increase was a decline in tax-free income in 1996. The
   effective tax rates approximated 24.8% and 23.5% for the respective
   periods.  
   
        The previously described factors contributed to a net increase of
   $405,000 or 10.5% in net income for the nine month period ended
   September 30, 1996.
       
        The significant changes and related causes which occurred during
   the three month period ending September 30, 1996 were generally
   consistent with those described for the nine month period ending
   September 30, 1996. Gains on mortgage sales were $47,000 and $60,000,
   respectively, for the three month periods ending September 30, 1996 and
   1995 while investment security gains were $4,000 and $63,000
   respectively.
   
   
   
                                     -9-
   
   
   
   
   
   
   
    
      
   
               
                                    
   
   
   
   
   Management's Discussion, Continued
   
   
   Financial Condition
   
        As of September 30, 1996 cash and due from banks was $3,518,000 or
   23.7% greater than it was at December 31, 1995. Affecting this increase
   were the previously noted new banking offices. Interest-bearing time
   deposits in other banks, investment securities, and federal funds sold
   increased $9,349,000 or 7.8% during this same period. The approximate
   market value of debt securities was $251,000 less than amortized cost at
   September 30, 1996. The approximate market value of debt securities was
   $1,584,000 more than amortized cost at December 31, 1995. 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 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
   September 30, 1996 and December 31, 1995, management classified
   investment securities with amortized costs and market values of
   $128,057,000 and $128,634,000, and $114,905,000 and $117,426,000,
   respectively, as available for sale. Gross unrealized gains and losses
   relating to debt securities approximated $861,000 and $1,112,000,
   respectively, at September 30, 1996. Net loans increased $15,491,000 or
   6.8% from December 31, 1995 to September 30, 1996. While Real estate
   loans and consumer loans increased approximately $13,295,000 and
   $2,451,000, respectively, during the period, most other types of loans
   experienced modest increases or declines. The allowance for loan losses
   approximated 1.06% and 1.11% of net loans at September 30, 1996 and
   December 31, 1995. Much of the increase in net premises and equipment of
   $170,000 related to the new banking offices. Goodwill continues to be
   amortized at an annualized rate of $240,000. As previously noted,
   Community Banks, Inc. sells only fixed-rate real estate and education
   loans specifically designated for resale on the secondary market and at
   September 30, 1996 and December 31, 1995 these loans totalled $2,448,000
   and $2,206,000, respectively. Affecting the increase of $912,000 in
   accrued interest receivable and other assets was an increase in accrued
   interest. These factors contributed to an increase of $29,617,000 or
   7.8% in total assets from December 31, 1995 to September 30, 1996. 
     
        Total deposits increased $17,047,000 or 5.3% from December 31, 1995
   to September 30, 1996. All of the increase can be attributed to
   increases in savings deposits. It is management's philosophy to
   generally maintain competitive but not overly-aggressive interest rates
   relative to interest-bearing liabilities. Management increased
   short-term borrowings in 1996 in an attempt to better balance rate
   sensitive assets and liabilities and enhance earnings. At September 30,
   1996 long-term debt totalling $7,000,000 was comprised entirely of
   borrowings from the Federal Home Loan Bank of Pittsburgh at a weighted
   average interest rate of 6.15%. Affecting the decline in accrued
   interest payable and other liabilities was a reduction in deferred tax
   liabilities of $660,000. 
                
        Based on a one year interval, rate sensitive assets to rate
   sensitive liabilities approximated 85% as of September 30, 1996.
   
   
    
                                     -10-
   
   
   
   Management's Discussion, Continued 
   
   
   
        As of September 30, 1996 the Corporation had risk-based capital in
   excess of the fully implemented regulatory requirements, and tier 1 plus
   tier 2 capital approximated 18% of risk-weighted assets. Effective
   January 1, 1994, the Corporation adopted the provisions of Statement of
   Financial Accounting Standards No. 115, "Accounting for Certain
   Investments in Debt and Equity Securities," which requires the
   Corporation to reflect securities available and held for sale at fair
   value on the balance sheet. Upon adoption, the Corporation classified
   all investment securities as available for sale and recorded the
   increase to fair value of $2,246,000, net of applicable income taxes, 
   as a separate component of equity. The increase recorded to
   stockholders' equity at September 30, 1996 was $380,000, net of
   applicable income taxes. Management believes that this action is
   necessary to provide for proper administration of the investment
   portfolio and can be accommodated by the capitalization of the
   Corporation.  
   
   Liquidity 
        
        Liquidity is the ratio of net liquid assets to net liabilities. 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.
   There was an adequate relationship of liquid assets to short-term
   liabilities at September 30, 1996.
   
   
   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 CBI. Increased loan demand is anticipated
   for the remainder of 1996 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.     
   
        The Corporation is anticipating the maintenance of a favorable net
   interest margin throughout the remainder of 1996.
   
   Other Events
   
        On April 22, 1996, the Corporation announced plans to repurchase up
   to 130,500 shares or 5% of its outstanding common stock. The repurchases
   will be made from time to time in open market transactions. The
   repurchased shares will become Treasury shares and will be used for
   general corporate purposes, including grants under its Employee Stock
   Option Plans.
   
        The Corporation declared a 10% stock dividend payable May 30, 1996,
   to shareholders of record on May 15, 1996. 
   
   
                                      
                                    -11-
    
   
   
   
   
   
            

    
    
    
    
    
    
    
                      COMMUNITY BANKS, INC. and SUBSIDIARIES
                                          
                     PART II - OTHER INFORMATION AND SIGNATURES
    
    
    Item 6.  Exhibits and Reports on Form 8-K
    
             (a)  Exhibits - none
    
             (b)  Registrant was not required to file any reports
                  on  Form 8-K during the quarter ending September 30, 1996.
    
             
                                          
                                          
                                          
                                     SIGNATURES
    
    Pursuant to the requirements of the Securities Exchange Act of 1934, the
    Registrant has duly caused this report to be signed on its behalf by the
    undersigned thereunto duly authorized.
    
                                                COMMUNITY BANKS, INC.
                                                (Registrant)
    
    
    Date    November 8, 1996                    /S/ Thomas L. Miller   
                                                    Thomas L. Miller
                                                         Chairman     
                                               (Chief Executive Officer)
                                              
    
    
    Date    November 8, 1996                    /S/ Terry L. Burrows   
                                                    Terry L. Burrows
                                                 Executive Vice-President
                                                 (Chief Financial Officer)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                       -12-