Annual Report (Form 10-K), fiscal year 1994

Item 1. Business:
Community Banks, Inc. (Bank) is a bank holding company whose banking subsidiary is Community Banks, N.A. (CBNA) and whose non-banking subsidiaries are Community Banks Investments, Inc. (CBI) and Community Banks Life Insurance Company, Inc. (CBLIC).
The Bank conducts a full service commercial banking business and provides trust services in northern Dauphin County, Northumberland County, western Schuylkill County, and southern Luzerene County. The Bank currently has fifteen offices. There are 57 offices of commercial banks and savings and loan associations within its market area with which the Bank competes. Deposits of the Bank represent approximately 11% of the total deposits in the market area. The Bank has six offices in Dauphin County, two offices in Northumberland County, five offices in Schuylkill County, and two offices in Luzerne County.
Like other depository institutions, the Bank has been subjected to competition from brokerage firms, money market funds, consumer finance and credit card companies and other companies providing financial services and credit to consumers. As a result of federal legislation, regulatory restrictions previously imposed on the Bank with respect to establishing money market fund accounts have been eliminated and the Bank is now better able to compete with other financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.
During 1986 the Bank formed CBLIC to provide credit life insurance to its consumer credit borrowers. Total premiums earned were $396,000 for the year ended December 31, 1994. During 1985 the Bank formed CBI to make investments primarily in equity securities of other banks. Total assets of CBI at December 31, 1994 were $1,735,000.
The Bank has approximately 172 full and part-time employees and considers its employee relations to be satisfactory.
Community Banks, Inc. is registered as a bank holding company with the Board of Governors of the Federal Reserve System in accordance with the requirements of the Bank Holding Company Act of 1956. It is subject to regulation by the Federal Reserve Board and the Comptroller of the Currency.
In 1989, the Federal Reserve Board issued final risk-based capital guidelines for bank holding companies which were phased in through December 31, 1992. The intent of regulatory capital guidelines is to measure capital adequacy based upon the credit risk of various assets and off-balance sheet items. Risk categories, weighted at 0%, 20%, 50% and 100%, are specifically identified. The sum of the results of each such category is then related to the adjusted capital account of the Company. A minimum required capital ratio at December 31, 1994, was 8 percent. The Bank's December 31, 1994 ratio approximated 17%. Subsequently, in August 1990 the board announced approval of capital to total assets (leverage) guidelines. This minimum leverage ratio was set at 4% and would apply only to those banking organizations receiving a regulatory composite 1 rating. Most banking organizations will be required to maintain a leverage ratio ranging from 1 to 2 percentage points above the minimum standard. The Bank's leverage ratio at December 31, 1994, approximated 10.%. Risk-based capital requirements replace previous capital guidelines which established minimum primary and total capital requirements.
				 The following summarizes the Bank's capital adequacy position:
						 Required 			 Bank Regulatory Capital (in thousands) December 31, 1994 December 31, 1994
Risk-based capital $34,136 17.2% $15,877 8.0% Leverage ratio (tier 1 capital) 30,740 10.0% 12,296 4.0%
Statistical Data: 	 Pages 18 through 20 of the Community Banks, Inc. Annual report to stockholders dated December 31, 1994 contain information concerning:
Financial Highlights
Average Balances, Effective Interest Differential, and Interest Yields for the three years ended December 31, 1994.
Rate/Volume Analysis for the two years ended December 31, 1994.
	Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 1994. 			 Amortized cost and Estimated Market Values of Investment Securities as of December 31, 1994, 1993, and 1992.
Maturity Distribution of Securities as of December 31, 1994 (Market Value).
Loan Account Composition as of December 31, 1994, 1993, 1992, 1991, and 1990.
Maturities and Sensitivity to Changes in Interest Rates for Commercial, Financial, and Agricultural Loans as of December 31, 1994.
Nonperforming Loans as of December 31, 1994, 1993, 1992, 1991, and 1990.
Loan Loss Experience for the five years ended December 31, 1994.
Loans Charged Off and Recovered for the five years ended December 31, 1994.
Allowance for Loan Losses as of December 31, 1994, 1993, 1992, 1991, and 1990.
Maturity Distribution of Time Deposits over $100,000 as of December 31, 1994.
Interest Rate Sensitivity as of December 31, 1994.
Item 2.



Item 2. Properties:
	 The Bank owns no real property except through its subsidiary bank, CBNA which owns the following buildings: 150 Market Street, Millersburg, Pennsylvania (its corporate headquarters); 13-23 South Market Street, Elizabethville, Pennsylvania; 3679 Peters Mountain Road, Halifax, Pennsylvania; 906 N. River Road, Halifax, Pennsylvania; 800 Peters Mountain Road, Dauphin, Pennsylvania; Main and Market Streets, Lykens, Pennsylvania; Route 209, Porter Township, Schuylkill County, Pennsylvania; 29 E. Main Street, Tremont, Schuylkill County, Pennsylvania; Second and Carroll Streets, St. Clair, Schuylkill County, Pennsylvania; R.D. 3, Mill Creek Manor, Pottsville, Schuylkill County, Pennsylvania; 300 East Independence Street, Shamokin, Northumberland County, Pennsylvania; Route 61, R.D. 1, Orwigsburg, Schuylkill County, Pennsylvania; One South Arch Street, Milton, Northumberland County, Pennsylvania; 4 West Broad Street, Hazleton, Luzerne County, Pennsylvania; and Route 93, Conyngham, Luzerne County, Pennsylvania. In addition thereto, CBNA leases an office on Main Street, Pillow, Pennsylvania, pursuant to a lease which, with renewal options, will extend to the year 2008. From time to time, the subsidiary bank also acquires real estate by virtue of foreclosure proceedings, which real estate is disposed of in the usual and ordinary course of business as expeditiously as is prudently possible.
All the buildings used by the Bank are free-standing and are used exclusively for banking purposes with the exception of offices and retail space rented at the St. Clair and Milton locations.
Item 3.

Item 3. Legal Proceedings:
There are no material pending legal actions, other than routine litigation incidental to the business of the Bank, to which the Bank is a party.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders:
No matters were submitted to a vote of security holders during the fourth quarter of 1994.
			
																										
																							
								 APPENDIX A 								 Continued 					
				 INTEREST RATE SENSITIVITY
	 The excess of interest-earning assets over interest-bearing liabilities which are expected to mature or reprice within a given period is commonly referred to as the "GAP" for that period. For an institution with a negative GAP, the amount of income earned on its assets fluctuates less than the cost of its liabilities in response to changes in the prevailing rates of interest during the period. Accordingly, in a period of decreasing interest rates, institutions with a negative GAP will experience a smaller decrease in the yield on their assets than in the cost of their liabilities. Conversely, in a period of rising interest rates, institutions with a negative GAP face a smaller increase in the yield on their assets than in the cost of their liabilities. A decreasing interest rate environment is favorable to institutions with a negative GAP because more of their liabilities than their assets adjust during the period and, accordingly, the decrease in the cost of their liabilities is greater than the decrease in the yield on their assets.
	 The negative GAP between the Bank's interest-earning assets and interest-bearing liabilities maturing or repricing within one year approximated 10.3% of total assets at December 31, 1994.
	 Significant maturity/repricing assumptions include the presentation of all savings and NOW accounts as being 100% interest rate sensitive. Equity securities are reflected in the shortest time interval. Assumed paydowns on mortgage-backed securities and loans have also been included in all time intervals.
	 The following table sets forth the scheduled repricing or maturity of the Bank's interest-earning assets and interest-bearing liabilities at December 31, 1994.
					 PART II
Item 5.

Item 5. Market for Registrant's Common Stock and 	 Related Stockholder Matters:
	 Incorporated by reference is the information appearing under the heading "Market for the Holding Company's Common Stock and Related Securities Holder Matters" on page 3 of the Annual Report to Stockholders for the year ended December 31, 1994 (hereafter referred to as the "Annual Report").
Item 6.

Item 6. Selected Financial Data:
	 Incorporated by reference is the information appearing under the heading "Financial Highlights" on page 18 of the Annual Report.
Item 7.

Item 7. Management's Discussion and Analysis of Financial 	 Condition and Results of Operations:
	 Incorporated by reference is the information appearing under the headings "Rate/Volume Analysis"; "Average Balances, Effective Interest Differential and Interest Yields"; and "Management's Discussion of Financial Condition and Results of Operations" on pages 19 through 23 of the Annual Report.
Item 8.


Item 8. Financial Statements and Supplementary Data:
	 The consolidated financial statements, together with the report thereon of Coopers & Lybrand L.L.P. dated January 15, 1995, are incorporated by reference to pages 6 through 18 of the Annual Report.
Item 9.

Item 9. Disagreements on Accounting and Financial Disclosures:
	 None.
					 PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant:
	 The following table sets forth the name and age of each director of Community Banks, Inc. as well as the director's business experience, including occupation for the past 5 years, the period during which he has served as a director of the Bank, or its wholly-owned subsidiary, Community Banks, N.A. (Formerly Upper Dauphin National Bank), and the number and percentage of outstanding shares of Common Stock of the Bank beneficially owned by said directors as of December 31, 1994.
Compliance with Section 16(a) of Securities Exchange Act
	 In 1994, to the knowledge of CBI, all directors filed on a timely basis reports required by the Securities Exchange Commission.
	 None of the directors or nominee directors are directors of other companies with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
	
Item 11.

Item 11. Executive Compensation: 	 	 Information regarding executive compensation is omitted from this report as the holding company has filed a definitive proxy statement for its annual meeting of shareholders to be held May 2, 1995; and the information included therein with respect to this item is incorporated herein by reference.
Pension Plan:
	 The Bank maintains a pension plan for its employees. An employee becomes a participant in the pension plan on January 1 or July 1 after completion of one year of service (12 continuous months) and attainment of the age 21 years. The cost of the pension is actuarially determined and paid by the Bank. The amount of monthly pension is equal to 1.15% of average monthly pay up to $650, plus .60% of average monthly pay in excess of $650, multiplied by the number of years of service completed by an employee. Average
monthly pay is based upon the 5 consecutive plan years of highest pay preceding retirement. The maximum amount of annual compensation used in determining retirement benefits is $150,000. A participant is eligible for early retirement after attainment of the age of 60 years and the completion of 5 years of service. The early retirement benefit is the actuarial equivalent of the pension accrued to the date of early retirement. Thomas L. Miller and Ernest L. Lowe have been credited with 36 and 10 years of service, respectively, under the pension plan as of December 31, 1994. The amounts shown on the following table assume an annual retirement benefit for an employee who chose a straight-line annuity and who is presently 50 years old and who will retire at the age of 65 years.
	 Directors' Compensation:
	 Each director of CBI is paid a quarterly fee of $600.00. In addition, each outside director receives a fee of $200.00 for attendance at the regular quarterly meetings of the Board of Directors of CBI. Each director who is not an executive officer also receives $150 for attendance at each committee meeting of CBI.
Item 12.

Item 12. Security Ownership of Certain Beneficial 	 Owners and Management:
	 Refer to Item 10 on pages 13 through 16.
Item 13.

Item 13. Certain Relationships and Related Transactions:
	 (a) Transactions with Management and Others
	 Incorporated by reference is the information appearing in Note 12 (Related Parties) of Notes to Consolidated Financial Statements on page 14 of the Annual Report.
	 (b) Certain Business Relationships
	 Allen Shaffer, a director of the Bank, is an attorney practicing in Harrisburg and Millersburg, Pennsylvania, who has been retained in the last two fiscal years by the Bank and who the Bank proposes to retain in the current fiscal year. James A. Ulsh, a director of the Bank, is a shareholder/employee of the law firm of Mette, Evans & Woodside, Harrisburg, Pennsylvania, which the Bank has retained in the last two fiscal years and proposes to retain in the current fiscal year.
	 All loans to directors and their business affiliates, executive officers and their immediate families were made by the subsidiary bank in the ordinary course of business, at the subsidiary bank's normal credit terms, including interest rates and collateralization prevailing at the time for comparable transactions with other non-related persons, and do not represent more than a normal risk of collection. 						 PART IV
Item 14.

Item 14. Exhibits, Financial Statements Schedules and 	 Reports on Form 8-K: 								Reference (page) 								 Annual 							 Form Report to 							 10-K Shareholders (a) (1) Consolidated Financial Statements 	 Report of Independent Public 	 Accountants -- 18
	 Balance Sheets as of December 31, 1994 	 and 1993 -- 6
	 Statements of Income for each of the three years 	 ended December 31, 1994 -- 7
	 Statements of Changes in Stockholders' 	 Equity for each of the three years ended 	 December 31, 1994 -- 8
	 Statements of Cash Flows for each of the three 	 years ended December 31, 1994 -- 8
	 	 Notes to Financial Statements -- 9-17
	 All other schedules are omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule.
(3) Exhibits
	 (3) Articles of Incorporation and By-Laws. Incorporated Registration by reference to the Proxy Statements dated April 14, 1987 and April 12, 1988 and Amendment 2 to Form S-2 dated May 13, 1987.
	 (13) Portions of the Annual Report to Security Holders incorporated by within this document.
	 (21) Subsidiaries of the Registrant (see Item 1, pages 2 and 3).
(b) The registrant did not file on Form 8-K during the Fourth quarter of the Fiscal year ended December 31, 1994.
			 CONSENT OF INDEPENDENT ACCOUNTANTS 	 	 	 We consent to the incorporation by reference in the registration statements of Community Banks, Inc. on Form S-8 (File No. 0-15786 and File No. 33-24908) of our report, dated January 13, 1995 on our audits of the consolidated financial statements of Community Banks, Inc. as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993, and 1992, which report is incorporated by reference in this Annual Report on Form 10-K. 	 	 						 Signature 						 						 /S/ Coopers & Lybrand L.L.P.
	 	 	 	 One South Market Square 	 Harrisburg, Pennsylvania 	 March 22, 1995 	 	
		 			 Signatures
	 Pursuant to the requirements of Section 13 or 15 (d) 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. 										 		 By:/S/__Thomas L. Miller_____ 			 (Thomas L. Miller) 				 Chairman 			 Chief Executive Officer 			 and Director
Date: March 17, 1995
	 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ Terry L. Burrows Ex. Vice President and 3/17/95 (Terry L. Burrows) Principal Financial Officer
/S/ Ronald E. Boyer Director 3/17/95 (Ronald E. Boyer)
/S/ Samuel E. Cooper Director 3/17/95 (Samuel E. Cooper)
/S/ Kenneth L. Deibler Director 3/17/95 (Kenneth L. Deibler)
/S/ Ray N.Leidich Director 3/17/95 (Ray N. Leidich)
/S/ Ernest L. Lowe Director 3/17/95 (Ernest L. Lowe)
/S/ Donald L. Miller Director 3/17/95 (Donald L. Miller)
/S/ Robert W. Rissinger_ Director 3/17/95 (Robert W. Rissinger)
/S/ Allen Shaffer _ Director 3/17/95 (Allen Shaffer)
/S/ William C. Troutman Director 3/17/95 (William C. Troutman)
/S/ James A. Ulsh _ Director 3/17/95 (James A. Ulsh)