UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                     WASHINGTON, D.C.  20549

                            FORM 10-K 

(Mark One)
   X     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES     
         EXCHANGE ACT OF 1934                    
         For the fiscal year ended December 31, 1996     
                                  OR
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 
         For the transition period from _______ to  _______
Commission file number   0-16276  
  
                           STERLING FINANCIAL CORPORATION                 
                  (Exact name of registrant as specified in its charter)
         Pennsylvania                               23-2449551     
(State or other jurisdiction of                  (I.R.S. Employer
 incorporation or organization)                 Identification No.)
                                 
101 North Pointe Boulevard                
Lancaster, Pennsylvania                             17601-4133     
(Address of principal executive offices)            (Zip Code)      

Registrant's telephone number, including area code: (717) 581-6030
Securities registered pursuant to Section 12(b) of the Act: None               
Securities registered pursuant to Section 12(g) of the Act:
             Common Stock, Par Value $5.00 Per Share
                     (Title of class)                                  
   Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this Form 10-K or any 
amendment to this Form 10-K. |X|

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 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    

The aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 28, 1997 was approximately $120,131,630.

The number of shares of Registrant's Common Stock outstanding on February 28,
1997 was 6,224,830. 

Documents Incorporated by Reference

    Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report. 
Sterling Financial Corporation
    Table of Contents

                                                                   Page
    Part I                                                         

     Item 1.  Business.............................................  3
     
     Item 2.  Properties...........................................  5

     Item 3.  Legal Proceedings....................................  6

     Item 4.  Submission of Matters to a Vote of Security Holders..  6

    Part II

     Item 5.  Market for the Registrant's Common Equity and
              Related Stockholder Matters..........................  7

     Item 6.  Selected Financial Data..............................  8

     Item 7.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations..................  9

     Item 8.  Financial Statements and Supplementary Data.......... 32

     Item 9.  Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure.................. 64

   Part III

     Item 10. Directors and Executive Officers of the Registrant... 64

     Item 11. Executive Compensation............................... 64

     Item 12. Security Ownership of Certain Beneficial Owners and
              Management........................................... 64

     Item 13. Certain Relationships and Related Transactions....... 64

   Part IV

     Item 14. Exhibits, Financial Statement Schedules and Reports 
              on Form 8-K.......................................... 65

   Signatures...................................................... 67

<PAGE>
                              PART I

Item 1 - Business

                  Sterling Financial Corporation

     Sterling Financial Corporation (the "Corporation") is a Pennsylvania
business corporation, based in Lancaster, Pennsylvania. The Corporation was
organized on February 23, 1987 and became a bank holding company through the
acquisition on June 30, 1987 of all the outstanding stock of The First National
Bank of Lancaster County, now by change of name, Bank of Lancaster County, N.A.

     In addition, the Corporation also owns all of the outstanding stock of a
non-bank subsidiary, Sterling Mortgage Services, Inc., a mortgage service 
company formed by the Corporation as a wholly owned subsidiary that 
presently is considered inactive.

     The Corporation provides a wide variety of commercial banking and trust
services through its wholly owned subsidiary, Bank of Lancaster County, N.A.
(the "Bank").

     A major source of operating funds for the Corporation is dividends provided
by the Bank.  The Corporation's expenses consist principally of operating
expenses.  Dividends paid to stockholders are, in part, obtained by the
Corporation from dividends declared and paid to it by the Bank. 

     As a bank holding company, the Corporation is registered with the Federal
Reserve Board in accordance with the requirements of the Federal Bank Holding
Company Act and is subject to regulation by the Federal Reserve Board and by the
Pennsylvania Department of Banking.


                     Bank of Lancaster County
                                 

     The Bank is a full service commercial bank operating under charter from the
Comptroller of the Currency.  On July 29, 1863, authorization was given by the
Comptroller of the Currency to The First National Bank of Strasburg to commence
the business of banking.  On September 1, 1980, the name was changed to The 
First National Bank of Lancaster County and at the time of the holding company
reorganization on June 30, 1987, the name was changed to its present name, Bank
of Lancaster County, N.A.  At December 31, 1996, the Bank had total assets of
$763,966,000 and total deposits of $648,205,000.

     The main office of the Bank is located at 1 East Main Street, Strasburg,
Pennsylvania.  In addition to its main office, the Bank had twenty-seven (27)
branches in Lancaster County and one (1) branch in Chester County, Pennsylvania
in operation at December 31, 1996.

     The Bank provides a full range of banking services.  These include demand,
savings and time deposit services, NOW (Negotiable Order of Withdrawal) 
accounts, money market accounts, safe deposit boxes, VISA credit card, and 
a full spectrum of personal and commercial lending activities.  
The Bank maintains correspondent relationships with major banks in New York 
City and Philadelphia.  Through these
correspondent relationships, the Bank can offer a variety of collection and
international services.

     With the installation of three automated teller machines (ATMs) in April of
1983, the Bank was the first financial institution in Lancaster County to join
the MAC (Money Access Center) Network.  The Bank now has 17 ATMs in Lancaster
County.  The Bank became a participating member of the Plus System in the Fall 
of 1984.  This membership entitles the Bank's MAC/Plus cardholders 
to have access to a nationwide network of over 119,000 ATMs.

     The Bank introduced Discount Brokerage Service in July, 1983.  This service
is offered in coordination with TradeStar Investments, Inc., an affiliate of BHC
Securities, Inc. and meets the needs of the commission-conscious investor.  In
1992 the Bank began offering mutual funds to customers.  We believe these
services are important additions to our product line and make a statement about
our progressive attitude in providing financial services for the future.

     The Bank was given permission to open a Trust Department by the Comptroller
of the Currency on May 10, 1971.  The Trust Department provides personal and
corporate trust services.  These include estate planning, administration of
estates and the management of living and testamentary trusts and investment
management services.  Other services available are pension and profit sharing
trusts and self-employed retirement trusts.  Trust Department assets totaled 
over $273 million at December 31, 1996.

     On January 31, 1983, the Bank purchased Town & Country, Inc. which is a
vehicle and equipment leasing company operating in Pennsylvania and other 
states. Its principal office is located at 1097 Commercial Avenue, 
East Petersburg, PA. 
Town & Country, Inc. employs thirty eight (38) people.

     The Bank's principal market area is Lancaster County. Lancaster County is
the sixth largest county in Pennsylvania, in terms of population, behind
Philadelphia, Allegheny, Montgomery, Delaware and Bucks.  Lancaster County, with
an area of 949 square miles has a population of approximately 448,000 people. 
Lancaster's tradition of economic stability has continued, with agriculture,
industry and tourism all contributing to the overall strength of the economy. 
Lancaster County has one of the strongest and most stable economies in the 
state. No single sector dominates the county economy.

     One of the best agricultural areas in the nation, Lancaster County ranks
first among Pennsylvania counties and one of the top 20 farm markets in the
country.  Lancaster County is also one of the leading industrial areas in the
state.  The county is considered a prime location for manufacturing, away from
congested areas, yet close to major east coast markets.  Diversification of
industry helps to maintain the economic stability of the county.  The
unemployment rate of the county in December 1996 was 2.8% which was lower than
the statewide rate (4.9%) and national (5.3%) level.  Lancaster County, with its
many historic sites, well-kept farmlands and the large Amish community has 
become very attractive to tourists and is one of the top tourist 
attractions in the U.S.

     The Bank is subject to intense competition in all respects and areas of its
business from banks and other financial institutions, including savings and loan
associations, finance companies, credit unions and other providers of financial
services.  There are 14 full-service commercial banks with offices in Lancaster
County with some of these banks having branches located throughout Lancaster
County and beyond.  The institutions range in asset size from approximately $203
million to over $57 billion. Four (4) banks in our trade area exceed $5 billion
in assets.  Several banks are part of bank holding companies.  One bank is part
of a bank holding company that has assets in excess of $73 billion while another
bank is part of a bank holding company that has over $45 billion in assets.  Due
to our location, we are in direct competition with the larger banks as well as a
number of smaller banks.  As of December 31, 1996, the Bank ranked, as measured
by total deposits, as the fourth largest in market share within Lancaster County
of the banks doing business in Lancaster County.  The Bank is not, however, the
fourth largest bank in Lancaster County.  As of December 31, 1996, the Bank had
total assets of over $763 million and ranked ninth on this basis among the
commercial banks with offices located in Lancaster County.

     There has not been a material portion of the Bank's deposits obtained 
from a single person or a few persons, including federal, state or 
local governments and agencies thereunder and the loss of any single or any 
few customers would not have a materially adverse effect on 
the business of the bank.

     The Bank has no significant foreign sources or applications of funds.

     As of December 31, 1996, there were 422 persons employed by the Bank, of
which 319 were full-time and 103 were part-time.  These figures do not include
employees of Town & Country, Inc. which employed 38 persons.

     The Bank is subject to regulation and periodic examination by the
Comptroller of the Currency.  Its deposits are insured by the Federal Deposit
Insurance Corporation, as provided by law.

Item 2 - Properties

     The Bank, in addition to its main office, had, at December 31, 1996, a
branch network of 28 offices and 2 off-site electronic MAC/ATM installations. 
All branches are located in Lancaster County with the exception of one office
which is located in Chester County.  Branches at fifteen (15) locations are
occupied under leases and at three branches, the Bank owns the building, but
leases the land.  One off-site MAC/ATM installation is occupied under lease.
All other properties were owned in fee.  All real estate and buildings owned 
by the Bank are free and clear of encumbrances.  The Corporation owns 
no real estate.

   
     The leases referred to above expire intermittently over the years through
2022 and most are subject to one or more renewal options.  Aggregate annual
rentals for real estate paid during 1996 did not exceed three percent of the
Bank's operating expenses.

     On December 4, 1996, the Bank purchased a property located at 1097
Commercial Avenue, East Petersburg, PA, situated on 12.7 acres with a building
containing approximately 123,000 square feet.  The building is used to house the
Bank's Administrative Service Center as well as other departments of the Bank. 
Town & Country, Inc., a wholly owned subsidiary of the Bank, also occupies this
building.  The building is owned in fee by the Bank, free and clear of
encumbrances.

     The building which previously housed the Administrative Service Center was
sold and settlement took place on February 21, 1997.

     The building formerly occupied by Town & Country, Inc. is under agreement 
of sale and settlement should take place on or before April 1, 1997.

     The Bank completed construction of a new headquarters building in 1995 
which includes a branch banking office and also serves as headquarters for 
Sterling Financial Corporation.  Occupancy took place in July of 1995.  
The three-story building contains approximately 53,000 square feet.  
The Bank and the Corporation occupy approximately 43,000 square feet 
while nearly 10,000 square feet has been leased to other tenants.  
The building is owned in fee by the Bank, free and
clear of encumbrances. 
     
Item 3 - Legal Proceedings

     As of December 31, 1996, there were no material pending legal proceedings,
other than ordinary routine litigation incidental to the business, to which the
Corporation or its subsidiaries are a party or by which any of their property is
the subject.

Item 4 - Submission of Matters to a Vote of Security Holders

     There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.  

                             PART II

Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters

     The common stock of the Corporation is not actively traded.  There are
35,000,000 shares of common stock authorized and the total number of shares
outstanding as of December 31, 1996 was 6,220,078.  As of December 31, 1996, the
Corporation had approximately 2,915 holders of record of its common stock.  
There is no other class of common stock authorized or outstanding.  
During 1996, the price range of the common stock known by management to have 
traded was $23.875 to $28.25 per share.  A regular $.15 per share 
dividend, as well as a $.25 per share "Special Dividend", was declared in the 
second quarter of 1995 and is reflected in the table below.  The Corporation is 
restricted as to the amount of dividends that it can pay holders of its 
common stock by virtue of the restrictions on the Bank's ability to pay 
dividends to the Corporation.  See Note 18 to the 1996
Consolidated Financial Statements elsewhere herein.  The Corporation paid a 5%
stock dividend in July 1996.  The following table reflects the bid and asked
prices reported for the common stock at the end of the period indicated and the
cash dividends declared on the common stock for the periods indicated.  All
information has been retroactively restated to give effect to the 5% stock
dividend in 1996.  In the absence of an active market, these prices may not
reflect the actual market value of the Corporation's stock for the periods
reported.

       1996                      Bid               Ask          Dividend
   First Quarter               $25.18            $26.13           $.18
   Second Quarter               26.36             26.60            .18
   Third Quarter                26.25             26.75            .19
   Fourth Quarter               25.25             26.25            .19
  
  
       1995                      Bid               Ask          Dividend
   First Quarter               $27.55            $28.74           $.15
   Second Quarter               28.03             28.98            .40
   Third Quarter                27.79             28.50            .17
   Fourth Quarter               27.31             28.50            .17
  
   
   The prices used in the previous table represent bid and asked prices 
furnishe by F.J. Morrissey & Company; Hopper Soliday & Co., Inc.; Legg Mason 
Wood Walker, Inc.; Prudential Securities; Ryan, Beck & Company; 
or The National Quotation Bureau.  These quotations reflect inter-dealer 
prices, without retail markup, markdown or commission.

     The Corporation maintains a Dividend Reinvestment and Stock Purchase Plan
for eligible shareholders who elect to participate in the plan.  A copy of the
Prospectus for this plan can be obtained by writing to: Bank of Lancaster 
County, N.A. Dividend Reinvestment and Stock Purchase Plan, 101 North 
Pointe Boulevard, Lancaster, Pennsylvania  17601-4133.



Item 6 - Selected Financial Data

     The following selected financial data should be read in conjunction with 
the Corporation's consolidated financial statements and the accompanying 
notes presented elsewhere herein.
<TABLE>
<CAPTION> 
                                       Summary of Operations
(Dollars in thousands, except per share data)
 <S>                        
  Years Ended                    1996       1995        1994        1993       1992 
                             <C>         <C>         <C>         <C>         <C>              
 Interest income.............$  52,558   $  48,850   $  41,931   $  40,092   $  40,284     
 Interest expense............   22,823      21,153      14,926      15,042      17,818       
                                ------      ------      ------      ------      ------        
 Net interest income.........   29,735      27,697      27,005      25,050      22,466        
 Provision for loan losses...      580         534       1,081       2,430       2,296        
                                ------      ------      ------      ------      ------       
 Net interest income after
  provision for loan losses..   29,155      27,163      25,924      22,620      20,170        
 Other income................   10,572       8,293       7,043       8,979       7,926        
 Other expenses..............   26,769      23,423      22,053      21,048      18,922        
                                ------      ------      ------      ------      ------      
 Income before income taxes..   12,958      12,033      10,914      10,551       9,174        

 Applicable income taxes.....    3,147       3,039       2,637       2,749       2,331
                                ------      ------      ------      ------      ------        
 NET INCOME..................$   9,811   $   8,994   $   8,277   $   7,802   $   6,843      
                                ======      ======      ======      ======      ======
 Per Common Share:*
 Net income..................$    1.57   $    1.45   $    1.35   $    1.30   $    1.15      
 Cash dividends declared**.        .74         .89         .58         .54         .48      
 Book value................      11.12       10.79        9.76        8.58        7.56    
 Book value (excluding 
   SFAS 115)...............      10.86       10.51        9.69        8.58        7.56      

 Average shares outstanding  6,235,257   6,204,212   6,128,058   6,013,937   5,916,198     
 Ratios:
 Return on average assets..       1.34%       1.36%       1.38%       1.41%       1.34%    
 Return on average equity..      15.01%      15.02%      15.47%      16.90%      16.99%    
 
 Financial Condition at
 Year-End:
 Assets.................... $  764,072   $ 711,154   $ 633,395   $ 587,883   $ 544,404     
 Loans (net of unearned)...    473,832     426,312     392,649     359,365     348,529        
 Deposits..................    647,036     610,105     537,002     505,680     473,184        
 Stockholders' Equity***...     69,179      63,909      57,285      49,467      42,794        
  
 Average Assets............    732,226     659,335     600,263     555,216     510,439        
</TABLE>
   *Figures prior to 1996 were retroactively restated for various stock 
dividends, a three-for-two stock split on November 30, 1992, 
a two-for-one stock split on September 1, 1994 and for comparative purposes.
  **The dividend in 1995 includes a $.25 per share "Special Dividend" which
was declared in the second quarter of 1995.
 ***Stockholders' Equity prior to 1993 has been restated for the 
retroactive effect of SFAS No. 109.  

Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

    The following discussion provides management's analysis of the consolidated
financial condition and results of operations of Sterling Financial Corporation
(the "Corporation") and subsidiaries, Bank of Lancaster County, N.A. (the 
"Bank") and its subsidiary, Town & Country, Inc. and Sterling 
Mortgage Services, Inc. (presently inactive).  
It should be read in conjunction with the audited
financial statements and footnotes appearing elsewhere in this report.

(All dollar amounts presented in the tables are in thousands, except per share
data.)

Results of Operations Summary

     Net income for 1996 was $9,811,000, an increase of $817,000 or 9.1% over 
the $8,994,000 earned in 1995.  The results of 1995 were $717,000 or 
8.7% higher than the $8,277,000 reported in 1994.  
Earnings per share on net income amounted to
$1.57, $1.45, and $1.35 for the years ended 1996, 1995 and 1994 respectively. 
Earnings per share were computed by dividing net income by the weighted average
number of shares of common stock outstanding which were 6,235,257, 6,204,212 and
6,128,058 for 1996, 1995 and 1994 respectively.  Figures prior to 1996 were
retroactively restated to reflect a 5% stock dividend paid in July 1996 and a
two-for-one stock split in the form of a 100% stock dividend paid in 1994.

     Return on average total assets was 1.34% in 1996 compared to 1.36% in 1995
and 1.38% in 1994.  Return on average stockholders' equity was 15.01% in 1996
compared to 15.02% in 1995 and 15.47% in 1994.

     Growth in earning assets was the primary factor contributing to the
increased earnings in 1996, while in 1995, both volume and an increase in rates
contributed to increased earnings.  As of December 31, 1996, earning assets were
approximately $673 million compared to $629 million at December 31, 1995 and 
$563 million at December 31, 1994.  Average earning assets for 1996 
increased nearly $61 million to approximately $648 million, 
up 10.3% from the prior year.  Similarly, in 1995 average earning 
assets increased approximately $49 million, up 9.1% from 1994.  
The current year increase was primarily due to an increase in
loans while in 1995 it was primarily due to increases in both loans and
investments.

     Average interest-bearing liabilities increased nearly $59 million or 11.3%
in 1996 compared to an increase of nearly $48 million, or 10.2% in 1995.

     The increase in average earning assets exceeded the increase in average
interest-bearing liabilities in both 1996 and 1995. 

     Provision for loan losses increased to $580,000 in 1996 from $534,000 in
1995.  The provision in 1994 was $1,081,000.

     Non-interest income increased $2,279,000 in 1996.  This compares to an
increase of $1,250,000 in 1995.  In 1996, all categories of non-interest income
reflected increases over the previous year.

     Non-interest expenses increased $3,346,000 or 14.3% in 1996 compared to an
increase of $1,370,000 or 6.2% in 1995 over 1994.

     The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories.  However, inflation does have an important impact on the growth of
total assets and on non-interest expenses, which tend to rise during periods of
general inflation.  The level of inflation over the last few years has been
declining.

     The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act") addresses the recapitalization of the bank insurance fund and is designed
to limit risk within the banking industry. On August 8, 1995, the Federal 
Deposit Insurance Corporation (the "FDIC") Board of Directors voted to 
significantly reduce the deposit premiums paid by most Bank Insurance Fund 
(the "BIF")-insured institutions to an average of approximately 4.4 cents 
per $100 of domestic deposits once the FDIC confirmed that the BIF met a 
reserve ratio of 1.25%.  The FDIC determined that the BIF was 
fully recapitalized at the end of May 1995.  As
a result, the Bank received a refund in 1995 in an amount equal to insurance
overpayments for the months June through September.  Under the new assessment
rate schedule for the BIF, the Bank's annual rate went to 4 cents per $100 of
assessable deposits, down from the then current rate of 23 cents per $100.  On
November 14, 1995, the FDIC Board of Directors voted to reduce the insurance
premiums paid on deposits covered by the BIF, effective for the first semiannual
assessment period of 1996.  Under the new rate structure for the BIF, assessment
rates were lowered by 4 cents per $100 of assessable deposits for all risk
categories, subject to the statutory requirement that all institutions pay at
least $2,000 annually for FDIC insurance.  Since the Bank was included in the
lowest premium paying category, the Bank anticipated paying the statutory annual
minimum of $2,000 in 1996.  However, the Deposit Insurance Funds Act of 1996
eliminated the minimum assessment, resulting in a $500 refund (representing the
minimum assessment for the fourth quarter of 1996).  As a result of the above
FDIC action, the Bank experienced a reduction of the FDIC assessment in 1996 
over 1995 as well as a reduction in 1995 over 1994.

     On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 to recapitalize the Savings Association Insurance Fund
("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC") 
and to provide for repayment of the FICO (Financial Institution 
Collateral Obligation) bonds issued by the United States Treasury 
Department.  The FDIC will levy a one-time special assessment on SAIF 
deposits equal to 65.7 cents per $100 of the SAIF-assessable deposit base as of 
March 31, 1995.  During the years 1997, 1998 and 1999, the Bank Insurance Fund 
("BIF") will pay $322 million of FICO debt service, and SAIF will pay 
$458 million.

     During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits.  Individual
institution's assessments will continue to vary according to their capital and
management ratings.  As always, the FDIC will be able to raise the 
assessments as necessary to maintain the funds at their target capital 
ratios provided by law.  After 1999, BIF and SAIF will share the 
FICO costs equally.  Under current estimates, BIF and SAIF assessment 
bases would each be assessed at the rate of approximately 2.43 cents 
per $100 of deposits.  The FICO bonds will mature in 2018-2019, ending the 
interest payment obligation.

     The law provides that BIF and SAIF are to merge to form the Deposit
Insurance Fund ("DIF") at the beginning of 1999, provided that there are no SAIF
institutions in existence at that time.  Merger of the Funds will require state
laws to be amended in those states authorizing savings associations to eliminate
that authorization.  This provision reflects Congress's apparent intent to merge
thrift and commercial bank charters by January 1999; however, no law has yet 
been enacted to achieve that purpose.

     Based on current deposit levels, management expects that the increase in 
the FDIC assessment rate will adversely impact results of operations in an 
amount estimated at $82,000 for 1997. 

     The passage of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 and the Riegle Community Development and Regulatory Improvement Act
may have a significant impact upon the Corporation.  The key provisions pertain
to interstate banking and interstate branching as well as a reduction in the
regulatory burden on the banking industry.  Since September 1995, bank holding
companies may acquire banks in other states without regard to state law.  In
addition, banks can merge with other banks in another state beginning in June
1997.  States may adopt laws preventing interstate branching but, if so, no out-
of-state  bank can establish a branch in such state and no bank in such state 
may branch outside the state.  Pennsylvania recently amended the 
provisions of its Banking Code to authorize full interstate 
banking and branching under Pennsylvania law and to facilitate 
the operations of interstate banks in Pennsylvania.  As a result 
of legal and industry changes, management predicts
that consolidation will continue as the financial services industry strives for
greater cost efficiencies and market share.  Management believes that such
consolidation may enhance its competitive position as a community bank.  There
are numerous proposals before Congress to modify the financial services industry
and the way commercial banks operate.  However, it is difficult to determine at
this time what effect such provisions may have until they are enacted into law. 
Except as specifically described above, management believes that the effect of
the provisions of the aforementioned legislation on the liquidity, capital
resources and results of operations of the Corporation will be immaterial. 
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation, which if they were implemented,
would have a material adverse effect upon the liquidity, capital resources or
results of operations, although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have and in the future may
have a negative impact on the Corporation's results of operations.

     Aside from those matters described above, management does not believe that
there are any trends or uncertainties which would have a material impact on
future operating results, liquidity or capital resources nor is it aware of any
current recommendations by the regulatory authorities which if they were to be
implemented would have such an effect. 



Net Interest Income

     The primary component of the Corporation's net earnings is net interest
income, which is the difference between interest and fees earned on interest-
earning assets and interest paid on deposits and borrowed funds.  For
presentation and analytical purposes, net interest income is adjusted to a
taxable equivalent basis.  For purposes of calculating yields on tax-exempt
interest income, the taxable equivalent adjustment equates tax-exempt interest
rates to taxable interest rates as noted in Table 1.  Adjustments are made using
a statutory federal tax rate of 34% for 1996, 1995 and 1994.

     Table 1 presents average balances, taxable equivalent interest income and
expense and the yields earned or paid on these assets and liabilities.  The
increase in net interest income during 1996 resulted from increased volumes in
average earning assets.  The increases in net interest income during 1995 was 
due primarily to increased volumes and interest rates in average earning 
assets. Average earning assets increased 10.3% in 1996 and 9.1% in 1995.  
These increases were primarily funded with interest-bearing 
liabilities which increased 11.3% in 1996 and 10.2% in 1995.

<PAGE>
Table 1 - Distribution of Assets, Liabilities and Stockholders' Equity
          Interest Rates and Interest Differential-Tax Equivalent Yields  
         (Unaudited)

<TABLE>
<CAPTION>                                          Years ended December 31,
                                      1996                      1995                      1994

                           Average           Annual  Average           Annual  Average           Annual
                           Balance  Interest  Rate   Balance  Interest  Rate   Balance  Interest  Rate
<S>
Assets:                                              
Interest bearing deposits <C>      <C>        <C>    <C>      <C>        <C>   <C>      <C>       <C>            
  with banks..............$    103 $      6   5.72%  $     30 $       2  6.78% $     55 $      2  3.79%
Federal Funds sold.........  7,376      398   5.39%     7,583       449  5.92%    6,247      264  4.24%
     
Investment securities:
  U.S. Treasury securities. 28,789     1,686  5.86%    28,696     1,675  5.84%   26,560    1,471  5.54% 
  U.S. Government agencies. 33,895     2,192  6.47%    27,999     1,761  6.29%   23,353    1,395  5.97% 
  State and Municipal
   securities.............. 57,966     4,615  7.96%    48,884     4,083  8.35%   44,442    3,781  8.51% 
  Other securities......... 57,189     3,535  6.18%    66,990     4,294  6.41%   62,476    3,961  6.34% 
                           -------   ------- ------  --------   ------- ------ --------  ------- -----
Total investment securities177,839    12,028  6.76%   172,569    11,813  6.85%  156,831   10,608  6.76%
Loans:
  Commercial...............245,018    22,276  9.09%   226,032    21,284  9.42%  207,844   17,743  8.54% 
  Consumer.................130,044    11,401  8.77%   106,171     9,766  9.20%  103,572    8,861  8.56% 
  Mortgages................ 41,046     3,330  8.11%    32,739     2,771  8.46%   26,704    2,274  8.51% 
  Leases................... 46,420     4,865 10.48%    41,974     4,350 10.36%   36,802    3,667  9.96%
                           -------   ------- ------  --------   ------- ------ --------  ------- -----
Total loans................462,528    41,872  9.05%   406,916    38,171  9.38%  374,922   32,545  8.68% 
                           -------   ------- ------  --------   ------- ------ --------  ------- -----
Total earning assets.......647,846    54,304  8.38%   587,098    50,435  8.59%  538,055   43,419  8.07%
Allowance for loan losses.. (7,863)                    (7,155)                   (7,472) 
Cash and due from banks.... 30,238                     27,763                    27,746
Other non-earning assets... 62,005                     51,629                    41,934
                           -------                   --------                  --------
Total non-earning assets... 84,380                     72,237                    62,208
                           -------  -------- ------  --------  -------- ------ -------- -------- -----
Total assets..............$732,226  $ 54,304  7.42%  $659,335  $ 50,435  7.65%  600,263 $ 43,419  7.23%
                          ========  ======== ======  ========  ======== ====== ========  ======= ====== 
Liabilities and Stockholders' Equity:
Deposits:
  Demand deposits
   Noninterest-bearing....$ 72,052  $      0  0.00%  $ 66,133  $      0   0.00%  $64,446 $     0  0.00% 
  Demand deposits
   Interest-bearing........257,622     6,726  2.61%   239,036     7,181   3.00%  229,693   5,375  2.34%
  Savings deposits......... 58,232     1,288  2.21%    54,982     1,333   2.42%   58,864   1,324  2.25%
  Time deposits............229,835    12,695  5.52%   194,512    10,579   5.44%  158,994   6,884  4.33% 
                           -------  -------- ------  --------   -------  ------ -------- ------- -----
Total deposits.............617,741    20,709  3.35%   554,663    19,093   3.44%  511,997  13,583  2.65%
Other borrowed funds....... 30,578     2,114  6.91%    29,143     2,060   7.07%   22,144   1,343  6.06%
Other liabilities.......... 17,122                     14,856                     12,227
Stockholders' equity....... 66,785                     60,673                     53,895
                           -------  --------  ------  --------  ------- ------  --------  ------- -----
Total liabilities and
  Stockholders' equity....$732,226  $ 22,823  3.12%  $659,335  $ 21,153   3.21% $600,263 $ 14,926 2.49%
                          ========  ========  ====== ========  ======== ======  ======== ======== ===== 
Net interest income/
 Average total assets......         $ 31,481  4.30%            $ 29,282   4.44%          $ 28,493 4.75%
Net interest income/
 Average earning assets....         $ 31,481  4.86%            $ 29,282   4.99%          $ 28,493 5.30%
            
</TABLE>
     Net interest income on a fully taxable equivalent basis increased by
$2,199,000 in 1996 compared to an increase of $789,000 in 1995.  Table 2
indicates that of the increase in 1996, $2,910,000 was the result of increased
volumes.  This figure was reduced by $711,000 as a result of decreases in
interest rates.  The decrease in interest rates had more of an effect on 
interest paid on earning assets than on interest-bearing liabilities.  The 
increase in 1995 resulted in $1,803,000 from increased volumes 
while a reduction of $1,014,000 was realized from 
increases in interest rates.

     For the year 1996 compared to 1995, loan volumes, on average, increased
nearly $56 million and income earned on loans increased $3,701,000, tax 
adjusted.  This compares to a volume increase of nearly $32 million in 1995 
over 1994 with an increase in income earned on loans 
amounting to $5,626,600.  As a result of increased volumes in 1996, 
nearly $5.2 million contributed to the increase in
income on loans.  Rates charged on loans decreased in late 1995 and into 1996. 
The decrease in rates reduced interest over $1.5 million in income earned on
loans.  Increased volumes in loans in 1995 contributed over $2.8 million to the
increase in income while $2.8 million was realized due to increases in interest
rates.

     Total investment securities, on average,  increased over $5.2 million in
1996 over 1995 compared to an increase of over $15.7 million in 1995 over 1994. 
The increased volumes in both periods were primarily responsible for the 
increase in interest income on securities.  Table 2 indicates that of 
the increase in interest income in 1996, $361,000 was the 
result of increased volumes while a $146,000 reduction resulted 
from a decrease in interest rates.  Increased volumes
in securities in 1995 contributed nearly $1.1 million to the increase while
$141,000 was generated from an increase in rates.

     Interest-bearing deposits, on average, grew over $57 million in 1996.  The
major portion of the increase in interest expense on deposits was generated on
time deposits as a result of increased volumes and rates paid for these 
deposits.  Although there were increased volumes on the other deposits, 
the decrease in rates paid on these deposits reduced 
the total interest expense by $500,000.  In
addition to an increase in interest expense due to volumes, interest expense
increased due to increases in rates paid on these deposits in 1995.  The
asssumption of certain deposit liabilities as a result of the acquisition of two
retail banking offices from CoreStates on December 1, 1995 added over $20 
million in interest-bearing deposits at that particular time.

Table 2 - Analysis of Changes in Net Interest Income

     The rate-volume variance analysis set forth in the table below, which is
computed on a tax equivalent basis, analyses changes in net interest income for
the periods indicated by their rate and volume components.
<TABLE>
<CAPTION>
                              1996 Versus 1995                  1995 Versus 1994
                              Increase (Decrease)               Increase (Decrease)
                               Due to Changes in                 Due to Changes in
                         Volume       Rate        Total     Volume       Rate        Total  
<S>                     <C>        <C>        <C>         <C>         <C>          <C>                    
Interest Income
Interest on deposits
   with banks...........$     5    $     (1)  $       4   $     (1)   $      1     $     0   
Interest on federal
   funds sold...........    (12)        (39)        (51)        57         128         185
Interest on investment
   securities...........    361        (146)        215      1,064         141       1,205 
Interest and fees on
   loans................  5,216      (1,515)      3,701      2,777       2,849       5,626
                        -------    --------   ---------   --------    --------     -------
Total interest income...$ 5,570    $ (1,701)  $   3,869   $  3,897    $  3,119     $ 7,016
                        -------    --------   ---------   --------    --------     -------
Interest Expense
Interest on 
  interest-bearing
   demand deposits......$   558    $ (1,013)  $    (455)  $    219    $  1,587     $ 1,806   
Interest on
  savings deposits......     79        (124)        (45)       (87)         96           9   
Interest on 
  time deposits.........  1,921         195       2,116      1,538       2,157       3,695   
Interest on
  borrowed funds........    102         (48)         54        424         293         717 
                        -------    --------    --------   --------    --------    --------
Total interest expense..$ 2,660    $   (990)  $   1,670   $  2,094    $  4,133     $ 6,227   
                        -------    --------    --------   --------    --------    --------
Net interest income.....$ 2,910    $   (711)  $   2,199   $  1,803    $ (1,014)    $   789
                        =======    ========    ========   ========    ========    ======== 

</TABLE>
Provision for Loan Losses

     The provision for loan losses charged against earnings was $580,000 in 1996
compared to $534,000 in 1995 and $1,081,000 in 1994.  The provision reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and foreseeable risk characteristics of the loan portfolio. 
Management's judgement is based on the evaluation of individual loans and their
overall risk characteristics, past loan loss experience, and other relevant
factors.  Net charge-offs amounted to $560,000 in 1996, $394,000 in 1995 and
$621,000 in 1994.  The 1996 increase in net charge-offs compared to 1995 was due
to substantial recoveries in 1995 that were not present in 1996.  Gross charge-
offs for 1996 were $703,000, a slight increase over the $676,000 reported in
1995.

     The allowance for loan losses as a percent of loans at December 31, 1995 
was 1.82%, while at December 31, 1996 it was 1.65%.

Non-Interest Income

Table 3 - Non-Interest Income
<TABLE>
<CAPTION>
                                            1996/1995               1995/1994
                                             Increase                Increase
                                            (Decrease)              (Decrease)        
                                   1996   Amount     %     1995   Amount    %     1994
<S>                              <C>     <C>       <C>   <C>     <C>       <C>   <C>          
Income from fiduciary activities.$ 1,139 $   283   33.1% $  856  $   114   15.4% $  742 
Service charges on deposit 
   accounts....................... 2,485     475   23.6%  2,010      212   11.8%  1,798 
Other service charges, commissions
   and fees....................... 2,074     358   20.9%  1,716      177   11.5%  1,539 
Mortgage banking income........... 1,192     667  127.0%    525     (110) (17.3%)   635
Other operating income............ 3,524     338   10.6%  3,186      857   36.8%  2,329 
Investment securities gains or 
   (losses).......................   158     158     --       0        0     .0%      0 
                                  ------  ------  ------ ------  -------  ------ ------
Total............................$10,572 $ 2,279   27.5% $8,293  $ 1,250   17.7% $7,043 
                                 ======= =======  ====== ======  =======  ====== ======
</TABLE>
                                
      Non-interest income, recorded as other operating income, consists of 
income from fiduciary activities, service charges on deposit accounts, 
other service charges, commissions and fees, mortgage banking 
income and other income such as safe deposit box rents 
and income from operating leases.

     Income from fiduciary activities in the amount of $1,139,000 in 1996 was
$283,000 or 33.1% greater than the $856,000 recorded in 1995.  Income in 1995 
was $114,000 or 15.4% greater than the $742,000 recorded in 1994.  Fees 
increased primarily due to increased transaction volumes.  

     Service charges on deposit accounts increased to $2,485,000, an increase of
$475,000 or 23.6% over 1995 service charge income of $2,010,000.  Service 
charges on deposit accounts in 1995 was $212,000 more than the $1,798,000 
reported for 1994.

     Other service charges, commissions and fees amounted to $2,074,000 in 1996
compared to $1,716,000 in 1995 and $1,539,000 in 1994.  Major contributors to 
the increase in 1996 were certain fees relating to VISA operations and 
fees received on mutual funds transactions.

     Income from mortgage banking activities increased to $1,192,000 in 1996 
from $525,000 in 1995 due to two factors. Mortgages sold in the secondary
market in 1996 increased to $33.2 million from $16.1 million in 1995.  
All mortgages sold were originated by the Bank's mortgage operation and 
branch network.  No mortgages were acquired from third parties, 
nor have servicing rights been purchased from third parties.  
A low and reasonably stable interest rate environment in 1996, as well as an 
expansion in mortage products and services, resulted in the increase in volume 
in 1996.  The Bank retains mortgage servicing rights on the majority of 
mortgages originated and sold on the secondary market. 
The Bank's mortgage servicing portfolio totaled $155 million as of December 31,
1996 compared to $142 million on December 31, 1995.

     The other component of mortgage banking profitability increase was a direct
result of the implementation of FASB 122 (subsequently replaced by FASB 125)
which required that mortgage servicing rights be recognized for their economic
value, as of January 1, 1996.  Mortgage servicing has a value because of future
servicing income over the life of the mortgage.  The value of servicing rights 
is available through third party purchasers in private transactions.  
The Bank has developed a business relationship with a third 
party mortgage company and values mortgage servicing from their 
price offerings.  The Bank recognized $470,805 in mortgage servicing values 
in 1996 for its originated servicing portfolio, when in
previous years no value was recognized.  Mortgage servicing rights are recorded
as an asset and recognized directly to income as if the servicing had been 
sold.  The asset is amortized as a charge to earnings over the estimated 
servicing life of the associated mortgage.  Mortgage servicing 
assets as of December 31, 1996 totaled $442,037.  Actual pay-off of mortgages 
serviced with a recorded asset value are immediately charged against earnings.

     Other operating income increased $338,000 to $3,524,000 in 1996 from
$3,186,000 in 1995.  Other income for 1994 was $2,329,000.  A major contributor
to other operating income is income generated from operating leases.  Income on
operating leases increased over $430,000 in 1996 over 1995.  This compares to an
increase of over $476,000 in 1995 over 1994.  Another contributor to the 
increase in 1995 was a gain on other real estate 
sold of nearly $270,000.

     Investment securities transactions reflect a gain of $158,000 in 1996 on
securities sold, from the available-for-sale securities.  There were no
securities sold during 1995 or 1994.

     The Bank does not engage in trading activities.  Therefore, there was no
impact on current year earnings or a restatement of previously issued financial
statements in connection with the adoption of SFAS 115.

     As a result of the above, total other operating income increased $2,279,000
in 1996 over 1995 compared to an increase of $1,250,000 in 1995 over 1994.

Non-Interest Expense

Table 4 - Non-Interest Expense
<TABLE>
<CAPTION>
                                         1996/1995               1995/1994   
                                          Increase                Increase
                                         (Decrease)              (Decrease)       
                                   1996   Amount    %      1995   Amount    %     1994
<S>                              <C>     <C>     <C>     <C>     <C>     <C>    <C>          
Salaries and employee benefits...$15,027 $ 1,987  15.2%  $13,040 $  776    6.3% $12,264 
Net occupancy expense............. 2,109     388  22.5%    1,721    244   16.5%   1,477 
Furniture & equipment expense..... 2,044     439  27.4%    1,605    226   16.4%   1,379 
FDIC insurance assessment.........     2    (620)(99.7%)     622   (506) (44.9%)  1,128 
Other operating expense........... 7,587   1,152  17.9%    6,435    630   10.9%   5,805 
                                   -----  ------  -----   ------  -----   ----- -------
Total............................$26,769 $ 3,346  14.3%  $23,423 $1,370    6.2% $22,053 
                                 =======  =======  =====  ======  ======  ===== ======= 
</TABLE>
     
     Non-interest expense consists of salaries and employee benefits, net
occupancy expense, furniture and equipment expense and other operating expenses.

     Total operating expenses for 1996 were $26,769,000 compared to $23,423,000
in 1995.  This represented an increase of $3,346,000 or 14.3%.  This compares to
an increase of $1,370,000 or 6.2% in 1995.

     The largest component of the Corporation's other operating expense is
salaries and employee benefits which increased to $15,027,000 in 1996 or
$1,987,000 (15.2%) over the $13,040,000 reported in 1995.  In 1995, expenses
increased $776,000 (6.3%) over the $12,264,000 reported in 1994.  The increase 
in 1996 and 1995 was primarily due to increases in staff as well 
as increases in wages and increased costs of employee benefits.  
During 1996 four branch offices were opened and two branch offices 
were acquired from another financial institution in December 1995.  

     Occupancy expense increased $388,000 or 22.5% to $2,109,000 in 1996 from
$1,721,000 in 1995.  By comparison, during 1995, there was an increase of
$244,000 or 16.5%.  The Bank added four branch facilities to its network in 
1996. In addition, the Bank completed construction of a new 
headquarters building in 1995 which also includes branch banking 
facilities and two branch offices were acquired from another 
financial institution in December 1995.  These additions
along with expenses relating to occupancy such as real estate taxes, insurance,
utilities, maintenance and janitor services contributed to the increase in
occupancy expense.

     Furniture and equipment expenses were $2,044,000 for 1996 and $1,605,000 
for 1995.  This represents an increase of $439,000 or 27.4%.  Reflected in this
increase is an increase of depreciation expense in 1996 amounting to $339,000. 
Service contracts on equipment was another major contributor to the increase in
1996.  Expenses in 1995 were $226,000 greater than those recorded in 1994.

     There was a significant reduction in the FDIC insurance assessment in 1996
over 1995 as well as 1995 over 1994.  Those reductions were a result of a new
assessment rate schedule approved by the FDIC.  

     Other operating expenses increased $1,152,000 or 17.9% in 1996 compared to
an increase of $630,000 in 1995.  The increase noted in 1996 is in line with
rising costs associated with acquiring services covered in this category of
expense.  Expenses covered in this category include postage, Pennsylvania Shares
Tax, advertising and marketing, professional services, telephone, stationery and
forms, ATM fees, VISA fees, insurance premiums, expense of other real estate
owned and other expense categories not specifically identified on the income
statement.  Contributing to the increase in 1996 were increases in marketing
expense, Pennsylvania Shares Tax, professional services, postage, stationery and
forms, VISA fees, MAC fees, telephone expense and training and development
expense.

     Income Taxes

    Income tax expense totaled $3,147,000 in 1996 compared to $3,039,000 in 1995
and $2,637,000 in 1994.  These increases resulted from higher levels of taxable
income and increased earnings each year.  The Corporation's effective tax rate
was 24.3% in 1996 compared with 25.3% in 1995 and 24.2% in 1994.  Utilization of
tax credits in 1996 resulted in a lower effective tax rate than 1995 even though
income before taxes increased.  Additional information related to income 
taxation is presented in the Notes to Consolidated Financial Statements.

Financial Condition

Investment Portfolio

Table 5 - Investment Securities at Cost

     The following table shows the amortized cost of the held-to-maturity
securities owned by the Corporation as of the dates indicated.  Investment
securities are stated at cost adjusted for amortization of premiums and 
accretion of discounts.

                                                    December 31,
                                           1996        1995         1994
U.S. Treasury securities................$  12,888   $  18,837    $  28,225
Obligations of other U.S. Government
  agencies and corporations.............   11,607      18,473       24,101 
Obligations of states and political
  subdivisions..........................   37,584      40,212       50,472
Mortgage-backed securities..............    2,076       3,854        5,122  
Other bonds, notes and debentures.......   27,269      38,944       50,811    
                                        ---------   ---------    ---------
Subtotal................................   91,424     120,320      158,731 
Non-marketable securities...............    2,798       2,565        2,429
                                        ---------   ---------    ---------
Total...................................$  94,222   $ 122,885    $ 161,160
                                        =========   =========    =========


     The following table shows the amortized cost and fair value of the
available-for-sale securities owned as of the dates indicated.  During December
1995, the Corporation was given the opportunity for a one-time transfer of
securities from the held-to-maturity category to the available-for-sale 
category. As the table indicates, securities were moved to the available-for-
sale category for U.S. Treasury securities, obligations of other U.S. 
Government agencies and corporations, obligations of states and political 
subdivisions and other bonds, notes and debentures.  
A total of $54,218,000 was moved from held-to-maturity to available-for-sale.
<TABLE>
<CAPTION>
                                          December 31,
                                             1996               1995                 1994
                                      Amortized   Fair   Amortized    Fair    Amortized    Fair
                                         Cost     Value     Cost      Value       Cost     Value
                                     --------- --------- --------  -------- ----------- -------- 
 <S>                                 <C>       <C>       <C>       <C>       <C>        <C>            
 U.S. Treasury securities............$  13,611 $  13,598 $ 11,046  $ 11,155  $   1,472  $  1,457
 Obligations of other U.S. Government
   agencies and corporations..........  18,800    18,718   15,489    15,632       none      none
 Obligations of states and political
   subdivisions.......................  20,488    20,819   19,622    19,945       none      none
 Mortgage-backed securities...........   1,125     1,117    1,249     1,242      1,344     1,256
 Other bonds, notes and debentures....  22,752    22,771   19,013    19,247      5,593     5,501
                                      -------- --------- --------  --------  ---------  --------
 Subtotal.............................  76,776    77,023   66,419    67,221      8,409     8,214
 Equity securities....................     171     2,352       88     1,746          7       837
                                      -------- --------- --------  --------  ---------  --------
 Total................................$ 76,947 $  79,375 $ 66,507  $ 68,967  $   8,416  $  9,051
                                      ======== ========= ========  ======== ==========  ========
</TABLE>
Table 6 - Investment Securities (Yields)

     The following table shows the maturities of held-to-maturity debt 
securities at amortized cost as of December 31, 1996 and approximate weighted 
average yields of such securities.  Yields are shown on a tax equivalent basis, 
assuming a 34% Federal income tax rate.
<TABLE>
<CAPTION>                                
                                     
                                Over 1 thru     Over 5 thru
             1 Year and less      5 Years         10 Years     Over 10 Years      Total
               Amount  Yield   Amount  Yield   Amount  Yield   Amount  Yield  Amount   Yield
<S>            <C>     <C>   <C>      <C>   <C>       <C>     <C>     <C>   <C>       <C>            
U.S. Treasury
 securities....$ 7,322 5.56% $ 5,566  5.84% $    ---    ---%  $  ---   ---% $ 12,888  5.68% 
Obligations of
 other U.S.
 Government
 agencies and
 corporations..  1,903 5.72%   8,709   5.90%    994    7.02%    ---    ---%   11,606  5.97%
Obligations of
 states and
 political sub-
 divisions.....  3,380 8.51%  12,486   6.52%  16,512   7.79%   5,206  7.48%   37,584  7.39%
Mortgage-backed
 securities....    114 8.34%   1,006   7.48%     577   8.45%     195  7.81%    1,892  7.86%
Other bonds, 
 notes and
 debentures.... 11,259 6.22%   16,195  6.35%     ---    ---%     ---   ---%   27,454  6.30%
               ------- ----- -------- ------ -------- ------  ------- ------ -------- -----
               $23,978 6.31%  $43,962  6.27% $ 18,083  7.77%  $ 5,401  7.49% $91,424  6.65%
               ======= =====  ======= ====== ========  =====  ======= ====== ======== =====
</TABLE>

     The following table shows the maturities of available-for-sale debt
securities at amortized cost as of December 31, 1996 and approximate weighted
average yields of such securities.  Yields are shown on a tax equivalent basis,
assuming a 34% Federal income tax rate.
<TABLE>
<CAPTION>
                             
                                  Over 1 thru     Over 5 thru
               1 Year and less      5 Years         10 Years     Over 10 Years      Total
                 Amount  Yield   Amount  Yield   Amount  Yield   Amount  Yield   Amount  Yield
<S>            <C>       <C>   <C>        <C>  <C>       <C>   <C>       <C>    <C>       <C>        
U.S. Treasury
 securities....$    500  6.52% $ 12,793   5.95%$    318  6.21% $  ---     ---%  $ 13,611  5.98% 
Obligations of
 other U.S.
 Government
 agencies and
 corporations..     509  5.40%   12,485   6.23%   4,809  6.79%     997   8.15%    18,800  6.45%
Obligations of
 states and
 political sub-
 divisions.....     258  6.89%    2,712   7.35%  14,087  7.93%   3,431   7.86%    20,488  7.83%
Mortgage-backed
 securities....     624  6.12%      501   5.99%     ---   ---%     ---    ---%     1,125  6.06%
Other bonds, 
 notes and
 debentures....   1,300  5.95%   21,452   6.43%     ---   ---%     ---    ---%    22,752  6.40%
                ------- ------  -------  ------ -------  -----  -------  -----  -------- ------
                $ 3,191  6.06%  $49,943   6.30% $ 19,214  7.62%  $ 4,428  7.93% $ 76,776   6.71%  
                ======= ======  ======== ====== ======== ======  ======= ====== ======== ======
</TABLE>

Loans

Table 7 - Loan Portfolio

     The following table sets forth the composition of the Corporation's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
                                                      December 31,
                               1996           1995         1994         1993       1992
<S>                         <C>          <C>          <C>          <C>         <C>             
Commercial, financial and
  agricultural..............$  239,701   $  228,058   $  208,918   $  191,431  $  172,482
Real estate-construction...      5,608        6,378        8,542       10,265      16,044
Real estate-mortgage.......     45,373       33,124       30,505       22,335      30,445
Consumer...................    136,989      116,210      106,921      101,256      99,444    
Lease financing (net of
  unearned income).........     47,346       43,904       38,771       35,443      32,768
                            ----------   ----------   ----------   ----------   ---------
Total loans.................$  475,017   $  427,674   $  393,657   $  360,730   $ 351,183
                            ==========   ==========   ==========   ==========   =========

</TABLE>
Table 8 - Loan Maturity and Interest Sensitivity

     The following table sets forth the maturity and interest sensitivity of the
loan portfolio as of December 31, 1996:
<TABLE>
                           
                                        After one 
                              Within    but within     After
                             one year   five years   five years   Total
<S>                          <C>          <C>         <C>        <C>
Commercial, financial 
   and agricultural..........$ 103,588    $ 116,403   $  19,710  $ 239,701
Real estate-construction.....    1,807        1,280       2,521      5,608      
                             ---------    ---------   ---------  ---------
                             $ 105,395    $ 117,683   $ 22,231   $ 245,309   
                             =========    =========   =========  =========
</TABLE>
     Loans due after one year totaling $86,853,000 have variable interest 
rates.  The remaining $53,061,000 in loans have fixed rates.


Table 9 - Nonaccrual, Past Due and Restructured Loans

     The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans:
<TABLE>
<CAPTION>
                                     
                                                      December 31,
                             1996      1995    1994     1993       1992 
<S>                        <C>     <C>      <C>      <C>        <C>           
Nonaccrual loans...........$ 1,193 $  1,010 $  2,127 $  2,960   $  4,129   
Accruing loans, past due
  90 days or more.........     737      330    1,127      522        519    
                           ------- -------- -------- --------   --------
Total non-performing loans.  1,930    1,340    3,254    3,482      4,648    
Other real estate owned....     81      252      759      251        360    
                           ------- -------- -------- --------   --------
Total non-performing assets$ 2,011 $  1,592 $  4,013 $  3,733   $  5,008    
                           ======= ======== ======== ========   ========



Ratios:
  Non-performing loans to
     total loans..........    .41%     .31%     .83%     .97%      1.33%    
     
  Non-performing assets to
     total loans and other
     real estate owned....    .42%     .37%    1.02%    1.04%      1.44%   
       
  Non-performing assets to
     total assets..........   .26%     .22%     .63%     .63%       .92%   
      
  Allowance for loan losses to
     non-performing loans.. 404.1%   580.6%   234.8%   206.2%     116.1%  
                  
</TABLE>
    
     The economic conditions within the Corporation's market area remained
healthy in 1996.  This is reflected in the unemployment rate for Lancaster
County, which is the Bank's primary market area.  The jobless rate remained low
during the past year with fluctuations between 3.8% and 2.8%.  Lancaster 
County's unemployment rate has historically been and continues to be 
one of the lowest among Pennsylvania's 14 metropolitan regions.  
It also remains well below the state unemployment rate of 4.79% 
that was reported for November 1996.  The 2.8% reported in November is the 
lowest rate since 1989.  Predictions for the local
economy range from "solid improvement" to a "flat economy with declining 
interest rates and low inflation".

     The strength in the employment sector in Lancaster County was also seen at
the national level.  Jobs grew by a strong 2.6 million in 1996 and the 
employment rate held steady at 5.3% for December.  The unemployment rate for 
December 1995 stood at 5.6%.  The strong job growth, particularly 
evidenced in December 1996, provided further evidence that the 
economy ended 1996 at a faster clip than analysts had expected.  Economists are 
predicting the U.S. economy will grow about the same rate as 1996.    

     The Bank's loan delinquency, as a percent of loans outstanding increased
during 1996.  At December 31, 1996, this rate stood at .96% compared to .58% and
1.33% for December 31, 1995 and December 31, 1994, respectively.  The increase 
in the delinquency rates was primarily experienced in the retail portfolio,
particularly in the installment and credit card portfolios.  The Bank is not
immune to the rising number of bankruptcies that occurred in 1996 nationwide. 
While management believes delinquency rates could continue to trend upward 
during 1997, expectations are that they will not approach the national 
delinquency rates.  The .96% remains well below the accepted level 
established by management. 
During the year, total nonaccrual loans and other real estate owned increased
slightly  to $1,274,000 from $1,262,000 at December 31, 1995.  Total non-
performing assets increased to $2,011,000 compared to $1,592,000 for December 
31, 1995 representing a 26% increase.  The increase was primarily 
attributed to increases in the 90 day delinquency categories.  
Other real estate declined while nonaccruals increased slightly.  
Management is taking steps to ensure non-performing assets do not reach 
unacceptable levels. 

     The Bank's reserve coverage declined during the year as reserves, as a
percent of non-performing loans, declined to 404% compared with 581% for 
December 31, 1995 and 235% for 1994.

     A portion of the Bank's loan portfolio consists of loans to agricultural-
related borrowers.  These loans consist of loans for a variety of purposes 
within the industry.  Lancaster County continues to be the top agricultural 
county in the state, leading Pennsylvania in production of 
most crops and all livestock with the exception of sheep.  
Dairy production remains Lancaster County's number
one agricultural industry.  Indications are that some segments of Lancaster
County farming are showing promising growth while others are moving ahead at a
steady pace.  While the Bank is hopeful that this portion of its loan portfolio
will continue to show growth, it should be noted that these loans are 
susceptible to a variety of external factors such as adverse climate, 
economic conditions, etc., in addition to factors common to other industries.

     The residential real estate market in 1996 for Lancaster County produced a
strong performance.  Home sales rose more than 6% from the previous year. 
Reasonably low interest rates and a strong economy accounted for the 
performance.  Strong home sales are predicted through at least the first 
half of 1997. Compared to 1995, 1996 was a soft year for 
non-residential construction.  In 1995, Lancaster County experienced 
a non-residential construction boom when contracts
jumped 79%.  Builders expect 1997 to be a very good year for non-residental
construction.

     Most of the Bank's business activity is with customers located within the
Bank's defined market area.  Since the majority of the Bank's real estate loans
are located within this area, a substantial portion of the debtor's ability to
honor their obligations and increases and decreases in the market value of the
real estate collateralizing such loans may be affected by the level of economic
activity in the market area.

       The general policy has been to cease accruing interest on loans when it 
is determined that a reasonable doubt exists as to the collectibility of 
additional interest.  Interest income on these loans is 
only recognized to the extent payments are received.  
Loans on a nonaccrual status amounted to $1,193,000 at
December 31, 1996 compared to $1,010,000 at December 31, 1995.    
If interest income had been recorded on all such loans for the 
years indicated, such interest income would have been increased by 
approximately $116,567 and $143,997 for 1996
and 1995 respectively.  Interest income recorded on non-accrual loans 
amounted to $27,532 and $93,795 for 1996 and 1995 respectively.  
Potential problem loans are
loans which are included as performing loans but for which possible credit
problems of the borrower causes management to have doubts as to the ability of
such borrower to comply with present repayment terms and which may eventually
result in disclosure as a non-performing loan.  At December 31, 1996 there were
no such loans that had to be disclosed as potential problem loans.
     
     SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures", an amendment of SFAS No. 114, was implemented at
the beginning of 1995.  The Bank has defined impaired loans as all loans on
nonaccrual status, except those specifically excluded from the scope of SFAS No.
114, regardless of the credit grade assigned by loan review.  All impaired loans
were measured by utilizing the fair value of the collateral for each loan.  When
the measure of an impaired loan is less than the recorded investment in the 
loan, the Bank will compare the impairment to the existing allowance 
assigned to the
loan.  If the impairment is greater than the allowance, the Bank will adjust the
existing allowance to reflect the greater amount or take a corresponding charge
to the provision for loan losses.  If the impairment is less than the existing
allowance for a particular loan, no adjustments to the allowance or the 
provision for loan and lease losses will be made.  There was no adjustment 
necessary for the impaired loans for the periods indicated.

     The following table presents information concerning impaired loans at
December 31:

                                                       1996   1995
  Gross impaired loans which have allowances..........$1,193 $1,010
     Less: Related allowances for loan losses.........  (179)  (349)
                                                      ------ ------
  Net impaired loans..................................$1,014 $  661
                                                      ====== ======

     At December 31, 1996, there were no concentrations exceeding 10% of total
loans.  A concentration is defined as amounts loaned to a multiple number of
borrowers engaged in similar activities which would cause them to be similarly
affected by changes in economic or other conditions.  There were no foreign 
loans outstanding at December 31, 1996.  

Allowance for Loan Losses

Table 10 - Summary of Loan Loss Experience

                                        Years ended December 31,
                                1996     1995     1994     1993     1992
Allowance for Loan Losses:
Beginning balance.............$ 7,780  $ 7,640  $ 7,180  $ 5,400  $ 4,400   
Loans charged off during year:
  Commercial, financial and
    agricultural..............     37       50      157      194      843  
  Real estate mortgage........    184      252      235      392      201   
  Consumer....................    458      360      360      290      471  
  Lease financing.............     24       14       10       14       97  
                              -------  -------  -------  -------  -------
  Total charge-offs...........    703      676      762      890    1,612   
                              -------  -------  -------  -------  -------
Recoveries:
  Commercial, financial and
    agricultural..............      5      117       61      157      232    
  Real estate mortgage........     42       72        2        8     none   
  Consumer....................     88       91       77       63       76   
  Lease financing.............      8        2        1       12        8   
                              -------  -------  -------  -------  -------
  Total recoveries............    143      282      141      240      316  
                              -------  -------  -------  -------  -------
Net loans charged off.........    560      394      621      650    1,296   
Additions charged to 
  operations..................    580      534    1,081    2,430    2,296   
                              -------  -------  -------  -------  -------
Balance at end of year........$ 7,800  $ 7,780  $ 7,640  $ 7,180  $ 5,400    
                              =======  =======  =======  =======  =======

Ratio of net loans charged  
  off to average loans
  outstanding.................   .12%     .10%     .17%     .18%     .39%    
Ratio of net loans charged
  off to loans at end of year.   .12%     .09%     .16%     .18%     .37%    
Net loans charged off to
  allowance for loan losses..   7.18%    5.06%    8.13%    9.05%   24.00%    
Net loans charged off to
  provision for loan losses..  96.55%   73.78%   57.45%   26.75%   56.45%   
Allowance for loan losses as a
  percent of average loans...   1.69%    1.91%    2.04%    2.01%    1.64%   
Allowance for loan losses 
  as a percent of loans at 
  end of year................   1.65%    1.82%    1.95%    2.00%    1.55%    
Allowance for loan losses
  as a percent of 
  non-performing loans.......  404.1%    580.6%   234.8%   206.2%   116.1%   

     The Bank experienced a 4% increase in gross charge-offs, while net charge-
offs increased 42%.  1995 was an exceptionally good year for recoveries, thus 
the substantial difference between the increase in gross charge-offs and net 
charge-offs.  For the year, the Bank recorded net charge-offs of 
$560,000 or .12% of average loans outstanding, compared to $394,000 or .10% of 
average loans in 1995 and $621,000 or .17% of average loans in 1994. 

     The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and inherent risk deemed present in the loan portfolio.  Management
performs a quarterly assessment of the loan portfolio to determine the
appropriate level of allowance. The factors considered in this evaluation
include, but are not limited to, estimated loan losses identified through a loan
review process, general economic conditions, deterioration in pledged 
collateral, past loan experience and trends in delinquencies and 
non-accruals. Management uses available information to determine the 
appropriate level of the allowance
for possible loan losses.  However, the allowance may be affected in the 
future based upon changes in the economic conditions and 
other factors.  While there can
be no assurance that material amounts of additional loan loss provisions will 
not be required in the future, management believes that, based upon information
presently available, the amount of the allowance for possible loan losses is
adequate.

     Management has not targeted any specific coverage ratio of non-performing
loans by the allowance for loan losses and the coverage ratio may fluctuate 
based on loans placed into or removed from non-performing status. 



Table 11 - Allocation of Allowance for Loan Losses

                                                     December 31,
                                                   1996        1995
 Commercial, financial and agricultural..........$ 3,471     $ 3,710    
 Real estate - mortgage..........................      5           3    
 Consumer........................................    590         523    
 Leases..........................................    620         600    
 Unallocated.....................................  3,114       2,944    
                                                 -------     ------- 
 Total...........................................$ 7,800     $ 7,780    
                                                 =======     =======


Deposits

Table 12 - Average Deposit Balances and Rates Paid

     The average amounts of deposits and rates paid for the years indicated are
summarized below:
<TABLE>
<CAPTION>
                                          1996             1995             1994
                                     Amount   Rate    Amount   Rate    Amount   Rate
<S>                                 <C>      <C>     <C>      <C>     <C>       <C>          
Demand deposits.....................$ 72,052   ---   $ 66,133   ---   $ 64,446   ---    
Interest-bearing demand deposits.... 257,622  2.61%   239,036  3.00%   229,693  2.34%   
Savings deposits....................  58,232  2.21%    54,982  2.42%    58,864  2.25%   
Time deposits....................... 229,835  5.52%   194,512  5.44%   158,994  4.33%   
                                    --------  -----  --------  -----  --------  -----
                                    $617,741  3.35%  $554,663  3.44%  $511,997  2.65%   
                                    ========  =====  ========  =====  ========  =====
</TABLE>
Table 13 - Deposit Maturity

     The maturities of time deposits of $100,000 or more are summarized below: 
                                        
                                                       December 31,
                                                     1996       1995 
    Three months or less..........................$  6,095   $  5,881   
    Over three thru six months....................   6,112      3,811   
    Over six thru twelve months...................   9,026      5,270   
    Over twelve months............................   5,963      8,976   
                                                   -------    -------
    Total.........................................$ 27,196   $ 23,938   
                                                   =======    =======

Capital

     Stockholders' equity increased nearly $5.3 million or 8.2% in 1996 to
$69,179,000.  Total stockholders' equity at December 31, 1995 in the amount of
$63,909,000 represents an increase of $6.6 million or 11.6% over the $57,285,000
reported at December 31, 1994.  Net earnings retained after the payment of
dividends as well as capital acquired through stock issued pursuant to a 
dividend reinvestment and stock purchase plan and employee stock plan generated 
the greatest portion of this growth in stockholders' equity.  There was no
significant change in equity as a result of change in net unrealized gain on
securities available-for-sale, net of taxes.  Stockholders' equity increased 
$1.2 million in 1995 due to an increase in net unrealized gains on 
investment securities available-for-sale, net of taxes.  Included 
in dividends declared for 1995 is $1,478,000 which represents 
a $.25 per share "Special Dividend" which was
declared in the second quarter of 1995.  Dividends declared amounted to
$4,508,000, $5,260,000 and $3,386,000 for 1996, 1995 and 1994 respectively.
Federal regulatory authorities approved risk-based capital guidelines applicable
to banks and bank holding companies in an effort to make regulatory capital more
responsive to the risk exposure related to various categories of assets and off-
balance sheet items.  These guidelines require that banking organizations meet a
minimum risk-based capital, define the components of capital, categorize assets
into different risk classes and include certain off-balance sheet items in the
calculation of capital requirements.  The components of total capital are called
Tier 1 and Tier 2 capital.  In the case of the Bank, Tier 1 capital is the
shareholders' equity and Tier 2 capital is the allowance for loan losses.  The
risk-based capital ratios are computed by dividing the components of capital by
risk-weighted assets.  Risk-weighted assets are determined by assigning various
levels of risk to different categories of assets and off-balance sheet items. 
Regulatory authorities have decided to exclude the net unrealized holding gains
and losses on available-for-sale securities from the definition of common
stockholders' equity for regulatory capital purposes.  However, national banks
will continue to deduct unrealized losses on equity securities in their
computation of Tier 1 capital.  Therefore, national banks will continue to 
report the net unrealized holding gains and losses on available-for-sale 
securities in the reports of condition and income submitted to federal 
regulators as required by SFAS 115 and the financial reports 
prepared in accordance with generally accepted accounting principles, 
but will exclude these amounts from calculations
of Tier 1 capital.  In addition, national banks should use the amortized cost of
available-for-sale debt securities (as opposed to fair value) to determine the
average total assets as well as the risk-weighted assets used in the 
calculations of the leverage and risk-based capital ratios.  The ratios 
below and in Table 14 reflect the above definition of common stockholders' 
equity which includes common
stock, capital surplus and retained earnings, less net unrealized holding losses
on available-for-sale equity securities with readily determinable fair values. 
The Bank's ratios at December 31, 1996, 1995 and 1994 were above the final 
risk-based capital standards that require Tier 1 capital of at least 4% and 
total risk-based capital of 8% of risk-weighted assets.  The Tier 1 
capital ratio at December 31, 1996 was 10.68% and the total risk-based 
capital ratio was 11.93%,
which exceeds the minimum capital guidelines.  Tier 1 capital ratio was 10.95%
and the total risk-based capital ratio was 12.21% at December 31, 1995 
while Tier 1 capital ratio was 11.05% and the total risk-based 
capital ratio was 12.3% at December 31, 1994.

     On December 4, 1996, the Bank purchased a property located at 1097
Commercial Avenue, East Petersburg, PA situated on 12.7 acres with a building
containing approximately 123,000 square feet.  The building is used to house the
Bank's Administrative Service Center, as well as other departments of the Bank. 
Town & Country, Inc., a wholly owned subsidiary of the Bank,  also occupies this
building.  The purchase price of the property was approximately $5.3 million. 
The capital expenditures relating to this building were financed out of existing
capital resources.  The Bank did not and does not expect to incur any
indebtedness relating to this new facility.  The reduction in earning assets and
the expenses relating to the new facilities will be offset somewhat to the 
extent the building which previously housed the Administrative Service 
Center was sold for approximately $1.2 million and settlement took 
place on February 21, 1997. In addition, the building formerly occupied 
by Town & Country, Inc. is also under
agreement of sale and settlement should take place on or before April 1, 1997. 
Efforts are being made to secure tenants for the additional available space in
the recently purchased Administrative Service Center building.  Management does
not expect this to have a material impact on future reported results of
operations, even though this will result in the application of a material amount
of capital.  The opportunity to acquire the Commercial Avenue facility came at a
time when management had been considering options to expand its current 
Administrative Service Center.  While exceeding the Bank's current space needs,
the Commercial Avenue facility purchase was financially superior to expanding 
the existing facility.  At the same time, it also provides significant 
future growth capacity.

Table 14 - Capital and Performance Ratios

     The following are selected ratios for the years ended December 31:
<TABLE>
<CAPTION>
                                                   1996       1995     1994
   <S>                                            <C>        <C>      <C>
   Return on average assets......................  1.34%      1.36%    1.38%     
   Return on average equity...................... 15.01%     15.02%   15.47%      
   Dividend payout ratio......................... 45.95%     58.48%   40.91%      
   Average total equity to average assets........  8.95%      9.10%    8.89%      
   Total equity to assets at year end............  8.87%      8.79%    8.99%      
   Primary capital ratio.........................  9.80%      9.78%   10.07%      
   Tier 1 risk-based capital ratio............... 10.68%     10.95%   11.05%      
   Total risk-based capital ratio................ 11.93%     12.21%   12.30%      

</TABLE>
Liquidity and Interest Rate Sensitivity

     Liquidity is the ability to meet the requirements of customers for loans
and deposit withdrawals in the most economical manner.  Some liquidity is 
ensured by maintaining assets which may be immediately converted into 
cash at minimal cost.  Liquidity from asset categories is provided through 
cash, noninterest-bearing and interest-bearing deposits with banks, 
federal funds sold and marketable investment securities 
maturing within one year.  Securities maturing within one
year amounted to $27,169,000 at December 31, 1996 compared to $30,833,000 at
December 31, 1995.  Interest-bearing deposits with banks totaled $643,498 at
December 31, 1996 compared to $24,158 at December 31, 1995.  Federal funds sold
totaled $24,150,000 at December 31, 1996 compared to $9,350,000 sold at December
31, 1995.  Securities available-for-sale as of December 31, 1996 were 
$79,374,627 compared to $68,967,132 as of December 31, 1995.

     The loan portfolio also provides an additional source of liquidity due to
Bank of Lancaster County participating in the secondary mortgage market.  Sales
of residential mortgages into the secondary market were approximately $33.2
million in 1996 and $16.1 million in 1995, which allowed the Bank to meet the
needs of customers for new mortgage financing.  The loan portfolio also provides
significant liquidity by repayment of loans by maturity or scheduled 
amortization payments.

     On the liability side, liquidity is available through customer deposit
growth and short term borrowings.  Federal Home Loan Bank available borrowing
capacity as of December 31, 1996 was $15,910,000 with existing capital stock
ownership and $21,500,000 in federal funds purchased lines are in place.

     Liquidity must constantly be monitored because future customer demands for
funds are uncertain.  The amount of liquidity needed is determined by the 
changes in levels of deposits and in the demand for loans.  Management 
believes that the sources of funds mentioned above provide sufficient liquidity.

     Interest sensitivity is related to liquidity because each is affected by
maturing assets and sources of funds.  Interest sensitivity, however, is also
concerned with pricing changes of assets and liabilities not maturing, and 
values of assets and liabilities as a result of rate changes.  Also, future 
income may be impacted as a result of rate change valuations on 
non-balance sheet commitments.

     Management endeavors to manage the exposure of earnings to changes in
interest rates.  The Bank's asset/liability committee manages interest rate risk
by various means including "GAP" management and internally developed reporting. 
Management has committed to supplement this process in 1997 with Sheshunoff
Interest Rate Risk management services.
 
     The Bank has various investments structured to change investment yield with
current market conditions.  Assets subject to repricing include federal funds
sold (repricing daily), loans tied to "Treasury Bill" indexes (repricing 
monthly) and loans tied to "prime" or other indexes subject to 
immediate change.  In addition to repricable assets are maturing 
and contracted repayments and prepayments of existing loans and investments.  
These cash flows will be re-invested at current market yields.

    The Bank's funding liabilities (customer deposits and borrowed funds) have
more complex repricing characteristics, since interest bearing deposits are
subject to rate change but are not specifically indexed to "prime" or "treasury"
indexes. Time certificates and borrowed money are subject to interest rate 
change at maturity.

     Interest rate sensitivity relates to earnings and economic impact to the
Bank with changing interest rates.  Earning assets and funding can be subject to
interest rate repricing with changing market conditions.  In addition,
investments, loans, time deposits and debt maturities and prepayments will be
subject to current market rates with reinvestment.  The net result of interest
rate repricings will impact the Bank's future net interest margins (either in a
positive or negative manner) based on the amount of unmatched funding, the 
amount of rate change, and the direction of rate change.  The net 
volume of earning assets and deposit funding subject to rate 
change is measured in time period
"gaps" where volumes of earning assets and deposit funding are measured to
determine the amount of the unmatched position.  These gaps are illustrated in
Table 15.  The regulatory presentation depicts all interest bearing deposits as
being subject to immediate and full repricing.

     Management considers factors in addition to volume of liability funding
(deposits) subject to rate change to more accurately reflect future impact to 
the net interest margin.  All interest rates do not move in full 
and equal amounts for loans and deposits.  Deposit rates historically 
lag loans in rate movement, and rate movement occurs to a smaller 
degree for deposits than loans.  Modeling is used to forecast projected 
impact to the net interest margin as a result of
rate movements, either increasing or decreasing.  For example, prime base rate
has changed 21 times since 1988 (movement from a high of 11.5% to a low of 
6.0% - a range of 5.5%).  During this period, NOW account deposit rates 
have also experienced rate changes (movement from a high of 4.85% to a low 
of 1.40% - a range of 3.45%).  Historic pricing correlations 
have been calculated for all interest-bearing products for 
rate change repricing impact as - immediate,
monthly and annually over one year time periods.  As illustrated in Table 15,
management's view of interest rate sensitivity reflects a calculated
interpretation of net interest margin exposure to rate changes.  Pricing
correlations are constantly refined by management.  There is no guarantee that
past history will accurately reflect future changes.

     Interest repricing of assets and liabilities is measured over future time
periods (interest rate sensitivity gaps).  While all time gaps are measured,
management's primary focus is the cumulative gap through six months, as 
this time frame directly impacts net interest income in the near term time 
horizon and is most difficult to make reactive adjustment to actual 
rate movements.

     During 1996, the net interest income tax-equivalent yield on average 
earning assets dropped to 4.86% from 4.99% in 1995.  The prime rate in 
1996 started at 8.50%, moving down in February to 8.25% 
and staying at that level for the remainder of the year.  
The average tax-equivalent yield on earning assets
decreased in 1996 to 8.38%, down from 8.59% in 1995.  Average earning assets
increased by $60,750,000 to $647,846,871 in 1996.  Deposit funding (average
balances) increased $63,000,000 in 1996.  Total deposit cost decreased to 3.35%
from 3.44% in 1995.  The net interest margin (tax equivalent) decreased to 4.86%
in 1996 from 4.99% in 1995.  Compression of the net interest margin was 
primarily a result of a competitive lending environment, 
with tax equivalent yields on loans decreasing to 9.05% in 1996 
from 9.38% in 1995, while lending volume increased $55,600,000.

Table 15 - Interest Rate Sensitivity Gaps
<TABLE>
<CAPTION>
<S>
                         0-30     31-90     91-180   181-365  Over 1   Over 2    Over 3    Over 4   Over 
Interest Earning         Days      Days      Days     Days   to 2 Yrs to 3 Yrs  to 4 Yrs  to 5 Yrs  5 Yrs
 Assets (I.E.A.)
                    <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>             
Fed Funds sold......$  24,150 $       0 $       0 $       0 $       0 $       0 $       0 $       0 $      0
Investment securities-
 Maturities..........   2,833     5,070     6,453    13,959    32,185    25,007    21,686     9,420   57,627
Loans - Maturities...   5,087     8,662    12,399    21,225    41,882    35,655    25,090    16,439   54,522
Loans - Variable Rate  98,652     1,402     3,512     8,501    13,085    10,727     3,451    13,407   53,967
Leases - Finance.....   1,016     2,083     3,170     6,461    13,699     9,589     6,712     4,616        0 
                     --------  --------  --------  --------  --------  --------  --------  --------  -------
Total...............$ 131,738 $  17,217 $  25,534 $  50,146 $ 100,851 $  80,978 $  56,939 $  43,882 $166,116
Cumulative..........$ 131,738   148,955   174,489   224,635   325,486   406,464   463,403   507,285  673,401

Interest Bearing
 Liabilities(I.B.L.)
C/D's $100,000 and 
 over...............$     402 $   3,454 $   7,301 $   4,463 $       0 $     965 $     133 $       0 $    200 
C/D - Maturities....   12,354    23,971    46,636    46,061    43,774    32,685    10,117     4,750    1,557
Interest Deposits - 
  Variable Rate.....   75,915    22,725     4,414     9,448    14,772    14,772    16,772    14,771  152,449
Short-term 
  borrowings........    2,741         0         0         0         0         0         0         0        0
Borrowings - Leasing
 Operations.........    1,100     1,920     2,610     4,360     8,080     6,040     3,740     1,584    1,001
                     --------  --------  --------  --------  --------  --------  --------  --------  -------
Total...............$  92,512 $  52,070 $  60,961 $  64,332 $  66,626 $  54,462 $  30,762 $  21,105 $155,207
Cumulative..........$  92,512 $ 144,582 $ 205,543 $ 269,875 $ 336,501   390,963   421,725   442,830  598,037

Period GAP (Dollars)$  39,226 $ (34,853)$ (35,427)$ (14,186)$  34,225 $  26,516 $  26,177 $  22,777 $ 10,909
I.E.A./I.B.L.%......      142%       33%       42%       78%      151%      149%      185%      208%    107% 

Cumulative GAP 
 (Dollars)..........$  39,226 $   4,373 $ (31,054)$ (45,240)$ (11,015)$  15,501 $  41,678 $  64,455 $ 75,364
Cumulative 
 I.E.A./I.B.L.%......     142%      103%       85%       83%       97%      104%      110%      115%    113%
Regulatory
 Presentation
Assets (cumulative).$ 131,738 $ 148,955 $ 174,489 $ 224,635 $ 325,486 $ 406,464 $ 463,403 $ 507,285 $673,401
Funding (cumulative)$ 342,635 $ 371,980 $ 428,527 $ 483,411 $ 535,265   574,955   588,945   595,279  598,037
                     --------  --------  --------  --------  --------  --------  --------  --------  -------
Cumulative GAP
 (Dollars)..........$(210,897)$(223,025)$(254,038)$(258,776)$(209,779)$(168,491)$(125,542)$ (87,994)$ 75,364
Cumulative 
 I.E.A./I.B.L.%.....       38%       40%       41%       46%       61%       71%       79%       85%    113%

</TABLE>

New Financial Accounting Standard

     In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125 - "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of 
Liabilities". 

This Statement amends and extends to all servicing assets and libilities the
accounting standards for mortgage servicing rights now in FASB Statement No. 65,
"Accounting for Certain Mortgage Banking Activities", and supercedes FASB
Statement No. 122, "Accounting for Mortgage Servicing Rights".  SFAS No. 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the consistent
application of the financial-components approach.  This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered and the derecognition of liabilities when they are extinguished. 
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets.  Liabilities and deriviatives
incurred or obtained by transferors in conjunction with the transfer of 
financial assets are required to be measured at fair value, if 
practicable.  Servicing assets and other retained interests in 
transferred assets are required to be measured by allocating the 
previous carrying amount between the assets sold, if
any, and the interest that is retained, if any, based on the relative 
fair values of the assets at the date of the transfer.  Servicing 
assets retained are
subsequently subject to amortization and assessment for impairment.  As issued,
this Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively.

     The FASB was made aware that the volume and variety of certain transactions
and the related changes to information systems and accounting processes that are
necessary to comply with the requirement of SFAS No. 125 would make it extremely
difficult, if not impossible, for some affected enterprises to apply the 
transfer and collateral provisions of the Statement to those 
transactions as soon as
January 1, 1997.  As a result, in December 1996, the FASB issued FASB No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"
that defers for one year the effective date of these provisions, as well as
accounting for transfers and servicing for repurchase agreement, dollar-roll,
securities lending and similar transactions.  Therefore, this Statement shall be
effective for such transfers of financial assets after December 31, 1997.

     Sterling has determined that the adoption of SFAS No. 127 is not expected 
to have a material effect on the financial position or results of 
operations of the Corporation.

Item 8 - Financial Statements and Supplementary Data

     (a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages:                                                             Page
      Report of Independent Auditors                                33
      Consolidated Balance Sheets                                   34
      Consolidated Statements of Income                             35
      Consolidated Statements of Changes in Stockholders' Equity    36
      Consolidated Statements of Cash Flows                         37
      Notes to Consolidated Financial Statements                    39

     (b) The following supplementary data is set forth in this Annual Report 
      on Form 10-K on the following pages:
      Summary of Quarterly Financial Data (Unaudited)               63





                   Trout, Ebersole & Groff, LLP
                   Certified Public Accountants
                         1705 Oregon Pike
                  Lancaster, Pennsylvania 17601
                          (717)569-2900
                        FAX (717) 569-0141


                   Independent Auditors' Report


Board of Directors and Shareholders
Sterling Financial Corporation and Subsidiaries
Lancaster, Pennsylvania

     We have audited the accompanying consolidated balance sheets of Sterling
Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996.  These
financial statements are the responsibility of 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.  Those 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 Sterling
Financial Corporation and Subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

     As discussed in Note 2, the Corporation changed its method of accounting 
for mortgage servicing rights to adopt the provisions of the Financial 
Accounting Standards Board's SFAS No. 122, "Accounting for Mortgage 
Servicing Rights", at January 1, 1996.

                                              Trout, Ebersole & Groff, LLP
                                               
                                              Trout, Ebersole & Groff, LLP
                                              Certified Public Accountants

January 24, 1997
Lancaster, Pennsylvania

                     Consolidated Balance Sheets
           Sterling Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
                                                                  As of December 31,
(Dollars in thousands)                                               1996       1995 
<S>                                                               <C>        <C>          
Assets   
Cash and due from banks...........................................$ 31,339   $ 35,414
Interest-bearing deposits in other banks..........................     644         24
Federal funds sold................................................  24,150      9,350
Mortgage loans held for sale......................................   1,016        962
Investment Securities: (Note 4)
 Securities held-to-maturity  
   (market value - $94,778 - 1996 and $124,066 - 1995)............  94,222    122,885
 Securities available-for-sale....................................  79,375     68,967  
Loans (Note 5).................................................... 475,017    427,674
  Less: Unearned income...........................................  (1,185)    (1,362)
        Allowance for loan losses (Note 6)......................... (7,800)    (7,780)
                                                                  --------    -------
Loans, net........................................................ 466,032    418,532
                                                                  --------    -------
Premises and equipment (Note 7)...................................  22,658     16,450
Other real estate owned...........................................      81        252
Accrued interest receivable and prepaid expenses..................  11,262     11,779
Other assets (Note 8).............................................  33,293     26,539
                                                                  --------    -------
Total Assets..................................................... $764,072   $711,154
                                                                   ========   ========  
   
Liabilities
Deposits:
  Noninterest-bearing.............................................$ 82,175   $ 77,318
  Interest-bearing (Note 9)....................................... 564,861    532,787
                                                                  --------   --------
Total Deposits.................................................... 647,036    610,105
                                                                  --------   --------
Interest-bearing demand notes issued to U.S. Treasury (Note 10)...   2,741      2,234
Other liabilities for borrowed money (Note 10)....................  30,434     21,523
Accrued interest payable and accrued expenses.....................   8,705      8,231
Other liabilities.................................................   5,977      5,152
                                                                  --------   --------
Total Liabilities................................................. 694,893    647,245
Stockholders' Equity                                              --------   --------
Common Stock -(par value:$5.00)
  No. shares authorized: 1996 - 35,000,000; 1995 - 10,000,000
  No. shares issued: 1996 - 6,237,009; 1995 - 5,932,686
  No. shares outstanding: 1996 - 6,220,078; 1995 - 5,925,527......  31,185     29,663
Capital surplus...................................................  16,325      9,987
Retained earnings.................................................  20,502     22,848
Net unrealized gain on securities available-for-sale, net of taxes   1,603      1,624
Less: Treasury Stock (16,931 shares in 1996 and
        7,159 shares in 1995) - at cost...........................    (436)      (213)
                                                                  --------   --------
Total Stockholders' Equity........................................  69,179     63,909
                                                                  --------   --------
Total Liabilities and Stockholders' Equity........................$764,072   $711,154
                                                                  ========   ========
See accompanying notes to financial statements
</TABLE>

                  Consolidated Statements of Income
           Sterling Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>

                                                     For the years ended December 31,
(Dollars in thousands, except per share data)            1996        1995         1994
<S>                                                  <C>         <C>          <C>             
Interest Income                             
Interest and fees on loans...........................$  41,611   $  37,975    $  32,356
Interest on deposits in other banks..................        6           2            2
Interest on federal funds sold.......................      398         449          264
Interest and dividends on investment securities:
  Taxable............................................    7,442       7,526        6,636
  Tax-exempt.........................................    2,882       2,695        2,496
  Dividends on stock.................................      219         203          177
                                                     ---------   ---------    ---------
Total Interest Income................................   52,558      48,850       41,931
                                                     ---------   ---------    ---------
Interest Expense
Interest on time certificates of deposit of
  $100,000 or more...................................      934         893          613
Interest on all other deposits.......................   19,775      18,200       12,970
Interest on demand notes issued to the U.S. Treasury.       95         114           77
Interest on federal funds purchased..................       89          66           10
Interest on other borrowed money.....................    1,930       1,880        1,255
Interest on mortgage indebtedness and obligations
  under capitalized leases...........................     none        none            1
                                                     ---------   ---------    ---------
Total Interest Expense...............................   22,823      21,153       14,926
                                                     ---------   ---------    ---------
Net Interest Income..................................   29,735      27,697       27,005
Provision for loan losses (Note 6)...................      580         534        1,081
                                                     ---------   ---------    ---------
Net Interest Income after Provision for Loan Losses..   29,155      27,163       25,924
                                                     ---------   ---------    ---------
Other Operating Income
Income from fiduciary activities.....................    1,139         856          742
Service charges on deposit accounts..................    2,485       2,010        1,798
Other service charges, commissions and fees..........    2,074       1,716        1,539
Mortgage banking.....................................    1,192         525          635
Other operating income (Note 8)......................    3,524       3,186        2,329
Investment securities gains or (losses)..............      158        none         none
                                                     ---------   ---------    ---------
Total Other Operating Income.........................   10,572       8,293        7,043
                                                     ---------   ---------    ---------
Other Operating Expenses
Salaries and employee benefits (Note 11).............   15,027      13,040       12,264
Net occupancy expense................................    2,109       1,721        1,477
Furniture and equipment expense (including depreciation
  of $1,256 in 1996, $917 in 1995 and $779 in 1994)..    2,044       1,605        1,379
FDIC insurance assessment............................        2         622        1,128
Other operating expenses.............................    7,587       6,435        5,805
                                                     ---------   ---------    ---------
Total Other Operating Expenses.......................   26,769      23,423       22,053
                                                     ---------   ---------    ---------
Income Before Income Taxes...........................   12,958      12,033       10,914
Applicable income taxes (Note 12)....................    3,147       3,039        2,637
                                                     ---------   ---------    ---------
Net Income...........................................$   9,811   $   8,994    $   8,277
                                                     =========   =========    =========
Earnings per common share:
  Net Income.........................................$    1.57   $    1.45    $    1.35
Cash dividends declared per common share.............$     .74   $     .89    $     .58
Average shares outstanding...........................6,235,257   6,204,212    6,128,058
</TABLE>
See accompanying notes to financial statements  


      Consolidated Statements of Changes in Stockholders' Equity
           Sterling Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
                              
                                                                           Net  
                                                                        Unrealized                   
                                                                         Gain on 
                                                                        Available-
                                 Shares                                  for-Sale 
                                 Common   Common    Capital  Retained  Securities,   Treasury
                                  Stock    Stock    Surplus  Earnings  Net of Taxes   Stock    Total
(Dollars in thousands)
<S>                            <C>       <C>      <C>       <C>       <C>           <C>    <C>              
Balance, January  1, 1994..... 2,882,920 $ 14,414 $  20,830 $  14,223 $          0  $     0$ 49,467
Net income....................                                  8,277                         8,277
Common stock issued
 Dividend Reinvestment Plan...    55,255      277     2,005                                   2,282
 Employee Stock Plan..........     8,830       44       319                                     363
Two-for-one stock split....... 2,927,412   14,637   (14,637)
Cash dividends declared -
 Common stock.................                                 (3,386)                       (3,386)
Purchase of Treasury Stock
 (14,471 shares)..............                                                         (379)   (379)
Issuance of Treasury Stock for
 Dividend Reinvestment Plan
 (8,664 shares)...............                           27                             214     241
Net unrealized gain on available-
 for-sale securities, net of taxes                                             420              420
                              ---------- --------  --------   --------  ----------  ------- --------
Balance, December 31, 1994.... 5,874,417   29,372     8,544     19,114         420     (165) 57,285

Net income....................                                   8,994                        8,994
Common stock issued
 Dividend Reinvestment Plan...    45,121      225     1,115                                   1,340
 Employee Stock Plan..........    13,148       66       325                                     391
Cash dividends declared -
 Common stock.................                                  (5,260)                      (5,260)
Purchase of Treasury Stock
 (41,880 shares)..............                                                       (1,252) (1,252)
Issuance of Treasury Stock for
 Dividend Reinvestment Plan
 (40,528 shares)..............                            3                           1,204   1,207
Change in net unrealized gain on 
 available-for-sale securities,
 net of taxes.................                                               1,204            1,204
                              ---------  --------  --------   --------  ---------- -------  --------
Balance, December 31, 1995....5,932,686    29,663     9,987     22,848       1,624    (213)  63,909
Net income....................                                   9,811                        9,811
Common stock issued
 Dividend Reinvestment Plan...    2,517        13        58                                      71
 Employee Stock Plan..........    5,690        28       140                                     168
Stock dividend issued - 
 Common stock - 5%, including
  cash paid in lieu of 
  fractional shares...........  296,116     1,481     6,144     (7,649)                         (24) 
Cash dividends declared -
 Common stock.................                                  (4,508)                      (4,508)
Purchase of Treasury Stock
 (21,026 shares)..............                                                        (547)    (547)
Issuance of Treasury Stock 
 Dividend Reinvestment Plan
 (8,435 shares)...............                           (3)                           247      244
 Employee Stock Plan
 (2,819 shares)...............                           (1)                            77       76
Change in net unrealized gain 
 on available-for-sale 
 securities, net of taxes......                                                (21)             (21)
                              ---------  --------  --------   --------  ---------- -------  -------
Balance, December 31, 1996....6,237,009  $ 31,185  $ 16,325   $ 20,502  $    1,603 $  (436) $69,179
                              =========  ========  ========   ========  ========== =======  =======

</TABLE>
See accompanying notes to financial statements

                Consolidated Statements of Cash Flows
           Sterling Financial Corporation and Subsidiaries
<TABLE>
<capation>
                                                       For the years ended December 31,
(Dollars in thousands)                                   1996        1995         1994
<S>                                                  <C>         <C>          <C>             
Cash Flows from Operating Activities
Net Income...........................................$   9,811   $   8,994    $   8,277
Adjustments to reconcile net income to net cash
  provided by/(used in) operating activities:  
   Depreciation......................................    1,625       1,198        1,014
   Accretion & amortization of investment securities.      356         367          661
   Provision for possible loan losses................      580         534        1,081
   Provision for deferred income taxes...............      824         579          307
   (Gain) on sale of property and equipment..........       (2)         (1)          (2)
   (Gain) on sales of investment securities..........     (158)       none         none
   (Gain) on sale of mortgage loans..................     (262)       (163)        (279)
   Proceeds from sales of mortgage loans.............   33,480      16,283       24,284
   Originations of mortgage loans held for sale......  (33,272)    (16,558)     (21,098)
   Change in operating assets and liabilities:
    (Increase) decrease in accrued interest receivable
     and prepaid expenses............................      517      (2,825)        (138)
    (Increase) in other assets.......................   (6,583)     (2,469)      (3,341)
     Increase (decrease) in accrued interest payable
      and accrued expenses...........................     (350)      1,915          324
     Increase (decrease) in other liabilities........      836        (753)        (140)
                                                     ---------   ---------    ---------
Net cash provided by/(used in) operating activities..    7,402       7,101       10,950
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits 
  in other banks.....................................    1,023       1,052       45,226
Purchase of interest-bearing deposits in other banks.   (1,643)     (1,052)     (45,209)
Proceeds from sales of investment securities
 available-for-sale..................................      670        none         none
Proceeds from maturities or calls of investment
 securities held-to-maturity.... ....................   37,508      30,095       31,435
Proceeds from maturities or calls of investment
 securities available-for-sale.......................    8,948       2,921        1,103
Purchases of investment securities held-to-maturity..   (9,791)    (46,273)     (54,338)
Purchases of investment securities available-for-sale  (19,310)     (6,926)      (1,972)
Federal funds sold, net..............................  (14,800)     (9,350)      12,350
Net loans and leases made to customers...............  (48,080)    (34,057)     (33,904)
Purchases of premises and equipment..................   (7,880)     (5,681)      (5,810)
Proceeds from sale of premises and equipment.........       49          11          245
                                                     ---------   ---------    ---------
Net cash provided by/(used in) investing activities..  (53,306)    (69,260)     (50,874)
Cash Flows from Financing Activities
Net increase in demand deposits, NOW and 
  savings accounts...................................   12,013      32,041        7,013
Net increase in time deposits........................   24,918      41,062       24,309
Net increrase (decrease) in interest-bearing demand 
 notes issued to the U.S. Treasury...................      507        (680)         (86)
Proceeds from borrowings.............................   58,474      39,180       13,850
Repayments of borrowings.............................  (49,563)    (36,830)     (14,088)
Federal funds purchased, net.........................     none      (6,000)       6,000
Repayments of mortgages payable and capitalized
  lease liability....................................     none        none         (11)
Proceeds from issuance of common stock...............      239       1,731        2,645
Cash dividends paid..................................   (4,508)     (5,260)      (3,386)
Cash paid in lieu of fractional shares...............      (24)       none         none
Acquisition of treasury stock........................     (547)     (1,252)        (379)
Proceeds from issuance of treasury stock.............      320       1,207          241
                                                     ---------   ---------    ---------
Net cash provided by/(used in) financing activities..   41,829      65,199       36,108
                                                     ---------   ---------    ---------
Increase (decrease) in cash and due from banks.......   (4,075)      3,040       (3,816)
Cash and due from banks:
Beginning............................................   35,414      32,374       36,190
                                                     ---------   ---------    ---------
Ending...............................................$  31,339   $  35,414    $  32,374
                                                     =========   =========    =========

Supplemental Disclosure of Cash Flow Information:
Cash payments for:
  Interest paid to depositors and on borrowed money..$  22,637   $  19,937    $  14,728
  Income taxes.......................................    2,230       2,526        2,160
Supplemental Schedule of Noncash Investing and
  Financing Activities:
Other real estate acquired in settlement of loans....$     119   $     293    $     630
</TABLE>
See accompanying notes to financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sterling Financial Corporation and Subsidiaries
(All dollar amounts presented in the tables are in thousands, except per share
data)

Note 1 - Formation of Sterling Financial Corporation

     As a result of a plan of reorganization, The First National Bank of
Lancaster County, now by name change, Bank of Lancaster County, N.A. (Bank),
became the wholly owned subsidiary of Sterling Financial Corporation (Parent
Company), a new bank holding company, at the close of business June 30, 1987. 
Each outstanding share of the Bank's common stock (par value $10.00) was
converted into two shares of common stock (par value $5.00) of the Parent
Company.  The authorized capital of the Parent Company is 35,000,000 shares of
common stock.

Note 2 - Summary of Significant Accounting Policies

     Business - Sterling Financial Corporation, through its subsidiary bank, 
Bank of Lancaster County, N.A., and its subsidiary, Town & Country, Inc., 
provides a full range of banking services to individual and 
corporate customers.  The principal market area is Lancaster County, 
Pennsylvania.  Sterling Financial Corpoation and the Bank of 
Lancaster County, N.A. are subject to competition from
other financial institutions.  Both are subject to regulations of certain 
federal agencies and, accordingly, they are periodically 
examined by those regulatory authorities.

     Basis of Financial Statement Presentation - The accounting and reporting
policies of Sterling Financial Corporation and its subsidiaries (the 
Corporation) conform to generally accepted accounting principles 
and to general practices within the banking industry.  
In preparing the financial statements, management is required to make estimates 
and assumptions that affect the reported amounts of assets and liabilities 
as of the date of the balance sheet and revenues and
expenses for the period.  Actual results could differ significantly from these
estimates.     

  Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Sterling Financial Corporation and its wholly
owned subsidiaries, Bank of Lancaster County, N.A. and its subsidiary Town &
Country, Inc., and Sterling Mortgage Services, Inc. (presently inactive).  All
significant intercompany transactions have been eliminated in the consolidation.

  Investment Securities - Investment securities include both debt securities and
equity securities.  Sterling adopted Statement of Financial Accounting Standards
Board Statement No. 115 (SFAS 115), "Accounting for Certain Investments in Debt
and Equity Securities" as of January 1, 1994.  SFAS 115 addresses the accounting
and reporting for investments in equity securities that have readily 
determinable fair values and for all investments in debt securities.  
These investments are to be classified in one of three categories 
and accounted for as follows: 1) debt securities that a company has 
the positive intent and ability to hold to maturity
are classified as held-to-maturity securities and reported at amortized cost; 2)
debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value with unrealized gains and losses included in earnings; 
and 3) debt and equity securities not classified as either 
held-to-maturity or trading securities are classified as 
available-for-sale securities and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity.  Sterling has
segregated its investment securities into two categories: those held-to-maturity
and those available-for-sale.  In 1995, the Financial Accounting Standards Board
(FASB) issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities."  Effective
November 15, 1995, the FASB permitted a one-time opportunity for institutions to
reassess the appropriateness of the designations of all securities held upon the
initial application of the Special Report.  After a reassessment of the current
designations of the portfolio, it was determined that an additional $54,218,000
in securities be transferred from the held-to-maturity category to available-
for-sale category.   

     Investment securities in the held-to-maturity category are carried at cost
adjusted for amortization of premiums and accretion of discounts, both computed
on the constant yield method.  It is management's intent to hold investment
account securities until maturity.  However, the investment portfolio does serve
as an ultimate source of liquidity.  In order to acknowledge this function,
Sterling has designated certain specific debt securities as being available-for-
sale.  Premiums and discounts are recognized in interest income computed on the
constant yield method.  All marketable equity securities are classified as
available-for-sale.  Realized gains and losses on securities are computed using
the specific identification method and are included in Other Operating Income in
the Consolidated Statements of Income.

     Future purchases of securities will be evaluated on an individual basis for
classification among the three permissible categories based on management's
intent and the ability to hold each security to maturity, on the relative sizes
of the security categories in relation to future liquidity needs, on current
asset/liability management strategies and other criteria as appropriate.

  Premises and Equipment - Premises, furniture and equipment, leasehold
improvements, and capitalized leases are stated at cost, less accumulated
depreciation and amortization.  For book purposes, depreciation is computed
primarily by using the straight-line method over the estimated useful life of 
the asset.  Charges for maintenance and repairs are expensed as incurred.  
Gains and losses on dispositions are reflected in current operations.

  Other Real Estate Owned - Other real estate owned is carried at the lower of
cost or an amount not in excess of estimated fair value.

  Allowance for Loan Losses - The provision for loan losses charged to operating
expense reflects the amount deemed appropriate by management to produce an
adequate reserve to meet the present and foreseeable risk characteristics of the
loan portfolio.  Management's judgement is based on the evaluation of individual
loans and their overall risk characteristics, past loan loss experience, and
other relevant factors.  Loan losses are charged directly against the allowance
and recoveries on previously charged-off loans are added to the allowance.

  Interest Income - Interest on installment loans is recognized primarily on the
simple interest, actuarial and the rule of seventy-eights methods.  Interest on
other loans is recognized based upon the principal amount outstanding.  The
general policy has been to cease accruing interest on loans when it is 
determined that a reasonable doubt exists as to the collectibility of 
additional interest. Interest income on these loans 
is only recognized to the extent payments are received.

  Loan Origination Fees and Costs - Loan fees, net of loan origination costs, 
are deferred and amortized to interest income over the life 
of the loan.  The amortization of net deferred fees is 
discontinued on non-accrual loans.

  Federal Income Taxes - Applicable income taxes are based on income as reported
in the consolidated financial statements.  Deferred income taxes are provided 
for those elements of income and expense which are recognized in 
different periods for financial reporting and income tax purposes.  

  Trust Department Assets and Income - Trust assets held by the Bank in a
fiduciary or agency capacity for customers of the Trust Department are not
included in the financial statements since such items are not assets of the 
Bank.  Trust income has been recognized on the cash basis which is not 
significantly different from amounts that would have been recognized 
on the accrual basis.

  Earnings per Share - Earnings per common share were computed by dividing net
income by the weighted average number of shares of common stock outstanding 
which were 6,235,257, 6,204,212 and 6,128,058 for 1996, 1995 and 1994 
respectively, after giving retroactive effect to a 5% stock dividend paid in
July 1996 and a two-for-one stock split in the form of a 
100% stock dividend paid in 1994.

  Presentation of Cash Flows - For purposes of reporting cash flows, cash and 
due from banks includes cash on hand and amounts due from banks (including 
cash items in process of clearing). 

  Reclassifications - Certain income items for prior years have been 
reclassified in order to conform with the current year presentation with no 
effect to net income.

   Accounting for Mortgage Servicing Rights - FASB Statement No. 122, 
"Accounting for Mortgage Servicing Rights - an amendment of FASB Statement 
No. 65", effective for fiscal years beginning after December 15, 1995, 
establishes accounting standards for recognizing servicing 
rights on mortgage loans.  The Corporation has historically originated mortgage 
loans as a normal business activity, selling
the mortgages on the secondary market to Federal Home Loan Mortgage Corporation
and retaining all mortgage servicing.  Mortgage sale income has been recorded on
a "net" gain/loss basis.  FASB No. 122 will require recognition of servicing
"value" as an asset and immediate income as though mortgage servicing has been
sold rather than retained.  The servicing asset valuation will be amortized over
the expected servicing life of the mortgage portfolio.  In addition, the 
mortgage servicing asset must be valued periodically for impairment, based 
upon review of expected servicing life in relation to current market rates.  
The implementation of FASB No. 122 will result in a greater 
recognition of income from mortgage origination and sales activity and a 
corresponding decrease of servicing income over the serviced mortgage 
portfolio life.

     In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 - "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities".  This Statement amends
and extends to all servicing assets and liabilities the accounting standards for
mortgage servicing rights now in FASB Statement No. 65, "Accounting for Certain
Mortgage Banking Activities", and supercedes FASB Statement No. 122, "Accounting
for Mortgage Servicing Rights".  This Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively.  Sterling has determined
that the application of this Standard will not have a material effect on
earnings.  The FASB also subsequently issued FASB No. 127 that delayed until
January 1, 1998, the effective date of certain provisions of FASB 125. 
Transactions subject to the later effective date include securities lending,
repurchase agreements, dollar-rolls and similar secured financing arrangements. 
Application of the new rules is not expected to have a material impact on
Sterling's consolidated financial statements.

  Mortgage Loans Held for Sale - Mortgage loans held for sale are recorded at
the lesser of current secondary market value or the actual book 
value of loans.


Note 3 - Restrictions on Cash and Due From Banks

     The Bank is required to maintain average reserve balances with the Federal
Reserve Bank.  The average amount of these reserve balances for the year ended
December 31, 1996 was approximately $7,776,000.  Balances maintained at the
Federal Reserve Bank are included in cash and due from banks.

Note 4 - Investment Securities

     As discussed in Note 2, the Corporation adopted SFAS 115 effective January
1, 1994.  A one-time move from the held-to-maturity category to the available-
for-sale category was permitted during 1995.  The Corporation took advantage of
this opportunity and moved a total of $54,218,000 from the held-to-maturity
category to the available-for-sale category.  The amount of net unrealized gain
on securities available-for-sale, net of taxes, transferred to stockholders'
equity amounted to $510,295 on this transfer. 
 
     Securities pledged to secure government and other public deposits, trust
deposits, short-term borrowings, and other balances as required or permitted by
law were carried at $47,763,546 in 1996 and $54,780,570 in 1995.  

     The amortized cost and fair values of investment securities held-to-
maturity are as follows:
<TABLE>
<CAPTION>
                                                   December 31, 1996
                                                     Gross       Gross    
                                        Amortized   Unrealized  Unrealized    Fair
                                          Cost        Gains       Losses      Value
  <S>                                 <C>         <C>         <C>         <C>             
  U.S. Treasury securities............$    12,888 $        42 $       32  $  12,898
  Obligations of other U.S. Government 
    agencies and corporations.........     11,607          35         77     11,565
  Obligations of states and political
    subdivisions......................     37,584         560        169     37,975
  Mortgage-backed securities..........      2,076         108          1      2,183
  Other bonds, notes and debentures...     27,269         154         64     27,359
                                       ----------   ---------   --------   --------
  Subtotal............................     91,424         899        343     91,980
  Nonmarketable equity securities.....      2,798        none       none      2,798
                                       ----------  ----------  ---------   --------
  Total...............................$    94,222 $       899 $      343  $  94,778
                                      ===========  ==========  =========   ========
                                                      December 31, 1995                 
  
                                                      Gross       Gross    
                                        Amortized   Unrealized  Unrealized    Fair
                                           Cost       Gains       Losses      Value
  U.S. Treasury securities............$    18,837  $      158  $       69  $  18,926
  Obligations of other U.S. Government 
    agencies and corporations.........     18,473         110          65     18,518
  Obligations of states and political 
    subdivisions......................     40,212         796         154     40,854
  Mortgage-backed securities..........      3,854         152           1      4,005
  Other bonds, notes and debentures...     38,944         362         108     39,198
                                       ----------   ---------   ---------   --------
  Subtotal............................    120,320       1,578         397    121,501 
  Nonmarketable equity securities.....      2,565        none        none      2,565
                                       ----------   ---------   ---------   --------
  Total...............................$   122,885  $    1,578  $      397  $ 124,066 
                                       ==========   =========   =========   ========

</TABLE>
     
     Included in nonmarketable equity securities is Federal Reserve stock, 
Federal Home Loan Bank of Pittsburgh stock and Atlantic 
Central Bankers Bank stock.     

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

                                                    December 31, 1996          
                                                    Amortized     Fair
                                                    Cost        Value         
        Due in one year or less................$     23,864  $    23,918     
        Due after one year through five years..      42,771       42,954
        Due after five years through ten years.      17,507       17,723
        Due after ten years....................       5,206        5,202
                                                -----------  -----------
                                                     89,348       89,797
        Mortgage-backed securities.............       2,076        2,183
                                                -----------  ----------- 
                                                $    91,424  $    91,980    
                                                ===========  ===========
  
     The amortized cost and fair values of investment securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
    
                                                   December 31, 1996
                                                     Gross       Gross    
                                        Amortized   Unrealized  Unrealized    Fair
                                          Cost        Gains       Losses      Value
  <S>                                 <C>         <C>         <C>         <C>           
  U.S. Treasury securities............$    13,611 $        60 $       73  $  13,598
  Obligations of other U.S. Government 
    agencies and corporations.........     18,800          63        145     18,718
  Obligations of states and political
    subdivisions......................     20,488         400         69     20,819
  Mortgage-backed securities..........      1,125           1          9      1,117
  Other bonds, notes and debentures...     22,752         129        110     22,771
                                       ----------   ---------   --------   --------
  Subtotal............................     76,776         653        406     77,023
  Equity securities and corporate
    stock.............................        171       2,181       none      2,352
                                       ----------  ----------  ---------   --------
  Total...............................$    76,947 $     2,834 $      406  $  79,375
                                      ===========  ==========  =========   ========
                                                   December 31, 1995
                                                       Gross      Gross     
                                        Amortized   Unrealized   Unrealized   Fair
                                          Cost         Gains      Losses      Value
  U.S. Treasury securities..............$ 11,046     $   148      $   40   $ 11,154
  Obligations of other U.S. Government
   agencies and Corporations............  15,489         180          37     15,632
  Obligations of states and political
   subdivisions.........................  19,622         455         132     19,945
  Mortgage-backed securities............   1,249           4          11      1,242
  Other bonds, notes and debentures.....  19,013         301          67     19,247
                                        --------     -------      ------   --------
  Subtotal..............................  66,419       1,088         287     67,220
  Equity securities and corporate 
    stock...............................      88       1,659        none      1,747
                                        --------     -------      ------   --------
  Total.................................$ 66,507     $ 2,747      $  287   $ 68,967
                                        ========     =======      ======   ========
</TABLE>
     The amortized cost and fair values of available-for-sale debt securities at
December 31, 1996 by contractual maturity, are shown below.  Expected maturities
will differ from contractual maturities because borrowers may have the 
right to call or prepay obligations with or without call or 
prepayment penalties.


                                                   December 31, 1996
                                                  Amortized     Fair
                                                    Cost        Value      
                                      
        Due in one year or less...................$  2,567    $  2,568
        Due after one year through five years.....  49,441      49,416
        Due after five years through ten years....  19,215      19,464
        Due after ten years.......................   4,428       4,458
                                                  --------    --------
                                                    75,651      75,906
        Mortgage-backed securities................   1,125       1,117
                                                  --------    --------
                                                  $ 76,776    $ 77,023    
                                                  ========    ========

     Proceeds from sales of investment securities available-for-sale during 
1996 were $670,095.  Gains of $158,373 were realized on these sales.  
There were no sales of investment securities during 1995 or 1994.  

Note 5 - Loans

  Loans outstanding at December 31, are as follows:
<TABLE>
<CAPTION>
                                                                   1996          1995   
  <S>                                                        <C>           <C>             
  Commercial, financial and agricultural.....................$    239,701  $    228,058 
  Real estate - construction.................................       5,608         6,378 
  Real estate - mortgage.....................................      45,373        33,124 
  Consumer...................................................     136,989       116,210 
  Lease financing receivables (net of unearned income).......      47,346        43,904 
                                                             ------------  ------------
  Total loans, gross.........................................$    475,017  $    427,674
                                                             ============  ============
</TABLE>
     Loans on a non-accrual status amounted to $1,193,000 at December 31, 1996,
compared to $1,010,000 at December 31, 1995.  If interest income had been
recorded on all such loans for the years indicated, such interest income would
have increased by approximately $116,567 and $143,997 for 1996 and 1995
respectively.

     SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures", an amendment of SFAS No. 114, was implemented at
the beginning of 1995.  The Bank has defined impaired loans as all loans on
nonaccrual status, except those specifically excluded from the scope of SFAS No.
114, regardless of the credit grade assigned by loan review.  All impaired loans
were measured by utilizing the fair value of the collateral for each loan.  When
the measure of an impaired loan is less than the recorded investment in the 
loan, the Bank will compare the impairment to the existing allowance assigned 
to the loan.  If the impairment is greater than the allowance, the Bank 
will adjust the existing allowance to reflect the 
greater amount or take a corresponding charge to the provision for loan 
losses.  If the impairment is less than the existing allowance for a particular 
loan, no adjustments to the allowance or the provision
for loan and lease losses will be made.  There was no adjustment necessary for
the impaired loans for the periods indicated.

     The average amount of nonaccruals for the fourth quarter of 1996 was
$1,171,599 compared to $1,112,405 for the fourth quarter 1995,  while the 
average for the year 1996 was $1,119,305 compared to $1,746,100 for 1995.
     

     The following table presents information concerning impaired loans at
December 31:

                                                           1996     1995
     Gross impaired loans which have allowances..........$ 1,193   $1,010
        Less: Related allowances for loan losses.........   (179)    (349)
                                                         -------   ------
     Net impaired loans..................................$ 1,014   $  661
                                                         =======   ======

Note 6 - Allowance for Loan Losses

  Changes in the Allowance for Loan Losses were as follows:
<TABLE>
<CAPTION>

                                                          1996      1995      1994 
<S>                                                   <C>        <C>       <C>
Balance at January 1..................................$   7,780  $  7,640  $  7,180
Recoveries credited to allowance......................      143       282       141 
Provisions for loan losses charged to income..........      580       534     1,081
                                                       --------  --------  --------
Total.................................................    8,503     8,456     8,402
Losses charged to allowance...........................      703       676       762
                                                       --------  --------  --------
Balance at December 31................................$   7,800  $  7,780  $  7,640
                                                      =========  ========  ========

Ratio of Allowance to loans, net of unearned income
  at end of year.....................................     1.65%     1.82%     1.95% 
</TABLE>
Note 7 - Premises and Equipment

  Premises and equipment at December 31, 1996 and 1995 is summarized as follows:

                                                            1996         1995
       Land.............................................$    3,756   $    2,482
       Buildings........................................    16,603       11,814
       Buildings under capitalized lease................       104          104
       Leasehold improvements...........................       813          735
       Equipment, furniture and fixtures................    11,553       10,597
       Construction in progress.........................       430           14
                                                        ----------   ----------
                                                            33,259       25,746
       Less: Accumulated depreciation...................   (10,601)      (9,296)
                                                        ----------   ----------
                                                        $   22,658   $   16,450 
                                                        ==========   ==========

     Contributing to the increase in premises and equipment was the cost of a
building to be utilized as an operations and administrative service center, as
well as furniture and equipment for this building.

  Depreciation expense amounted to $1,625,184 in 1996, $1,197,980 in 1995 and
$1,013,830 in 1994.  

Note 8 - Other Assets

     Included in other assets for 1996 and 1995 is $26,533,442 and $22,990,784
respectively which represents operating leases generated by Town & Country, Inc.
The income generated from the leases for 1996 and 1995 amounted to $2,647,810 
and $2,211,700 respectively and is reflected in other operating income.

     The following schedule provides an analysis of Town & Country's investment
in property on operating leases and property held for lease by major classes as
of December 31, 1996 and 1995:
                                                        1996         1995  
                   Construction equipment...........$      400   $       688
                   Transportation equipment.........    14,604        12,018
                   Automobiles......................    17,218        14,265
                   Manufacturing equipment..........       961         5,550
                   Trucks...........................    14,956        12,614
                   Other............................     4,028           734
                                                    ----------   -----------
                   Total............................    52,167        45,869
                   Less: Accumulated depreciation...   (25,634)      (22,878)
                                                    ----------   -----------
                                                    $   26,533   $    22,991
                                                    ==========   ===========


     The following is a schedule by years of minimum future rentals on
noncancelable operating leases as of December 31, 1996:

                   Year ending December 31:         
                   1997...............................$ 13,118
                   1998................................  1,995
                   1999................................    382
                   2000................................    213
                   2001................................    189
                                                       -------
                   Total minimum future rentals.......$ 15,897
                                                       =======

     Also included in other assets is mortgage servicing rights activity.  The
activity for the year ended December 31, 1996 is as follows:
                                                        1996
                Balance at beginning of year..........$   none
                Capitalized mortgage servicing rights.     471
                Amortization..........................     (29)
                                                       -------
                Balance at end of year................$    442
                                                       =======

     The Corporation adopted, effective January 1, 1996, Statement of Financial
Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights",
an ammendment of FASB Statement No. 65.  In June 1996, the Financial Accounting
Standards Board (FASB) issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities".  The 
Statement amends and extends to all servicing assets and liabilities 
the accounting standards for mortgage servicing rights now in FASB Statement 
No. 65, "Accounting for Certain Mortgage Banking Activities", 
and supercedes SFAS No. 122.  This Statement requires that servicing assets 
and liabilities be subsequently measured by (a) amortization in 
proporation to and over the period of estimated net
servicing income or loss and (b) assessment for asset impairment or increased
obligation based on their fair values.  A valuation allowance will be 
recorded if the unamortized mortgage servicing rights exceed their fair 
value.  There was no valuation allowance for servicing rights 
for the year ended December 31, 1996.  Mortgage servicing rights 
are a result of originated mortgages.  There have been no mortgage servicing 
rights purchased.

Note 9 - Time Certificates of Deposit

     At December 31, 1996 and 1995, time certificates of deposit of $100,000 or
more aggregated $26,196,721 and $22,938,324 respectively.

Note 10 - Short-Term Borrowings and Other Liabilities for Borrowed Money
     
     The Bank maintains lines of credit with various correspondent banks to use
as sources of short-term funds.  Federal funds purchased, borrowings from the
Federal Reserve Bank and interest-bearing demand notes issued to the U.S.
Treasury would be considered short-term borrowings.  There were no federal funds
purchased or borrowings from the Federal Reserve Bank at December 31, 1996 or
1995. Interest-bearing demand notes issued to U.S. Treasury were $2,741,000 and
$2,234,000 for 1996 and 1995 respectively.  In addition, the Bank maintains a
line of credit with the Federal Home Loan Bank of Pittsburgh.  Based on the
amount of the Federal Home Loan Bank stock owned by the Bank, the maximum
borrowing capacity at December 31, 1996 was $15,910,000.  There were no advances
from the Federal Home Loan Bank considered as short-term borrowings at December
31, 1996 or 1995.  

     The average balance outstanding for any category of short-term borrowings
during the periods reported was less than 30 per cent of stockholders' equity at
the end of each period reported.
 
  The following represents other liabilities for borrowed money at December 31:
<TABLE>
<CAPTION>
                                                                   1996        1995
    <S>                                                           <C>         <C>
    Notes payable-Town & Country, Inc.(Subsidiary of Bank)
      borrowings from various lenders for leasing operations......$28,423     $19,283
    Federal Home Loan Bank advances...............................  2,011       2,240
                                                                   ------      ------
    Total.........................................................$30,434     $21,523
                                                                   ======      ====== 
</TABLE>
  Liabilities in connection with Town & Country, Inc. leasing operations are
payable to various lenders at various terms.  The estimated current portion of
this debt is $14,817,345 at December 31, 1996.  The borrowings from the Federal
Home Loan Bank of Pittsburgh, which total $2,010,547, consist of three 
advances. An advance in 1993 in the amount of $950,000 carries an interest 
rate of 5.39% per year and matures September 13, 2000.  In 1995 an advance 
was obtained in the
amount of $668,700, at a rate of 6.41% per year and matures September 28, 2001. 
In 1996, $400,000 was advanced at the rate of 3% per year and matures March 7,
2011.  The balance on this obligation at December 31, 1996 was $391,847.


Note 11 - Pension and Employee Stock Bonus Plan

     The Bank of Lancaster County, N.A. and its subsidiary, Town & Country, 
Inc.  maintains a qualified non-contributory pension plan for their employees.  
The Plan specifies fixed benefits to provide a monthly pension 
benefit at age 65 for life equal to one and one-half percent 
of each participant's final average salary
(highest five consecutive years' base compensation preceding retirement) 
for each year of credited service.  Salary in excess of $150,000 
(effective in the year 1994) is disregarded in determining a participant's 
retirement benefit pursuant
to IRS regulations.  All employees with one year of service who work at least
1,000 hours per year and who are at least age 21 are eligible to participate.  A
participant becomes 100% vested upon completion of five years with a vesting
credit.
     
     Net periodic pension cost for 1996, 1995 and 1994 included the following:

                                              1996       1995       1994
          Service cost....................... $ 614     $  579     $  577
          Interest cost......................   567        504        428
          Return on Plan assets..............(1,049)      (950)         6
          Net amortization and deferral......   368        417       (463)
                                             ------     ------     ------
          Net periodic pension cost..........$  500     $  550     $  548
                                             ======     ======     ======

 The following table sets forth the Plan's funded status at December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
 Actuarial present value of benefit obligations:
                                                            1996     1995     1994
 <S>                                                       <C>      <C>      <C>          
 Accumulated benefit obligation, including vested  
  benefits of $5,499,101 for 1996, $5,238,774 for 1995 
  and $3,705,229 for 1994..................................$ 5,551  $ 5,275  $ 3,745
                                                           =======  =======  =======
Projected benefit obligation for service rendered to
 date......................................................$(8,451) $(8,143) $(6,890)
Plan assets at fair value.. ...............................  8,265    6,728    6,087
                                                           -------  -------  -------
Projected plan assets in excess of or (less than)
 benefit obligation........................................$  (186) $(1,415) $  (803)
Unrecognized net (gain) or loss from past experience
 different from that assumed and effects of changes
 in assumptions............................................    449    1,495    1,374
Unrecognized net (asset) or obligation.....................   (207)    (276)    (345)
Unrecognized prior service cost............................   (120)    (128)    none
                                                           -------  -------  -------
Prepaid (accrued) pension cost included
 in other assets (liabilities).............................$   (64) $  (324) $   226
                                                           =======  =======  =======
</TABLE>
     The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.25% and 5.25%, respectively, at December 31,
1996.  The expected long-term rate of return on plan assets in 1996 was 9%.     
                                  
     The Board of Directors of the Bank adopted an employee stock plan effective
July 1, 1981.  The assets of the Plan will be entirely invested in Sterling
Financial Corporation common stock.  The Plan covers all Bank employees who are
age 18 and over, are employed for at least 1,000 hours per year and have
completed at least one year of service.  The Plan has two parts:

     *The salary deferral portion of the Plan permits any eligible participant 
to make voluntary contributions to the Plan ranging from 2% to 6% of 
compensation.  The Bank will contribute 25% of what the participant 
contributes.  Effective January 1, 1997, the Plan was amended 
to allow employees to make voluntary contributions up to a maximum 
of 10% of total compensation.  The provision for
the matching contribution remains the same, with the Bank contributing 25% of
each participant's contribution up to 6%.  This portion of the Plan is intended
to encourage thrift and investment in Sterling Financial Corporation stock, as
well as supplement their retirement.  The Plan allows for employees to make 
their voluntary contributions on a pre-federal income tax basis.

     *The performance incentive portion of the Plan allows the Bank to make
annual contributions to the Plan based on certain overall Bank performance
objectives.  These contributions will be allocated to the participants based on
compensation.

      Bank contributions to the Plan vest in each participant's account at the
rate of 20% for each year of service.  Normally, benefits may be paid from the
Plan on retirement, termination, disability or death.  Participants in the Plan
may withdraw their own contribution earlier under several restricted conditions
of hardship with approval of the Plan Committee.  The Plan provides that each
participant may vote the shares in his or her account through the Plan Trustee 
at any shareholder meeting.  The Bank of Lancaster County Trust Department 
serves as Trustee for the Plan.  All dividends received on 
Sterling Financial Corporation stock are reinvested in additional 
shares of Sterling Financial Corporation stock.

     The contribution to the performance incentive portion of the Plan was
$235,000, $216,000 and $200,000 for 1996, 1995 and 1994 respectively.  The
contribution to the salary deferral portion of the Plan was $75,619 in 1996,
$65,946 in 1995 and $51,305 in 1994.

     Effective January 1, 1993, Sterling adopted Statement of Financial
Accounting Standards No. 106 - "Employers' Accounting for Postretirement 
Benefits Other Than Pensions".  Under SFAS No. 106, the cost of 
postretirement benefits other than pensions must be recognized on an accrual 
basis as employees perform services to earn the benefits.  
This is a significant change from the previous generally accepted practice 
of accounting for these benefits which was on a cash basis.  The 
accumulated postretirement benefit obligation at the date of adoption
(the "transition obligation") could have been recognized in operations as the
cumulative effect of an accounting change in the period of adoption, which would
have resulted in an actuarially determined pre-tax charge to earnings of 
$1,026,457, or its recognition could be delayed by amortizing the 
obligation over future periods as a component of the postretirement 
benefit cost.  Sterling adopted SFAS No. 106 by recognizing 
the transition on a delayed basis.  The
transition obligation in the amount of $1,026,457 is being amortized on a
straight-line basis over a 20 year period which is the average remaining service
period of active plan participants.     

     The cost for postretirement benefits other than pensions consisted of the
following components at December 31, 1996, 1995 and 1994:

                                            1996   1995   1994
          Service cost......................$ 96   $ 93   $ 93
          Interest cost..................... 100     99     87
            Amortization of unrecognized
             transition obligation........... 51     51     51
                                           -----  -----  -----
          Net periodic postretirement
              benefit cost................. $247   $243   $231
                                            ====   ====   ====

     Sterling's postretirement benefits other than pensions are currently not
funded.  The status of the plans at December 31, 1996, 1995 and 1994 is as
follows:


     Actuarial valuation of accumulated postretirement benefit obligation:
          
                                                 1996    1995    1994
     Retirees..................................$  319  $  324  $  289
     Fully eligible active plan participants...   290     323     258
     Other active plan participants............   601     787     786
                                                -----   -----   -----
                                               $1,210  $1,434  $1,333
     Unrecognized transition obligation........  (821)   (872)   (924)
     Unrecognized prior service cost...........   251    none    none
     Unrecognized net gain (loss)..............   195      56      (9)
                                                -----   -----   -----
     Accrued postretirement benefit cost....... $ 835  $  618  $  400
                                                =====   =====   =====

     Prior to January 1, 1993, Sterling recognized the cost of postretirement
benefits, which is primarily retiree health care, as an expense as premiums were
incurred.  The postretirement health care plan is contributory, with retiree
contributions based on years of service.

     The assumed postretirement health care cost trend rate used in measuring
the accumulated postretirement benefit was 7.75% in 1996, decreasing by .5% per
year to an ultimate rate of 5.25% in 2001 and remains at that level thereafter. 
The discount rate used to measure the accumulated postretirement benefit
obligation was 7.25% in 1996.

     The health care cost trend rate assumption has a significant effect on the
amounts reported.  To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $250,304 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 1996 by $52,861.

     The Board of Directors of the Bank adopted a Retirement Restoration Plan
during 1996 for any officer whose compensation exceeded $150,000.  The Plan was
designed to "restore" the level of benefits which is lost to these employees
under the organization's qualified retirement plans because of Internal Revenue
Code restrictions.

     The Plan is designed to mirror the provisions set forth in the qualified
retirement plans available to all Bank of Lancaster County employees -- the
defined benefit pension plan, and the employee stock or 401(k) plan.  The Plan
allows for the calculation of benefits on the officer's salary in excess of
$150,000.  The effective date of the Plan was May 1, 1996.

     The net periodic pension cost for the Retirement Restoration Plan for 1996
included the following:
                                                                  1996
                                                                  ----
                Service cost.....................................$    8
                Interest cost....................................     9
                Amortization of unrecognized prior service cost..    13
                                                                 ------
                Net periodic pension cost........................$   30
                                                                 ======

     Actuarial valuation of accumulated benefit obligation:

                                                                  1996
                                                                  ----
                Eligible Participant............................$    48
                Intangible asset................................    (18)
                                                                -------
                Accrued retirement restoration plan liability...$    30
                                                                =======
<PAGE>
Note 12 - Applicable Income Taxes

     The effective income tax rates for financial reporting purposes are less
than the Federal statutory rate of 34% for 1996, 1995 and 1994 for reasons shown
as follows:            
<TABLE>
<CAPTION>
                                            For the years ended December 31,
                                        Statutory          Statutory         Statutory
                                    1996   Rate      1995      Rate    1994     Rate
  <S>                             <C>      <C>      <C>       <C>     <C>      <C>             
  Federal income tax expense                       
     at statutory rate............$ 4,406   34.0%   $ 4,091    34.0%  $ 3,711   34.0%
  Reduction resulting from:
   Non-taxable interest income...  (1,153)  (8.9%)   (1,046)   (8.7%)    (966)  (8.8%) 
   Other, net....................    (186)  (1.4%)      (71)    (.6%)    (149)  (1.4%) 
                                   -------  ------   -------   ------  -------  ------
  Applicable Federal income taxes.$ 3,067   23.7%   $ 2,974    24.7%  $ 2,596    23.8%
  State income taxes..............     80     .6%        65      .6%       41      .4%
                                  -------  ------   -------   ------  -------   ------
  Applicable income taxes.........$ 3,147   24.3%   $ 3,039    25.3%  $ 2,637    24.2%
                                  =======  ======   =======   ======  =======   ======
  Taxes currently payable.........$ 2,323           $ 2,460           $ 2,330
  Deferred income taxes...........    824               579               307     
                                  -------           -------           -------
  Applicable income taxes.........$ 3,147           $ 3,039           $ 2,637
                                  =======           =======           =======
</TABLE>
     The Corporation had net deferred tax credits of $4,326,000, $3,512,000 and
$2,312,000 at December 31, 1996, 1995 and 1994 respectively.  The tax effect of
temporary differences that gave rise to significant portions of the net 
deferred tax liability at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
                                                               December 31,
                                                            1996          1995
                                                            ----          ----
           <S>                                             <C>           <C>
           Deferred tax assets:

             Allowance for loan losses.....................$ 2,763       $ 2,756
             Deferred loan fees and costs..................     43            57
             Postretirement benefits other than pensions...    292           216
             Foreclosed assets.............................      7            11
             Pension.......................................     47             0
             Other.........................................     38            15
                                                           -------       -------
               Total deferred tax assets...................$ 3,190       $ 3,055
                                                           =======       =======
           Deferred tax liabilities:
             
             Leasing...................................... $(6,375)      $(5,321)
             Depreciation..................................   (294)         (244)
             Pension.......................................     (0)         (145)
             Unrealized gains on investments...............   (826)         (836)
             Other.........................................    (21)          (21)
                                                           -------       -------
               Total deferred tax liabilities..............$(7,516)      $(6,567)
                                                           =======       =======
               Net deferred tax liability..................$(4,326)      $(3,512)
                                                           =======       =======
</TABLE>

     Amounts for the current year are based upon estimates and assumptions as of
the date of this report and could vary from amounts shown on the tax return when
filed.  Accordingly, amounts previously reported for 1995 may change as a result
of adjustments to conform to tax returns filed. 

     The Financial Accounting Standards Board has issued Statement No. 109,
"Accounting for Income Taxes", which significantly changes the recognition and
measurement of deferred income tax assets and liabilities.  Statement No. 109
requires that deferred income taxes be recorded on an asset/liability method and
adjusted when new tax rates are enacted.  The corporation adopted Statement No.
109 beginning with its year ending December 31, 1993.  The Statement provides
that the effect of its adoption may be recorded entirely in the year of adoption
or retroactively by restating one or more prior years.  The statement was
retroactively applied to 1990.    

Note 13 - Stock Options

     On November 19, 1996, the Board of Directors of the Corporation adopted the
Sterling Financial Corporation 1996 Stock Incentive Plan (the "Stock Incentive
Plan") which will be submitted to the shareholders of this Corporation for their
approval and ratification at the 1997 Annual Meeting of Shareholders.  The 
stated purpose of the Stock Incentive Plan is to advance the development, 
growth and financial condition of the Corporation.  
The Stock Incentive Plan provides for the issuance of shares 
of the Corporation's Common Stock to the Corporation's
employees.  The shares of Common Stock that may be issued under the Stock
Incentive Plan shall not exceed in the aggregate 500,000 shares of Common Stock.

     The Stock Incentive Plan is administered by a disinterested committee of 
the Corporation's Board of Directors.  Incentive awards can be made in 
the form of incentive stock options, nonqualified stock options, stock 
appreciation rights or restricted stock as the disinterested 
committee deems appropriate.  There were 32,850 options granted, 
pending shareholder approval, during 1996; no options
were exercised during 1996, or as of the record date, March 14, 1997.

     Sterling has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation", requires use of option valuation models that were 
not developed for use in valuing employee stock options.  
Under APB 25, because the exercise price of Sterling's employee stock 
options equals the market price of the underlying stock on the 
date of the grant, no compensation expense is recognized.
   
Note 14 - Operating Leases

     The Bank leases certain banking facilities under operating leases which
expire on various dates to 2022.  Renewal options are available on these 
leases.  Minimum future rental payments as of December 31, 1996 
are as follows:
                                                     Operating
                                                       Leases
                       1997.........................$    565
                       1998.........................     531
                       1999.........................     474
                       2000.........................     299 
                       2001.........................     242 
                       Later years..................   1,888 
                                                     -------
                       Total minimum future rental
                         payments...................$  3,999 
                                                     =======

     Total rent expense charged to operations amounted to $562,547 in 1996,
$479,809 in 1995 and $413,996 in 1994.

Note 15 - Disclosures about Fair Value of Financial Instruments

     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.

Cash and Short-Term Investments - For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.

Investment Securities - For investment securities, fair value equals quoted
market price, if available.  If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.

Loans - For certain homogenous categories of loans, such as some residential
mortgages, fair value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics.  The
fair value of other types of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.  Lease
contracts as defined in FASB Statement No. 13, "Accounting for Leases", are not
included in this disclosure statement.

Deposit Liabilities - The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date.  The fair value of fixed-maturity certificates of deposits is estimated
using the rates currently offered for deposits of similar remaining maturities.

Federal Funds Purchased - The carrying amount of federal funds purchased
approximates its fair value due to the overnight maturities of these financial
instruments.

U.S. Treasury Demand Notes - For U.S. Treasury demand notes, the carrying amount
is a reasonable estimate of fair value.

Other Borrowings - Rates currently available to the Company for debt with 
similar terms and remaining maturities are used to estimate fair value of 
existing debt.

Commitments to Extend Credit and Standby Letters of Credit - The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties.  For fixed-rate loan 
commitments, fair value also considers the difference between current levels of 
interest rates and committed rates.  The fair value of guarantees 
and letters of credit is based on fees currently charged for similar 
agreements or on the estimated cost to terminate them or otherwise settle 
the obligations with the counterparties at the reporting date.

The estimated fair values of the Corporation's financial instruments are as 
follows:
<TABLE>
<CAPTION>
                                                   1996                    1995
                                           ---------------------   --------------------
                                            Carrying     Fair       Carrying    Fair
                                             Amount      Value       Amount     Value
                                           ---------   ---------   ---------  ---------
      <S>                                  <C>        <C>         <C>        <C>           
      Financial Assets:
       Cash and short-term investments.....$ 31,983   $  31,983   $  35,438  $  35,438  
       Investment securities
          held-to-maturity.................  94,222      94,778     122,885    124,066  
       Investment securities
          available-for-sale...............  79,375      79,375      68,967     68,967
       
       Loans............................... 428,687                 384,732
        Less: Allowance for loan losses....  (7,180)                 (7,180)            
                                          ---------   ---------   ---------  ---------
       Net loans..........................$ 421,507   $ 421,936   $ 377,552  $ 380,131
                          
             

      Financial Liabilities:
        Deposits..........................$ 647,036   $ 649,315   $ 610,105  $ 612,611
        U.S. Treasury demand notes........    2,741       2,741       2,234      2,234
        Other borrowings..................   30,434      30,189      21,523     21,281
          
      Unrecognized financial instruments:*
        Interest rate swaps:
         In a net receivable position.....$    none   $    none   $    none  $    none
         In a net payable position........    (none)      (none)      (none)     (none)
        Commitments to extend credit......      (82)        (82)        (72)       (72)
        Standby letters of credit.........      (48)        (48)        (38)       (38)
        Financial guarantees written......    (none)      (none)      (none)     (none)
</TABLE>
* The amounts shown under "Carrying Amount" represent accruals or deferred 
income (fees) arising from those unrecognized financial instruments.

Note 16 - Commitments and Contingent Liabilities

     In the normal course of business, there are various commitments and
contingent liabilities which are not reflected in the financial statements. 
These include lawsuits and commitments to extend credit, guarantees and letters
of credit.  In the opinion of management, there are no material commitments 
which represent unusual risks.  

     A summary of the more significant commitments as of December 31, 1996 and
1995 are as follows:

       Financial instruments whose contract amounts
         represent credit risk:      
                                                            1996          1995
           Standby letters of credit ....................$  7,594     $   7,568
           Commitments to extend credit..................$ 80,259     $  76,672

     Standby letters of credit are obligations to make payments under certain
conditions to meet contingencies related to customers' contractual agreements 
and are subject to the same risk, credit review and approval process as loans.

     Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.  
Commitments generally have fixed expiration dates or other 
termination clauses and may require the payment of a fee.  
Since many of the commitments are expected to expire without being drawn upon, 
the total commitment amounts do not necessarily
represent future cash requirements.  Each customer's creditworthiness is
evaluated on a case-by-case basis.  Excluded from these amounts are commitments
to extend credit in the form of retail credit cards, check credit or related
plans.
     
     Sterling's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments.  Sterling uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.

     Most of Sterling's business activity is with customers located within
Sterling's defined market area.  Sterling grants commercial, residential and
consumer loans throughout the market area.  The loan portfolio is well
diversified and Sterling does not have any significant concentrations of credit
risk.

     In 1994, SFAS No. 119 - "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" was issued effective for financial
statements issued after December 15, 1994.  The Corporation has not entered into
any derivatives defined as a future, forward, swap, option, caps, floors, etc. 
However, the financial instruments listed above as standby letters of credit and
commitments to extend credit have characteristics similar to derivatives.  The
following is a schedule that represents the estimated risk of current interest
rates versus committed rates.  Due to the uncertainty of when and how much a
commitment to extend credit will be exercised, estimates were used.

                                                       Fixed Rate Commitments
                                                        
                                                           1996     1995        
            Carrying value at December 31,..............$      0 $      0

            Commitment available not yet exercised......$ 17,932   19,105

            Commitment revalued at existing rates with
              estimated activity........................$ 17,932   19,117


Note 17 - Related Party Transactions

     Certain directors and officers of Sterling Financial Corporation and its
subsidiaries, their immediate families and companies in which they are principal
owners (more than 10%), were indebted to the Bank during 1996 and 1995.  All
loans were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and, in the opinion of the management of the Bank, do not involve
more than a normal risk of collectibility or present other unfavorable 
features.  Total loans to these persons at December 31, 1996 and 1995 
amounted to $5,435,443 and $6,170,667 respectively.  During 1996, 
$1,585,700 of new loans were made and repayments totaled $2,320,924.

Note 18 - Dividend and Loan Restrictions

     Dividends are paid by Sterling Financial Corporation from its assets which
are provided in part by dividends from Bank of Lancaster County, N.A.  However,
certain restrictions exist regarding the ability of the Bank to transfer funds 
to Sterling Financial Corporation in the form of dividends.  The 
approval of the Comptroller of the Currency shall be required 
if the total of all dividends declared by the Bank in any 
calendar year shall exceed the total of its net profits of that year combined 
with its retained net profits of the preceding two
years.  Under these restrictions, the Bank can declare dividends in 1997 without
approval of the Comptroller of the Currency of approximately $10,312,000 plus an
additional amount equal to the Bank's net profits for 1997 up to the date of any
such dividend declaration.

     Under current Federal Reserve regulations, the Bank is limited in the 
amount it may loan to Sterling Financial Corporation.  Loans to 
Sterling Financial Corporation may not exceed 10% of 
the Bank's capital stock and surplus.

Note 19 - Sterling Financial Corporation (Parent Company Only) Financial
Information
<TABLE>
<CAPTION>
                               Condensed Balance Sheets
                                                                 As of December 31,
                                                                  1996        1995      
  Assets
    <S>                                                        <C>         <C>          
    Cash.......................................................$  1,109    $      5
    Securities available-for-sale..............................     185          88
    Investment in subsidiaries at equity.......................  69,026      63,994
    Other assets...............................................      51         847
                                                               --------    --------     
  Total Assets.................................................$ 70,371    $ 64,934
                                                               ========    ========
  Liabilities
    Other liabilities..........................................$  1,192    $  1,025

  Stockholders' Equity
    Common Stock...............................................$ 31,185    $ 29,663
    Capital Surplus............................................  16,325       9,987
    Retained Earnings..........................................  20,502      22,848
    Net Unrealized Gain on securities available-for-sale,
        net of taxes...........................................   1,603       1,624
    Less: Treasury Stock at cost...............................    (436)       (213)
                                                               --------    --------
  Total Stockholders' Equity...................................$ 69,179    $ 63,909
                                                               --------    --------
  Total Liabilities and Stockholders' Equity...................$ 70,371    $ 64,934
                                                               ========    ========
</TABLE>
                               Condensed Statements of Income
<TABLE>
>caption>
                                  
                                                  Years Ended December 31, 
                                               1996         1995         1994 
<S>                                          <C>         <C>           <C>       
Income       
   Dividends from subsidiaries...............$  4,847    $  3,837      $    966
   Dividends on investment securities........       3           2          none
   Other income..............................       1           1             1
                                             --------    --------      --------
     Total Income............................   4,851       3,840           967
                                             --------    --------      -------- 
 Expenses    
   Other expense.............................     155         141           178
                                             --------    --------      --------
     Total Expenses..........................     155         141           178
                                             --------    --------      --------
 Income before income taxes and equity 
   in undistributed net income             
   of subsidiaries...........................   4,696       3,699           789      
 Income taxes (credits)......................     (51)        (47)          (60)  
                                             --------    --------      --------
                                                4,747       3,746           849
 Equity in undistributed income of 
   subsidiaries..............................   5,064       5,248         7,428
                                             --------    --------      --------
 Net Income..................................$  9,811    $  8,994      $  8,277
                                             ========    ========      ========
</TABLE>

<TABLE>
<CAPTION>

                       Statements of Cash Flows
                                                        Years Ended December 31,  
                                                       1996       1995       1994 
  <S>                                               <C>        <C>        <C>
  Cash flows from operating activities      
  Net income........................................$  9,811   $  8,994   $  8,277
  Adjustments to reconcile net income to net cash
    provided by/(used in) operating activities:    
  Undistributed (earnings) loss of subsidiaries.....  (5,064)    (5,248)    (7,428)
  Changes in operating assets and liabilities:
    (Increase) decrease in other assets.............     796       (519)      (142)
    (Decrease) increase in other liabilities........     164        142         73
                                                    --------   --------   --------
  Net cash provided by/(used in)
    operating activities............................   5,707      3,369        780  
                                                    --------   --------   --------
  Cash flows from investing activities
   Purchase of investment securities
    Available-for-sale..............................     (83)       (81)      none
                                                    --------   --------   --------
  Net cash provided by/(used in) investing
    activities......................................     (83)       (81)      none
                                                    --------   --------   --------
  Cash flows from financing activities      
   Proceeds from issuance of common stock...........     239      1,731      2,645
   Cash dividends paid..............................  (4,508)    (5,260)    (3,386)
   Cash dividends paid in lieu of 
    fractional shares...............................     (24)      none       none      
   Acquisition of treasury stock....................    (547)    (1,252)      (379)
   Proceeds from issuance of treasury stock.........     320      1,207        241
                                                    --------   --------   --------
  Net cash provided by/(used in) financing
    activities......................................  (4,520)    (3,574)      (879)
                                                     --------  --------   --------
  Increase (decrease) in cash.......................   1,104       (286)       (99)
                                  
  Cash                          
    Beginning.......................................       5        291         390
                                                    --------   --------    --------
    Ending.........................................$   1,109   $      5    $    291
                                                   =========   ========    ========    

</TABLE>


         Summary of Quarterly Financial Data (Unaudited)
         Sterling Financial Corporation and Subsidiaries
  
     The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995.  Net income per share of common stock 
has been restated to retroactively reflect a 5% stock dividend paid in 
July 1996.


                                                    1996
                                                Quarter Ended  
                                    March       June    September      December
                                     31          30         30            31   
Interest income..................$  12,798    $ 13,013    $ 13,227    $  13,520 
Interest expense.................    5,465       5,635       5,832        5,891
                                 ---------     -------    --------     --------
Net interest income..............    7,333       7,378       7,395        7,629
Provision for loan losses........      159         102          50          269
                                 ---------     -------    --------     --------
Net interest income after
  provision for loan losses......    7,174       7,276       7,345        7,360
Other income.....................    2,509       2,551       2,592        2,920
Other expenses...................    6,479       6,523       6,672        7,095
                                 ---------    --------    --------     -------- 
Income before income taxes.......    3,204       3,304       3,265        3,185
Applicable income taxes..........      768         818         802          759
                                 ---------    --------    --------     --------
Net income.......................$   2,436    $  2,486    $  2,463     $  2,426
                                 =========    ========    ========     ========
Net income per share of   
  common stock...................$     .39    $    .40    $    .39     $   .39

                                                    1995
                                                Quarter Ended  
                                    March       June    September      December
                                     31          30         30            31   
Interest income..................$  11,536    $ 12,090    $ 12,509    $  12,715 
Interest expense.................    4,776       5,258       5,529        5,590
                                 ---------     -------    --------     --------
Net interest income..............    6,760       6,832       6,980        7,125
Provision for loan losses........      151         126         182           75
                                 ---------     -------    --------     --------
Net interest income after
  provision for loan losses......    6,609       6,706       6,798        7,050
Other income.....................    1,905       1,964       2,127        2,297
Other expenses...................    5,687       5,809       5,809        6,118
                                 ---------    --------    --------     -------- 
Income before income taxes.......    2,827       2,861       3,116        3,229
Applicable income taxes..........      696         718         794          831
                                 ---------    --------    --------     --------
Net income.......................$   2,131    $  2,143    $  2,322     $  2,398
                                 =========    ========    ========     ========
Net income per share of   
  common stock...................$     .34    $    .35    $    .37     $    .39


Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

    None



                             PART III

Item 10 - Directors and Executive Officers of the Registrant

     Incorporated by reference is the information appearing under the headings
"Information about Nominees and Continuing Directors" and "Officers and 
Executive Officers" of the 1997 Annual Meeting Proxy Statement.

Item 11 - Executive Compensation

     Incorporated by reference is the information under the headings
"Compensation of Directors" and "Executive Compensation" of the 1997 Annual
Meeting Proxy Statement.

Item 12 - Security Ownership of Certain Beneficial Owners and Management

    Incorporated by reference is the information appearing under the headings
"Principal Holders" and "Beneficial Ownership of Executive Officers, Directors
and Nominees" of the 1997 Annual Meeting Proxy Statement.

Item 13 - Certain Relationships and Related Transactions

     Incorporated by reference is the information appearing under the heading
"Transactions with Directors and Executive Officers" of the 1997 Annual Meeting
Proxy Statement and under "Notes to Consolidated Financial Statements - 
Note 17 - Related Party Transactions" on page 59 of this Form 10-K.

                             PART IV

Item 14 - Exhibits, Financial Statement Schedules and Reports of Form 8-K


   (a) The following documents are filed as part of this report:

      1. The financial statements listed on the index set forth in Item 8 of 
         this Annual Report on Form 10-K are filed as part of 
         this Annual Report.


      2. Financial Statement Schedules

         All schedules are omitted because they are either not applicable, the
         data are not significant or the required information is shown in the
         financial statements or the notes thereto or elsewhere herein.  

      3. Exhibits

         The following is a list of the Exhibits required by Item 601 of
         Regulation S-K and are incorporated by reference herein or annexed
         to this Annual Report.

         3(i) Amended Articles of Incorporation of Sterling Financial
               Corporation. (Incorporated by reference to Exhibit 3(i) of 
               the Current Report on Form 8-K, filed with the Securities and
               Exchange Commission, on June 14, 1996.)

          3(ii) Amended Bylaws of Sterling Financial Corporation. (Incorporated
                by reference to Exhibit 3(ii) of the Current Report on Form 8-K,
                filed with the Securities and Exchange Commission, on March 7,
                1996.)

           10a  Employment Agreement, dated as of April 30, 1983, between The
                First National Bank of Lancaster County and John E. Stefan.
                (Incorporated by reference to Exhibit 10a of the Current Report
                on Form 8-K, filed with the Securities and Exchange Commission,
                on March 19, 1997.

           10b  Assumption and Modification Agreeement, dated July 14, 1987, by
                and among John E. Stefan, Bank of Lancaster County, N.A. and 
                Sterling Financial Corporation.  (Incorporated by reference
                to Exhibit 10b of the Current Report on Form 8-K, filed with
                the Securities and Exchange Commission, on March 19, 1997.)

           10c  Sterling Financial Corporation 1996 Stock Incentive Plan.
                (Incorporated by refernce to Exhibit 99 of the Current Report
                on Form 8-K, filed with the Securities and Exchange Commission,
                on February 5, 1997.)

           10d  The Sterling Financial Corporation Dividend Reinvestment and 
                Stock Purchase Plan. (Incorporated by reference to Exhibit A to 
                
                the Prospectus included in the Registration Statement No. 33-
                55131 on Form S-3, filed with the Securities and Exchange
                Commission on August 18, 1994.)
                 
           11   Statement re: Computations of Earnings Per Share (included
                herein at Item 8 at Notes to Consolidated Financial
                Statements, Note 2.)

           21   Subsidiaries of the Registrant

           23   Consent of Auditors

           27   Financial Data Schedule


   (b) Reports on Form 8-K
       
            A report on Form 8-K dated November 19, 1996 was filed November 29,
            1996 pursuant to item 5 of Form 8-K reporting the adoption of the
            1996 Stock Incentive Plan.  The Plan will be submitted for approval
            at the 1997 Annual Meeting of Shareholders.

          

                              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.
                                         STERLING FINANCIAL CORPORATION

                                         By:                                  
                                         John E. Stefan
                                         Chairman of the Board, President and 
                                         Chief Executive Officer

     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 indicated.

           
             Signature                         Title                  Date      
                                                                     
                                  Chairman of the Board,
/s/ John E. Stefan                President and Chief        February 25, 1997
  (John E. Stefan)                Executive Officer; Director


/s/Jere L. Obetz                  Senior Vice President/     February 25, 1997
  (Jere L. Obetz)                 Treasurer,Chief Financial Officer


/s/Ronald L. Bowman               Vice President/Secretary,  February 25, 1997
  (Ronald L. Bowman)              Principal Accounting Officer           


                                  Director                   February 25, 1997
  (Richard H. Albright, Jr.)


/s/Robert H. Caldwell             Director                   February 25, 1997
  (Robert H. Caldwell)


/s/Howard E. Groff, Jr.           Director                   February 25, 1997
  (Howard E. Groff, Jr.)


/s/Joan R. Henderson              Director                   February 25, 1997
  (Joan R. Henderson)

  
/s/J. Robert Hess                 Director                   February 25, 1997
  (J. Robert Hess)


                                  Director                   February 25, 1997
  (Calvin G. High)


/s/J. Roger Moyer, Jr.            Director                   February 25, 1997
  (J. Roger Moyer, Jr.)


/s/E. Glenn Nauman                Director                   February 25, 1997
  (E. Glenn Nauman)


/s/Glenn R. Walz                  Director                   February 25, 1997
  (Glenn R. Walz)
                                                  


                            EXHIBIT 21
                  SUBSIDIARIES OF THE REGISTRANT

     The following are the subsidiaries of Sterling Financial Corporation:

     Subsidiary                        State of Incorporation or Organization   
 Bank of  Lancaster County, N.A.                    Pennsylvania
 1 East Main Street                         (National Banking Association)
 P.O. Box 0300
 Strasburg, PA  17579


 Town & Country, Inc.  (Wholly owned                Pennsylvania
 Subsidiary of Bank of Lancaster
 County, N.A.)
 1097 Commercial Avenue
 East Petersburg, PA  17520-0038
 


 Sterling Mortgage Services, Inc.                   Pennsylvania
 (Presently inactive)
 101 North Pointe Boulevard
 Lancaster, PA  17601-4133


                   Trout, Ebersole & Groff, LLP
                   Certified Public Accountants
                         1705 Oregon Pike
                  Lancaster, Pennsylvania  17061

                            Exhibit 23
       Consent of Independent Certified Public Accountants


     We hereby consent to the incorporation by reference in Registration
Statement No. 33-55131 on Form S-3 filed August 19, 1994 of our opinion dated
January 24, 1997, on the consolidated financial statements of Sterling Financial
Corporation for the year ended December 31, 1996 as set forth in this form 10-K.


                                           /s/ Trout, Ebersole & Groff, LLP
                                         
                                           Trout, Ebersole & Groff, LLP
                                           Certified Public Accountants


Lancaster, Pennsylvania
March 6, 1997


                          Exhibit Index

                                                             Page
        Exhibits Required Pursuant to                 (in accordance with
         Item 601 of Regulation S-K              sequential numbering system)

 3(i). Amended Articles of Incorporation of Sterling Financial
       Corporation. (Incorporated by reference to Exhibit 3(i) of 
       the Current Report on Form 8-K, filed with the Securities and
       Exchange Commission, on June 14, 1996.)                        
                                                                        
                                      
3(ii). Amended Bylaws of Sterling Financial Corporation
       (incorporated by reference to Exhibit 3(ii) of
       the Current Report on Form 8-K, filed with the
       Securities and Exchange Commission, March 7, 1996.)


10a  Employment Agreement, dated as of April 30, 1983, between The
     First National Bank of Lancaster County and John E. Stefan.
     (Incorporated by reference to Exhibit 10a of the Current Report
     on Form 8-K, filed with the Securities and Exchange Commission,
     on March 19, 1997.

10b  Assumption and Modification Agreeement, dated July 14, 1987, by
     and among John E. Stefan, Bank of Lancaster County, N.A. and 
     Sterling Financial Corporation.  (Incorporated by reference
     to Exhibit 10b of the Current Report on Form 8-K, filed with
     the Securities and Exchange Commission, on March 19, 1997.)

10c  Sterling Financial Corporation 1996 Stock Incentive Plan.
     (Incorporated by refernce to Exhibit 99 of the Current Report
     on Form 8-K, filed with the Securities and Exchange Commission,
     on February 5, 1997.)

10d  The Sterling Financial Corporation Dividend Reinvestment and 
     Stock Purchase Plan (Incorporated by reference to Exhibit A to 
     the Prospectus included in the Registration Statement No. 33-
     55131 on Form S-3, filed with the Securities and Exchange
     Commission on August 18, 1994.)
                 
11   Statement re: Computations of Earnings Per Share (included
     herein at Item 8 at Notes to Consolidated Financial
     Statements, Note 2.)

21   List of Subsidiaries                                             68

23   Consent of Auditors                                              69

27   Financial Data Schedule