STEELTON BANCORP, INC.

                          CONSOLIDATED FINANCIAL REPORT


                                DECEMBER 31, 2002



<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
TABLE OF CONTENTS





                                                                    PAGE NO.

FINANCIAL STATEMENTS:

     Independent Auditor's Report                                      1

     Consolidated Balance Sheets                                       2

     Consolidated Statements of Income                                 3

     Consolidated Statements of Stockholders' Equity                   4

     Consolidated Statements of Cash Flows                             5

     Notes to Consolidated Financial Statements                        6






<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
Steelton Bancorp, Inc.
Steelton, Pennsylvania


     We have audited the  accompanying  consolidated  balance sheets of Steelton
Bancorp, Inc. and its wholly-owned subsidiary (the "Corporation") as of December
31,  2002  and  2001,  and  the  related  consolidated   statements  of  income,
stockholders'  equity and cash flows for the years then ended.  These  financial
statements  are  the  responsibility  of  the  Corporation's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits 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 consolidated  financial  statements  referred to above
present fairly,  in all material  respects,  the financial  position of Steelton
Bancorp, Inc. and its wholly-owned  subsidiary as of December 31, 2002 and 2001,
and the  results  of their  operations  and their  cash flows for the years then
ended in conformity with accounting  principles generally accepted in the United
States of America.



/s/ Beard Miller Company LLP
----------------------------


Harrisburg, Pennsylvania
January 17, 2003


                                       1

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                --------------------------
                                                                                 2002             2001
                                                                                -----------    -----------
<S>                                                                          <C>            <C>
                                     ASSETS

   Cash and due from banks                                                      $ 1,027,734    $   580,181
   Interest bearing deposits in other banks                                       3,624,071      2,617,767
                                                                                -----------    -----------

       Cash and Cash Equivalents                                                  4,651,805      3,197,948

   Investment securities available for sale                                      17,891,505     10,359,100
   Investment securities held to maturity, fair value 2002 $1,599,698;
      2001 $2,387,828                                                             1,579,272      2,362,443
   Loans receivable, net of allowance for loan losses 2002 $256,383;
      2001 $147,697                                                              29,022,909     36,615,998
   Federal Home Loan Bank stock, at cost                                            980,900        989,200
   Bank premises and equipment, net                                               1,560,272      1,539,967
   Accrued interest receivable and other assets                                   2,200,539      1,959,938
                                                                                -----------    -----------

       Total Assets                                                             $57,887,202    $57,024,594
                                                                                ===========    ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

   Deposits                                                                     $33,358,179    $33,555,174
   Advances from Federal Home Loan Bank                                          17,917,126     17,185,303
   Advances from borrowers for insurance and taxes                                  252,620        277,084
   Accrued interest payable and other liabilities                                   641,301        335,871
                                                                                -----------    -----------

       Total Liabilities                                                         52,169,226     51,353,432
                                                                                -----------    -----------

STOCKHOLDERS' EQUITY

   Preferred stock, no par value; 2,000,000 shares authorized;                            -              -
      none issued and outstanding
   Common stock, $.10 par value; 8,000,000 shares authorized;
      issued 416,515 shares                                                          41,652         41,652
   Surplus                                                                        3,963,434      3,942,710
   Retained earnings                                                              3,711,359      3,759,801
   Unearned compensation                                                           (292,677)      (362,015)
   Treasury stock, at cost 2002 116,225 shares; 2001 115,325 shares              (1,794,254)    (1,777,154)
   Accumulated other comprehensive income                                            88,462         66,168
                                                                                -----------    -----------

       Total Stockholders' Equity                                                 5,717,976      5,671,162
                                                                                -----------    -----------

       Total Liabilities and Stockholders' Equity                               $57,887,202    $57,024,594
                                                                                ===========    ===========
</TABLE>


See notes to consolidated financial statements.
--------------------------------------------------------------------------------

                                       2

<PAGE>


STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME



<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                                       ---------------------------
                                                                          2002             2001
                                                                       ----------       ----------
<S>                                                                 <C>              <C>

INTEREST AND DIVIDEND INCOME

   Loans                                                               $2,627,245       $3,062,947
   Securities:
      Taxable                                                             581,543          778,853
      Tax exempt                                                           94,001           86,598
   Dividends on FHLB stock                                                 35,055           65,434
   Other                                                                   72,710           72,643
                                                                       ----------       ----------

       Total Interest and Dividend Income                               3,410,554        4,066,475
                                                                       ----------       ----------

INTEREST EXPENSE
   Deposits                                                             1,042,943        1,464,985
   Advances from Federal Home Loan Bank                                 1,008,288        1,152,545
                                                                       ----------       ----------

       Total Interest Expense                                           2,051,231        2,617,530
                                                                       ----------       ----------

       Net Interest Income                                              1,359,323        1,448,945

PROVISION FOR LOAN LOSSES                                                 142,000           24,000
                                                                       ----------       ----------

       Net Interest Income after Provision for Loan Losses              1,217,323        1,424,945
                                                                       ----------       ----------

NONINTEREST INCOME
   Fees and service charges                                               176,292          168,585
   Gain on sales of securities available for sale                         176,850           11,725
   Earnings on bank owned life insurance                                   55,462           56,709
   Other                                                                   61,905           74,228
                                                                       ----------       ----------

       Total Noninterest Income                                           470,509          311,247
                                                                       ----------       ----------

NONINTEREST EXPENSE
   Salaries and employee benefits                                         812,268          775,668
   Occupancy                                                              122,441          116,082
   System conversion                                                       95,777                -
   Equipment                                                              106,907           85,898
   Professional fees                                                      223,923          142,050
   Data processing                                                        138,945          156,535
   Advertising                                                             21,497           35,221
   Other                                                                  233,146          201,827
                                                                       ----------       ----------

       Total Noninterest Expenses                                       1,754,904        1,513,281
                                                                       ----------       ----------

       Income (Loss) before Income Taxes (Benefit)                        (67,072)         222,911

INCOME TAXES (BENEFIT)                                                    (68,349)          30,625
                                                                       ----------       ----------

       Net Income                                                      $    1,277       $  192,286
                                                                       ==========       ==========

PER SHARE DATA
   Net income, basic                                                    $    0.00       $     0.63
                                                                        =========       ==========

   Net income, diluted                                                  $    0.00       $     0.58
                                                                        =========       ==========
</TABLE>



See notes to consolidated financial statements.
--------------------------------------------------------------------------------

                                       3

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                                                                                       Accumulated
                                                                                                          Other           Total
                                Common                     Retained      Unearned      Treasury     Comprehensive    Stockholders
                                 Stock         Surplus     Earnings     Compensation     Stock       Income (Loss)      Equity
                               -----------  ------------  ------------  ------------   -----------   -------------   -------------
<S>                          <C>         <C>           <C>            <C>           <C>              <C>           <C>

BALANCE - DECEMBER 31, 2000      $40,224     $3,665,748    $3,889,722     $(422,598)    $(478,826)       $(49,482)     $6,644,788
                                                                                                                       -----------
Comprehensive income:
    Net income                         -              -       192,286             -             -               -         192,286
    Net change in unrealized gains
     (losses) on available for
      sale securities                  -              -             -             -             -         115,650         115,650
                                                                                                                       -----------

    Total Comprehensive Income                                                                                            307,936
                                                                                                                       -----------

    Stock purchased for treasury                      -             -             -    (1,298,328)              -      (1,298,328)
    Earned compensation                -         12,996             -        60,583             -               -          73,579
    Cash dividends declared
       ($.18 per share)                -              -       (55,046)            -             -               -         (55,046)
    Stock dividend declared        1,428        263,966      (267,161)            -             -               -          (1,767)
                               ---------     ----------    ----------     ---------   -----------         -------      ----------

BALANCE - DECEMBER 31, 2001       41,652      3,942,710     3,759,801      (362,015)   (1,777,154)         66,168       5,671,162
                                                                                                                       ----------
Comprehensive income:
    Net income                         -              -         1,277             -             -               -           1,277
    Net change in unrealized gains
     (losses) on available for
     sale securities                   -              -             -             -             -          22,294          22,294
                                                                                                                       ----------

    Total Comprehensive Income                                                                                             23,571
                                                                                                                       ----------

    Stock purchased for treasury       -              -             -             -       (17,100)              -         (17,100)
    Earned compensation                -         20,724             -        69,338             -               -          90,062
    Cash dividends declared
       ($.18 per share)                -              -       (49,719)            -             -               -         (49,719)
                               ---------     ----------    ----------     ---------   -----------         -------      ----------

BALANCE - DECEMBER 31, 2002      $41,652     $3,963,434    $3,711,359     $(292,677)  $(1,794,254)        $88,462      $5,717,976
                               =========     ==========    ==========     =========   ===========         =======      ==========

</TABLE>


See notes to consolidated financial statements.
--------------------------------------------------------------------------------
                                        4


<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                   Years Ended December 31,
                                                                                ------------------------------
                                                                                    2002              2001
CASH FLOWS FROM OPERATING ACTIVITIES                                            ------------      ------------

<S>                                                                          <C>               <C>
   Net income                                                                   $      1,277      $    192,286
   Adjustments to reconcile net income to net cash provided by
      operating activities:
         Provision for loan losses                                                   142,000            24,000
         Depreciation                                                                 96,060            76,720
         Amortization of securities, net                                             117,917            64,995
         ESOP and restricted stock plan expense                                       90,062            73,579
         Gain on sales of securities available for sale                             (176,850)          (11,725)
         Earnings on bank-owned life insurance                                       (55,462)          (56,709)
         Deferred income taxes (benefit)                                             (19,015)            7,144
         Decrease in accrued interest receivable                                      26,376           114,002
         Increase (decrease) in accrued interest payable                               9,925           (22,174)
         Other, net                                                                   91,521          (199,987)
                                                                                ------------      ------------

         Net Cash Provided by Operating Activities                                   323,811           262,131
                                                                                ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Available for sale securities:
      Maturities and paydowns                                                      4,663,900         5,661,693
      Purchases                                                                  (21,835,692)       (8,536,413)
      Sales                                                                        9,735,706         5,551,057
   Held to maturity securities:
      Maturities and paydowns                                                        779,563           521,236
      Purchases                                                                            -          (508,750)
   Net decrease in loans                                                           7,451,089         3,129,078
   Purchase of bank premises and equipment                                          (116,365)         (167,102)
   Redemption of Federal Home Loan Bank stock                                          8,300            41,500
                                                                                ------------      ------------

         Net Cash Provided by Investing Activities                                   686,501         5,692,299
                                                                                ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net decrease in deposits                                                         (196,995)         (578,076)
   Net decrease in advances from borrowers for insurance and taxes                   (24,464)          (28,578)
   Advances from Federal Home Loan Bank                                            6,500,000        10,181,200
   Repayment of Federal Home Loan Bank advances                                   (5,768,177)      (12,394,751)
   Stock purchased for treasury                                                      (17,100)       (1,298,328)
   Payment of dividends and cash in lieu of fractional shares                        (49,719)          (56,511)
                                                                                ------------      ------------

         Net Cash Provided by (Used in) Financing Activities                         443,545        (4,175,044)
                                                                                ------------      ------------

         Net Increase in Cash and Cash Equivalents                                 1,453,857         1,779,386

CASH AND CASH EQUIVALENTS - BEGINNING                                              3,197,948         1,418,562
                                                                                ------------      ------------

CASH AND CASH EQUIVALENTS - ENDING                                              $  4,651,805      $  3,197,948
                                                                                ============      ============

SUPPLEMENTARY CASH FLOWS INFORMATION
   Interest paid                                                                $  2,041,006      $  2,639,704
                                                                                ============      ============

   Income taxes paid                                                            $     10,000      $     53,750
                                                                                ============      ============
</TABLE>


See notes to consolidated financial statements.
--------------------------------------------------------------------------------
                                        5


<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - NATURE OF OPERATIONS

The  Corporation's  business is conducted  principally  through its wholly-owned
subsidiary,  Mechanics Savings Bank (the "Bank"). The Bank provides a variety of
retail banking services to customers  through its two offices located in Dauphin
County,  Pennsylvania.  The Bank's primary deposit products are non-interest and
interest-bearing  checking  accounts,   savings  accounts  and  certificates  of
deposit. Its primary lending products are single-family residential loans.

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES

Basis of Consolidation

     The  consolidated  financial  statements  include the  accounts of Steelton
     Bancorp,   Inc.  (the  "Corporation")  and  its  wholly-owned   subsidiary,
     Mechanics  Savings  Bank and the Bank's  wholly-owned  subsidiary,  Baldwin
     Investment Corporation. All material intercompany balances and transactions
     have been eliminated in consolidation.

Use of Estimates

     The  preparation of  consolidated  financial  statements in conformity with
     accounting  principles  generally  accepted in the United States of America
     requires  management  to make  estimates  and  assumptions  that affect the
     reported  amounts of assets and  liabilities  and  disclosure of contingent
     assets and  liabilities  at the date of the  financial  statements  and the
     reported  amounts of revenues and  expenses  during the  reporting  period.
     Actual results could differ from those estimates.

Investment Securities

     Management determines the appropriate  classification of debt securities at
     the time of purchase and  reevaluates  such  designation as of each balance
     sheet date.  The  Corporation's  investment  securities  are  classified as
     available for sale and held to maturity and are accounted for as follows:

     o    Securities  held to maturity - Debt securities that management has the
          positive  intent and ability to hold to maturity are reported at cost,
          adjusted for  amortization of premiums and accretion of discounts that
          are  recognized  in interest  income using methods  approximating  the
          interest   method  over  the  period  to   maturity.   Mortgage-backed
          securities  represent  participating  interests  in pools of long-term
          first  mortgage  loans  originated  and  serviced  by  issuers  of the
          securities. Mortgage-backed securities are carried at unpaid principal
          balances,  adjusted for unamortized  premiums and unearned  discounts.
          Premiums and discounts are  amortized  using the interest  method over
          the terms of the securities.

     o    Securities  available for sale - Available for sale securities consist
          of  investment   securities   not   classified  as  held  to  maturity
          securities.  Unrealized  holding  gains  and  losses,  net of tax,  on
          available  for sale  securities  are  included in other  comprehensive
          income. Realized gains and losses on available for sale securities are
          included   in  income   and  are   determined   using   the   specific
          identification  method. The amortization of premiums and the accretion
          of  discounts  are  recognized  in interest  income using the interest
          method over the terms of the securities.

     o    Federal  Home  Loan  Bank  Stock  -  Federal  law  requires  a  member
          institution  of the Federal  Home Loan Bank System to hold  restricted
          stock  of  its  district   Federal  Home  Loan  Bank  according  to  a
          pre-determined formula. The restricted stock is carried at cost.


--------------------------------------------------------------------------------
                                        6

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

Loans Receivable

     Loans receivable that management has the intent and ability to hold for the
     foreseeable  future  or  until  maturity  or  payoff  are  stated  at their
     outstanding unpaid principal balances,  net of an allowance for loan losses
     and any deferred fees.  Interest income is accrued on the unpaid  principal
     balance. Loan origination fees are deferred and recognized as an adjustment
     of the yield (interest  income) of the related loans. The Bank is generally
     amortizing these amounts over the contractual life of the loan.

     The accrual of  interest is  generally  discontinued  when the  contractual
     payment of principal or interest has become 90 days past due or  management
     has serious doubts about further  collectibility  of principal or interest,
     even though the loan is currently performing.  A loan may remain on accrual
     status if it is in the process of  collection  and is either  guaranteed or
     well secured.  When a loan is placed on nonaccrual status,  unpaid interest
     credited to income in the  current  year is  reversed  and unpaid  interest
     accrued in prior years is charged  against the  allowance  for loan losses.
     Interest  received on nonaccrual  loans generally is either applied against
     principal  or  reported  as  interest  income,  according  to  management's
     judgment  as to the  collectibility  of  principal.  Generally,  loans  are
     restored to accrual  status when the  obligation  is brought  current,  has
     performed in accordance with the contractual  terms for a reasonable period
     of time and the ultimate  collectibility of the total contractual principal
     and interest is no longer in doubt.

Allowance for Loan Losses

     The allowance for loan losses is  established  through  provisions for loan
     losses charged against income. Loans deemed to be uncollectible are charged
     against the allowance for loan losses, and subsequent  recoveries,  if any,
     are credited to the allowance.

     The allowance for loan losses is maintained at a level considered  adequate
     to provide  for losses  that can be  reasonably  anticipated.  Management's
     periodic evaluation of the adequacy of the allowance is based on the Bank's
     past  loan loss  experience,  known and  inherent  risks in the  portfolio,
     adverse  situations  that may affect the borrower's  ability to repay,  the
     estimated  value  of any  underlying  collateral,  composition  of the loan
     portfolio,  current economic  conditions and other relevant  factors.  This
     evaluation is inherently  subjective as it requires material estimates that
     may be susceptible to significant change,  including the amounts and timing
     of future cash flows expected to be received on impaired loans.

     A loan is  considered  impaired  when,  based on  current  information  and
     events,  it is  probable  that the  Bank  will be  unable  to  collect  the
     scheduled  payments of  principal  or interest  when due  according  to the
     contractual terms of the loan agreement.  Factors  considered by management
     in determining impairment include payment status,  collateral value and the
     probability of collecting  scheduled  principal and interest  payments when
     due.  Loans  that  experience  insignificant  payment  delays  and  payment
     shortfalls generally are not classified as impaired.  Management determines
     the significance of payment delays and payment shortfalls on a case-by-case
     basis,  taking into consideration all of the circumstances  surrounding the
     loan and the borrower,  including the length of the delay,  the reasons for
     the  delay,  the  borrower's  prior  payment  record  and the amount of the
     shortfall in relation to the  principal  and interest  owed.  Impairment is
     measured on a loan by loan basis for commercial  loans by the fair value of
     the collateral if the loan is collateral dependent.

     Large  groups  of  smaller  balance   homogeneous  loans  are  collectively
     evaluated  for  impairment.  Accordingly,  the  Bank  does  not  separately
     identify   individual   consumer  and  residential   loans  for  impairment
     disclosures.


--------------------------------------------------------------------------------
                                       7


<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

Bank Premises and Equipment

     Bank premises and equipment are comprised of land, at cost,  and buildings,
     building  improvements,  furnishings and equipment at cost less accumulated
     depreciation.  Depreciation  charges are computed on the  straight-line and
     declining  balance  methods over the estimated  useful lives of the related
     assets.

Stock Based Compensation

     Stock options are accounted for under  Accounting  Principles Board Opinion
     (APB) No. 25.  Stock  options are granted at exercise  prices not less than
     the fair value of the common stock on the date of grant.  Under APB No. 25,
     no compensation expense is recognized related to these plans. The pro forma
     impact  to  net  income  and   earnings  per  share  that  would  occur  if
     compensation  expense was  recognized  based on the estimated fair value of
     the  options  on the date of the  grant is  disclosed  in the  notes to the
     consolidated financial statements.

Income Taxes

     Deferred taxes are provided on the liability  method  whereby  deferred tax
     assets are recognized for deductible temporary differences and deferred tax
     liabilities  are recognized for taxable  temporary  differences.  Temporary
     differences are the differences  between the reported amounts of assets and
     liabilities in the financial  statements and their tax basis.  Deferred tax
     assets  are  reduced  by a  valuation  allowance  when,  in the  opinion of
     management,  it is more  likely  than not that some  portion  or all of the
     deferred  tax  assets  will  not  be  realized.  Deferred  tax  assets  and
     liabilities  are adjusted  through the  provision  for income taxes for the
     effects of changes in tax laws and rates on the date of enactment.

     The Corporation  and its subsidiary file a consolidated  federal income tax
     return.

Advertising

     Advertising costs are expensed as incurred.

Off-Balance Sheet Financial Instruments

     In the ordinary course of business,  the Bank has entered into  off-balance
     sheet  financial  instruments  consisting of  commitments to extend credit.
     Such financial  instruments are recorded in the balance sheet when they are
     funded.

Earnings per Share

     Basic  earnings  per share is  calculated  by  dividing  net  income by the
     weighted average number of shares of common stock  outstanding  during each
     period.  Unallocated  shares associated with the Corporation's ESOP are not
     considered  outstanding shares. Diluted earnings per share is calculated by
     increasing the  denominator  for the assumed  conversion of all potentially
     dilutive securities.  The Corporation's  dilutive securities are limited to
     stock options and restricted stock awards.

Treasury Stock

     The  acquisition of treasury  stock is recorded under the cost method.  The
     subsequent  disposition or sale of the treasury stock is recorded using the
     average cost method.


--------------------------------------------------------------------------------
                                       8

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

Statements of Cash Flows

     The Corporation  considers all cash and due from banks and interest-bearing
     deposits  in  other  banks  to be  cash  equivalents  for  purposes  of the
     statements of cash flows.

Comprehensive Income

     Comprehensive  income  for  the  Corporation  consists  of net  income  and
     unrealized  gains  or  losses  on  available  for  sale  securities  and is
     presented in the consolidated statement of stockholders' equity. Unrealized
     securities  gains  or  losses  and  the  related  tax  impact  included  in
     comprehensive income are as follows:

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                                  -------------------------
                                                                                     2002            2001
                                                                                  ---------        --------
<S>                                                                               <C>              <C>


      Unrealized holding gains on available for sale securities                    $ 210,629        $217,556
      Unrealized holding losses on securities transferred from held to maturity            -         (30,603)
      Reclassification adjustment for gains realized in income                      (176,850)        (11,725)
                                                                                   ---------        --------

             Net Unrealized Gains                                                     33,779         175,228

      Tax effect                                                                     (11,485)        (59,578)
                                                                                   ---------        --------

             Net of Tax Amount                                                     $  22,294        $115,650
                                                                                   =========        ========
</TABLE>

Reclassifications

     Certain  amounts in the 2001  consolidated  financial  statements have been
     reclassified to conform with the 2002 presentation.  Such reclassifications
     had no impact on reported net income.

Segment Reporting

     The  Corporation  operates  in a  single  business  segment  consisting  of
     traditional savings bank activities.

New Accounting Standards

     In July 2001, the Financial Accounting Standards Board issued Statement No.
     143,  "Accounting for Asset  Retirement  Obligations,"  which addresses the
     financial  accounting  and  reporting   obligations   associated  with  the
     retirement  of  tangible   long-lived   assets  and  the  associated  asset
     retirement  costs.  This  Statement  requires  that  the  fair  value  of a
     liability for an asset retirement obligation be recognized in the period in
     which it is  incurred if a  reasonable  estimate of fair value can be made.
     The  associated  asset  retirement  costs  are  capitalized  as part of the
     carrying amount of the long-lived  asset.  This Statement  became effective
     for the  Corporation  on January 1, 2003 and did not have any impact on its
     financial condition or results of operations.


--------------------------------------------------------------------------------
                                       9

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

New Accounting Standards (Continued)

     In July 2002, the Financial Accounting Standards Board issued Statement No.
     146,  "Accounting for Costs  Associated with Exit or Disposal  Activities,"
     which  nullifies  EITF  Issue  94-3,  "Liability  Recognition  for  Certain
     Employee   Termination  Benefits  and  Other  Costs  to  Exit  an  Activity
     (including  Certain Costs  Incurred in a  Restructuring)."  This  statement
     delays  recognition of these costs until  liabilities are incurred,  rather
     than at the  date of  commitment  to the  plan,  and  requires  fair  value
     measurement.  It does not impact the recognition of liabilities incurred in
     connection  with a  business  combination  or the  disposal  of  long-lived
     assets. The provisions of this statement are effective for exit or disposal
     activities initiated after December 31, 2002 and are not expected to have a
     significant impact on the Corporation's  financial  condition or results of
     operations.

     In October 2002, the Financial  Accounting Standards Board issued Statement
     No. 147,  "Acquisitions of Certain Financial  Institutions." This statement
     provides  guidance  on  accounting  for  the  acquisition  of  a  financial
     institution,  including the acquisition of part of a financial institution.
     The  statement  defines  criteria  for  determining  whether  the  acquired
     financial institution meets the conditions for a "business combination." If
     the  acquisition  meets the  conditions  of a "business  combination",  the
     specialized  accounting  guidance under  Statement No. 72,  "Accounting for
     Certain  Acquisitions  of  Banking or Thrift  Institutions"  will not apply
     after  September 30, 2002 and the amount of any  unidentifiable  intangible
     asset will be  reclassified to goodwill upon adoption of Statement No. 147.
     The  transition  provisions  were  effective on October 1, 2002 and did not
     have any  impact on the  Corporation's  financial  condition  or results of
     operations.

NOTE 3 - INVESTMENT SECURITIES

     The  amortized  cost  and  estimated  fair  values  of  the   Corporation's
     investment  securities  at  December  31, 2002 and 2001 are  summarized  as
     follows:

<TABLE>
<CAPTION>
                                                            Gross         Gross
                                             Amortized    Unrealized    Unrealized       Fair
                                                Cost        Gains        Losses         Value
                                             -----------  ----------    ----------   -----------
<S>                                       <C>           <C>            <C>        <C>


SECURITIES AVAILABLE FOR SALE:
     December 31, 2002:
         Mortgage-backed securities          $16,713,195   $117,702       $ (7,803)  $16,823,094
         Corporate obligations                   350,000     21,140              -       371,140
         State and local governments             694,276      2,995              -       697,271
                                             -----------   --------       --------   -----------

                                             $17,757,471   $141,837       $ (7,803)  $17,891,505
                                             ===========   ========       ========   ===========

     December 31, 2001:
         U.S. Government and federal
           agencies                          $   400,000   $ 14,026             -    $   414,026
         Mortgage-backed securities            9,082,222     95,194        (9,510)     9,167,906
         Corporate obligations                   350,000          -             -        350,000
         State and local governments             426,623      1,869        (1,324)       427,168
                                             -----------   --------      --------    -----------

                                             $10,258,845   $111,089      $(10,834)   $10,359,100
                                             ===========   ========      ========    ===========
</TABLE>

--------------------------------------------------------------------------------
                                       10

<PAGE>


STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 - INVESTMENT SECURITIES (CONTINUED)


<TABLE>
<CAPTION>
                                                            Gross         Gross
                                             Amortized    Unrealized    Unrealized       Fair
                                                Cost        Gains        Losses         Value
                                             -----------  ----------    ----------   -----------
<S>                                       <C>           <C>            <C>        <C>

SECURITIES HELD TO MATURITY:
     December 31, 2002:
         Certificate of deposit                $  100,000    $     -       $     -    $  100,000
         Mortgage-backed securities               516,220     12,859          (996)      528,083
         State and local governments              963,052      8,563             -       971,615
                                               ----------    -------       -------    ----------

                                               $1,579,272    $21,422       $  (996)   $1,599,698
                                               ==========    =======       =======    ==========

     DECEMBER 31, 2001:
         Certificate of deposit                $  100,000    $     -       $     -    $  100,000
         Mortgage-backed securities               964,968     20,463        (3,134)      982,297
         State and local governments            1,297,475      9,559        (1,503)    1,305,531
                                               ----------    -------       -------    ----------

                                               $2,362,443    $30,022       $(4,637)   $2,387,828
                                               ==========    =======       =======    ==========
</TABLE>

     The following is a summary of the  maturities  of investment  securities at
     December 31, 2002:

<TABLE>
<CAPTION>
                                             Available for Sale             Held to Maturity
                                         --------------------------    ------------------------
                                         Amortized          Fair       Amortized       Fair
                                            Cost            Value        Cost          Value
                                         -----------    -----------    ----------    ----------
<S>                                   <C>            <C>            <C>           <C>

Amounts maturing:
     Due in one year or less             $         -    $         -    $  149,924    $  151,435
     After one but within five years         363,345        369,524             -             -
     After five but within ten years         970,467        977,046       431,697       433,311
     After ten years                      16,423,659    $16,544,935       997,651     1,014,952
                                         -----------    -----------    ----------    ----------

                                         $17,757,471    $17,891,505    $1,579,272    $1,599,698
                                         ===========    ===========    ==========    ==========

</TABLE>


--------------------------------------------------------------------------------
                                       11


<PAGE>


STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - INVESTMENT SECURITIES (CONTINUED)

The  amortized  cost and fair value of securities  are presented by  contractual
maturity  in  the  preceding  table.   Expected   maturities  will  differ  from
contractual  maturities  because  borrowers may have the right to call or prepay
obligations without call or prepayment penalties.

During 2001, the Bank transferred securities with a carrying value of $2,880,467
and fair value of $2,849,864  from held to maturity to available  for sale.  The
difference  of $20,198,  net of taxes of $10,405 was  reflected  in  accumulated
other  comprehensive  income.  This  transfer  was an allowable  transaction  as
permitted by the  adoption of  Statement  No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities."

Gross realized gains and gross realized losses on sales of securities  available
for sale were $176,850 and $-0-, respectively,  in 2002 and $42,836 and $31,111,
respectively, in 2001.


NOTE 4 - LOANS RECEIVABLE

Loans receivable at December 31, 2002 and 2001 consist of the following:


                                                   2002            2001
                                               -----------     -----------
     Loans secured by real estate:
          Residential                          $28,224,724     $35,826,590
          Commercial                               555,412         381,137
     Consumer                                      846,694         935,268
     Commercial                                     77,128          68,634
                                               -----------     -----------

                                                29,703,958      37,211,629

     Loans in process                             (235,057)       (205,081)
     Net deferred loan origination fees           (189,609)       (242,853)
     Allowance for loan losses                    (256,383)       (147,697)
                                               -----------     -----------

                                               $29,022,909     $36,615,998
                                               ===========     ===========


--------------------------------------------------------------------------------
                                       12

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - LOANS RECEIVABLE (CONTINUED)

The majority of the Bank's loan portfolio consists of single-family  residential
loans in the area of Dauphin County,  Pennsylvania.  The ultimate collectibility
of a substantial  portion of the Corporation's  loan portfolio is susceptible to
changes in local market conditions.

An analysis of the allowance for loan losses at December 31, 2002 and 2001 is as
follows:

                                                        2002          2001
                                                      --------      --------

          Balance, beginning of year                  $147,697      $149,603
               Provision for loan losses               142,000        24,000
               Charge-offs                             (33,416)      (27,106)
               Recoveries                                  102         1,200
                                                      --------      --------

          Balance, end of year                        $256,383      $147,697
                                                      ========      ========

Nonaccrual  loans  totaled  $574,000 and $635,000 at December 31, 2002 and 2001,
respectively.  Nonaccrual  loans are  those on which  income  under the  accrual
method has been  discontinued  with  subsequent  interest  payments  credited to
interest income when received or, if the ultimate collectibility of principal is
in doubt, applied as principal reductions. The impact of nonaccrual loans was to
reduce  interest  income by $29,786 and $28,956 for the years ended December 31,
2002 and 2001,  respectively.  There were no loans greater than 90 days past due
and still accruing interest as of December 31, 2002 and 2001.

There were no impaired commercial loans as of December 31, 2002 and 2001.

NOTE 5 - BANK PREMISES AND EQUIPMENT

A summary of bank premises and equipment at December 31, 2002 and 2001 follows:

                                                 2002               2001
                                              ----------         ----------

          Land                                $  444,079         $  444,079
          Buildings and improvements           1,115,928          1,106,223
          Furnishings and equipment              569,728            466,407
                                              ----------         ----------

                                               2,129,735          2,016,709

          Accumulated depreciation              (569,463)          (476,742)
                                              ----------         ----------

                                              $1,560,272         $1,539,967
                                              ==========         ==========


--------------------------------------------------------------------------------
                                       13

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - DEPOSITS

Deposits at December 31, 2002 and 2001 consist of the following:

                                                2002             2001
                                            -----------      -----------

     Noninterest-bearing deposits           $ 3,039,045      $ 2,594,738
     Interest-bearing deposits:
          NOW                                 1,970,983        1,936,649
          Savings                             6,289,045        5,868,413
          Money market                        1,306,859        1,013,331
          Certificates of deposit            20,752,247       22,142,043
                                            -----------      -----------

            Total Deposits                  $33,358,179      $33,555,174
                                            ===========      ===========


The aggregate amount of certificates of deposit, including individual retirement
accounts,  with a minimum denomination of $100,000 was $3,300,160 and $3,575,604
at December 31, 2002 and 2001, respectively.

Maturities of certificates of deposit at December 31, 2002 are as follows:

          2003                           $10,442,237
          2004                             6,135,989
          2005                             1,808,891
          2006                               504,502
          2007                             1,242,568
          Thereafter                         618,060
                                         -----------

                                         $20,752,247
                                         ===========


--------------------------------------------------------------------------------
                                       14


<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK

The Bank is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh  and, as
such,  can take advantage of the FHLB program for overnight and term advances at
published  daily  rates.  Under  the terms of a  blanket  collateral  agreement,
advances from the FHLB are collateralized by first mortgage loans and securities
which totaled  $40,851,000 at December 31, 2002.  Advances  available under this
agreement are limited by available and  qualifying  collateral and the amount of
FHLB stock held by the borrower.  At December 31, 2002, the Bank could borrow an
additional  $16,551,000 based on qualifying  collateral.  Outstanding borrowings
from the Federal Home Loan Bank are  summarized  as follows at December 31, 2002
and 2001:

                                     2002                      2001
                             -----------------------  ------------------------
                                           Weighted                  Weighted
                                            Average                   Average
                                           Interest                  Interest
                               Amount        Rate        Amount        Rate
                             -----------   ---------  -----------   ----------

Maturity:
     Within one year         $ 5,000,000     5.41%    $ 2,000,000      3.12%
     Within two years                  -       -        3,500,000      6.42
     Within three years        4,167,126     5.49               -        -
     Within four years                 -       -        2,935,303      7.39
     Within five years                 -       -                -        -
     Thereafter                8,750,000     5.46       8,750,000      5.46
                             -----------              -----------

                             $17,917,126              $17,185,303
                             ===========              ===========

Of the amounts  outstanding  at December  31, 2002,  $5,000,000  are fixed rate,
nonamortizing; $2,167,126 are fixed rate, amortizing; $8,750,000 are convertible
from fixed to floating rate,  nonamortizing  and $2,000,000 are adjustable rate,
nonamortizing.  Of the amounts outstanding at December 31, 2001,  $4,500,000 are
fixed rate, nonamortizing;  $2,935,303 are fixed rate, amortizing and $9,750,000
are convertible from fixed to floating rate, nonamortizing.


NOTE 8 - INCOME TAXES

The consolidated provision for federal income taxes for the years ended December
31, 2002 and 2001 is as follows:

                                                        2002        2001
                                                      --------     -------

     Tax currently payable (receivable)               $(49,334)    $23,481
     Deferred taxes (benefit)                          (19,015)      7,144
                                                      --------     -------

            Total Income Tax Expense (Benefit)        $(68,349)    $30,625
                                                      ========     =======


--------------------------------------------------------------------------------
                                       15

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - INCOME TAXES (CONTINUED)

The difference  between the statutory federal income tax rate and the income tax
expense  (benefit)  included  in the  consolidated  statements  of  income is as
follows:

                                                          2002         2001
                                                        --------     --------

    Expected tax provision (benefit) at 34% rate        $(22,804)    $ 75,789
    Tax-exempt interest income                           (27,354)     (27,262)
    Earnings on bank-owned life insurance                (18,857)     (19,281)
    Other                                                    666        1,379
                                                        --------     --------

                                                        $(68,349)    $ 30,625
                                                        ========     ========

Income taxes of $60,129 and $3,987 were recorded  related to securities gains in
the years ended December 31, 2002 and 2001, respectively.

Temporary  differences between the amounts reported in the financial  statements
and the tax bases of assets and liabilities  result in deferred taxes.  Deferred
tax assets and  liabilities  for the years ended  December 31, 2002 and 2001 are
summarized as follows:

                                                     2002         2001
                                                  ---------     ---------

    Deferred tax assets:
         Deferred loan fees                        $ 64,467     $  82,570
         Allowance for loan losses                   82,284        44,945
         Other                                       19,751        19,972
                                                   --------     ---------

           Total Deferred Tax Assets                166,502       147,487
                                                   --------     ---------

          Deferred tax liabilities:
               Bank premises and equipment          (18,077)      (18,077)
               Unrealized securities gains          (45,572)      (34,087)
                                                   --------     ---------

                 Total Deferred Tax Liabilities     (63,649)      (52,164)
                                                   --------     ---------

                 Net Deferred Tax Asset            $102,853     $  95,323
                                                   ========     =========

The Corporation is permitted a special bad debt deduction for federal income tax
purposes which is limited generally to an amount calculated under the experience
method as defined in the Internal  Revenue Code (Code).  With the passage of the
Small Business Jobs  Protection Act of 1996 (Act),  thrift  institutions  are no
longer  permitted to use the  percentage  of taxable  income method of computing
additions to their bad debt  reserves as provided for in the Code.  In addition,
the excess of the thrift's bad debt  reserves over those  permitted,  as defined
under the  provisions of the Act, are required to be recaptured  into income for
federal income tax purposes over a six-year  period.  Excess  reserves are those
reserves in excess of the base year reserves generally defined as the balance of
reserves as of December 31, 1987. In accordance  with SFAS 109,  "Accounting for
Income  Taxes," a deferred  liability has not been  established  for the tax bad
debt base year  reserve of the  Corporation.  Therefore,  retained  earnings  at
December 31, 2002 and 2001 includes approximately $703,000 representing such bad
debt deductions for which no deferred taxes have been provided.

--------------------------------------------------------------------------------
                                       16


<PAGE>


STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - INCOME TAXES (CONTINUED)

Management  has  determined  that it is not  required  to  establish a valuation
reserve for the  deferred  tax assets  since it is more likely than not that the
deferred  tax assets will be realized  through  carryback,  future  reversals of
existing taxable temporary  differences,  future taxable income and tax planning
strategies.

NOTE 9 - STOCKHOLDERS' EQUITY

On  July 8,  1999,  the  Bank  completed  a  mutual  to  stock  conversion  (the
"Conversion").  In connection with the Conversion,  the Corporation sold 424,463
shares  (adjusted  for stock  dividends)  of its common stock in a  subscription
offering at $9.07 per share (adjusted for stock  dividends).  Upon completion of
these  transactions,   the  Bank  became  the  wholly-owned  subsidiary  of  the
Corporation  and  changed  its name from  Mechanics  Savings  and  Loan,  FSA to
Mechanics Savings Bank.

At the  time  of its  mutual  to  stock  Conversion,  the  Bank  segregated  and
restricted  approximately  $3.7  million of retained  earnings in a  liquidation
account  for the benefit of eligible  account  holders who  continue to maintain
their deposit accounts in the Bank after conversion.  In the event of a complete
liquidation  of the Bank,  and only in such an event,  eligible  depositors  who
continue to maintain  accounts shall be entitled to receive a distribution  from
the  liquidation  account in an amount  proportionate  to the  current  adjusted
balances of all qualifying  deposits then held. The liquidation  account will be
reduced  annually to the extent that eligible account holders have reduced their
qualifying deposits.

Subsequent to the Conversion, the Corporation or the Bank may not declare or pay
a cash  dividend on any of its shares of common stock if the effect would reduce
stockholders'  equity  below  either the  amount  required  for the  liquidation
account discussed above or the applicable regulatory capital requirements, or if
such declaration and payment would otherwise violate regulatory requirements.

NOTE 10 - STOCK-BASED COMPENSATION

The Corporation has an Employee Stock Ownership Plan (the "ESOP") which provides
for annual  contributions  at the discretion of the  Corporation.  Employees are
eligible  to  participate  after one year of service  and are vested  after five
years of service.  In 1999, the ESOP purchased 33,957 shares (adjusted for stock
dividends) of the Corporation's common stock at a total cost of $308,000 through
a loan financed by the  Corporation.  Dividends are paid on allocated shares and
credited to participants'  accounts.  Compensation  expense  associated with the
ESOP totaled $61,504 for 2002 and $45,276 for 2001. The fair value of the 23,729
unearned ESOP shares approximated $508,000 at December 31, 2002.

In 2000, the  Corporation  established  the  Restricted  Stock Plan (the "Plan")
under which shares were awarded to directors  and certain  employees.  Under the
terms of the plan in 2000, each non-employee director was awarded 841 shares for
a total of 4,205  shares and certain  employees  were  awarded a total of 12,611
shares as determined by a Board appointed committee.  (The number of shares were
adjusted for stock dividends.) No shares were granted in 2002 and 2001.  Granted
shares  are  earned  and  non-forfeitable  at the  rate  of 20% on the  one-year
anniversary of the date of the grant and 20% annually for the next four years if
service continues. Unearned compensation,  representing the fair market value of
the shares at the  issuance  date,  will be charged to expense  over the vesting
period.  The  Corporation  recognized  expense of $28,305  and  $28,303  for the
portion of shares vesting in 2002 and 2001, respectively.


--------------------------------------------------------------------------------
                                       17


<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - STOCK-BASED COMPENSATION (CONTINUED)

In 2000,  the  Corporation  established  the 2000 Stock Option Plan (the "Option
Plan"),  which  provides for the  granting of options to  Directors  and certain
employees.  Under  the  terms  of the  Option  Plan in 2000,  each  non-employee
director  was awarded  2,122  options for a total of 10,610  options and certain
employees  were  awarded  a total of 31,836  options  as  determined  by a Board
appointed  committee.  The  exercise  price  of  the  options  is  $8.33,  which
represents the fair market value of the related  shares on the grant date.  (The
number of options and exercise  price were  adjusted for stock  dividends.)  The
options are  exercisable  at the rate of 20% on the one-year  anniversary of the
date of the grant and 20% annually for the next four years if service continues.
The options expire after a ten-year period.  No options were granted in 2002 and
2001. At December 31, 2002,  42,446  options were  outstanding,  of which 16,972
options were  exercisable.  The remaining  contractual life of these options was
approximately 7 years.

The  Corporation  accounts for the stock option plan under the  recognition  and
measurement  principles of APB Opinion No. 25,  "Accounting  for Stock Issued to
Employees," and related  interpretations.  No stock-based employee  compensation
cost is reflected in net income,  as all options  granted  under the plan had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant.  The  following  table  illustrates  the effect on net income and
earnings  per share if the  Corporation  had applied the fair value  recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation:

<TABLE>
<CAPTION>

                                                                                Years Ended December 31,
                                                                                ------------------------
                                                                                  2002            2001
                                                                                --------       ---------
<S>                                                                          <C>            <C>

     Net income, as reported                                                    $  1,277       $192,286
     Stock-based employee compensation expense included in
          reported net income, net of related taxes                               59,274         48,652
     Total stock-based employee compensation expense determined under fair
          value based method for all awards, net of related taxes                (79,214)       (68,592)
                                                                                --------       --------

            Pro Forma Net Income (Loss)                                         $(18,663)      $172,346
                                                                                ========       ========

     Earnings (loss) per share (basic):
          As reported                                                           $   0.00       $   0.63
          Pro forma                                                                (0.07)          0.56
     Earnings (loss) per share (assuming dilution):
          As reported                                                           $   0.00       $   0.58
          Pro forma                                                                (0.07)          0.52

</TABLE>

The pro forma impact is based on a 2000 grant date fair value of $2.38 (adjusted
for stock dividends) per option computed using the  Black-Scholes  model and the
following  assumptions:  dividend  yield of 1.72%,  expected  volatility of 26%,
interest rate of 6.63% and an expected life of 7 years.

--------------------------------------------------------------------------------
                                       18


<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - EARNINGS PER SHARE

The following is a  reconciliation  of the  numerators and  denominators  of the
basic and diluted earnings per share computations:

                                                         2002        2001
                                                       --------    --------
     Numerator, net income                             $  1,277    $192,286
                                                       ========    ========

     Denominators:
          Average basic shares outstanding              264,752     306,032
          Average dilutive option effect                 23,895      19,795
          Average restricted stock effect                 3,651       4,004
                                                       --------    --------

            Average Dilutive Shares Outstanding         292,298     329,831
                                                       ========    ========

     Earnings per share:
          Basic                                        $   0.00    $   0.63
                                                       ========    ========

          Diluted                                      $   0.00    $   0.58
                                                       ========    ========

NOTE 12 - REGULATORY MATTERS

The Bank is subject to various regulatory capital  requirements  administered by
its primary federal regulator,  the Office of Thrift Supervision (OTS).  Failure
to meet  the  minimum  regulatory  capital  requirements  can  initiate  certain
mandatory, and possible additional discretionary, actions by regulators that, if
undertaken,  could  have a direct  material  effect on the  Corporation  and the
consolidated  financial  statements.   Under  the  regulatory  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines involving quantitative measures of assets,
liabilities and certain  off-balance  sheet items as calculated under regulatory
accounting  practices.  The Bank's capital amounts and  classification  are also
subject  to   qualitative   judgments  by  the  regulators   about   components,
risk-weightings and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Corporation to maintain  minimum amounts of ratios of Total and Tier
1 capital (as defined in the regulations) to risk-weighted  assets (as defined),
and Tier 1 capital to assets (as defined).


--------------------------------------------------------------------------------
                                       19



<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - REGULATORY MATTERS (CONTINUED)

The  following  table  provides a comparison  of the Bank's  risk-based  capital
position to regulatory capital requirements:

<TABLE>
<CAPTION>
                                                                                              To be Well
                                                                                          Capitalized under
                                                               For Capital Adequacy       Prompt Corrective
                                              Actual                 Purposes             Action Provisions
                                         -----------------     ---------------------     ---------------------

                                          Amount    Ratio       Amount       Ratio        Amount       Ratio
                                         --------   ------     --------     --------     --------     --------
                                                               (Dollars in Thousands)

<S>                                   <C>        <C>        <C>             <C>       <C>            <C>


As of December 31, 2002:
  Total capital (to risk-weighted
      assets)                            $5,344     21.20%     $  2,017        8.00%     $  2,521       10.00%
  Tier 1 capital (to risk-weighted
      assets)                             5,088     20.18        N/A          N/A           1,513        6.00
  Core (Tier 1) capital (to adjusted
      total assets)                       5,088      8.88         2,292        4.00         2,865        5.00
  Tangible equity (to adjusted total
      assets)                             5,088      8.88           859        1.50        N/A          N/A


As of December 31, 2001:
  Total capital (to risk-weighted
      assets)                            $5,140     18.98%     $  2,166        8.00%     $  2,708       10.00%
  Tier 1 capital (to risk-weighted
      assets)                             4,993     18.44        N/A          N/A           1,624        6.00
  Core (Tier 1) capital (to adjusted
      total assets)                       4,993      8.84         2,260        4.00         2,825        5.00
  Tangible equity (to adjusted total
      assets)                             4,993      8.84           847        1.50        N/A          N/A

</TABLE>


As of December 31, 2002, the Bank was categorized as well capitalized  under the
regulatory  framework  for prompt  corrective  action  based on the most  recent
examination  by the OTS.  There are no  conditions or events which have occurred
since  notification  that  management  believes  have changed the  institution's
category.

NOTE 13 - PENSION AND RETIREMENT SAVINGS PLANS

The Bank  offers a defined  benefit  plan  through  the  Financial  Institutions
Retirement Fund (the "Fund"),  administered by the Pentegra Group. The Fund is a
multiple  employer plan whereas the plan is a single trust  commingled  plan for
investment  purposes.   Plan  funding  is  determined  based  on  an  individual
employer's benefit structure,  demographics,  salary experience and other pooled
actuarial  experience.  Benefits are based on 1.5% of the high five-year average
salary  for each year of  benefit  service,  up to a maximum  of 25 years,  with
two-year to six-year step vesting.

The Fund is a  pension  plan that  meets the  criteria  of a  multiple  employer
pension plan as defined by FASB  Statement No. 87,  "Employers'  Accounting  for
Pensions." FASB Statement No. 87 indicates that an employer  participating  in a
multiple  employer  plan  must  recognize  as  net  pension  cost  the  required
contribution for the period and shall recognize as a liability any contributions
due and unpaid. As indicated by the actuarial valuation prepared by the Pentegra
Group, the plan was fully funded at the end of the plan year and no contribution
was required.  Accordingly,  disclosure of the accumulated benefit  obligations,
plan  assets and the  components  of annual  pension  expense  required  by FASB
Statement No. 87 is not applicable.


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                                       20


<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13 - PENSION AND RETIREMENT SAVINGS PLANS (CONTINUED)

The Corporation is also a participant in the Financial Institutions Thrift Plan.
The plan covers  substantially all employees and is in participation  with other
institutions.  The Plan is a qualified 401(k) salary deduction plan that permits
participants to contribute up to 15% of their salary to the plan.  Additionally,
the Corporation  provides  matching  contributions up to 6% of the participants'
salaries.  For the years ended  December  31, 2002 and 2001,  the  Corporation's
contributions totaled $11,617 and $21,167, respectively.

The Bank has entered into the Director  Supplemental  Retirement  Plan - Defined
Contribution.  This plan is designed to provide an annual retirement benefit, to
be paid to each director upon retirement from the Board, and a death benefit, to
be paid  to the  director's  beneficiary  upon  his or her  death.  To fund  the
benefits  under  this  plan,  the  Bank is the  owner  and  beneficiary  of life
insurance  policies  on  the  directors.  The  aggregate  cash  surrender  value
associated  with all policies was  $1,145,000  and $ $1,090,000  at December 31,
2002 and 2001, respectively.  The amount charged to expense associated with this
plan was $25,683 and  $23,981  for the years  ended  December  31, 2002 and 2001
respectively.

NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Corporation is a party to financial instruments with  off-balance-sheet risk
in the normal course of business to meet the financial  needs of its  customers.
These  financial  instruments  consist of commitments  to extend  credit.  These
instruments  involve,  to varying degrees,  elements of credit risk in excess of
the amount  recognized in the statement of financial  position.  The contract or
notional  amounts of those  instruments  reflect the extent of  involvement  the
Corporation has in particular classes of financial instruments.

The Corporation's exposure to credit loss in the event of non-performance by the
other party to the  financial  instrument  for  commitments  to extend credit is
represented  by the  contractual  notional  amount  of  those  instruments.  The
Corporation  uses the same credit policies in making  commitments as it does for
on-balance-sheet instruments.

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.  The
Corporation evaluates each customer's credit-worthiness on a case-by-case basis.
The  amount  of  collateral  obtained  upon  extension  of  credit  is  based on
management's credit evaluation of the counter party.

The Corporation has outstanding  loan  commitments that are not reflected in the
accompanying  consolidated financial statements at December 31, 2002 and 2001 as
follows:

                                                2002          2001
                                              --------      --------

          Unfunded loan commitments           $315,000      $264,000
          Unfunded lines of credit             369,000       308,000
                                              --------      --------

                                              $684,000      $572,000
                                              ========      ========




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                                       21

<PAGE>


STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards No. 107,  "Disclosures  About Fair
Value of Financial  Instruments,"  requires disclosure of fair value information
about financial instruments,  whether or not recognized in the balance sheet. In
cases where quoted  market  prices are not  available,  fair values are based on
estimates using present value or other valuation  techniques.  Those  techniques
are significantly  affected by the assumptions used, including the discount rate
and  estimates  of future cash flows.  In that  regard,  the derived  fair value
estimates cannot be  substantiated by comparison to independent  markets and, in
many cases,  could not be realized in immediate  settlement of the  instruments.
Statement No. 107 excludes certain  financial  instruments and all non-financial
instruments from its disclosure  requirements.  Accordingly,  the aggregate fair
value  amounts   presented  do  not  represent  the  underlying   value  of  the
Corporation.

The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:

Cash and Cash Equivalents

     The  carrying  amounts  reported  in the  balance  sheets for cash and cash
     equivalents approximate their fair value.

Investment Securities (including Mortgage-Backed Securities)

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

Loans

     For  variable-rate  loans  that  reprice  frequently  and  which  entail no
     significant  changes in credit  risk,  fair  values  are based on  carrying
     values.  The fair values of other loans are estimated using discounted cash
     flow analysis,  based on interest rates  currently  being offered for loans
     with similar terms to borrowers of similar credit quality.

Federal Home Loan Bank Stock

     No ready  market  exists  for  this  restricted  stock  that is held by the
     Corporation  as required by law.  However,  redemption  of this  restricted
     stock has historically been at par value. Accordingly,  the carrying amount
     is deemed to be a reasonable estimate of fair value.

Accrued Interest Receivable

     The carrying amount of accrued interest approximates its fair value.

Deposits

     Fair values for demand deposits,  savings accounts and certain money market
     deposits are, by  definition,  equal to the amount payable on demand at the
     reporting date (i.e.,  their carrying  amounts).  Fair values of fixed-rate
     certificates  of  deposit  are  estimated  using  a  discounted  cash  flow
     calculation   that  applies  interest  rates  currently  being  offered  on
     certificates  to a schedule  of  aggregated  expected  monthly  maturity of
     deposits.

Advances from Federal Home Loan Bank

     The  carrying  amounts  of  advances  from the  Federal  Home Loan Bank are
     estimated  using  discounted  cash flow  analysis,  based on interest rates
     currently being offered for loans with similar terms.

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                                       22

<PAGE>



STEELTON BANCORP, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

Accrued Interest Payable

     The carrying amount of accrued interest approximates its fair value.

Unfunded Lending Commitments

     Fair values for unfunded  lending  commitments  are based on fees currently
     charged to enter into similar agreements, taking into account the remaining
     terms of the agreements and the counterparties' credit standings.

The carrying  amounts and estimated fair values of the  Corporation's  financial
instruments at December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>

                                                        2002                                  2001
                                           -----------------------------      ----------------------------
                                            Carrying             Fair          Carrying           Fair
                                             Amount             Value           Amount            Value
                                           -------------    ------------      ------------    -------------
<S>                                      <C>             <C>                <C>            <C>

Financial assets:
     Cash and due from banks                $  1,027,734    $  1,027,734       $    580,181   $    580,181
     Interest bearing deposits                 3,624,071       3,624,071          2,617,767      2,617,767
     Investments:
         Available for sale                   17,891,505      17,891,505         10,359,100     10,359,100
         Held to maturity                      1,579,272       1,599,698          2,362,443      2,387,828
     Loans receivable, net                    29,022,909      32,168,548         36,615,998     37,744,836
     Federal Home Loan Bank stock                980,900         980,900            989,200        989,200
     Accrued interest receivable                 260,611         260,611            286,987        286,987

Financial liabilities:
     Deposits                                 33,358,179      35,900,015         33,555,174     34,098,822
     Advances from Federal Home Loan
         Bank                                 17,917,126      19,275,236         17,185,303     18,883,453
     Accrued interest payable                    130,597         130,597            120,372        120,372

Off-balance sheet financial instruments,
     unfunded lending commitments                      -               -                  -              -

</TABLE>


NOTE 16 - PENDING MERGER

On December 20, 2002, the Corporation entered into a definitive merger agreement
with Sun Bancorp, Inc. pursuant to which the Corporation will be merged into Sun
Bancorp,  Inc. Under the merger  agreement,  Mechanics  Savings Bank and Baldwin
Investment Corporation, the Corporation's two subsidiaries,  will be merged into
Sun Bank, a bank subsidiary of Sun Bancorp, Inc.

In the merger,  each of the issued and outstanding  shares of the  Corporation's
common stock will be exchanged for $22.04 per share in cash.  In addition,  each
of the Corporation's  outstanding  options will be cashed out in an amount equal
to the excess of the per share merger consideration,  $22.04, over the per share
exercise  price of $8.33  per  share.  The  merger  has  been  approved  by both
organizations' Boards of Directors but is subject to approval by bank regulatory
authorities  and the  Corporation's  stockholders.  The merger is expected to be
completed in the first half of 2003.

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                                       23