EXHIBIT 13
<PAGE>


                             STEELTON BANCORP, INC.


                       1999 ANNUAL REPORT TO STOCKHOLDERS





<PAGE>



                             STEELTON BANCORP, INC.
                                  ANNUAL REPORT







TABLE OF CONTENTS

                                                                            Page
                                                                            ----

Letter to Stockholders ....................................................    1

Corporate Profile and Stock Price Information .............................    2

Selected Financial Ratios and Other Data ..................................    3

Management's Discussion and Analysis ......................................    4

Independent Auditor's Report ..............................................   13

Consolidated Financial Statements .........................................   14

Notes to Consolidated Financial Statements ................................   20

Corporate Information .....................................................   42




                                       i
<PAGE>
                       [Steelton Bancorp, Inc. Letterhead]






To Our Stockholders:

On behalf of our Board of Directors and employees, we are pleased to present the
first Annual Report to Stockholders of Steelton  Bancorp,  Inc. (the "Company").
As you will  see  from the  Annual  Report,  1999 was an  eventful  year for the
Company and its wholly-owned subsidiary, Mechanics Savings Bank (the "Bank").

On July 8, 1999, the Bank successfully  completed its conversion from the mutual
to stock form of  organization  and the  concurrent  public  offering of 385,000
shares of the  Company's  common stock (the  "Conversion").  Net proceeds to the
Company and the Bank from the Conversion were approximately $3.5 million.

For the fiscal year ended December 31, 1999, the Company earned $182,000 or $.47
per share,  as  compared  to net income of  $100,000  for the fiscal  year ended
December 31, 1998. The increase in net income was primarily  attributable to the
net proceeds received from the Conversion.

At December 31, 1999, the Company's assets totaled $53.9 million, as compared to
$41.5  million at December  31, 1998.  Stockholders'  equity was $6.8 million or
$17.66 per share at December 31, 1999, as compared to retained  earnings of $3.7
million at December 31, 1998.  The increase in assets and  stockholders'  equity
was primarily attributable to the net proceeds received from the Conversion.

We are pleased to announce that our bank entered the new millennium  without any
Y2K computer problems. Two years of planning,  testing and the dedication of our
employees allowed us to enter the New Year successfully.  As we move forward, we
plan to proceed with long  anticipated  expansion plans for our Steelton office.
During 1999 we were able to purchase  property  to the north and  adjoining  our
main office  building  and next to property we  purchased  back in 1988 for this
purpose.  Arrangements  have  been  made  to  clear  the  buildings  from  these
properties  so that we can begin  construction  of much  needed  parking for the
convenience  of  our   customers.   Plans  also  call  for  the  addition  of  a
drive-through  window  complete with a 24 hour  full-service  ATM. The year 2000
proves to be an eventful year as we celebrate the Bank's 100 years of continuous
service to the Borough of Steelton and surrounding communities.

We  sincerely  appreciate  the  confidence  shown  by our  customers  and  local
community  during  the  Conversion.  The  goal of your  Board of  Directors  and
Management is to continuously strive to enhance your investment in the Company.

Sincerely,



/s/Harold E. Stremmel
---------------------
Harold E. Stremmel
President and Chief Executive Officer



<PAGE>


CORPORATE PROFILE

Steelton  Bancorp,  Inc.  (the  "Company")  is the parent  company for Mechanics
Savings Bank (the "Bank"). The Company was formed as a Pennsylvania  corporation
in February  1999 at the  direction  of the Bank in  connection  with the Bank's
conversion  from a mutual to stock form of  ownership  (the  "Conversion").  The
Company  acquired  all  of  the  capital  stock  issued  by the  Bank  upon  its
conversion.  On July 8, 1999,  the Bank  completed its  conversion in connection
with a $3.85 million initial public offering of the Company's  common stock. The
Company is a unitary  savings and loan holding  company  which,  under  existing
laws,  generally is not restricted in the types of business  activities in which
it may engage provided that the Bank retains a specified amount of its assets in
housing-related  investments.  At the  present  time,  the  Company  conducts no
significant  business  or  operations  of its own other than  holding all of the
outstanding  stock of the Bank and investing  the  Company's  portion of the net
proceeds obtained in the Conversion.

Mechanics Savings Bank,  founded in 1900 under the name "Mechanics  Building and
Loan  Association  of  Steelton,"  is a  federally-chartered  stock savings bank
headquartered in Steelton,  Pennsylvania. The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision (the "OTS") and its
deposits are federally  insured by the Savings  Association  Insurance Fund (the
"SAIF"),  as  administered  by the Federal Deposit  Insurance  Corporation  (the
"FDIC") . The Bank is a member of, and owns  capital  stock in, the Federal Home
Loan Bank (the "FHLB") of  Pittsburgh,  one of the twelve  regional banks in the
FHLB system.

The Bank  operates a  traditional  savings bank  business,  attracting  deposits
accounts from the general public and using those  deposits,  together with other
funds, primarily to originate and invest in loans secured by one- to four-family
residential real estate.

STOCK PRICE INFORMATION

The Company's common stock has been traded on the  OTC-Bulletin  Board under the
trading  symbol  of "SELO"  since it  commenced  trading  on July 9,  1999.  The
following  table  reflects the high and low bids for the Company's  common stock
during the quarters  indicated.  The  quotations  reflect  inter-dealer  prices,
without retail  mark-up,  mark-down or commission  and may not represent  actual
transactions.

                                                              Dividends per
1999                                          High      Low    share Declared
----                                          ----      ---    --------------

Third Quarter (beginning July 9, 1999)      $11.00   $10.50           --

Fourth Quarter                              $11.00    $8.75        $0.08

The number of  shareholders  of record of common  stock as of February 29, 2000,
was  approximately  206. This does not reflect the number of persons or entities
who held stock in nominee or "street" name through various  brokerage  firms. At
February  29,  2000,  there  were

                                       2
<PAGE>

377,000 shares  outstanding.  There were no dividends paid by the Company during
the fiscal year ended December 31, 1999. The Company's  ability to pay dividends
to  stockholders  is largely  dependent  upon the dividends it receives from the
Bank. The Bank may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause the Bank's regulatory capital to be reduced below (1)
the amount required for the liquidation  account  established in connection with
the Conversion, or (2) the regulatory requirements imposed by the OTS.


SELECTED FINANCIAL RATIOS AND OTHER DATA

                                                    At or For the Years Ended
                                                 -------------------------------
                                                           December 31
                                                 -------------------------------

                                                   1999       1998       1997
                                                 -------    -------    -------
Return on average assets ......................     0.38%      0.25%      0.43%
Return on average equity ......................     3.84       2.77       4.62
Average equity to average assets ..............    10.00       9.14       9.41
Equity to assets at period end ................    12.57       8.91       9.70
Average interest-earning assets to average
    interest-bearing liabilities ..............   107.42     106.37     107.68
Net interest rate spread(1) ...................     2.45       2.58       2.56
Net interest margin(2) ........................     2.77       2.88       2.93
Non-performing loans to total loans ...........     1.65       1.16       1.84
Allowance for loan loss to total loans ........     0.53       0.60       0.39
Allowance for loan losses to non-
   performing loans ...........................    31.92      51.55      21.32

-------------------
(1)  Represents  the  difference  between the average yield on  interest-earning
     assets and the average cost of interest-bearing liabilities.
(2)  Net interest income as a percentage of average interest earning assets.


                                       3
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         The following is a discussion of the financial condition and results of
operations of the Company and the Bank, and should be read in  conjunction  with
the accompanying Consolidated Financial Statements.

Forward - Looking Statements

         This document contains statements that project the future operations of
the Company which involve risks and uncertainties.  The Company's actual results
may differ  significantly  from the results  discussed in these  forward-looking
statements.  Statements  concerning future  performance,  developments,  events,
expectations for growth and market  forecasts,  and any other guidance on future
periods,  constitute forward-looking statements which are subject to a number of
risks and uncertainties, including interest rate fluctuations and government and
regulatory  actions which might cause actual results to differ  materially  from
stated expectations or estimates.

GENERAL

         The Company  conducts no significant  business or operations of its own
other than holding all of the  outstanding  stock of the Bank and  investing the
Company's  portion of the net  proceeds  obtained in the Bank's  mutual-to-stock
conversion.  The  following  discussion  relates  only to the  Bank's  financial
condition and results of operations.

         The Bank's  results of  operations  depend  primarily  on net  interest
income,  which is determined by (i) the difference between rates of interest the
Bank  earns on its  interest-earning  assets  and the  rates  the  Bank  pays on
interest-bearing  liabilities  (interest  rate  spread),  and (ii) the  relative
amounts of interest-earning assets and interest-bearing  liabilities. The Bank's
results of  operations  are also  affected by  non-interest  income,  including,
primarily,  income from customer  deposit  account  service  charges,  gains and
losses  from  the  sale  of  investments  and  mortgage-backed   securities  and
non-interest expense, including, primarily,  compensation and employee benefits,
federal deposit insurance  premiums,  office occupancy cost, and data processing
cost.  The Bank's  results of  operations  are also  affected  significantly  by
general and economic and competitive conditions,  particularly changes in market
interest rates, government policies and actions of regulatory  authorities,  all
of which are beyond the Bank's control.

MARKET RISK ANALYSIS

         Qualitative  Analysis.  Because the  majority of the Bank's  assets and
liabilities  are  sensitive  to  changes in  interest  rates,  the  Bank's  most
significant form of market risk is interest rate risk.

         An asset or liability is interest rate sensitive within a specific time
period if it will  mature or  reprice  within  that time  period.  If the Bank's
assets  mature  or  reprice  more  quickly  or  to a  greater

                                       4
<PAGE>

extent than its  liabilities,  the Bank's net  portfolio  value and net interest
income  would  tend to  increase  during  periods of rising  interest  rates but
decrease  during periods of falling  interest rates.  Conversely,  if the Bank's
assets mature or reprice more slowly or to a lesser extent than its liabilities,
the Bank's net  portfolio  value and net interest  income would tend to decrease
during periods of rising  interest rates but increase  during periods of falling
interest  rates.  The Bank's  policy has been to address the interest  rate risk
inherent in the historical savings institution business of originating long-term
loans funded by short-term deposits by maintaining  sufficient liquid assets for
material and prolonged  changes in interest rates and by originating  loans with
shorter terms to maturity such as  construction,  commercial and consumer loans.
In addition, the Bank has invested in adjustable-rate mortgage-backed securities
as an interest rate risk management strategy.

         Quantitative  Analysis.  In order to encourage savings  associations to
reduce  their  interest  rate  risk,  the OTS  adopted a rule  incorporating  an
interest rate risk ("IRR") component into the risk-based  capital rules. The IRR
component is a dollar  amount that will be deducted  from total  capital for the
purpose of calculating an institution's  risk-based  capital  requirement and is
measured  in terms of the  sensitivity  of its net  portfolio  value  ("NPV") to
changes in interest rates.  NPV is the difference  between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An  institution's  IRR is  measured  as the  change  to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the  estimated  present  value of total  assets
("PV")  will  require  the  institution  to deduct  from its capital 50% of that
excess  change.  The rules provide that the OTS will calculate the IRR component
quarterly for each  institution.  Based on the Bank's asset size and  risk-based
capital, the Bank has been informed by the OTS that it is exempt from this rule.
Nevertheless,  the following table presents the Bank's NPV at December 31, 1999,
as calculated by the OTS, based on quarterly information voluntarily provided to
the OTS.

       Changest                      Net Portfolio Value
      in Market                      -------------------
    Interest Rates      $ Amount          $ Change       % Change   NPV Ratio(1)
    --------------      -----------       ------------   ---------- ------------
    (basis points)         (Dollars in Thousands)
         +300           1,857               -3,894         -68%         3.86%
         +200           3,174               -2,577         -45%         6.39%
         +100           4,530               -1,221         -21%         8.82%
            0           5,751                                          10.87%
         -100           6,816                1,065         +19%        12.55%
         -200           7,280                1,529         +27%        13.19%
         -300           7,451                1,700         +30%        13.35%


---------------
(1)  Calculated as the estimated NPV divided by present value of total assets.

                                       5
<PAGE>

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates,  prepayments and deposit  run-offs and should not be relied upon
as  indicative  of actual  results.  Certain  shortcomings  are inherent in such
computations.   Although   certain  assets  and  liabilities  may  have  similar
maturities  or periods of  repricing,  they may react at different  times and in
different degrees to changes in market rates of interest.  The interest rates on
certain types of assets and  liabilities  may fluctuate in advance of changes in
market interest rates,  while rates on other types of assets and liabilities may
lag  behind  changes  in  market  interest  rates.  In the  event of a change in
interest  rates,   prepayments  and  early   withdrawal   levels  could  deviate
significantly  from those  assumed in making the  calculations  set forth above.
Additionally,  an  increased  credit  risk may result as many  borrowers  may be
unable to service their debt in the event of an interest rate increase.

         The Bank's  Board of Directors  reviews the Bank's asset and  liability
policies on an annual basis.  The Board of Directors  meets  quarterly to review
interest  rate risk and trends,  as well as  liquidity  and  capital  ratios and
requirements.  Management  administers  the policies and  determinations  of the
Board of  Directors  with respect to the Bank's  asset and  liability  goals and
strategies.  The  Bank  expects  that  its  asset  and  liability  policies  and
strategies  will  continue as described so long as  competitive  and  regulatory
conditions  in the  financial  institution  industry and market  interest  rates
continue as they have in recent years.

Financial Condition

         Assets  increased  $12.4 million or 29.9% to $53.9 at December 31, 1999
from $41.5 million at December 31,1998. The increase was primarily  attributable
to a net  increase  in loans  receivable  of $4.2  million,  a net  increase  in
investment  securities  of  $6.8  million  and an  increase  in  cash  and  cash
equivalents of $900,000.

         The loan receivable increase of $4.2 million was primarily attributable
to a strong  increase in loan  originations  in the third and fourth quarters of
1999.  The  $6.8  million  increase  in  investment   securities  was  primarily
attributable to proceeds from the Conversion and investment of excess liquidity.
Cash and cash  equivalents  increased  by  $900,000  as a result  of  regulatory
required  additional  cash  reserves  at  December  31,  1999  due to year  2000
concerns.

         The  Company's  total  liabilities  increased  $9.3 million or 24.6% to
$47.1 million at December 31, 1999 from $37.8 million at December 31, 1998.  The
increase was primarily attributable to a $5.0 million increase in deposits and a
$4.0 million increase in advances from the Federal Home Loan Bank (the "FHLB").

         Stockholders' equity increased $3.1 million to $6.8 million or 12.6% of
total  assets at December  31,  1999,  as compared to retained  earnings of $3.7
million or 8.9% of total assets at December 31, 1998.  The increase is primarily
attributable to the Conversion and net income.

                                       6
<PAGE>
Average Balance Sheet

         The following table sets forth a summary of average  balances of assets
and liabilities as well as average yield and rate information.  Average balances
are based upon month-end balances, however, the Company does not believe the use
of month-end  balances  differs  significantly  from an average based upon daily
balances. There have been no tax equivalent adjustments made to yields.

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                ------------------------------------------------------------------
                                                           1999                                1998
                                                --------------------------------  --------------------------------
                                                                      Average                             Average
                                                 Average               Yield/      Average                 Yield/
                                                 Balance Interest      Cost        Balance   Interest       Cost
                                                 ------- --------     -------       -------  --------     -------
                                                                      (Dollar in thousands)
<S>                                             <C>       <C>       <C>          <C>       <C>          <C>
Interest-earning assets:
  Loans receivable(1)                            $28,035   $2,267       8.09%      $29,889   $2,537         8.49%
  Investment securities                           13,527      823       6.08         5,660      259         4.58
  Other interest-earning assets                    3,491      100       2.86         2,203       84         3.81
                                                  ------    -----                   ------    -----
     Total interest-earning assets                45,053    3,190       7.08        37,752    2,880         7.63
                                                            -----                             -----
Noninterest-earning assets                         2,395                             1,800
                                                  ------                            ------
     Total assets                                $47,448                           $39,552
                                                  ======                            ======

Interest-bearing liabilities:
  NOW and commercial checking                    $ 3,749       21       0.56       $ 1,936       16         0.82
  Savings accounts                                 4,392      115       2.62         3,670       97         2.65
  Money market accounts                            1,936       47       2.43         1,389       34         2.43
  Certificates of deposit                         21,209    1,170       5.52        18,351    1,066         5.81
  Other liabilities                               10,656      589       5.53        10,147      581         5.72
                                                  ------    -----                   ------    -----
     Total interest-bearing liabilities           41,942    1,942       4.63        35,493    1,794         5.05
                                                            -----                             -----
Noninterest-bearing liabilities                      763                               443
                                                  ------                            ------
     Total liabilities                            42,705                            35,936
                                                  ------                            ------

Stockholders' equity                               4,743                             3,616
                                                  ------                            ------
     Total liabilities and stockholders'         $47,448                           $39,552
                                                  ======                            ======
equity

Net interest income                                       $ 1,248                           $ 1,086
                                                           ======                            ======
Interest rate spread(2)                                                 2.45%                               2.58%
                                                                        ====                                ====
Net yield on interest-earning assets(3)                                 2.77%                               2.88%
                                                                        ====                                ====
Ratio of average interest-earning assets to
  average interest-bearing liabilities                                107.42%                             106.37%
                                                                      ======                              ======
</TABLE>
-------------
(1)  Average balances include non-accrual loans.
(2)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(3)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.

                                       7
<PAGE>

Rate/Volume Analysis

         The table below sets forth certain information regarding changes in the
Company's  interest income and interest expense for the periods  indicated.  For
each  category  of  interest-earning  assets and  interest-bearing  liabilities,
information  is  provided  on  changes  attributable  to (i)  changes  in volume
(changes  in  average  volume  multiplied  by old rate);  (ii)  changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).

<TABLE>
<CAPTION>
                                       Year Ended December 31,              Year Ended December 31,
                                             1999 vs. 1998                       1998 vs. 1997
                                     ---------------------------           ----------------------------
                                         Increase (Decrease)                   Increase (Decrease)
                                               Due to                                Due to
                                               ------                                ------

                                                     Rate/                                       Rate/
                                  Volume   Rate     Volume    Net     Volume   Rate     Volume    Net
                                  ------   -----    ------   -----    ------   ----     ------   -----
                                                           (In thousands)
<S>                              <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>

Interest income:
 Loans receivable .............   $(157)   $(120)   $   7    $(270)   $(185)   $  70    $  (5)   $(120)
 Investment securities ........     360       85      118      563      148       --        1      149
 Other interest-earning assets       49      (21)     (12)      16      (31)      (7)      (3)      21
                                  -----    -----    -----    -----    -----    -----    -----    -----
  Total interest-earning assets   $ 252    $ (56)   $ 113    $ 309    $  (6)   $  63    $  (7)   $  50
                                  =====    =====    =====    =====    =====    =====    =====    =====
Interest expense:
 Commercial checking and
    NOW accounts ..............   $  15    $  (5)   $  (4)   $   6    $   7    $  (2)   $  (1)   $   4
 Savings account ..............      19       (1)      --       18       14       --       --       14
 Money market accounts ........      13       --       --       13        8       (3)      (1)       4
 Certificates of deposit ......     166      (53)      (8)     105       57      (18)      (1)      38
 Other liabilities ............      29      (19)      (1)       9      (25)     (16)       1      (40)
                                  -----    -----    -----    -----    -----    -----    -----    -----
 Total interest-bearing
    liabilities ...............   $ 242    $ (78)   $ (13)   $ 151    $  61    $ (39)   $  (2)   $  20
                                  =====    =====    =====    =====    =====    =====    =====    =====
Net change in interest income..   $  10    $  22    $ 126    $ 158    $ (67)   $ 102    $  (5)   $  30
                                  =====    =====    =====    =====    =====    =====    =====    =====
</TABLE>



                                       8
<PAGE>



Results of Operations

         Net Income.  The  Company's net income  increased  $82,000 for the year
ended  December 31, 1999, to $182,000 from $100,000 for the year ended  December
31, 1998. This increase was primarily attributable to a $163,000 increase in the
Company's net interest income and a $89,000 increase in the Bank's  non-interest
income, partially offset by a $172,000 increase in non-interest expense.

         Net  Interest  Income.  Net  interest  income  is the most  significant
component of the Company's  income from  operations.  Net interest income is the
difference between interest the Company received on its interest-earning assets,
primarily  loans,  investment  and  mortgage-backed  securities and interest the
Company  pays  on  its  interest-bearing  liabilities,  primarily  deposits  and
advances from the FHLB.  Net interest  income depends on the volume of and rates
earned  on  interest-earning  assets  and  the  volume  of  and  rates  paid  on
interest-bearing liabilities.

         Net interest  income  increased  $163,000 or 15.1%, to $1.2 million for
the year ended  December  31, 1999,  as compared to the year ended  December 31,
1998.  The increase was primarily due to the growth in average  interest-earning
assets to $45.1 million in 1999 from $37.8 million in 1999 partially offset by a
decline in the  Company's  interest  rate  spread to 2.45% for 1999  compared to
2.58% for 1998.

         The  increase  in  average  interest-earning  assets  of  $7.3  million
primarily  reflects  $7.9  million  increase  in average  investment  securities
partially  offset by  average  decreases  in loans and  other  interest  earning
assets.

         Net  yield on  interest-earning  assets  decreased  to  7.08%  for 1999
compared  to 7.63% for 1998,  partially  offset by a decrease  in the  Company's
average cost on interest-bearing liabilities to 4.63% for 1999 compared to 5.05%
for 1998. The decrease in the Company's average yield on interest-earning assets
was due  primarily to a decline in the average  yield on loans to 8.09% for 1999
compared  to 8.49%  for 1998  offset  somewhat  by an  increase  in the yield on
investment  securities.  The  increase  in the  Company's  average  yield on its
investment  securities to 6.08% from 4.58% was due primarily to higher yields on
investment securities purchased in 1999.

         The increase in average  interest-bearing  liabilities  of $6.4 million
reflects  average  balance  increases  of $1.8 million in  interest-bearing  NOW
accounts, $4.1 million in savings, money market and certificates of deposit, and
$500,000 in other interest-bearing liabilities.

         Provision for Loan Losses. Provision for loan losses was $2,000 for the
year  ended  December  31 , 1999,  as  compared  to  $50,000  for the year ended
December 31, 1998. The decrease in the provision is due to management's periodic
evaluation of the general level of loan  delinquency,  the level of risk by type
of loan, specific loan evaluations, and general economic conditions. The current
allowance  represents  .52% of total  loans  outstanding  at  December  31, 1999
compared to .60% at December 31, 1998.

                                       9
<PAGE>

        Management believes the allowance for loan losses is at a level that is
adequate to provide for  estimated  losses.  However,  there can be no assurance
that further  additions  will not be made to the  allowance and that such losses
will not exceed the estimated amount.

         Non-interest  Income.  Non-interest  income increased  $90,000 or 51.4%
from  $175,000 for the year ended  December 31, 1998 to $265,000 for 1999.  This
increase in the  Company's  non-interest  income was  primarily due to a $77,000
increase in fees and  service  charges  including  $36,000 in  automated  teller
machine charges for  non-customer  withdrawals and a $22,000 increase in service
charges on NOW accounts.

         Non-interest Expense.  Non-interest expense increased $172,000 or 15.8%
from $1,092,000 for the year ended December 31, 1998 to $1,264,000 for 1999. The
increase in the Company's  non-interest expense was primarily  attributable to a
$33,000  increase in  salaries  and  employee  benefits,  including  the expense
related to the employee stock ownership  plan, and a $142,000  increase in other
expenses.  The  increase  in  other  expenses  is  primarily  due to  the  costs
associated  with being a public  company  such as periodic  reporting,  transfer
agent and professional fees.

         The category of non-interest  expense described as "Other" is comprised
of  expenses  related  to fees  charged  by banks,  loan  processing  fees,  NOW
expenses, costs related to postage,  supplies and professional fees. The highest
of these expenses was $59,000 for professional  fees, which were greater in 1999
as  compared to 1998 due to legal and  accounting  fees in  connection  with the
Conversion and becoming a public company.

         Management expects  compensation and benefits expenses will increase in
future  periods due to the employee  stock  ownership  plan as well as the stock
option and restricted  stock plans adopted by  stockholders  of the Company at a
special meeting held on February 3, 2000. Furthermore,  the planned expansion of
the Steelton office, which will include a larger parking lot and a drive-through
window with a full-service ATM, will result in increased  expenses during future
periods.  It is not possible to project the total costs of the expansion at this
time.

         Income Tax Expense.  Income tax expense  increased $47,000 from $19,000
in 1998 to $66,000 in 1999.  This  increase  in income tax expense is due to the
increase in the  Company's  pretax  income of $128,000 from $120,000 for 1998 to
$248,000 for 1999. The Company's  effective tax rate was 26.6% and 15.9% for the
years ended December 31, 1999 and 1998, respectively.

Liquidity and Capital Resources

         The Bank is  required to maintain  minimum  levels of liquid  assets as
defined by OTS  regulations.  This  requirement,  which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of the Bank's deposits and short-term  borrowings.  The required ratio currently
is 4% and the  Bank's  regulatory  liquidity  ratio  average  was 37% and 26% at
December 31, 1999 and 1998, respectively.


                                       10
<PAGE>

         The Company's primary sources of funds are deposits, repayment of loans
and  mortgage-backed   securities,   maturities  of  investment  securities  and
interest-bearing deposits with other banks, advances from the FHLB of Pittsburgh
and funds  provided from  operations.  While  scheduled  repayments of loans and
mortgage-backed   securities  and   maturities  of  investment   securities  are
predictable  sources of funds,  deposit flows,  and loan prepayments are greatly
influenced  by the general  level of interest  rates,  economic  conditions  and
competition.  The  Company  uses its  liquidity  resources  principally  to fund
existing  and future  loan  commitments,  maturing  certificates  of deposit and
demand  deposit  withdrawals,  to invest in other  interest-earning  assets,  to
maintain liquidity, and meet operating expenses.

         Net cash  provided  by the  Company's  operating  activities  (the cash
effects  of  transactions  and  other  events  that  enter  into  the  Company's
determination  of net  income)  was  $338,000  in 1999,  an increase of $291,000
compared with the same period in 1998.  This increase in 1999 was largely due to
a net  decrease in income taxes paid in 1999 of $140,000 as well as increases in
accrued interest payable and other liabilities of $177,000.

         Net cash provided by the Company's  investing  activities  (i.e.,  cash
disbursements,  primarily for the purchase of the bank's  investment  securities
and mortgage-backed securities portfolios and the Bank's loan portfolio) for the
year ended December 31, 1999, totaled $11.8 million, an increase of $9.1 million
from  1998.  This  increase  was  primarily  due to net  increases  in loans and
investment securities.

         Net cash  provided by  financing  activities  increased by $8.1 million
largely due to increases  in deposits  and  advances  from the FHLB and proceeds
from issuance of common stock.

         Approximately  $10.7 million of the Bank's time deposits  mature within
the next 12 months.  To the extent that these deposits do not remain at the Bank
upon maturity,  the Bank believes that it can replace these funds with deposits,
excess liquidity,  FHLB advances or outside  borrowings.  It has been the Bank's
experience that a substantial  portion of such maturing deposits remain with the
Bank.

         At December 31, 1999, the Bank had loan commitments outstanding of $1.8
million.  Funds required to fill these  commitments  are derived  primarily from
current  excess   liquidity,   deposit   inflows  or  loan  and  investment  and
mortgage-backed security repayments.

Impact of Inflation and Changing Prices

         The consolidated financial statements of the Company and notes thereto,
presented  elsewhere  herein,  have been prepared in accordance with GAAP, which
require the measurement of financial  position and operating results in terms of
historical  dollars without  considering  the change in the relative  purchasing
power of money over time due to inflation.  The impact of inflation is reflected
in the  increased  cost of the  Company's  operations.  Unlike  most  industrial
companies,  nearly all the assets and  liabilities of the Company are financial.
As a result,  interest rates have a greater impact

                                       11
<PAGE>

on the Company's performance than do the effects of general levels of inflation.
Interest  rates do not  necessarily  move in the same  direction  or to the same
extent as the prices of goods and services.

Year 2000

         Like many  financial  institutions,  the Bank  relies on  computers  to
conduct its business and information systems  processing.  Industry experts were
concerned that on January 1, 2000, some computers might not be able to interpret
the new year properly,  causing  computer  malfunctions.  Some banking  industry
experts  remain  concerned  that  some  computers  may not be able to  interpret
additional dates in the year 2000 properly.  The Bank has operated and evaluated
its computer  operating systems following January 1, 2000 and has not identified
any  errors or  experienced  any  computer  system  malfunctions.  The Bank will
continue to monitor its information systems to assess whether its systems are at
risk  of  misinterpreting   any  future  dates  and  will  develop   appropriate
contingency  plans to prevent any potential  system  malfunction  or correct any
system failures.  The Bank has not been informed of any such problem experienced
by its  vendors or its  customers,  nor by any of the  municipal  agencies  that
provide services to the Bank.

         Nevertheless,  it is too soon to  conclude  that  there will not be any
problems arising from the Year 2000 problem,  particularly at some of the Bank's
vendors.  The Bank will continue to monitor its significant vendors of goods and
services  with respect to Year 2000  problems they may encounter as those issues
may effect the Bank's ability to continue operations,  or might adversely affect
the Bank's  financial  position,  results of operations and cash flows. The Bank
does not  believe at this time that these  potential  problems  will  materially
impact the ability of the Bank to continue its operations, however, no assurance
can be given that this will be the case.

         The expectations of the Bank contained in this section on Year 2000 are
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation  Reform Act of 1995 and involve  substantial  risks and uncertainties
that may cause actual results to differ  materially  from those indicated by the
forward looking  statements.  All forward looking statements in this section are
based on information available to the Company on the date of this document,  and
the Company assumes no obligation to update such forward looking statements.


                                       12

<PAGE>

                       [McKonley & Asbury LLP letterhead]


                          INDEPENDENT AUDITOR'S REPORT


The Board of Directors
Steelton Bancorp, Inc.
Steelton, Pennsylvania



We have audited the accompanying  consolidated statements of financial condition
of Steelton  Bancorp,  Inc. and subsidiary (the  Corporation) as of December 31,
1999 and 1998, and the related consolidated statements of income,  comprehensive
income,  changes  in  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  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 consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Steelton Bancorp,
Inc. and  subsidiary as of December 31, 1999 and 1998,  and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.


                                        /s/McKonly & Asbury LLP


Harrisburg, Pennsylvania
January 24, 2000




                                       13
<PAGE>

                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                     YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                     ASSETS

                                                                     Note               1999                1998
                                                                    -------       ------------------  ------------------
<S>                                                               <C>              <C>                  <C>
Cash and cash equivalents
     Cash and amounts due from depository
      institutions                                                       1            $1,617,768            $433,414
     Interest bearing deposits in other banks                            1             1,670,023           1,954,178
Investment securities
     Securities available-for-sale                                    1, 2            10,252,585           4,004,294
     Securities held-to-maturity                                      1, 2             5,756,786           5,200,205
Loans receivable, net                                                 1, 3            32,027,255          27,784,386
Accrued interest receivable                                           1, 4               322,219             227,712
Federal Home Loan Bank stock, at cost                                   14               691,800             564,600
Office properties and equipment, net                                  1, 5             1,212,927           1,046,050
Rental property, net                                                  1, 5                     -              68,678
Deferred income taxes                                                 1, 8               302,800              97,771
Other assets                                                                              41,208             129,986
                                                                               ------------------  ------------------
Total assets                                                                         $53,895,371         $41,511,274
                                                                               ==================  ==================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                              1, 6           $33,266,127         $28,272,431
Advances from Federal Home Loan Bank                                     7            13,334,745           9,257,408
Advances from borrowers for insurance and taxes                                          232,508             167,315
Accrued interest payable                                                                 140,473              72,227
Dividends payable                                                                         30,800                   -
Other liabilities                                                                        118,640              43,404
                                                                               ------------------  ------------------
Total liabilities                                                                     47,123,293          37,812,785
                                                                               ------------------  ------------------

Commitments and contingencies                                       1,3,12

Preferred stock, no par value; 2,000,000
 shares authorized; none issued and
 outstanding at December 31, 1999 and 1998                                                     -                   -
Common stock, $.10 par value; 8,000,000
 shares authorized; 385,000 shares
 issued and outstanding
 at December 31, 1999; none issued or
 outstanding at December 31, 1998                                                         38,500                   -
Additional paid-in capital                                                             3,457,015                   -
Retained earnings                                                                      3,863,701           3,712,571
Unearned compensation ESOP                                               1              (308,000)                  -
Accumulated other comprehensive income (loss)                                           (279,138)            (14,082)
                                                                               ------------------  ------------------
Total stockholders' equity                                                             6,772,078           3,698,489
                                                                               ------------------  ------------------
Total liabilities and stockholders' equity                                           $53,895,371         $41,511,274
                                                                               ==================  ==================

</TABLE>
                     The accompanying notes are an integral
                       part of these financial statements.

                                       14
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                       Note               1999                  1998
                                                                    -----------    -------------------    ------------------
<S>                                                                <C>           <C>                         <C>
Interest income
    Loans                                                                    1             $2,266,609            $2,536,713
    Investment securities                                                 1, 2                822,924               259,160
    Other interest earning assets                                                             100,459                83,818
                                                                                   -------------------    ------------------
Total interest income                                                                       3,189,992             2,879,691
                                                                                   -------------------    ------------------
Interest expense
    Deposits                                                                 6              1,351,594             1,213,091
    Advances from Federal Home Loan Bank                                     7                589,316               580,763
                                                                                   -------------------    ------------------
Total interest expense                                                                      1,940,910             1,793,854
                                                                                   -------------------    ------------------
Net interest income                                                                         1,249,082             1,085,837

Provision for loan losses                                                  1,3                  2,000                50,000
                                                                                   -------------------    ------------------
Net interest income after provision
 for loan losses                                                                            1,247,082             1,035,837
                                                                                  -------------------    ------------------

Other income
    Fees and service charges                                                                  162,634                85,909
    Dividends on FHLB stock                                                                    52,129                35,343
    Other                                                                                      49,842                54,208
                                                                                   -------------------    ------------------
Total other income                                                                            264,605               175,460
                                                                                   -------------------    ------------------
Other expense
    Salaries and employee benefits                                                            625,736               592,612
    Occupancy expense of premises                                                              97,040                92,560
    Equipment                                                                                 171,169               180,526
    Advertising                                                                                42,422                40,859
    Other                                                                                     327,224               185,066
                                                                                   -------------------    ------------------
Total other expense                                                                         1,263,591             1,091,623
                                                                                   -------------------    ------------------
Income before income taxes                                                                    248,096               119,674

Income taxes                                                              1, 8                 66,166                19,358
                                                                                   -------------------    ------------------
Net income                                                                                   $181,930              $100,316
                                                                                   ===================    ==================
Earnings per share, basic                                                                        0.33            N/A
                                                                                   ===================    ==================
Shares used in computing basic earnings per share                                             354,200            N/A
                                                                                   ===================    ==================
</TABLE>
                     The accompanying notes are an integral
                       part of these financial statements.


                                       15
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                           1999                 1998
                                                                                     -----------------    ------------------

<S>                                                                                        <C>                  <C>
Net income                                                                                   $181,930             $ 100,316

Other comprehensive income (loss)

    Unrealized losses on securities
      available for sale                                                                     (432,233)              (21,336)
         Income tax benefit                                                                   167,177                 7,254
                                                                                     -----------------    ------------------
Comprehensive income (loss)                                                                  $(83,126)             $ 86,234
                                                                                     =================    ==================

</TABLE>
                     The accompanying notes are an integral
                       part of these financial statements.

                                       16
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                         Accumulated
                                                                                            Other       Total
                                                   Additional                 Unearned     Compre-      Stock-
                                         Common     Paid-in       Retained      ESOP       hensive      holders'
                                         Stock      Capital       Earnings     Shares    Income (loss)   Equity
                                       ----------- -----------  ------------------------ ------------------------
<S>                                     <C>       <C>          <C>          <C>          <C>         <C>

Balance - January 1, 1998                $      -  $        -   $3,612,255   $        -   $        -  $3,612,255

Net income                                      -           -      100,316            -            -     100,316

Net change in unrealized losses on
   securities available for sale,
   net of deferred income tax benefit           -           -            -            -      (14,082)    (14,082)
                                       ----------- -----------  -----------  ----------- ------------ -----------

Balance - December 31, 1998                     -           -    3,712,571            -      (14,082)  3,698,489

Issuance of Steelton Bancorp, Inc.
   common stock                            38,500   3,457,015            -     (308,000)           -   3,187,515

Net income                                      -           -      181,930            -            -     181,930

Dividends declared                              -           -      (30,800)                        -     (30,800)

Net change in unrealized losses on
   securities available for sale,
   net of deferred income tax benefit           -           -            -            -     (265,056)   (265,056)
                                       ----------- -----------  -----------  ----------- ------------ -----------

Balance - December 31, 1999              $ 38,500  $3,457,015   $3,863,701   $ (308,000)  $ (279,138) $6,772,078
                                       =========== ===========  ===========  =========== ============ ===========

</TABLE>


                     The accompanying notes are an integral
                       part of these financial statements.


                                       17
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                          1999                 1998
                                                                                    ------------------  -------------------
<S>                                                                                  <C>                  <C>
Cash flows from operating activities
    Net income                                                                              $ 181,930            $ 100,316
    Adjustments to reconcile net income to net
     cash provided by operating activities
        Depreciation                                                                           84,077               98,129
        Amortization of deferred loan fees                                                    (58,000)             (75,735)
        Amortization of premiums on loans purchased                                             7,487                8,030
        Accretion of investment security discounts
         net of premium amortization                                                           20,561               19,110
        Provision for loan losses                                                               2,000               50,000
        Deferred income taxes                                                                 (37,852)              (3,644)
        (Increase) decrease in
          Accrued interest receivable                                                         (94,507)             (24,665)
          Other assets                                                                         88,778              (90,346)
        Increase (decrease) in
          Accrued interest payable                                                             68,246              (12,666)
          Other liabilities                                                                    75,236              (21,258)
                                                                                    ------------------  -------------------
            Net cash provided by operating activities                                         337,956               47,271
                                                                                    ------------------  -------------------
Cash flows from investing activities
    Investment securities available-for-sale:
        Proceeds from sales and maturities of
         mortgaged-backed securities                                                        1,447,318               29,998
        Purchase of mortgage-backed securities                                             (2,881,568)          (3,956,056)
        Purchase of other securities                                                       (5,261,494)             (99,740)
    Investment securities held-to-maturity:
        Proceeds from maturities and repayments
          Mortgage-backed securities                                                          916,652            1,513,064
          Other                                                                                     -              510,000
        Purchase of mortgage-backed securities                                             (1,257,149)          (3,325,633)
        Purchase of other securities                                                         (221,425)          (1,545,839)
    Net (increase) decrease in loans                                                       (4,194,356)           4,351,710
    Purchase of office properties and equipment                                              (182,276)             (78,705)
    Purchase of Federal Home Loan Bank stock                                                 (127,200)             (73,700)
                                                                                    ------------------  -------------------
            Net cash used in investing activities                                         (11,761,498)          (2,674,901)
                                                                                    ------------------  -------------------

</TABLE>

                                  (continued)

                                       18
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)

                     YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                         1999             1998
                                                                    ---------------  ----------------
<S>                                                                 <C>               <C>
Cash flows from financing activities
   Net increase (decrease) in
      Deposits                                                           4,993,696         4,804,736
      Advances from borrowers for insurance and taxes                       65,193           (19,046)
   Advances from Federal Home Loan Bank                                 14,264,247                 -
   Repayment of Federal Home Loan Bank advances                        (10,186,910)         (559,120)
   Proceeds from issuance of stock, net                                  3,187,515                 -
                                                                    ---------------  ----------------

          Net cash provided by financing activities                     12,323,741         4,226,570
                                                                    ---------------  ----------------

Net increase in cash
 and cash equivalents                                                      900,199         1,598,940

Cash and cash equivalents - beginning                                    2,387,592           788,652
                                                                    ---------------  ----------------

Cash and cash equivalents - ending                                     $ 3,287,791       $ 2,387,592
                                                                    ===============  ================



Supplemental disclosures
   Cash paid during the year for interest                              $ 1,872,665       $ 1,806,520
                                                                    ===============  ================

   Cash (received) paid during the year for taxes                        $ (49,152)         $ 88,992
                                                                    ===============  ================

   Deferred income tax benefit on recorded
    unrealized losses on securities available-for-sale                   $ 167,177           $ 7,254
                                                                    ===============  ================

   Total increase in unrealized loss on securities
    available-for-sale                                                   $(432,233)        $ (21,336)
                                                                    ===============  ================

</TABLE>

                     The accompanying notes are an integral
                       part of these financial statements.

                                       19

<PAGE>

                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        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
        main office  located in Steelton and its branch office  located in Lower
        Swatara Township,  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. The Corporation reports its activities
        as one operating segment.

        Basis of Consolidation

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

        Mutual to Stock Conversion

        On July 8, 1999, the Bank completed it mutual to stock  conversion  (the
        "Conversion").  In connection  with the  Conversion,  Steelton  Bancorp,
        Inc., a Pennsylvania chartered  corporation,  sold 385,000 shares of its
        common  stock in a  subscription  offering  at $10.00  per  share.  Upon
        completion  of these  transactions,  the Bank  became the  wholly  owned
        subsidiary of Steelton Bancorp, Inc. and changed its name from Mechanics
        Savings and Loan, FSA to Mechanics Savings Bank.

        This business combination has been accounted for at historical cost in a
        manner  similar  to the  accounting  method  known  as the  "pooling  of
        interest" method.

        At   the   time  of  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.


                                  (continued)

                                       20
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

        Subsequent to the Conversion,  the Corporation or Mechanics Savings 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.

        Use of Estimates

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

        Material  estimates  that are  particularly  susceptible  to significant
        change relate to the  determination of the allowance for losses on loans
        and  the  valuation  of  real  estate   acquired  in   connection   with
        foreclosures. In connection with the determination of the allowances for
        losses  on  loans  and  foreclosed  real  estate,   management   obtains
        independent appraisals for significant properties.

        A majority  of the  Bank's  loan  portfolio  consists  of  single-family
        residential  loans  in the area of  Dauphin  County,  Pennsylvania.  The
        regional  economy is currently  stable and consists of various  types of
        industry,  services,  and government  employment.  Real estate prices in
        this market are also stable;  however, the ultimate  collectibility of a
        substantial  portion of the Corporation's  loan portfolio is susceptible
        to change in local market conditions.

        While management uses available information to recognize losses on loans
        and foreclosed  real estate,  future  additions to the allowances may be
        necessary  based on changes in local economic  conditions.  In addition,
        regulatory  agencies,  as an integral part of their examination process,
        periodically review the Corporation's allowances for losses on loans and
        foreclosed  real estate.  Such agencies may require the  Corporation  to
        recognize  additions to the allowances  based on their  judgments  about
        information available to them at the time of their examination.  Because
        of these  factors,  it is reasonably  possible that the  allowances  for
        losses on loans and foreclosed real estate may change  materially in the
        near term. However, the amount of the change that is reasonably possible
        cannot be estimated.


                                  (continued)

                                       21

<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

        Investment Securities

        The   Corporation's   investments   in  securities   are  classified  as
        available-for-sale   and  held-to-maturity  and  are  accounted  for  as
        follows:

          o    Securities  Held-to-Maturity  - Government,  federal agency,  and
               corporate 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  remaining  period to  contractual
               maturity, adjusted for anticipated prepayments.

          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  other  income
               (expense)   and,   when    applicable,    are   reported   as   a
               reclassification  adjustment,  net of tax, in other comprehensive
               income.  Gains  and  losses  on the  sale  of  available-for-sale
               securities  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 period of maturity.

        Loans and Allowance for Loan Losses

        Loans are stated at unpaid  principal  balances,  less the allowance for
        loan losses and net deferred loan fees and costs.

        Loan  origination  and  commitment  fees,  as  well  as  certain  direct
        origination costs, are deferred and amortized as a yield adjustment over
        the contractual lives of the related loans using the interest method.

        Interest income  generally is not recognized on specific  impaired loans
        unless the  likelihood  of further  loss is  remote.  Interest  payments
        received on such loans are applied as a reduction of the loan  principal
        balance.  Interest  income on other impaired loans is recognized only to
        the extent of interest payments received.

                                  (continued)

                                       22
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

        Loans and Allowance for Loan Losses (Cont'd)

        An  allowance  for  loan  losses  is  maintained  at a level  considered
        adequate  to absorb  loan  losses.  Management  of the  Corporation,  in
        determining the allowance for loan losses,  considers the risks inherent
        in its loan  portfolio  and changes in the nature and volume of its loan
        activities,   along  with  general   economic  and  real  estate  market
        conditions.   The  Corporation   utilizes  a  two  tier  approach:   (1)
        identification  of impaired loans and the establishment of specific loss
        allowances  on  such  loans;  and  (2)  establishment  of  general  loss
        allowances  on the  remainder  of its loan  portfolio.  The  Corporation
        maintains a loan review system that allows for a periodic  review of its
        loan portfolio and the early identification of potential impaired loans.
        Such system takes into  consideration,  among other things,  delinquency
        status,  size of loans,  type and estimated fair value of collateral and
        financial condition of the borrowers.  Specific loan loss allowances are
        established for identified losses based on a review of such information.
        General  loan loss  allowances  are based on a  combination  of  factors
        including, but not limited to, actual loan loss experience,  composition
        of the loan  portfolio,  current  economic  conditions and  management's
        judgement.  Allowances for impaired loans are generally determined based
        on collateral  values or the present value of estimated cash flows.  The
        allowance is increased by a provision for loan losses,  which is charged
        to expense, and reduced by charge-offs, net of recoveries.

        Office Properties and Equipment

        Office  properties  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 following estimated
        useful lives:

        Buildings and improvements                     10 to 40 years
        Furnishings and equipment                       5 to 10 years

        Significant   renewals  and   betterments  are  charged  to  the  office
        properties and equipment account. Maintenance and repairs are charged to
        operations in the period incurred.

        Pension Plan

        The Corporation has a pension plan covering substantially all employees.
        The plan is a fully  insured  defined  benefit plan  provided  through a
        contract with a life insurance  company that is currently  funded by the
        Corporation through annual premiums.


                                  (continued)

                                       23
<PAGE>

                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

        Income Taxes

        Income  taxes  are  provided  for the tax  effects  of the  transactions
        reported in the financial  statements and consist of taxes currently due
        plus deferred taxes.  The deferred tax assets and liabilities  represent
        the future  tax return  consequences  of those  differences,  which will
        either be taxable or  deductible  when the  assets and  liabilities  are
        recovered or settled.  Deferred tax assets and liabilities are reflected
        at income tax rates  applicable  to the period in which the deferred tax
        assets or liabilities are expected to be realized or settled. As changes
        in tax laws or rates are enacted,  deferred  tax assets and  liabilities
        are adjusted through the provision for income taxes.

        Comprehensive Income

        In   1998, the  Corporation  adopted  Statement of Financial  Accounting
        Standards  (SFAS)  No. 130, Reporting Comprehensive Income. SFAS No. 130
        establishes  reporting  requirements of  comprehensive  income  and  its
        components.  Comprehensive  income for the Corporation consists  of  net
        income and unrealized  losses on available for sale  securities  and  is
        presented  in the  consolidated  statement  of  changes  in  equity.  At
        January 1, 1998,  the  adoption of SFAS No. 130  had  no impact on total
        equity.

        Earnings Per Share

        Basic earnings per common share for the year ended December 31, 1999 was
        calculated  by  dividing  net  income  for the  period  from the date of
        conversion  to December  31, 1999 of  $116,251 by the  weighted  average
        common shares outstanding for that same period of 354,200.  Common stock
        outstanding  is adjusted for the  unallocated  portion of shares held by
        the Employee  Stock  Ownership Plan (ESOP).  The ESOP  purchased  30,800
        shares  of  common  stock in  conjunction  with the  conversion  that is
        financed through a loan from the corporation.

        Diluted earnings per common share is calculated by adjusting outstanding
        shares,  assuming conversion of all potentially  dilutive stock options.
        The  Company did not have  potentially  dilutive  securities  in 1999 or
        1998.

        Statements of Cash Flows

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

                                   (contiued)

                                       24

<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


 1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

        Reclassifications

        Certain amounts in 1998 have been  reclassified to conform with the 1999
        presentation.


2.      INVESTMENT SECURITIES

        The  amortized  cost and  estimated  fair  values  of the  Corporation's
        investments  in securities at December 31, 1999 and 1998 are  summarized
        as follows:
<TABLE>
<CAPTION>
                                                                 Gross                Gross
                                           Amortized           Unrealized          Unrealized
         December 31, 1999                     Cost              Gains               Losses             Fair Value
-------------------------------------  ------------------- -------------------  ------------------  -------------------
<S>                                      <C>                   <C>                <C>                 <C>
Securities available-
 for-sale
    U.S. Government and
     federal agencies                      $    4,591,384        $      1,458       $    (166,358)      $    4,426,484
    State and local
     governments                                  826,762                   -             (75,038)             751,724
    Mortgaged-backed
     securities
      FHLMC                                       432,979                   -              (5,927)             427,052
      FNMA                                      2,546,433               3,065             (51,209)           2,498,289
      Other                                     2,308,597                   -            (159,561)           2,149,036
                                       ------------------- -------------------  ------------------  -------------------

                                           $   10,706,155        $      4,523       $    (458,093)      $   10,252,585
                                       =================== ===================  ==================  ===================

Securities held-
 to-maturity
    Certificate of deposit                 $      100,000        $          -       $           -       $      100,000
    U.S. Government and
     federal agencies                             621,312                   -             (48,807)             572,505
    State and local
     governments                                1,295,743               6,775             (61,485)           1,241,033
    Mortgaged-backed
     securities
      FHLMC                                       276,372                 472              (1,442)             275,402
      FNMA                                      2,852,791               6,974            (159,173)           2,700,592
      Other                                       610,568                   -             (40,544)             570,024
                                       ------------------- -------------------  ------------------  -------------------

                                           $    5,756,786       $      14,221       $    (311,451)      $    5,459,556
                                       =================== ===================  ==================  ===================

</TABLE>

                                  (continued)

                                       25
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


2.       INVESTMENT SECURITIES (Cont'd)


<TABLE>
<CAPTION>
                                                           Gross           Gross
                                         Amortized       Unrealized             Unrealized
         December 31, 1998                   Cost            Gains           Losses      Fair Value
------------------------------------ ----------------------------------------------------------------
<S>                                   <C>                <C>               <C>          <C>
Securities available-
 for-sale
      U.S. Government and
        federal agencies                 $  200,000          $   360        $      -      $  200,360
      State and local
        governments                          99,745                -          (1,245)         98,500
      Mortgaged-backed
        securities
        FNMA                              1,501,363                -          (6,299)      1,495,064
        GNMA                              1,239,376            3,964               -       1,243,340
        Other                               985,146                -         (18,116)        967,030
                                     ---------------  --------------- ---------------  --------------

                                         $4,025,630          $ 4,324        $(25,660)     $4,004,294
                                     ===============  =============== ===============  ==============

Securities held-
 to-maturity
      U.S. Government and
        federal agencies                 $  500,000          $     -        $(17,835)     $  482,165
      State and local
        governments                       1,295,177           13,202               -       1,308,379
      Mortgaged-backed
       securities
        FHLMC                               487,737              323               -         488,060
        FNMA                              2,511,591           64,839               -       2,576,430
        GNMA                                384,624                -            (362)        384,262
        Other                                21,076                -            (199)         20,877
                                     ---------------  --------------- ---------------  --------------

                                         $5,200,205         $ 78,364        $(18,396)     $5,260,173
                                     ===============  =============== ===============  ==============
</TABLE>
        State and local government securities held at December 31, 1999 and 1998
        are backed by the full faith and credit of the issuing organization.

                                  (continued)

                                       26
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


2.      INVESTMENT SECURITIES (Cont'd)

        The  following  is a summary of  maturities  of  available-for-sale  and
        securities held-to maturity at December 31, 1999:


                         Available-for-sale         Held-to-maturity
                       -------------------------   -------------------------
                        Amortized                  Amortized
                            Cost     Fair Value        Cost      Fair Value
                       -----------   -----------   -----------   -----------
Amounts maturing in:
   One year or less   $   500,000   $   500,000    $        -    $        -
   After one year
    through five years    599,800       578,010       810,254       783,960
   After five years
    through ten years   1,344,615     1,302,341       535,863       510,205
   After ten years      8,261,740     7,872,234     4,410,669     4,165,391
                       ----------    -----------   -----------   -----------
                      $10,706,155   $10,252,585    $5,756,786    $5,459,556
                       ==========    ===========   ===========   ===========

        The  amortized  cost and fair value of  mortgage-backed  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.


 3.     LOANS RECEIVABLE - NET

        Loans  receivable  - net at December  31, 1999 and 1998  consists of the
        following:

                                         1999         1998
                                     ------------ -------------

Real estate
   1 - 4 family                      $28,470,370   $23,537,782
   Non-residential                       830,132       765,331
Consumer loans
   Home equity and second mortgage     3,408,553     3,233,871
   Share loans                           225,549       276,873
   Other                                 403,509       289,183
Commercial loans                          75,485        78,799
                                     ------------ -------------
                                      33,413,598    28,181,839

Loans in process                        (946,638)      (51,175)
Net deferred loan origination fees      (271,505)     (180,078)
Allowance for loan losses               (168,200)     (166,200)
                                     ------------ -------------
                                     $32,027,255   $27,784,386
                                     ============ =============

                                  (continued)

                                       27

<PAGE>

                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


 3.     LOANS RECEIVABLE - NET (Cont'd)

        An analysis of the  allowance  for loan losses at December  31, 1999 and
        1998 is as follows:

                                                   1999             1998
                                              ----------------  -------------

Balance,  beginning of year                          $166,200       $126,579
Provision for loan losses                               2,000         50,000
Charge-offs                                                 -        (10,379)
                                              ----------------  -------------

Balance, end of year                                 $168,200       $166,200
                                              ================  =============

        Nonaccrual  loans totaled $527,000 and $322,000 at December 31, 1999 and
        1998.  Nonaccrual  loans are  those on which  income  under the  accrual
        method has been discontinued with subsequent  interest payments credited
        to interest income and 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 $27,382 and $16,328
        for the years ended December 31, 1999 and 1998.

        There were no impaired loans as of December 31, 1999 and 1998.

        The Corporation has entered into lending  transactions,  in the ordinary
        course  of  business,  with  executive  officers  and  directors  of the
        Corporation  and  to  their  associates  on  the  same  terms  as  those
        prevailing for comparable  transactions with other borrowers.  A summary
        of activity related to such loans is as follows:

                                              1999           1998
                                          -------------- --------------

Balance, beginning of year                   $  302,384     $  201,805
Loans                                           121,796        228,703
Repayments                                      (44,618)      (128,124)
                                          -------------- --------------

Balance, end of year                         $  379,562     $  302,384
                                          ============== ==============

                                  (continued)

                                       28


<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


4.      ACCRUED INTEREST RECEIVABLE

        Accrued  interest  receivable  consists of the following at December 31,
        1999 and 1998:

                                                  1999           1998
                                               ------------   ------------

Loans                                            $ 169,238      $ 175,930
Investments                                        179,858         68,110
                                               ------------   ------------
                                                   349,096        244,040

Allowance for uncollectible interest               (26,877)       (16,328)
                                               ------------   ------------
                                                 $ 322,219      $ 227,712
                                               ============   ============

5.      OFFICE PROPERTIES AND EQUIPMENT

        A summary of office  properties  and  equipment at December 31, 1999 and
        1998 follows:

                   Description              1999           1998
-------------------------------------   -------------  -------------

Land                                      $  193,930     $  193,930
Properties held for expansion                179,248              -
Buildings and improvements                   863,066        820,635
Furnishings and equipment                    614,354        587,960
                                        -------------  -------------
                                           1,850,598      1,602,525
Accumulated depreciation                    (637,671)      (556,475)
                                        -------------  -------------
                                          $1,212,927     $1,046,050
                                        =============  =============

        In 1999, the Corporation  purchased properties adjacent to the principal
        offices in Steelton for expansion of  operations.  During 1999, the only
        rental  property of the  Corporation was also converted to property held
        for expansion.


                                  (continued)

                                       29

<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


6.      DEPOSITS

        Deposits at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
                                      1999                      1998
                                  ------------------------- -------------------------
                                                  Percent                   Percent
                                                    of                         of
                                                   Total                     Total
                                      Amount     Deposits       Amount      Deposits
                                  -------------- ---------- --------------  ---------
<S>                                <C>            <C>       <C>            <C>
Commercial checking
    accounts                        $ 1,778,931      5.33%    $ 1,096,334      3.88%
   NOW accounts                       1,330,492      3.98%      1,193,744      4.22%
   Savings accounts                   5,457,016     16.34%      3,959,892     14.01%
   Money Market                       2,111,086      6.32%      1,606,027      5.68%
   Certificates of deposit
      1 -  3 months                     377,396      1.13%        272,726      0.96%
      4 -  6 months                   1,233,379      3.69%      1,325,018      4.69%
      7 - 12 months                   3,771,064     11.29%      5,194,567     18.37%
     13 - 36 months                  12,040,158     36.05%      9,660,262     34.17%
     37 + months                      5,297,312     15.86%      3,963,861     14.02%
                                  -------------- ---------- --------------  ---------
                                     33,396,834    100.00%     28,272,431    100.00%
                                                 ==========                 =========
Inter-company account
 eliminated in consolidation           (130,707)                        -
                                  --------------            --------------
                                    $33,266,127               $28,272,431
                                  ==============            ==============
</TABLE>

        The aggregate  amount of  certificates of deposit  including  individual
        retirement  accounts  with  a  minimum   denomination  of  $100,000  was
        $3,759,212  at December  31, 1999 and  $1,933,731  at December 31, 1998.
        Deposits  in  excess  of  $100,000   are  not  insured  by  the  Savings
        Corporation Insurance Fund.

        Maturities  of  certificates  of deposit  at  December  31,  1999 are as
        follows:

         2000                                                   $10,734,556
         2001                                                     4,935,510
         2002                                                     2,507,496
         2003                                                     2,358,026
         2004 and thereafter                                      2,183,721
                                                              --------------
                                                                $22,719,309
                                                              ==============


                                  (continued)

                                       30

<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


6.      DEPOSITS (Cont'd)

        Interest expense on deposits consists of:


                                               1999            1998
                                            ------------   -------------

    NOW and money market accounts            $   68,069      $   49,685
    Savings accounts                            115,268          97,335
    Certificates of deposit                   1,168,257       1,066,071
                                            ------------   -------------
                                             $1,351,594      $1,213,091
                                            ============   =============

 7.     ADVANCES FROM FEDERAL HOME LOAN BANK

        Advances in the amount of $13,334,745 in 1999 and $9,257,408 in 1998 are
        due in each of the next five years and thereafter as follows:

                                          Weighted                    Weighted
                                          Average                     Average
                          December 31,  Interest rate December 31, Interest rate
                             1999           1999           1998        1998
                         -------------  -------------  ----------- -------------
Maturity
   Within one year        $ 6,084,745          5.78%    $ 3,000,000       5.48%
   Within two years         2,000,000          5.76%      2,007,408       5.95%
   Within three years       1,000,000          6.08%              -           -
   Within four years        1,000,000          5.35%      1,000,000       6.08%
   Five years and
    thereafter              3,250,000          5.76%      3,250,000       5.18%
                         -------------                 -------------
                          $13,334,745                   $ 9,257,408
                         =============                 =============

        The Corporation's  investment  securities issued by the U.S.  Government
        and  federal  agencies,   mortgage-backed  securities  and  real  estate
        mortgage  loans   receivable  with  carrying  values  of   approximately
        $43,000,000  at December  31, 1999 are  pledged as  collateral  for FHLB
        advances.


                                  (continued)

                                       31

<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


 8.     INCOME TAXES

        The Corporation  and subsidiary  file a consolidated  federal income tax
        return.  The  consolidated  provision for income taxes for 1999 and 1998
        consists of the following:

                                                     1999         1998
                                                  -----------  -----------
Taxes currently payable
   Federal                                         $  90,564    $  14,160
   State                                              13,454        8,842
Deferred taxes (benefit)                             (37,852)      (3,644)
                                                  -----------  -----------
Total income tax expense                           $  66,166    $  19,358
                                                  ===========  ===========
Effective income tax rate                             26.67%       16.18%
                                                  ===========  ===========

        The  difference  between the statutory  federal  income tax rate and the
effective income tax rates are as follows:

                                                        1999         1998
                                                     -----------  ------------

Pre-tax income                                        $ 248,096     $ 119,674
                                                     ===========  ============

Expected tax provision at 34% rate                    $  84,353     $  40,689
Tax-exempt interest income                              (29,998)      (15,292)
Disallowed interest expense                               4,784             -
State income tax, net of
  federal income tax benefit                              9,540         5,346
Other                                                    (2,513)      (11,385)
                                                     -----------  ------------
     Actual income tax expense                        $  66,166     $  19,358
                                                     ===========  ============

                                  (continued)

                                       32
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


 8.     INCOME TAXES (Cont'd)

        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 are summarized as follows:

                                                       1999          1998
                                                    ------------  ------------

Deferred loan fees                                    $  92,312        61,227
Unrealized depreciation on securities
      available-for-sale                                174,431         7,254
Accelerated depreciation on fixed assets                 (7,556)            -
Allowance for uncollected interest                        9,138         5,552
Allowance for loan losses                                54,993        54,514
Recapture of excess loan loss allowance                 (20,518)      (30,776)
                                                    ------------  ------------

Net deferred tax asset                                $ 302,800     $  97,771
                                                    ============  ============

        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 Section 585 of the  Internal
        Revenue Code. With the passage of the Small Business Jobs Protection Act
        of  1996,  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 Code  Section  593. In  addition,  the
        excess of the  thrift's  bad debt  reserves  over  those  permitted,  as
        defined  under  the  provisions  of the  new  Act,  are  required  to be
        recaptured  into income for federal  income tax  purposes  beginning  in
        calendar  years after 1995 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, 1999 and 1998  includes
        approximately  $703,000  representing such bad debt deductions for which
        no deferred  taxes have been  provided.  Deferred taxes are provided for
        reserves  totaling  $181,035  that are  being  recaptured  into  federal
        taxable income ratably over a six year period that began in 1996.

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


                                  (continued)

                                       33
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


 9.     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 Corporation must
        meet specific capital guidelines involving  quantitative measures of the
        Bank's  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 judgements 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).

        The following tables present a  reconciliation  of capital per generally
        accepted  accounting   principles  (GAAP)  and  regulatory  capital  and
        information as to the Bank's  capital levels at the dates  presented (in
        thousands):



                                  (continued)

                                       34

<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


 9.     REGULATORY MATTERS (Cont'd)
<TABLE>
<CAPTION>
                                                                      For Capital
                                                                 Adequacy Purposes and
                                                                   to Be Adequately
                                                                 Capitalized under the
                                                                   Prompt Corrective
         December 31, 1999                    Actual               Action Provisions
------------------------------------     --------------------- --------------------------
                                           Amount        Ratio       Amount        Ratio
                                         ---------- ---------- -------------- ----------
                                         (Thousands)               (Thousands)
<S>                                       <C>        <C>            <C>          <C>
Total capital (to risk-
 weighted assets)                          $ 5,798      23.59%       $ 1,966      8.00%

Tier 1 capital (to risk-
 weighted assets)                            5,630      22.91%             -          -

Core (Tier 1) capital (to
 adjusted total assets)                      5,630      10.59%         2,127      4.00%

Tangible equity (to
 adjusted total assets)                      5,630      10.59%           797      1.50%


         December 31, 1998
------------------------------------

Total capital (to risk-
 weighted assets)                          $ 3,878      19.23%       $ 1,613      8.00%

Tier 1 capital (to risk-
 weighted assets)                            3,712      18.41%             -          -

Core (Tier 1) capital (to
 adjusted total assets)                      3,712       8.93%         1,622      4.00%

Tangible equity (to
 adjusted total assets)                      3,712       8.93%           623      1.50%
</TABLE>

                                  (continued)

                                       35
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


 9.     REGULATORY MATTERS (Cont'd)

        As of July 31, 1999, the most recent notification from the OTS, the Bank
        was categorized as adequately capitalized under the regulatory framework
        for prompt corrective action. There are no conditions existing or events
        which have occurred since  notification  that  management  believes have
        changed the institution's category.


10.      PENSION PLAN

         The Corporation has a qualified, noncontributory, fully insured defined
         benefit pension plan which covers  substantially  all of the employees.
         The benefits are primarily based on years of service and earnings.  The
         plan is fully insured through a contract with a life insurance  company
         and, as such,  the  benefits  of the plan are covered by the  insurance
         contract.   As  a  result,   disclosure  of  the  accumulated   benefit
         obligations,  plan assets and the components of annual pension  expense
         required  by  Statement  of  Financial  Accounting  Standards  No.  87,
         "Employers' Accounting for Pensions" is not applicable.

         The  Corporation  makes  annual  premium  payments  for plan years that
         coincide with the  Corporation's  fiscal year. The  Corporation  has no
         obligation  for benefits  covered by the plan other than the payment of
         premiums  due  to  the  insurance  company.   Pension  expense  of  the
         Corporation,  net of  experienced-rated  dividends  for the years ended
         December 31, 1999 and 1998 follows:

                                            1999            1998
                                           ----------   -------------

Premium for plan year ended December 31,   $  79,167       $  67,096
Experienced-rated dividends                  (16,236)        (15,712)
                                           ----------   -------------
                                           $  62,931       $  51,384
                                           ==========   =============

11.     RETIREMENT SAVINGS PLAN

        The  Corporation is 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 participant  salaries.  For the
        years ended December 31, 1999 and 1998, the Corporation's  contributions
        totaled $18,487 and $15,814.


                                  (continued)

                                       36
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


12.     COMMITMENTS AND CONTINGENCIES

        In  the  normal  course  of  business,   the   Corporation  has  various
        outstanding   commitments  and  contingent   liabilities  that  are  not
        reflected in the accompanying  consolidated  financial  statements.  The
        financial commitments of the Corporation are as follows:

        The  Corporation  has  outstanding  commitments  to  originate  loans at
        December 31, as follows:

                                          1999            1998
                                       ------------   -------------

First mortgage loans (fixed rate)       $1,817,316       $ 274,600
                                       ============   =============

        The  range  of  interest   rates  on  fixed  rate  first  mortgage  loan
        commitments was 7.0% to 7.4% at December 31, 1999.

        The Corporation has pledged mortgage-backed  securities with fair values
        totaling  $1,387,000  at  December  31, 1999 as  collateral  for certain
        deposits held in excess of applicable  deposit  insurance  coverage with
        carrying values at December 31, 1999 of $1,126,000.

        At December 31, 1999, the Corporation had a commitment  totaling $58,000
        with a  contractor  for  building  demolition  on  properties  held  for
        expansion of operations.


13.     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.

                                  (continued)

                                       37
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


14.     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  statement of  financial  condition.  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
               statement of financial  condition  for cash and cash  equivalents
               approximate 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 - The fair values for 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.  Loan fair  value  estimates  include  judgments
               regarding    future    expected   loss    experience   and   risk
               characteristics.   The  carrying   amount  of  accrued   interest
               receivable approximates its fair value.

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





                                  (continued)

                                       38

<PAGE>

                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


14.     FAIR VALUES OF FINANCIAL INSTRUMENTS  (Cont'd)

               Deposits - The fair values  disclosed for demand deposits are, by
               definition,  equal  to  the  amount  payable  on  demand  at  the
               reporting date (that is, their carrying amounts). The fair values
               for 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  contractual
               maturities on such time deposits.  The carrying amount of accrued
               interest payable approximates fair value.

               Advances - 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.

               Commitments  to  extend  credit - The fair  value of these  items
               approximate their contractual amounts.

        The  carrying  amounts and  estimated  fair values of the  Corporation's
        financial instruments at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
                                           1999                           1998
                            -------------------------------- ---------------------------
                                 Carrying                         Carrying
                                  Amount       Fair Value          Amount    Fair Value
                            ------------------------------------------------------------
<S>                            <C>             <C>             <C>           <C>
Financial assets
   Cash                         $ 1,617,768     $ 1,617,768     $   433,414   $   433,414
   Interest-bearing
    deposits                      1,670,023       1,670,023       1,954,178     1,954,178
   Investments
     Available-for-sale          10,252,585      10,252,585       4,004,294     4,004,294
     Held-to-maturity             5,756,786       5,459,556       5,200,205     5,260,173
   Loans receivable - net        32,027,255      31,485,994      27,784,386    28,324,393
   Federal Home Loan
    Bank stock                      691,800         691,800         564,600       564,600

Financial liabilities
   Deposits                      33,266,127      32,999,998      28,272,431    28,492,224
   Advances from Federal
    Home Loan Bank               13,334,745      13,176,062       9,257,408     9,258,408
Off-balance sheet select
 financial liabilities
     Commitments to
      originate loans             1,817,316       1,817,316         274,600       274,600
     Unused lines of credit         298,000         298,000         201,000       201,000
</TABLE>

                                  (continued)

                                       39
<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


14.     FAIR VALUES OF FINANCIAL INSTRUMENTS (Cont'd)

        The  carrying  amounts  in  the  preceding  table  are  included  in the
        Consolidated  Statement  of  Financial  Condition  under the  applicable
        captions.

        Fair  value  estimates  are made at a  specific  point in time  based on
        relevant  market   information  and  information   about  the  financial
        instrument.  These estimates do not reflect any premium or discount that
        could result from offering for sale at one time the entire holdings of a
        particular  financial  instrument.   Because  no  market  exists  for  a
        significant portion of the financial  instruments,  fair value estimates
        are  based on  judgments  regarding  future  expected  loss  experience,
        current economic  conditions,  risk characteristics of various financial
        instruments,  and other  factors.  These  estimates  are  subjective  in
        nature,  involve  uncertainties and matters of judgment and,  therefore,
        cannot be  determined  with  precision.  Changes  in  assumptions  could
        significantly affect the estimates.

        Finally, reasonable comparability between financial institutions may not
        be likely due to the wide range of permitted  valuation  techniques  and
        numerous  estimates  which  must be made  given  the  absence  of active
        secondary  markets for many of the financial  instruments.  This lack of
        uniform   valuation   methodologies   introduces  a  greater  degree  of
        subjectivity to these estimated fair values.


15.     IMPACT OF NEW ACCOUNTING STANDARDS

        In June 1998,  FASB  issued  SFAS No.  133,  Accounting  for  Derivative
        Instruments Hedging Activities.  SFAS No. 133 establishes accounting and
        reporting  standards  for  derivative  instruments,   including  certain
        derivative   instruments  embedded  in  other  contracts   (collectively
        referred to as derivatives) and for hedging  activities.  It requires an
        entity to recognize all  derivatives  as either assets or liabilities in
        the  statement of financial  position and measure those  instruments  at
        fair value.  Initial  application of this statement  should be as of the
        beginning  of  an  entity's  fiscal  quarter.   On  that  date,  hedging
        relationships  must be designated  anew and  documented  pursuant to the
        provisions of SFAS No. 133. Earlier application of all of the provisions
        of SFAS No.  133 is  encouraged.  This  Statement  should not be applied
        retroactively to financial statements of prior periods.  SFAS No. 133 is
        not expected to have a material impact on the Corporation.




                                  (continued)

                                       40

<PAGE>
                             STEELTON BANCORP, INC.
                                 AND SUBSIDIARY

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)


15.     IMPACT OF NEW ACCOUNTING STANDARDS (Cont'd)

        In June 1999, the FASB issued SFAS No. 137,  Accounting  for  Derivative
        Instruments and  Hedging  Activities-Deferral  of the Effective Date  of
        FASB Statement  No. 133. SFAS  No. 137 established  that SFAS No. 133 be
        effective  for  all fiscal  quarters of all fiscal years beginning after
        June 15, 2000.


16.     YEAR 2000 ISSUE

        The  Corporation  has  assessed and  continues  to assess the  potential
        impact  that  the  year  2000  issue  could  have  on  operations.   The
        Corporation  does not anticipate any related material adverse affects on
        its financial condition or results of operations.










                                       41






<PAGE>
Corporate Information
---------------------

                             STEELTON BANCORP, INC.
                              51 South Front Street
                          Steelton, Pennsylvania 17113
                                 (717) 939-1966

                             MECHANICS SAVINGS BANK
<TABLE>
<CAPTION>
<S>    <C>                                    <C>
                Main Office                              Middletown Office
           51 South Front Street                     1100 Spring Garden Drive
       Steelton, Pennsylvania, 17113              Middletown, Pennsylvania, 17057

                               Board of Directors

                                 Marino Falcone
                              Chairman of the Board
                     Retired - Steelton Coal and Oil Company

             Harold E. Stremmel                               Richard E. Farina
   President and Chief Executive Officer          Retired - Pennsylvania Insurance Company

               James F. Stone                                Joseph A. Wiedeman
        Retired - Stone Funeral Home                    CPA - Wiedeman & Douty, P.C.

              James S. Nelson                                 Victor J. Segina
           Senior Vice President                             Retired - Architect

                               Executive Officers

                               Harold E. Stremmel
                      President and Chief Executive Officer

         Victor J Segina, Secretary                            Joseph A. Wiedeman, Treasurer

   James S. Nelson, Senior Vice President               Shannon Aylesworth, Chief Financial Officer


Local Counsel                                        Independent Auditor
Skarlatos and Zonarich                               McKonly & Asbury, LLP
204 State Street                                     415 Fallowfield Road, 2nd Floor
Harrisburg, Pennsylvania 17101                       Camp Hill, Pennsylvania 17011

Special Counsel                                      Transfer Agent and Registrar
Malizia Spidi & Fisch, PC                            Illinois Stock Transfer Company
1301 K Street, N.W., Suite 700 East                  209 West Jackson Blvd., Suite 903
Washington, D.C. 20005                               Chicago, Illinois 60607

</TABLE>

The Company's  Annual  Report on Form 10-KSB for the fiscal year ended  December
31, 1999 is available  without  charge upon written  request.  For a copy of the
Form 10-KSB,  please write or call Mr.  James S. Nelson,  Vice  President at the
Company's  Office.  The Annual Meeting of Stockholders will be held on April 19,
1999 at 10:00 a.m. at 1100 Spring Garden Dr., Middletown, Pennsylvania 17057.