<PAGE>   1

                                                                      Exhibit 13
 
NSD BANCORP
           ---------------------------------------------------------------------
 
                           CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                  1997            1996
                                                              ------------    ------------
<S>                                                           <C>             <C>
ASSETS
Cash and Due From Banks                                       $ 13,638,396    $ 12,493,654
Federal Funds Sold                                               2,000,000       8,400,000
Securities Available for Sale                                   58,179,424      55,668,550
Securities Held to Maturity (Market Value of $5,459,499 at
  December 31, 1997 and $9,563,505 at December 31, 1996)         5,287,319       9,316,952
Loans Available for Sale                                         3,419,440       2,943,248
Loans, Net of Deferred Fees                                    233,039,784     211,106,328
Unearned Income                                                 (1,290,389)     (1,212,814)
Reserve for Loan Losses                                         (2,914,329)     (2,578,504)
                                                              ------------    ------------
  Loans, Net                                                   228,835,066     207,315,010
Premises and Equipment, Net                                      3,095,629       3,686,319
Accrued Interest Receivable                                      2,116,439       1,992,396
Other Real Estate Owned and Assets Held for Sale                   369,416         432,687
Other Assets                                                     3,388,441       3,164,744
                                                              ------------    ------------
TOTAL ASSETS                                                  $320,329,570    $305,413,560
                                                              ============    ============
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
  Non-Interest Bearing                                        $ 57,112,908    $ 50,341,084
  Interest Bearing                                             211,613,706     210,645,721
                                                              ------------    ------------
  Total Deposits                                               268,726,614     260,986,805
Borrowed Funds:
  Repurchase Agreements                                            --            1,911,184
  Short-Term Borrowings                                          6,000,000       5,560,000
  Long-Term Borrowings                                           9,000,000       4,000,000
                                                              ------------    ------------
  Total Borrowed Funds                                          15,000,000      11,471,184
Accrued Interest Payable                                         4,783,086       4,551,792
Other Liabilities                                                1,480,299       1,083,526
                                                              ------------    ------------
Total Liabilities                                              289,989,999     278,093,307
Common Stock $1 Par Value; Authorized 5,000,000 Shares,
  Issued and Outstanding 2,586,999 in 1997 and 1,637,630 in
  1996                                                           2,586,999       1,637,630
Capital Surplus                                                  7,633,361       6,266,182
Net Unrealized Holding Gains on Securities Available for
  Sale                                                           1,906,683       1,199,083
Retained Earnings                                               18,212,528      18,217,358
                                                              ------------    ------------
Total Shareholders' Equity                                      30,339,571      27,320,253
                                                              ------------    ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                    $320,329,570    $305,413,560
                                                              ============    ============
</TABLE>
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                        4
<PAGE>   2
 
--------------------------------------------------------------------------------
 
                        CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                            -----------------------------------------
                                                               1997           1996           1995
                                                            -----------    -----------    -----------
<S>                                                         <C>            <C>            <C>
INTEREST INCOME
Loans, Including Fees                                       $19,506,012    $17,518,046    $15,983,482
Investment Securities:
  Taxable                                                     3,636,691      2,894,268      2,121,803
  Tax-Exempt                                                    443,534        725,016        852,214
  Dividends                                                     127,418        113,199        105,484
Interest Bearing Deposits                                         4,117          8,901          4,510
Federal Funds Sold                                               94,966        242,152        338,387
                                                            -----------    -----------    -----------
  Total Interest Income                                      23,812,738     21,501,582     19,405,880
 
INTEREST EXPENSE
Interest on Deposits                                          9,129,539      8,107,572      7,190,619
Federal Funds Purchased                                          84,065          1,046          5,055
Interest on Repurchase Agreements                                56,818         96,484         88,077
Interest on Borrowings                                          710,154        519,503        201,680
                                                            -----------    -----------    -----------
  Total Interest Expense                                      9,980,576      8,724,605      7,485,431
Net Interest Income                                          13,832,162     12,776,977     11,920,449
Provision for Loan Losses                                       720,000        650,000        530,000
                                                            -----------    -----------    -----------
Net Interest Income After Provision for Loan Losses          13,112,162     12,126,977     11,390,449
 
OTHER INCOME
Net Investment Securities Gains (Losses)                        220,250        211,594         32,656
Service Fees                                                    710,755        668,785        692,859
Net Gain on Settlement of Pension Plan                          --             --             510,960
Other Operating Income                                          655,409        459,134        505,216
                                                            -----------    -----------    -----------
  Total Other Income                                          1,586,414      1,339,513      1,741,691
 
OTHER EXPENSES
Salaries and Employee Benefits                                4,153,371      4,015,567      3,927,542
Occupancy Expense                                               783,068        766,869        713,639
Equipment and Supplies                                        1,043,300      1,021,056        912,795
Data Processing                                                 575,845        507,826        494,825
FDIC Insurance                                                   40,233          2,000        245,061
Advertising                                                     150,708        197,333        167,485
Other Operating Expenses                                      2,203,891      1,642,006      1,497,285
                                                            -----------    -----------    -----------
  Total Other Expenses                                        8,950,416      8,152,657      7,958,632
Income Before Income Taxes                                    5,748,160      5,313,833      5,173,508
Provision for Income Taxes                                    1,843,450      1,624,344      1,500,556
                                                            -----------    -----------    -----------
 
NET INCOME                                                  $ 3,904,710    $ 3,689,489    $ 3,672,952
                                                            ===========    ===========    ===========
NET INCOME PER COMMON SHARE (1)
Net Income--Basic                                                 $1.51          $1.43          $1.42
                                                            ===========    ===========    ===========
Net Income--Diluted                                               $1.50          $1.43          $1.42
                                                            ===========    ===========    ===========
Common Dividends Declared and Paid Per Share                      $0.66          $0.57          $0.50
                                                            ===========    ===========    ===========
Weighted Average Shares Outstanding--Basic                    2,579,473      2,579,268      2,579,600
                                                            ===========    ===========    ===========
Weighted Average Shares Outstanding--Diluted                  2,597,737      2,582,310      2,579,682
                                                            ===========    ===========    ===========
</TABLE>
 
(1) Adjusted for a 3-for-2 stock split in 1997 and 5% stock dividends in 1997
    and 1996.
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                        5
<PAGE>   3
 
NSD BANCORP
           ---------------------------------------------------------------------
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                              ------------------------------------------
                                                                  1997           1996           1995
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                                    $  3,904,710   $  3,689,489   $  3,672,952
Adjustments to Net Income:
  Provision for Loan Losses                                        720,000        650,000        530,000
  (Gain) Loss on Calls of Investment Securities Held to
    Maturity                                                        (7,860)           228        (21,956)
  Gain on Sale of Investment Securities Available for Sale        (212,391)      (211,823)       (10,700)
  (Gain) Losses on Sale of Other Assets                              6,250          3,321        (71,574)
  Gains on Settlement and Curtailment of Pension Plan              --             --            (510,960)
  Gain on Disposition of Premises and Equipment                   (168,462)       --             --
  Depreciation and Amortization                                    644,399        490,463        422,588
  Net Premium Amortization and Discount
    Accretion on Investment Securities                              60,835       (164,466)        96,102
  (Benefit) Provision for Deferred Income Taxes                   (138,915)        83,577        118,035
  (Increase) in Accrued Interest Receivable                       (124,043)      (177,180)       (92,760)
  Increase in Accrued Interest Payable                             231,294        645,835      1,005,178
  (Increase) Decrease in Other Assets                             (236,903)          (639)        35,559
  Deferred Loan Fees, Net                                          (18,430)       (37,450)        (1,785)
  Increase (Decrease) in Other Liabilities                          19,061        (45,834)      (203,157)
                                                              ------------   ------------   ------------
Net Cash Provided by Operating Activities                        4,679,545      4,910,907      4,967,522
                                                              ------------   ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from Sales of Investment Securities Available for
    Sale                                                        13,938,578     10,888,662      6,042,965
  Proceeds from Repayments and Maturities of Investment
    Securities Available for Sale                               16,929,934     17,651,474      8,017,766
  Proceeds from Repayments and Maturities of Investment
    Securities Held to Maturity                                  4,041,000      1,575,000      7,929,487
  Purchases of Investment Securities Available for Sale        (32,197,537)   (40,036,313)   (19,180,199)
  Purchases of Investment Securities Held to Maturity              --             --          (4,249,922)
  Proceeds from Sales of Other Real Estate Owned                   318,124        --             224,500
  Net Increase in Loans                                        (22,958,922)   (28,085,772)   (16,864,319)
  Proceeds from Loan Sales                                         --           1,475,996        --
  Premium on Deposit Account Acquisition                           --            (883,005)       --
  Proceeds from the Disposition of Premises and Equipment          510,751        --             --
  Purchases of Premises and Equipment                             (192,363)      (364,513)      (625,262)
                                                              ------------   ------------   ------------
Net Cash Used by Investing Activities                          (19,610,435)   (37,778,471)   (18,704,984)
                                                              ------------   ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Increase (Decrease) in Demand and Savings Deposit
    Accounts                                                     8,140,836     34,181,574     (7,370,720)
  Net Increase (Decrease) in Certificates of Deposit              (401,027)     6,676,873     13,847,192
  Net Increase (Decrease) in Repurchase Agreements              (1,911,184)        88,751        440,277
  Proceeds from Long-Term Borrowings                            11,000,000      4,000,000      6,600,000
  Repayments of Long-Term Borrowings                            (2,600,000)       --          (2,000,000)
  Proceeds from Short-Term Borrowings                            9,500,000        960,000      6,568,264
  Repayments of Short-Term Borrowings                          (12,460,000)    (2,780,000)    (4,568,264)
  Proceeds from the Exercise of Common Stock Options               117,247        --             --
  Cash Dividends Paid in Lieu of Fractional Shares                 (11,499)        (4,758)        (3,681)
  Cash Dividends Paid                                           (1,698,741)    (1,458,316)    (1,294,675)
                                                              ------------   ------------   ------------
  Net Cash Provided by Financing Activities                      9,675,632     41,664,124     12,218,393
                                                              ------------   ------------   ------------
  Increase (Decrease) in Cash and Cash Equivalents              (5,255,258)     8,796,560     (1,519,069)
  Cash and Cash Equivalents at Beginning of Year                20,893,654     12,097,094     13,616,163
                                                              ------------   ------------   ------------
  Cash and Cash Equivalents at End of Year                    $ 15,638,396   $ 20,893,654   $ 12,097,094
                                                              ============   ============   ============
</TABLE>
 
For the years ended December 31, 1997, 1996, and 1995, the Corporation paid
interest of $9,749,282, $8,077,378 and $6,480,252, and income taxes of
$1,811,450, $1,703,512 and $1,694,425, respectively. Non-cash investing activity
consisted of transfers of loans in liquidation to foreclosed assets of
approximately $261,100 for 1997, $328,000 for 1996 and $472,800 for 1995. There
were no loans originated to facilitate the sale of other real estate during 1997
or 1996. Such loan originations were nominal in 1995. Investment securities with
an amortized cost of approximately $25,772,000 were reclassified from securities
held to maturity to securities available for sale during 1995.
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                        6
<PAGE>   4
 
--------------------------------------------------------------------------------
 
           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
 
              For the Years Ended December 31, 1997, 1996 and 1995
 
<TABLE>
<CAPTION>
                                           COMMON STOCK ISSUED &
                                                OUTSTANDING
                                           ----------------------
                                                                     CAPITAL                   RETAINED
                                            SHARES     PAR VALUE     SURPLUS       OTHER       EARNINGS
                                           ---------   ----------   ----------   ----------   -----------
<S>                                        <C>         <C>          <C>          <C>          <C>
BALANCE AT DECEMBER 31, 1994               1,560,000   $1,560,000   $4,597,421   $  429,210   $15,362,738
Net Income                                    --           --           --           --         3,672,952
Fractional Shares                               (151)        (151)      (3,530)      --           --
Cash Dividends Declared ($.50 per
  share)(1)                                   --           --           --           --        (1,294,675)
Net Unrealized Holding Gains on
  Securities
  Available for Sale                          --           --           --          539,889       --
                                           ---------   ----------   ----------   ----------   -----------
BALANCE AT DECEMBER 31, 1995               1,559,849    1,559,849    4,593,891      969,099    17,741,015
Net Income                                                                                      3,689,489
Stock Dividend                                77,781       77,781    1,672,291       --        (1,750,072)
Cash Paid in Lieu of Fractional Shares        --           --           --           --            (4,758)
Cash Dividends Declared ($.57 per
  share)(1)                                   --           --           --           --        (1,458,316)
Net Unrealized Holding Gains on
  Securities
  Available for Sale                          --           --           --          229,984       --
                                           ---------   ----------   ----------   ----------   -----------
BALANCE AT DECEMBER 31, 1996               1,637,630    1,637,630    6,266,182    1,199,083    18,217,358
Net Income                                    --           --           --           --         3,904,710
Stock Dividend                                81,656       81,656    2,129,143       --        (2,210,799)
Stock Split                                  859,503      859,503     (859,503)      --           --
Cash Paid in Lieu of Fractional Shares        --           --          (11,499)      --           --
Cash Dividends Declared ($.66 per
  share)(1)                                   --           --           --           --        (1,698,741)
Stock Options Exercised, Net of Tax
  Benefit                                      8,210        8,210      109,038       --           --
Net Unrealized Holding Gains on
  Securities
  Available for Sale                          --           --           --          707,600       --
                                           ---------   ----------   ----------   ----------   -----------
BALANCE AT DECEMBER 31, 1997               2,586,999   $2,586,999   $7,633,361   $1,906,683   $18,212,528
                                           =========   ==========   ==========   ==========   ===========
</TABLE>
 
(1) Adjusted for a 3-for-2 stock split in 1997 and 5% stock dividends in 1997
and 1996.
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
<TABLE>
<CAPTION>
                     Measurement Period
                   (Fiscal Year Covered)         At December 31 
<S>                                             <C>
1993                                                   7.81
1994                                                   8.48
1995                                                   9.61
1996                                                  10.56
1997                                                  11.73
</TABLE>
 
                                        7
<PAGE>   5
NSD BANCORP
           ---------------------------------------------------------------------

 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION:
 
The consolidated financial statements of NSD Bancorp, Inc. (the Corporation)
include the accounts of the Corporation and its wholly owned subsidiary,
NorthSide Bank, a community bank operating ten branch offices located in Western
Pennsylvania, and NorthSide Bank's wholly owned subsidiary, 100 Federal Street,
Inc. Material intercompany accounts and transactions have been eliminated.
 
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
 
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, the disclosure of
contingent assets and contingent liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
INVESTMENT SECURITIES:
 
The investment securities portfolio consists of securities and short-term
investments which are purchased by the Corporation to enhance the overall yield
on earning assets and to contribute to the management of interest rate risk and
liquidity. Investments in debt and equity securities are classified into three
categories: securities held to maturity, trading securities and securities
available for sale.
 
The Corporation classifies securities as held to maturity when it has both the
ability and positive intent to hold securities to maturity. Securities held to
maturity are stated at cost adjusted for amortization of premium and accretion
of discount, computed primarily under the interest method. The Corporation's
investment policy specifically prohibits the existence of a trading account
portfolio.
 
Securities not classified as held to maturity are designated as available for
sale. These securities may be sold in response to changes in market interest
rates, changes in prepayment or extension risk, asset-liability management
decisions, income tax considerations or other circumstances identified by
management. Securities available for sale are recorded at estimated market
value, with aggregate unrealized holding gains and losses reported, net of tax
effect, as a separate component of shareholders' equity.
 
On a periodic basis, management evaluates each security where amortized cost
exceeds realizable value. If the decline is judged to be other than temporary,
the cost of the security is written down to estimated net realizable value with
the write-down included in net securities gains. Realized gains and losses are
computed principally under the specific identification method.
 
LOANS AVAILABLE FOR SALE:
 
At December 31, 1997 and also at December 31, 1996, loans available for sale
consisted of student loans. These loans are carried at the lower of cost or
aggregate market value obtained through secondary market bid quotations. Any
realized gains and losses on these loans are included in other operating income.
 
LOANS AND RESERVE FOR LOAN LOSSES:
 
Loans are stated at face value, net of unearned income and deferred fees.
Installment loan unearned income is recognized over the loan term using the
interest method. Interest on all other loans is recognized based on the
outstanding principal balance of the loans. The accrual of interest is
discontinued when, in management's judgment, it is determined that the
collectibility of interest, but not necessarily principal, is doubtful. When a
loan is classified as nonaccrual, all previously accrued and unpaid interest is
reversed. Interest receipts on nonaccrual loans are applied to principal. Net
loan fees are deferred and amortized over the term of the related loan using the
interest method.
 
The reserve for loan losses is maintained at a level considered adequate by
management to provide for potential loan losses. The reserve is increased by
provisions charged to expense and reduced by loan losses net of recoveries. The
amount of reserve is based on management's evaluation of the loan portfolio as
well as prevailing and anticipated economic conditions, specific problem loans
and other factors.
 
                                        8
<PAGE>   6
 
--------------------------------------------------------------------------------
 
Within the context of Statement No. 114, "Accounting by Creditors for Impairment
of a Loan," a loan is considered to be impaired when, based upon current
information and events, it is probable that the Corporation will be unable to
collect all amounts due for principal and interest according to the contractual
terms of the loan agreement. Impairment is measured based on the present value
of expected future cash flows discounted at a loan's effective interest rate, or
as a practical expedient, the observable market price or, if the loan is
collateral dependent, the fair value of the underlying collateral. When the
measurement of an impaired loan is less than the recorded investment in the
loan, the impairment is recorded in a specific valuation allowance through a
charge to provision for loan losses. This specific valuation allowance is
periodically adjusted for significant changes in the amount or timing of
expected future cash flows, observable market price or fair value of the
collateral. The valuation allowance, or reserve for impaired loan losses, is
part of the total reserve for loan losses. Upon disposition of an impaired loan,
any related allowance is reversed through a charge to the impaired reserve for
loan losses. Cash payments received on impaired loans are recorded as a direct
reduction of the loan principal. Subsequent amounts collected are recognized as
interest income. Impaired loans are not returned to accruing status until all
amounts due, both principal and interest, are current and there has been a
demonstrated, sustained payment history.
 
Generally, management considers all major nonaccrual loans and certain
renegotiated loans for impairment. The minimum period without payment that
typically can occur before a loan is considered for impairment is ninety days.
Statement No. 114 does not apply to large groups of smaller balance, homogeneous
loans that are collectively evaluated for impairment. The Corporation
collectively reviews leases and consumer loans under $50,000, and residential
and commercial real estate under $250,000 for impairment.
 
PREMISES AND EQUIPMENT:
 
Premises and equipment are carried at original cost less accumulated
depreciation. Premises and equipment are depreciated over their estimated useful
lives using either the straight-line or an accelerated method. Leasehold
improvements are amortized over the terms of the respective lease or the
estimated useful lives of the improvements, whichever is shorter. Costs for
maintenance and repairs are expensed currently. Major improvements are
capitalized. When premises and equipment are disposed of, the accounts are
relieved of the cost and accumulated depreciation or amortization, and any
resulting gains or losses are credited to or charged against income.
 
FORECLOSED ASSETS:
 
Foreclosed assets are comprised of other real estate owned and repossessed
collateral, which are carried at the lower of the outstanding loan balance or
estimated fair value less estimated costs to sell at the date of foreclosure.
 
INCOME TAXES:
 
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. The Corporation uses the liability method to
account for deferred income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax basis of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
 
INTANGIBLE ASSETS:
 
Included in other assets is a deposit premium of approximately $706,404 and
$891,339 net of accumulated amortization, at December 31, 1997 and 1996,
respectively. The premium is amortized using the straight-line method over a
five year period. The Corporation periodically evaluates the carrying value and
the remaining amortization period of the intangible asset for possible
impairment. Adjustments are recorded when the benefit of the related asset to
the corporation decreases due to disposition of deposits relative to the deposit
premium.
 
CASH EQUIVALENTS:
 
The Corporation has defined cash equivalents as cash and due from banks and
federal funds sold.
 
                                        9
<PAGE>   7
 
NSD BANCORP
           ---------------------------------------------------------------------
 
EARNINGS PER SHARE:
 
The Corporation adopted Statement of Financial Accounting Standard (SFAS) No.
128, "Earnings Per Share," which was issued in February, 1997. This statement
requires the disclosure of basic and diluted earnings per share and revised the
method required to calculate these amounts.
 
Basic earnings per common share is calculated by dividing net income by the sum
of the weighted average number of shares of common stock outstanding during each
period. Diluted earnings per common share is calculated by dividing net income
by the sum of the weighted average number of shares of common stock outstanding
and the number of shares of common stock which would be issued assuming the
exercise of stock options during each period.
 
Basic and diluted earnings per share calculations include the retroactive effect
of a 3-for-2 stock split in 1997 and 5% stock dividends recorded in 1997 and
1996.
 
RECENT ACCOUNTING PRONOUNCEMENTS:
 
In September, 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
This standard will require the display of comprehensive income and its
components in the financial statements. Implementation of this standard is
required for the fiscal year 1998.
 
In January, 1998, SFAS No. 132, "Employers' Disclosures About Pensions and Other
Post-Retirement Benefits," was issued. This standard will require certain
footnote disclosure requirements related to pension and other retiree benefits.
Implementation of this standard is required for the fiscal year 1998.
 
RECLASSIFICATIONS:
 
For comparative purposes, reclassifications have been made to certain amounts
previously reported in the Consolidated Financial Statements.
 
NOTE 2--INVESTMENT SECURITIES
 
A summary of investment securities available for sale is as follows:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1997
                                              -------------------------------------------------
                                                              GROSS UNREALIZED
                                                                   HOLDING
                                               AMORTIZED    ---------------------      FAIR
                                                 COST         GAINS       LOSSES       VALUE
                                              -----------   ----------   --------   -----------
<S>                                           <C>           <C>          <C>        <C>
U.S. Treasury Securities                      $ 6,199,308   $   30,403   $  1,413   $ 6,228,298
Obligations of U.S. Government Agencies        20,657,983      174,423     21,163    20,811,243
Mortgage-Backed Securities                     26,385,529      204,861     44,073    26,546,317
Obligations of State and Political
  Subdivisions                                    544,955        3,694      --          548,649
Marketable Equity Securities                    1,502,737    2,542,180      --        4,044,917
                                              -----------   ----------   --------   -----------
                                              $55,290,512   $2,955,561   $ 66,649   $58,179,424
                                              ===========   ==========   ========   ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1996
                                              -------------------------------------------------
                                                              GROSS UNREALIZED
                                                                   HOLDING
                                               AMORTIZED    ---------------------      FAIR
                                                 COST         GAINS       LOSSES       VALUE
                                              -----------   ----------   --------   -----------
<S>                                           <C>           <C>          <C>        <C>
U.S. Treasury Securities                      $ 9,195,877   $   43,413   $  2,854   $ 9,236,436
Obligations of U.S. Government Agencies        25,403,448       68,571    190,325    25,281,694
Mortgage-Backed Securities                     17,160,596       71,578    110,330    17,121,844
Obligations of State and Political
  Subdivisions                                    719,948        4,556      1,682       722,822
Marketable Equity Securities                    1,377,143    1,928,611      --        3,305,754
                                              -----------   ----------   --------   -----------
                                              $53,857,012   $2,116,729   $305,191   $55,668,550
                                              ===========   ==========   ========   ===========
</TABLE>
 
                                       10
<PAGE>   8
 
--------------------------------------------------------------------------------
 
A summary of investment securities held to maturity is as follows:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1997
                                              -------------------------------------------------
                                                              GROSS UNREALIZED
                                                                   HOLDING
                                               AMORTIZED    ---------------------      FAIR
                                                 COST         GAINS       LOSSES       VALUE
                                              -----------   ----------   --------   -----------
<S>                                           <C>           <C>          <C>        <C>
Obligations of State and Political
  Subdivisions                                $ 5,037,319   $  172,180   $  --      $ 5,209,499
Other Bonds                                       250,000       --          --          250,000
                                              -----------   ----------   --------   -----------
                                              $ 5,287,319   $  172,180   $  --      $ 5,459,499
                                              ===========   ==========   ========   ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1996
                                              -------------------------------------------------
                                                              GROSS UNREALIZED
                                                                   HOLDING
                                               AMORTIZED    ---------------------      FAIR
                                                 COST         GAINS       LOSSES       VALUE
                                              -----------   ----------   --------   -----------
<S>                                           <C>           <C>          <C>        <C>
Obligations of State and Political
  Subdivisions                                $ 9,066,952   $  246,553   $  --      $ 9,313,505
Other Bonds                                       250,000       --          --          250,000
                                              -----------   ----------   --------   -----------
                                              $ 9,316,952   $  246,553   $  --      $ 9,563,505
                                              ===========   ==========   ========   ===========
</TABLE>
 
The amortized cost and estimated market value of the investment portfolio
available for sale and the investment portfolio held to maturity at December 31,
1997, by contractual maturity, are shown below. Mortgage-backed securities are
presented in the schedule below at contractual maturity without consideration
given to scheduled repayments or accelerated prepayments. Expected maturities
will differ from contractual maturities because borrowers have the right to call
or prepay obligations with or without call or prepayment penalties.
 
The amortized cost and estimated fair value of the investment portfolio
available for sale is as follows:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1997
                                                           --------------------------
                                                            AMORTIZED        FAIR
                                                              COST           VALUE
                                                           -----------    -----------
<S>                                                        <C>            <C>
Within one year                                            $ 3,003,283    $ 3,001,870
After one year, but within five years                       14,191,144     14,232,038
After five years, but within ten years                       9,167,516      9,286,364
After 10 years, includes marketable equity securities       28,928,569     31,659,152
                                                           -----------    -----------
Total Investments                                          $55,290,512    $58,179,424
                                                           ===========    ===========
</TABLE>
 
The amortized cost and estimated fair value of the investment portfolio held to
maturity is as follows:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1997
                                                           --------------------------
                                                            AMORTIZED        FAIR
                                                              COST           VALUE
                                                           -----------    -----------
<S>                                                        <C>            <C>
Within one year                                            $    24,966    $    25,263
After one year, but within five years                        2,825,000      2,906,219
After five years, but within ten years                       2,437,353      2,528,017
                                                           -----------    -----------
Total Investments                                          $ 5,287,319    $ 5,459,499
                                                           ===========    ===========
</TABLE>
 
The fair value of securities was based on quoted market prices or bid quotations
received from securities dealers. Proceeds from the sale of available for sale
securities during 1997, 1996 and 1995 were $13,938,578, $10,888,662 and
$6,042,965, respectively. Gross gains of $233,835, $240,969 and $31,593 and
gross losses of $21,444, $29,146 and $20,893 were realized on sales from the
available for sale category in 1997, 1996 and 1995, respectively. There were no
sales of investment securities held to maturity in 1997, 1996 or 1995. Gross
gains of $8,062, $123 and $21,956 in 1997, 1996 and 1995, respectively, and
gross losses of $202 and $351 in 1997 and 1996 were realized on calls from the
held to maturity category. There were no gross losses realized from the held to
maturity category in 1995. Investment securities with a total par value of
$6,200,000 and $7,460,000 at
 
                                       11
<PAGE>   9
 
NSD BANCORP
           ---------------------------------------------------------------------
 
December 31, 1997 and 1996, respectively, were pledged as collateral for public
and trust funds, repurchase agreements and long-term borrowings.
 
As a member of the Federal Home Loan Bank of Pittsburgh (FHLB), the Corporation
is required to maintain a minimum investment in FHLB stock. The minimum amount
is calculated based on the level of assets, residential real estate loans and
outstanding FHLB advances. At December 31, 1997 and 1996, the Corporation held
$910,100 and $772,500, respectively, of FHLB stock.
 
NOTE 3--LOANS
 
Loans are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                         ----------------------------
                                                             1997            1996
                                                         ------------    ------------
<S>                                                      <C>             <C>
Consumer Loans to Individuals                            $ 95,357,873    $ 80,107,845
Mortgage:
  Non-Residential                                          29,385,042      29,470,461
  Residential                                              55,125,240      56,641,022
Commercial, Financial, and Agricultural                    37,831,540      30,392,059
Lines of Credit                                             5,487,417       5,433,560
Lease Financing                                             8,900,409       8,248,697
Nonaccrual Loans                                            1,355,617       1,234,467
                                                         ------------    ------------
                                                          233,443,138     211,528,112
Deferred Fees                                                (403,354)       (421,784)
                                                         ------------    ------------
                                                         $233,039,784    $211,106,328
                                                         ============    ============
</TABLE>
 
At December 31, 1997 and 1996, the Corporation had $1,213,225 and $615,466,
respectively, in loans which were 90 days or more past due, but were still
accruing interest. If interest on loans classified as nonaccrual had been
recognized, such income would have approximated $97,558, $33,884 and $48,500 for
the years ended 1997, 1996 and 1995, respectively. The Corporation did not
receive interest on any nonaccrual loans during 1997, 1996 or 1995.
 
The Corporation collectively reviews leases and consumer loans under $50,000 and
residential real estate and commercial real estate loans under $250,000. The
Corporation's recorded investment in loans for which impairment has been
recognized in accordance with Statement No. 114 totaled $471,181 in 1997 and
$650,673 in 1996, with a corresponding reserve for loan losses of $235,591 and
$154,194 in 1997 and 1996, respectively. There were no loans considered impaired
that have been partially written down through charge-offs. The average recorded
investment in impaired loans was $574,362 and $528,674 during 1997 and 1996,
respectively. The Corporation recognized approximately $2,500 in 1997 and
$14,000 in 1996 of interest on impaired loans under the accrual method (during
the portion of the year that they were impaired).
 
NOTE 4--RESERVE FOR LOAN LOSSES
 
The following is a summary of activity in the reserve for loan losses:
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                        --------------------------------------
                                                           1997          1996          1995
                                                        ----------    ----------    ----------
<S>                                                     <C>           <C>           <C>
Balance at Beginning of Year                            $2,578,504    $2,676,362    $2,281,598
Provision for Loan Losses                                  720,000       650,000       530,000
Losses Charged Against Reserve                            (522,934)     (842,911)     (506,193)
Recoveries on Loans Previously Charged-Off                 138,759        95,053       370,957
                                                        ----------    ----------    ----------
Balance at End of Year                                  $2,914,329    $2,578,504    $2,676,362
                                                        ==========    ==========    ==========
</TABLE>
 
                                       12
<PAGE>   10
 
--------------------------------------------------------------------------------
 
NOTE 5--PREMISES AND EQUIPMENT
 
Premises and equipment, at cost, consist of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             ------------------------
                                                                1997          1996
                                                             ----------    ----------
<S>                                                          <C>           <C>
Land                                                         $  671,987    $  997,895
Buildings                                                     1,943,873     1,943,873
Equipment                                                     3,247,977     3,093,227
Leasehold Improvements                                        1,070,560     1,062,418
                                                             ----------    ----------
                                                              6,934,397     7,097,413
Accumulated Depreciation                                     (3,838,768)   (3,411,094)
                                                             ----------    ----------
Premises and Equipment, Net                                  $3,095,629    $3,686,319
                                                             ==========    ==========
</TABLE>
 
During 1997, the Corporation sold land with a book value of $325,908 for
$492,908 resulting in a gain of $166,999 which has been included in other
operating income in the consolidated statement of income. Depreciation expense,
principally calculated using a straight-line method, was $440,764, $421,763 and
$353,888 in 1997, 1996 and 1995, respectively. The Corporation leases certain
offices under various operating leases. These leases contain various renewal
option periods extending through December, 2005. Certain of the leases require
adjustment of the rent based upon cost escalations.
 
The following is a summary of the future minimum lease payments under these
operating leases:
 
<TABLE>
<CAPTION>
   FOR THE YEAR ENDING DECEMBER 31,
   --------------------------------
<S>                                      <C>
                 1998                    $  229,270
                 1999                       216,734
                 2000                       140,093
                 2001                       135,162
                 2002                       135,162
            and thereafter                  145,295
                                         ----------
                                         $1,001,716
                                         ==========
</TABLE>
 
Rental expense under all operating leases was $250,386, $209,667 and $196,608
for the years ended December 31, 1997, 1996 and 1995, respectively.
 
NOTE 6--INCOME TAXES
 
The provision (benefit) for income taxes is composed of the following:
 
<TABLE>
<CAPTION>
                                    FOR THE YEARS ENDED DECEMBER 31,
                                 --------------------------------------
                                    1997          1996          1995
                                 ----------    ----------    ----------
<S>                              <C>           <C>           <C>
Current
  Federal                        $1,940,915    $1,523,768    $1,367,465
  State                              41,450        16,999        15,056
Deferred                           (138,915)       83,577       118,035
                                 ----------    ----------    ----------
                                 $1,843,450    $1,624,344    $1,500,556
                                 ==========    ==========    ==========
</TABLE>
 
                                       13
<PAGE>   11
 
NSD BANCORP
           ---------------------------------------------------------------------
 
Reconciliations of the federal statutory and effective tax rates are as follows:
 
<TABLE>
<CAPTION>
                                                     FOR THE YEARS ENDED DECEMBER 31,
                                 ------------------------------------------------------------------------
                                         1997                      1996                      1995
                                 --------------------      --------------------      --------------------
                                   AMOUNT     PERCENT        AMOUNT     PERCENT        AMOUNT     PERCENT
                                 ----------   -------      ----------   -------      ----------   -------
<S>                              <C>          <C>          <C>          <C>          <C>          <C>
Federal Statutory Tax Rate       $1,954,374    34.0%       $1,806,703    34.0%       $1,758,993    34.0%
Tax-Exempt Interest Income         (164,475)   (2.9)         (265,464)   (5.0)         (322,560)   (6.2)
Interest Expense Disallowed          17,779      .3            29,026     0.5            33,256     0.6
State Income Taxes                   27,357      .4            11,219     0.2             9,937     0.2
Other, Net                            8,415      .2            42,860     0.8            20,930     0.4
                                 ----------    ----        ----------    ----        ----------    ----
                                 $1,843,450    32.0%       $1,624,344    30.5%       $  964,446    29.0%
                                 ==========    ====        ==========    ====        ==========    ====
</TABLE>
 
The tax effects of deductible and taxable differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities,
respectively, are as follows:
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                     ------------------------
                                                        1997           1996
                                                     ----------      --------
<S>                                                  <C>             <C>
Deferred Tax Assets:
  Provision for Loan Losses                          $  795,290      $681,110
  Loan Origination Fees/Costs                            43,973        53,435
  Other                                                  35,074         1,129
                                                     ----------      --------
     Gross Deferred Tax Assets                       $  874,337      $735,674
Deferred Tax Liabilities:
  Net Unrealized Holding Gains on
     Securities Available for Sale                   $  982,230      $615,801
  Bond Discount Accretion                                61,354        45,819
  Depreciation                                           92,291        82,428
  Other                                                  31,437        47,974
                                                     ----------      --------
     Gross Deferred Tax Liabilities                  $1,167,312      $792,022
                                                     ----------      --------
     Net Deferred Tax Assets (Liabilities)           $ (292,975)     $(56,348)
                                                     ==========      ========
</TABLE>
 
No valuation allowance was established at December 31, 1997 or 1996 in view of
the Corporation's ability to carry back net deferred tax assets to taxes paid in
previous years and certain tax strategies available to the Corporation such as
liquidation of the appreciation in the Corporation's investment securities
portfolio. Net deferred tax assets are classified as other assets and net
deferred tax liabilities are classified as other liabilities on the consolidated
balance sheet.
 
NOTE 7--EMPLOYEE BENEFITS
 
The Corporation maintains a profit sharing retirement plan which covers
substantially all of its employees meeting minimum age and service requirements.
Expense for the profit sharing plan was $117,000 in 1997, $111,000 in 1996 and
$110,000 in 1995. In 1995, an amendment was made to the profit sharing plan to
include a 401(k) retirement plan provision. The amended profit sharing plan
contains provisions for matching individual employee 401(k) contributions and
allows for additional contributions to be made at the discretion of the
Corporation. During 1997, 1996 and 1995, respectively, the Corporation expensed
$63,584, $65,613 and $50,055 related to 401(k) plan matching contributions.
 
Profit sharing assets are primarily invested in mutual funds which are selected
at the discretion of the employee. The plan was also invested in 6,667 shares of
NSD Bancorp, Inc. common stock with a market value of $217,291 at December 31,
1997. Total cash dividends received from plan investments in common stock of the
Corporation were $4,445 in 1997.
 
The Corporation also maintained a defined benefit pension plan which covered
substantially all of its employees meeting minimum age and service requirements.
As of February 1, 1995, the Corporation terminated its defined
 
                                       14
<PAGE>   12
 
--------------------------------------------------------------------------------
 
benefit plan and replaced it by amending the aforementioned profit sharing plan
to include a 401(k) retirement plan provision. Employees were eligible to
receive their vested benefits from the terminated defined benefit plan in the
form of cash which could be rolled into the profit sharing plan. A net
curtailment gain of $510,960 was recognized during 1995 as a result of the plan
termination and settlement. Benefits of the defined benefit plan were generally
based on the years of service and the employee's compensation during the last
five years of employment. The Corporation's funding policy had been to
contribute annually to the pension plan the maximum amount that could be
deducted for federal income tax purposes. Contributions were intended to provide
not only for the benefits attributed to service to date, but also for those
expected to be earned in the future.
 
NOTE 8--STOCK OPTION PLANS
 
The Corporation has two fixed option plans. Under the 1994 Employee Stock Option
Plan, the Corporation may grant options to its employees for up to 193,488
shares of common stock. Under the 1994 Non-employee Director Stock Option Plan,
the Corporation may grant options to its non-employee directors for up to 64,496
shares of common stock. Under both Plans, the exercise price of each option is
equal to the fair market price of the Corporation's stock on the date of grant
with each option having a maximum term of 10 years. The total shares reserved
for issuance, options granted and the option exercise price per share have been
adjusted for the 3-for-2 stock split for holders of record on December 1, 1997,
the five percent stock dividend for holders of record on April 30, 1997 and the
five percent stock dividend for holders of record on April 30, 1996, in
accordance with the terms of both Plans.
 
A summary of the status of the Corporation's two fixed stock option plans as of
December 31, 1997, 1996 and 1995 and changes during the years ending on those
dates is presented below:
 
<TABLE>
<CAPTION>
                                        1997                        1996                        1995
                              -------------------------   -------------------------   -------------------------
                                       WEIGHTED-AVERAGE            WEIGHTED-AVERAGE            WEIGHTED-AVERAGE
       FIXED OPTIONS          SHARES    EXERCISE PRICE    SHARES    EXERCISE PRICE    SHARES    EXERCISE PRICE
----------------------------  ------        ------        ------        ------        ------        ------
<S>                           <C>      <C>                <C>      <C>                <C>      <C>
Outstanding at Beginning of
  Year                        79,415        $14.36        56,524        $14.00        29,238        $14.23
Granted                       23,095         18.92        25,436         15.13        27,286         13.76
Exercised                     8,210          14.28         --          --              --          --
Forfeited                     2,547          13.91        2,545          13.99         --          --
                              ------        ------        ------        ------        ------        ------
Outstanding at End of Year    91,753        $15.53        79,415        $14.36        56,524        $14.00
Options Exercisable at Year-
  End                         91,753                      79,415                      56,524
Weighted-Average Fair Value
  of Options Granted During
  the Year                    $18.92                      $6.74                       $4.18
                              ======                      ======                      ======
</TABLE>
 
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
 
<TABLE>
<CAPTION>
                    OPTIONS OUTSTANDING AND EXERCISABLE
----------------------------------------------------------------------------
                       NUMBER         WEIGHTED-AVERAGE
   RANGE OF          OUTSTANDING         REMAINING          WEIGHTED-AVERAGE
EXERCISE PRICES      AT 12/31/97      CONTRACTUAL LIFE       EXERCISE PRICE
---------------      -----------      ----------------      ----------------
<S>                  <C>              <C>                   <C>
 $13.76-$14.55         50,549            7.2 Years               $14.07
     15.29             18,109             8.6                     15.29
 18.37-19.07           23,095             9.5                     18.92
                       ------
                       91,753
                       ======
</TABLE>
 
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock
Based Compensation." As permitted by SFAS No. 123, the Bank has chosen to apply
Accounting Pronouncements Bulletin (APB) No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its Plans. Accordingly,
no compensation cost has been recognized for options granted under either Plan.
Had compensation expense included stock option plan costs determined based on
the fair value at the grant dates for options
 
                                       15
<PAGE>   13
 
NSD BANCORP
           ---------------------------------------------------------------------
 
granted under these plans consistent with SFAS No. 123, proforma net income and
earnings per share would have been as follows:
 
<TABLE>
<CAPTION>
                                                REPORTED      PROFORMA
                                               ----------    ----------
<S>                                            <C>           <C>
Net Income
     1997                                      $3,904,710    $3,727,731
     1996                                       3,689,489     3,576,261
     1995                                       3,672,952     3,597,677
Diluted Earnings Per Share
     1997                                           $1.50         $1.43
     1996                                            1.43          1.38
     1995                                            1.42          1.39
</TABLE>
 
For purposes of computing proforma results as if the above plans were accounted
for under the fair value method, the Corporation estimated the fair value of
stock options using the Black-Scholes options pricing model with dividends paid
every quarter at the current rate at the date of grant. The following
assumptions were used:
 
<TABLE>
<CAPTION>
                                            1997                      1996                      1995
                                    --------------------      --------------------      --------------------
                                    EMPLOYEE    DIRECTOR      EMPLOYEE    DIRECTOR      EMPLOYEE    DIRECTOR
                                    --------    --------      --------    --------      --------    --------
<S>                                 <C>         <C>           <C>         <C>           <C>         <C>
Risk Free Interest Rate              6.15%       6.80%         6.82%       6.58%         6.44%       7.00%
Volatility                          87.00%      87.00%        44.09%      46.77%        23.08%       21.83%
Expected Lives                      7 Years     7 Years       7 Years     7 Years       7 Years     7 Years
</TABLE>
 
NOTE 9--TRANSACTIONS WITH RELATED PARTIES
 
In the ordinary course of business, the Corporation has transactions, including
loans, with the Corporation's employees, principal officers and directors and
their related interests. Approximately 84% of related party loans are with two
Board members. A summary of loan activity for directors, executive officers and
their associates with loan balances in excess of $60,000 is as follows:
 
<TABLE>
<S>                                               <C>
Balance, December 31, 1995                        $ 7,807,047
New Loans                                             582,640
Repayments                                         (1,690,086)
                                                  -----------
Balance, December 31, 1996                          6,699,601
New Loans                                             701,809
Repayments                                         (1,482,349)
                                                  -----------
Balance, December 31, 1997                        $ 5,919,061
                                                  ===========
</TABLE>
 
NOTE 10--COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
 
The Corporation incurs off-balance sheet risk in the normal course of business
in order to meet financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit which
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated financial statements.
 
At December 31, 1997, there are various outstanding commitments to extend credit
of approximately $27,971,000 and standby letters of credit of $683,000. The
majority of standby letters of credit expire within the next fifteen months.
 
Commitments to extend credit are commitments to lend to a customer as long as
there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis.
 
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing
 
                                       16
<PAGE>   14
 
--------------------------------------------------------------------------------
 
arrangements, including normal business activities, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers. The
Corporation requires collateral supporting those commitments as deemed
necessary.
 
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Corporation uses the same credit and collateral policies in
making commitments and conditional obligations as for all other lending.
Collateral for these types of commitments is similar to collateral obtained on
other commercial loans.
 
Additionally, the Corporation is subject to certain asserted and unasserted
potential claims encountered in the normal course of business. In the opinion of
management and legal counsel, neither the resolution of these claims nor the
funding of those credit commitments will have an adverse effect on the
Corporation's consolidated financial position, results of operations or cash
flows.
 
NOTE 11--CONCENTRATIONS OF CREDIT
 
The Corporation grants commercial, residential and consumer loans primarily to
customers in the Western Pennsylvania area. The Corporation has a diversified
loan portfolio which is not dependent upon any particular economic sector.
Substantially all of the Corporation's investments in municipal securities are
obligations of state or political subdivisions located within Pennsylvania. As a
whole, the Corporation's loan and investment portfolios could be affected by the
general economic conditions of Pennsylvania. In addition, at December 31, 1997,
a significant portion of the Corporation's "cash and due from banks" and
"federal funds sold" is maintained with a large financial institution located in
southwestern Pennsylvania.
 
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value:
 
CASH AND FEDERAL FUNDS SOLD:
 
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
 
INVESTMENT SECURITIES:
 
The estimated fair value of securities and marketable equity securities is based
on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
 
LOAN RECEIVABLES:
 
Fair values were estimated for loan portfolios with similar financial
characteristics by discounting contractual cash flows considering prepayments,
credit risk, overhead and other factors.
 
Assumptions regarding credit risk, cash flows and discount rates were
judgmentally determined using available market and internal information which
management believes to be reasonable. However, because there are no active
markets for many loan types, the Corporation has no basis to determine whether
the estimated fair value presented would be indicative of the value negotiated
in an actual sale.
 
DEPOSIT LIABILITIES:
 
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand as of December 31, 1997. The fair value
of the fixed-maturity certificates of deposit is estimated using the rates
currently offered as of December 31, 1997, for deposits of similar maturities.
Fair value estimates do not include the value of depositor relationships or the
value of the low-cost funding provided by deposits.
 
REPURCHASE AGREEMENTS AND BORROWED FUNDS:
 
The fair value is estimated using the rates currently offered for borrowings
with similar terms and remaining maturities.
 
                                       17
<PAGE>   15
 
NSD BANCORP
           ---------------------------------------------------------------------
 
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES:
 
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter-parties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and the letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counter-parties at the reporting date.
 
The fair value of commitments, guarantees and letters of credit is insignificant
after considering the aforementioned factors.
 
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                      -----------------------------------------
<S>                                                   <C>        <C>        <C>        <C>
                                                             1997                  1996
                                                      -------------------   -------------------
 
<CAPTION>
                                                      CARRYING     FAIR     CARRYING     FAIR
                                                       AMOUNT     VALUE      AMOUNT     VALUE
                                                      --------   --------   --------   --------
<S>                                                   <C>        <C>        <C>        <C>
Financial Assets:
  Cash and Federal Funds Sold                         $ 15,638   $ 15,638   $ 20,894   $ 20,894
  Investment Securities                                 63,467     63,639     64,986     65,232
  Loans                                                234,215    236,198    211,603    214,597
     Less: Reserve for Loan Losses                      (2,914)     --        (2,579)     --
                                                      --------   --------   --------   --------
                                                      $310,406   $315,475   $294,904   $300,723
                                                      ========   ========   ========   ========
Financial Liabilities:
  Deposits                                            $268,727   $268,934   $260,987   $262,010
  Repurchase Agreements                                      0          0      1,911      1,911
  Federal Home Loan Bank Borrowings                     15,000     14,893      9,560      9,495
                                                      --------   --------   --------   --------
                                                      $283,727   $283,827   $272,458   $273,416
                                                      ========   ========   ========   ========
Off-Balance Sheet Financial Instruments:
Commitments to Extend Credit                          $ 27,971   $  --      $ 24,197   $  --
                                                      ========   ========   ========   ========
</TABLE>
 
NOTE 13--REGULATORY RESTRICTIONS
 
The Corporation is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by such regulatory authorities.
Neither the Corporation nor its subsidiary is subject to written regulatory
agreements.
 
Under capital adequacy regulatory guidelines and the regulatory framework for
prompt corrective action, the Corporation must meet specific capital
requirements taking into consideration quantitative measures of assets,
liabilities, and certain off-balance sheet items. Such measures are subject to
qualitative judgments by the regulators with regard to composition, risk
weightings and other factors.
 
Minimum regulatory risk-based capital ratios for Tier I, total capital and
leverage are 4%, 8% and 4%, respectively. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Management believes,
as of December 31, 1997, that the Corporation meets all capital adequacy
requirements to which it is subject.
 
As of the most recent notification from the regulators, the Corporation and its
subsidiary were categorized as well capitalized under the regulatory framework
for prompt corrective action. To be considered as well capitalized, an
institution must maintain risk-based capital ratios for Tier I, total capital,
and leverage ratios of at least 6%, 10%, and 5%, respectively.
 
                                       18
<PAGE>   16
 
--------------------------------------------------------------------------------
 
The following represents Tier I and total risk-based capital and leverage ratios
for the Corporation and also its subsidiary, NorthSide Bank, as of December 31,
1997 and 1996:
 
<TABLE>
<CAPTION>
                                                 AMOUNT                    RATIOS
                                        -------------------------      ---------------
                                           1997          1996           1997     1996
                                        -----------   -----------      ------   ------
<S>                                     <C>           <C>              <C>      <C>
Risk-Based Capital
Tier I
  NSD Bancorp, Inc.                     $27,726,483   $25,229,831       12.53%   12.41%
  NorthSide Bank                         26,687,786    24,445,197       12.11    11.95
Total
  NSD Bancorp, Inc.                      30,493,837    27,771,577       13.78    13.66
  NorthSide Bank                         29,444,116    27,002,347       13.36    13.20
Leverage
  NSD Bancorp, Inc.                                                      8.90     9.02
  NorthSide Bank                                                         8.64     8.78
</TABLE>
 
Under regulations of the Federal Reserve, the Corporation is required to
maintain certain average reserve balances which include both cash on hand and
deposits with the Federal Reserve. These deposits are included in cash and due
from banks in the accompanying consolidated balance sheet. At December 31, 1997,
the Corporation was required to maintain $1,449,000 of such balances.
 
Dividends and loans to the Holding Company from NorthSide Bank are subject to
regulatory limitations. Dividends are limited to retained earnings of NorthSide
Bank. Loans must be collateralized by specific obligations and cannot exceed 10%
of NorthSide Bank's capital. The maximum amount available to the Holding Company
at December 31, 1997 from NorthSide Bank in the form of dividends and loans,
individually, was approximately $22.7 million and $2.8 million, respectively.
 
NOTE 14--STOCK DIVIDENDS AND STOCK SPLITS
 
On November 25, 1997, the Corporation's Board of Directors declared a 3-for-2
common stock split payable on December 31, 1997 to shareholders of record at
December 1, 1997.
 
On April 22, 1997, the Corporation's Board of Directors declared a common stock
dividend payable May 30, 1997 to shareholders of record at April 30, 1997.
 
On April 23, 1996, the Corporation's Board of Directors declared a common stock
dividend payable May 31, 1996 to shareholders of record at April 30, 1996.
 
Earnings per share and dividends per share have been restated to reflect the
stock dividends and stock split declared.
 
NOTE 15--TREASURY STOCK
 
In November, 1995, the Corporation's Board of Directors authorized the
repurchase of up to 10% of the outstanding common stock of the Corporation, to
be made available for issuance pursuant to stock option plans and for general
corporate purposes. There were no shares repurchased during 1997 or 1996.
 
NOTE 16--BORROWED FUNDS
 
Borrowed funds at December 31, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                  1997                           1996
                                        -------------------------      -------------------------
                                                       WEIGHTED                       WEIGHTED
                                         BALANCE     AVERAGE RATE       BALANCE     AVERAGE RATE
                                        ----------       ----          ----------       ----
<S>                             <C>     <C>          <C>               <C>          <C>
Advances Due In:                1997        --          --             $5,560,000       5.76%
                                1998    $6,000,000       5.80%          3,000,000       5.67
                                1999     1,000,000       5.19           1,000,000       5.19
                                2002     8,000,000       5.48              --          --
</TABLE>
 
                                       19
<PAGE>   17
 
NSD BANCORP
           ---------------------------------------------------------------------
 
Advances in the FHLB are collateralized by qualifying securities and loans.
Qualifying collateral includes U.S. Treasury, government agency and
mortgage-backed securities and real estate loans based upon the amount of
outstanding advances. These advances are subject to restrictions or penalties
related to prepayments.
 
The Corporation had an unused line of credit with the Federal Home Loan Bank of
approximately $8.1 million at December 31, 1997.
 
NOTE 17-- CONDENSED FINANCIAL INFORMATION OF NSD BANCORP, INC.
          (PARENT COMPANY ONLY)
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              --------------------------
                       BALANCE SHEET                             1997           1996
----------------------------------------------------------------------------------------
<S>                                                           <C>            <C>
Assets
  Cash                                                        $   582,342    $   302,467
  Securities Available for Sale                                 2,714,297      2,227,221
  Investment in Bank Subsidiary                                27,784,050     25,348,190
  Other Assets                                                     66,932         54,225
                                                              -----------    -----------
Total Assets                                                  $31,147,621    $27,932,103
                                                              ===========    ===========
Liabilities
  Accounts Payable                                            $    26,658    $       144
  Deferred Tax Liability                                          781,393        611,706
                                                              -----------    -----------
Total Liabilities                                                 808,051        611,850
Shareholders' Equity                                           30,339,570     27,320,253
                                                              -----------    -----------
Total Liabilities and Shareholders' Equity                    $31,147,621    $27,932,103
                                                              ===========    ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                           -------------------------------------------
                  STATEMENT OF INCOME                         1997            1996            1995
------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>             <C>
Cash Dividends from Bank Subsidiary                        $ 1,698,741     $ 1,458,316     $ 1,319,675
Property Dividends from Bank Subsidiary                        --              --              179,698
Dividends from Securities Available for Sale                    58,908          50,412          36,382
Net Investment Securities Gains (Losses)                       179,391         180,829            (188)
Other Expenses                                                 (78,534)        (51,326)        (46,026)
                                                           -----------     -----------     -----------
  Income Before Taxes and Equity in Undistributed Net
     Income of Bank Subsidiary                               1,858,506       1,638,231       1,489,541
Provision for Income Taxes                                     (11,450)        (17,321)        --
                                                           -----------     -----------     -----------
Income Before Equity in Undistributed Net Income of
  Bank Subsidiary                                            1,847,056       1,620,910       1,489,541
Equity in Undistributed Net Income of Bank Subsidiary        2,057,654       2,068,579       2,183,411
                                                           -----------     -----------     -----------
Net Income                                                 $ 3,904,710     $ 3,689,489     $ 3,672,952
                                                           ===========     ===========     ===========
</TABLE>
 
                                       20
<PAGE>   18
 
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                            -----------------------------------------
                 STATEMENT OF CASH FLOWS                       1997           1996           1995
-----------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>            <C>
Cash Flows From Operating Activities
  Net Income                                                $ 3,904,710    $ 3,689,489    $ 3,672,952
     Adjustments to Net Income
       Equity in Net Income of Bank Subsidiary               (2,057,654)    (2,068,579)    (2,183,411)
       Property Dividend                                        --             --            (179,698)
       (Increase) Decrease in Other Assets                      (12,691)        17,670         (3,329)
       (Gains) Losses on Investment Securities                 (179,391)      (180,829)           188
       Increase (Decrease) in Other Liabilities                  26,514           (831)           976
                                                            -----------    -----------    -----------
Net Cash Provided by Operating Activities                     1,681,488      1,456,920      1,307,678
 
Cash Flows From Investing Activities
  Proceeds from Repayments of Investment Securities
     Available for Sale                                         191,380        293,125            412
                                                            -----------    -----------    -----------
Net Cash Provided by Investing Activities                       191,380        293,125            412
 
Cash Flows From Financing Activities
  Proceeds from Issuance of Common Stock                        117,247        --             --
  Cash Dividends Paid                                        (1,698,741)    (1,458,316)    (1,294,675)
  Cash Dividends Paid in Lieu of Fractional Shares              (11,499)        (4,758)        (3,681)
                                                            -----------    -----------    -----------
Net Cash Used by Financing Activities                        (1,592,993)    (1,463,074)    (1,298,356)
                                                            -----------    -----------    -----------
Net Increase in Cash                                            279,875        286,971          9,734
Cash at Beginning of Year                                       302,467         15,496          5,762
                                                            -----------    -----------    -----------
Cash at End of Year                                         $   582,342    $   302,467    $    15,496
                                                            ===========    ===========    ===========
</TABLE>
 
                                       21
<PAGE>   19
 
NSD BANCORP
           ---------------------------------------------------------------------
 
                           COMPARATIVE FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                                 FOR THE YEARS ENDED DECEMBER 31,
                                             ------------------------------------------------------------------------
                                                 1997           1996           1995           1994           1993
                                             ------------   ------------   ------------   ------------   ------------
<S>                                          <C>            <C>            <C>            <C>            <C>
EARNINGS
Interest Income                              $ 23,812,738   $ 21,501,582   $ 19,405,880   $ 17,194,852   $ 16,577,443
Interest Expense                                9,980,576      8,724,605      7,485,431      5,867,068      5,798,452
                                             ------------   ------------   ------------   ------------   ------------
Net Interest Income                            13,832,162     12,776,977     11,920,449     11,327,784     10,778,991
Provision for Loan Losses                         720,000        650,000        530,000        460,000        471,000
Non-Interest Income                             1,586,414      1,339,513      1,741,691        792,263        926,784
Non-Interest Expense                            8,950,416      8,152,657      7,958,632      7,884,226      7,901,273
                                             ------------   ------------   ------------   ------------   ------------
Income Before Taxes and Cumulative Effect
  of Accounting Change                          5,748,160      5,313,833      5,173,508      3,775,821      3,333,502
Income Taxes                                    1,843,450      1,624,344      1,500,556        964,446        797,513
                                             ------------   ------------   ------------   ------------   ------------
Income Before Cumulative Effect of
  Accounting Change                             3,904,710      3,689,489      3,672,952      2,811,375      2,535,989
Cumulative Effect of Accounting Change            --             --             --             --              97,975
                                             ------------   ------------   ------------   ------------   ------------
Net Income                                   $  3,904,710   $  3,689,489   $  3,672,952   $  2,811,375   $  2,633,964
                                             ============   ============   ============   ============   ============
YEAR END BALANCES
Assets                                       $320,329,570   $305,413,560   $259,132,930   $242,071,525   $228,449,295
Loans                                         236,459,224    214,049,576    188,653,465    172,000,399    155,180,662
Investment Securities                          63,466,743     64,985,502     54,658,490     52,464,021     53,126,962
Deposits                                      268,726,614    260,986,805    220,243,135    213,766,664    203,831,795
Repurchase Agreements                             --           1,911,184      1,822,433      1,382,156        --
Short-Term Borrowings                           6,000,000      5,560,000      2,780,000        --             --
Long-Term Borrowings                            9,000,000      4,000,000      4,600,000        780,000        780,000
Shareholders' Equity                           30,339,571     27,320,253     24,863,854     21,949,369     20,211,121
Number of Shareholders                                453            448            454            452            454
AVERAGE BALANCES
Assets                                       $312,219,529   $279,854,944   $248,746,561   $231,867,752   $219,410,380
Loans                                         226,006,573    198,720,233    176,706,914    160,197,388    144,011,197
Investment Securities                          66,767,405     60,999,113     52,489,567     53,512,045     53,421,711
Deposits                                      261,385,203    240,125,299    215,564,206    235,368,739    196,193,389
Repurchase Agreements                           1,088,017      1,873,104      1,577,178        648,308        --
Short-Term Borrowings                           9,390,000      2,372,240      1,441,545        --             --
Long-Term Borrowings                            2,964,466      6,900,000      2,127,890        780,000        337,479
Shareholders' Equity                           28,739,768     26,008,987     23,627,621     21,161,402     18,684,290
PER SHARE DATA (1)
BASIC
Income Before Cumulative Effect of
  Accounting Change                                $ 1.51         $ 1.43          $1.42          $1.09          $ .98
Cumulative Effect of Accounting Change                 --             --             --             --            .04
Net Income                                           1.51           1.43           1.42           1.09           1.02
DILUTED
Income Before Cumulative Effect of
  Accounting Change                                $ 1.50         $ 1.43          $1.42          $1.09          $ .98
Cumulative Effect of Accounting Change                 --             --             --             --            .04
Net Income                                           1.50           1.43           1.42           1.09           1.02
Dividends                                             .66            .57            .50            .29            .29
Book Value                                          11.73          10.56           9.61           8.48           7.81
RATIOS
Return on Average Assets                             1.25%          1.32%          1.48%          1.21%          1.20%
Return on Average Equity (3)                        13.59          14.19          15.55          13.29          14.10
Net Interest Margin (2)                              4.81           5.01           5.31           5.47           5.58
Equity to Assets                                     9.47           8.95           9.60           9.07           8.85
Dividend Payout Ratio                               43.50          39.53          35.32          26.68          28.40
</TABLE>
 
---------
 
(1) Adjusted for 3-for-2 stock split in December, 1997, 5% stock dividend in May
    1997, 5% stock dividend paid in May, 1996, 4% stock dividend paid in
    January, 1995, 25% stock dividend paid in June, 1993 and 20% stock dividend
    paid in April, 1992.
 
(2) Tax equivalent basis.
 
(3) Included in 1997, 1996, 1995 and 1994 average equity were net unrealized
    holding gains on securities available for sale due to the adoption of FASB
    Statement No. 115 as of December 31, 1993. Results for 1997, 1996, 1995 and
    1994 reflect the full impact of adopting Statement No. 115.
 
                                       22
<PAGE>   20
 
--------------------------------------------------------------------------------
 
COOPERS & LYBRAND [logo]                         COOPERS & LYBRAND L.L.P.
                                                     
                                                 a professional services firm

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of 
 NSD Bancorp, Inc.

We have audited the accompanying consolidated balance sheet of NSD Bancorp,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made be 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 consolidated financial position of NSD
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period December 31, 1997, in conformity with generally
accepted accounting principles.


                                                   /S/ COOPERS & LYBRAND LLP
    


Pittsburgh, Pennsylvania
January 26, 1998



Coopers & Lybrand is a member of Coopers & Lybrand International, a limited
liability association incorporated in Switzerland.

                                       23
<PAGE>   21
 
NSD BANCORP
           ---------------------------------------------------------------------
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion is an analysis of NSD Bancorp, Inc.'s (the Corporation)
financial condition and results of operations and should be read in conjunction
with the Consolidated Financial Statements.
 
RESULTS OF OPERATIONS FOR THE YEAR
 
Net income increased to $3,904,710 or $1.51 (basic) per share in 1997, from
$3,689,489 or $1.43 in 1996 and $3,672,952 or $1.42 per share in 1995.
Contributing to the increase in net income were increases in net interest income
of $1,055,185, net gains on investment securities of $8,656, service fee income
of $41,970, a gain on the sale of land of $166,999, and a decrease in
advertising expense of $46,625. These increases were offset by increases to the
provision for loan losses of $70,000, equipment and supplies expense of $22,244,
data processing costs of $68,019, salary and benefit expense of $137,804 and an
increase of $219,106 in the provision for income taxes. Also impacting earnings
was a $289,000 loss recognized on the merchant credit card portfolio. The
remaining accounts were subsequently sold to a third party. Excluding the
after-tax effect of a $510,960 net gain recognized on the settlement and
curtailment of the pension plan in 1995, 1996 net income represented a $353,771
increase over the previous year's net income. Contributing to this increase was
an increase in net interest income of $856,528, an increase in net gains on
investment securities of $178,939 and a decrease in FDIC insurance expense of
$243,061. These were offset by increases to the provision for loan losses of
$120,000, equipment and supplies expense of $108,261, operating expenses of
$144,721 and provision for income taxes of $123,788.
 
Although net income during 1997 increased over 1996, there was a decline in the
Corporation's return on average assets (ROA) and return on average equity (ROE).
The decline in ROA and ROE reflects the impact of a decline in net interest
margin from 5.01% in 1996 to 4.81% in 1997 and also the merchant card loss
recognized during 1997. The Corporations's ROA for 1997 was 1.25%, compared to
1.32% in 1996 and 1.48% in 1995. The ROE for 1997 was 13.59% compared to 14.19%
in 1996 and 15.55% in 1995. The decline in ROA and ROE from 1995 to 1996 was
primarily the result of the one-time noncash gain of $510,960 recognized on the
settlement and curtailment of the pension plan during 1995.
 
NET INTEREST INCOME
 
The primary component of the Corporation's earnings is net interest income,
which is the difference between interest earned on loans, investments and other
earning assets and the interest expense on deposits and other interest bearing
liabilities which fund those assets. Tax-exempt securities and loans carry
pretax yields lower than comparable taxable assets. Therefore, it is more
meaningful to analyze net interest income on a tax-equivalent basis.
 
Total interest income increased $2,168,959 during 1997 as the result of a
$30,336,038 increase in average earning assets offset by a decline in average
yield on earning assets from 8.31% in 1996 to 8.19% in 1997. Interest expense on
deposits increased $1,021,967 as the result of a $17,526,025 increase in the
average level of interest bearing deposits and an increase from 4.16% in 1996 to
4.30% in 1997 in the average cost of such deposits. Interest expense on long and
short-term borrowings increased $234,004 due to a $3,783,050 increase in average
outstanding levels and an increase in the average rate paid on such balances
from 5.63% in 1996 to 5.71% in 1997.
 
Total interest income increased $2,022,923 during 1996 as the result of a
$29,483,912 increase in average earning assets offset by a decline in average
yield on earning assets from 8.49% in 1995 to 8.31% in 1996. Interest expense
increased $1,239,174 as the result of a $19,327,366 increase in the average
level of interest bearing deposits and an increase from 4.10% in 1995 to 4.16%
in the average cost of such deposits. Interest expense on long and short-term
borrowings increased $317,823 due to a $5,662,805 increase in average
outstanding levels offset by a slight decline in the average rate paid on such
balances from 5.65% in 1995 to 5.63% in 1996.
 
Net interest income was $14,171,227 at December 31, 1997, compared to
$13,259,239 at December 31, 1996 and $12,475,490 at December 31, 1995. This
consistent improvement has been largely due to increases in average
 
                                       24
<PAGE>   22
 
--------------------------------------------------------------------------------
 
earning assets, primarily in loans. In 1997 and 1996, increases in average
investment securities also contributed to the overall increases in net interest
income.
 
Average earning assets for 1997 were $294,800,289 compared to $264,464,251 and
$234,980,339 in 1996 and 1995, respectively. To provide a more in depth analysis
of net interest income, the following average balance sheet and net interest
income analysis detail the contribution of earning assets to overall net
interest income and the impact of the cost of funds. The rate/volume analysis
shows the portions of the net change in interest income due to changes in volume
or rate on a tax equivalent basis using the statutory federal income tax rate of
34%. Changes in net interest income due to both rate and volume in the
accompanying rate and volume analysis have been allocated to changes due to
volume and rate in proportion to the absolute amount of the change in each.
 
                              RATE/VOLUME ANALYSIS
 
<TABLE>
<CAPTION>
                                               FROM 1996 TO 1997                     FROM 1995 TO 1996
                                      -----------------------------------   -----------------------------------
                                        CHANGE IN INCOME/                     CHANGE IN INCOME/
                                          EXPENSE DUE TO                        EXPENSE DUE TO
                                      ----------------------     TOTAL      ----------------------     TOTAL
                                        VOLUME       RATE        CHANGE       VOLUME       RATE        CHANGE
<S>                                   <C>          <C>         <C>          <C>          <C>         <C>
---------------------------------------------------------------------------------------------------------------
Interest Earning Assets
  Loans
    Industrial Revenue and Tax-
      Exempt Financing                $  (29,519)  $   4,851   $  (24,668)  $  (46,849)  $  13,647   $  (33,202)
    All Other Loans                    2,386,457    (382,210)   2,004,247    1,992,923    (436,445)   1,556,478
---------------------------------------------------------------------------------------------------------------
Total Loans                            2,356,938    (377,359)   1,979,579    1,946,074    (422,798)   1,523,276
  Investment Securities
    Taxable                              688,918      81,044      769,962      695,480      86,735      782,215
    Tax Exempt                          (414,880)    (11,609)    (426,489)    (213,073)    (20,350)    (192,723)
---------------------------------------------------------------------------------------------------------------
Total Investment Securities              274,038      69,435      343,473      482,407     107,085      589,492
  Due From Banks                          (1,390)     (5,518)      (6,908)       7,270        (879)       6,391
  Federal Funds Sold                    (134,780)    (12,406)    (147,186)     (62,796)    (33,439)     (96,532)
---------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets          2,494,806    (325,848)   2,168,958    2,372,955    (350,031)   2,022,924
 
Interest Bearing Liabilities
  Interest Bearing Deposits
    Savings and Interest Bearing
      Demand Deposits                    376,097      67,309      443,406      292,404     417,069      709,473
    Time Deposits                        309,807     269,054      578,861      420,466    (212,986)     207,480
---------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits          685,904     336,363    1,022,267      712,871     204,082      916,953
  Federal Funds Purchased                 82,536         483       83,019       (2,954)     (1,055)      (4,009)
  Repurchase Agreements                  (40,981)      1,315      (39,666)      15,619      (7,212)       8,407
  Short-Term Borrowings                  535,500      --          535,500       48,990         667       49,657
  Long-Term Borrowings                  (354,446)      9,597     (344,849)     270,741      (2,574)     268,166
---------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities       908,513     347,758    1,256,271    1,045,266     193,908    1,239,174
---------------------------------------------------------------------------------------------------------------
Change in Net Interest Income         $1,586,293   $(673,606)  $  912,687   $1,327,689   $(543,939)  $  783,750
===============================================================================================================
</TABLE>
 
(1) Tax exempt income on loans and investments and related yields are shown on a
    fully tax equivalent basis computed using the federal statutory rate of 34%.
 
(2) For purposes of calculating loan yields, average loan balances include
nonaccrual loans.
 
                                       25
<PAGE>   23
 
NSD BANCORP
           ---------------------------------------------------------------------
 
                   AVERAGE BALANCE SHEET/NET INCOME ANALYSIS
 
                        FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
                                            1997                                    1996                   
                            ------------------------------------    ------------------------------------   
                              AVERAGE                    AVERAGE      AVERAGE                    AVERAGE   
                              BALANCE       INTEREST      YIELD       BALANCE       INTEREST      YIELD    
<S>                         <C>            <C>           <C>        <C>            <C>           <C>       
-----------------------------------------------------------------------------------------------------------
ASSETS
Loans
  Industrial Revenue and
    Tax Exempt              $    604,370   $    66,257    10.96%    $    875,839   $    90,925    10.38%   
All Other Loans              225,402,203    19,462,283     8.63      197,844,394    17,458,036     8.82    
-----------------------------------------------------------------------------------------------------------
      Total                  226,006,573    19,528,540     8.64      198,720,233    17,548,961     8.83    
Investment Securities
  Taxable                     58,961,980     3,853,302     6.54       48,392,511     3,083,340     6.37    
  Tax-Exempt                   7,795,425       672,021     8.62       12,606,602     1,098,510     8.71    
-----------------------------------------------------------------------------------------------------------
      Total                   66,757,405     4,525,323     6.78       60,999,113     4,181,849     6.86    
Due From Banks, Interest
  Earning                        134,777         3,974     2.94          157,515        10,882     6.91    
Federal Funds Sold             1,901,534        94,966     4.99        4,587,391       242,152     5.28    
-----------------------------------------------------------------------------------------------------------
      Total Earning Assets   294,800,289    24,152,803     8.19      264,464,251    21,983,844     8.31    
Allowance for Loan Losses     (2,771,915)                             (2,570,416)                          
Cash and Due From Banks       10,762,215                              10,285,873                           
Premises and Equipment         3,368,864                               3,712,094                           
Other Assets                   6,060,077                               3,963,142                           
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS                $312,219,529                            $279,854,944                           
===========================================================================================================
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Deposits
  Savings Deposits          $ 37,025,880   $   994,503     2.69%    $ 37,750,180   $ 1,132,591     2.97%   
  Interest Checking and
    Money Market              80,482,448     2,550,857     3.17       67,611,775     1,969,363     2.91    
  Time Deposits               94,732,134     5,584,179     5.89       89,352,483     5,005,618     5.60    
-----------------------------------------------------------------------------------------------------------
      Total Interest
        Bearing Deposits     212,240,462     9,129,539     4.30      194,714,438     8,107,572     4.16    
Federal Funds Purchased        1,470,501        84,065     5.72           24,590         1,046     4.25    
Repurchase Agreements          1,088,017        56,818     5.22        1,873,104        96,484     5.15    
Short-Term Borrowings          9,390,000       535,500     5.70        2,332,240       128,176     5.50    
Long-Term Borrowings           2,964,466       174,654     5.89        6,900,000       391,327     5.67    
-----------------------------------------------------------------------------------------------------------
      Total Interest
        Bearing
        Liabilities          227,153,446     9,980,576     4.39      205,844,372     8,724,605     4.24    
Demand Deposits               49,144,741                              45,410,862                           
Other Liabilities              7,181,574                               2,590,723                           
Shareholders' Equity          28,739,768                              26,008,987                           
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY      $312,219,529                            $279,844,944                           
===========================================================================================================
Net Interest Income                        $14,172,227                             $13,259,239
===========================================================================================================
Interest Spread                                            3.80%                                   4.07%
Interest Margin                                            4.81%                                   5.01%
 
<CAPTION>
                                          1995
                            -----------------------------------
                              AVERAGE                   AVERAGE
                              BALANCE      INTEREST      YIELD
<S>                         <C>           <C>           <C>
-------------------------------------------------------------------
ASSETS
Loans
  Industrial Revenue and
    Tax Exempt              $  1,340,039  $   124,127     9.26%
All Other Loans              175,366,875   15,901,558     9.07
-------------------------------------------------------------------
      Total                  176,706,914   16,025,685     9.07
Investment Securities
  Taxable                     37,434,268    2,301,125     6.51
  Tax-Exempt                  15,055,299    1,291,233     8.58
-------------------------------------------------------------------
      Total                   52,489,567    3,592,358     6.84
Due From Banks, Interest
  Earning                         53,995        4,491     8.32
Federal Funds Sold             5,729,863      338,387     5.91
-------------------------------------------------------------------
      Total Earning Assets   234,980,339   19,960,921     8.49
Allowance for Loan Losses     (2,553,316
Cash and Due From Banks        8,917,402
Premises and Equipment         3,546,144
Other Assets                   3,835,992
-------------------------------------------------------------------
TOTAL ASSETS                $248,746,561
===================================================================

LIABILITIES AND SHAREHOLDE
Interest Bearing Deposits
  Savings Deposits          $ 41,165,715  $ 1,221,768     2.97%
  Interest Checking and
    Money Market              52,266,567    1,170,713     2.24
  Time Deposits               81,594,789    4,798,138     5.85
-------------------------------------------------------------------
      Total Interest
        Bearing Deposits     175,387,071    7,190,619     4.10
Federal Funds Purchased           88,219        5,055     5.73
Repurchase Agreements          1,577,178       88,077     5.58
Short-Term Borrowings          1,441,545       78,519     5.45
Long-Term Borrowings           2,127,890      123,161     5.79
---------------------------------------- --------------------------
      Total Interest
        Bearing
        Liabilities          180,621,903    7,485,431     4.14
Demand Deposits               40,177,135
Other Liabilities              4,319,902
Shareholders' Equity          23,627,621
-------------------------------------------------------------------
TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY      $248,746,561
===================================================================
Net Interest Income                       $12,475,490
===================================================================
Interest Spread                                           4.35%
Interest Margin                                           5.31%
</TABLE>
 
(1) Tax exempt income on loans and investments and related yields are shown on a
    fully tax equivalent basis computed using a statutory rate of 34%.
 
(2) For purposes of calculating loan yields, average loan balances include
    nonaccrual loans.
 
(3) Average yields on available for sale investment securities are calculated
    based on average estimated market values for the years 1997, 1996 and 1995.
 
                                       26
<PAGE>   24
 
--------------------------------------------------------------------------------
 
PROVISION FOR LOAN LOSSES
 
The Corporation's provision for loan losses was $720,000 in 1997, $650,000 in
1996 and $530,000 in 1995. The increase in the provision for loan losses was
primarily due to an increase in average loans during 1997. Net charge-offs for
1997 were $384,175, compared to $747,858 in 1996 and $135,236 in 1995. For
additional information, see the Non-Performing Assets and Reserve for Loan
Losses sections of this discussion.
 
OTHER INCOME
 
Other income increased $246,901 from $1,339,513 in 1996 to $1,586,414 in 1997.
Contributing to this increase was a one-time gain on the sale of land of
$167,000, an increase in net gains on investment securities of $8,656, an
increase in service fee income of $41,970 and increases in net gains on the
sales of lease assets and other assets of $7,173 and $19,785, respectively.
Loans sold in 1996 resulted in a gain of $14,614. There were no loans sold in
1997 resulting in an offset to the increase in other income.
 
Other income decreased $402,177 from $1,741,691 in 1995 to $1,339,513 in 1996.
During the first quarter of 1995, a one time non-cash gain of $510,960 was
recognized upon the settlement and curtailment of NorthSide Bank's pension plan.
The sale of investment securities during 1996 resulted in net gains of $211,594,
compared to $32,656 in 1995. Service fees for 1996 decreased to $668,785 from
$692,859 during 1995. Contributing to the decrease in service fees was a $36,749
reduction in the amount of NSF charges received offset by a $7,398 increase in
service charges on savings deposits. Other operating income decreased $46,082.
This decline is largely the result of net gains on the sale of other real estate
of $88,505 recognized in 1995. There were no sales of other real estate during
1996. Loan sales during 1996 resulted in gains of $14,614. There were no loans
sold during 1995. An increase of $24,792 in checkbook commissions, due to
improved fee penetration, was offset by a decline in fees generated from
automated teller transactions of $14,024.
 
OTHER EXPENSES
 
Total other expenses increased $797,759 from $8,152,657 in 1996 to $8,950,416 in
1997. Salary and benefits increased $137,804 to $4,153,371 from $4,015,567 in
1996. Included in 1997 expenses were slight increases in the cost of health and
life insurance premiums of $17,122 and $2,876, respectively, and an increase in
the contribution to the employee profit sharing plan of $6,050. Salary expense
increased $140,668 due to normal inflation adjustments resulting in a
corresponding increase in the employer portion of payroll taxes of $10,024. This
overall increase was offset slightly by a decline in temporary employee expense
of $10,349.
 
Occupancy expense increased $16,199 from $766,869 in 1996 to $783,068 in 1997
primarily due to the costs associated with the addition and operation of the
Bank's downtown Pittsburgh branch office opened in December, 1996. Equipment and
supplies expense increased $22,244 during 1997 due primarily to increases in
depreciation expense, equipment maintenance contracts, equipment rent expense
and vehicle expense of $19,001, $35,200, $12,248 and $4,293, respectively,
offset by a decrease in equipment repair expense of $25,572. Data processing
expense increased $68,019 due primarily to the addition of an on-line collection
system and higher ATM network expenses. FDIC insurance increased $38,233 as the
Federal Deposit Insurance Corporation levied additional assessments on the
deposits of all banks insured by its Bank Insurance Fund and also due to
premiums on acquired SAIF insured deposits. Advertising expense decreased
$46,625 to $150,708 from $197,333 for the same period in 1996. Other operating
expenses increased $561,885 from $1,642,006 in 1996 to $2,203,891 in 1997. A
significant portion of this increase is attributable to approximately $289,000
in unrecoverable charges recognized from transactions with two of NorthSide
Bank's merchant credit card customers. Although additional losses may be
incurred, it is anticipated that any future charges related to these customers
will not have any material effect on the Corporation's financial results. Also
contributing to the increase in other operating expenses was an increase in
deposit premium amortization expense of $134,935 related to deposits acquired
from another financial institution in December, 1996 and an increase in dealer
reserves and commissions of $120,893 resulting from the increased volume of
indirect automobile loans originated in 1997. Increases in postage, telephone,
legal expenses, promotions, Pennsylvania shares tax and Federal Reserve service
charges of $18,133, $18,596, $17,292, $21,400, $18,426 and $30,315,
respectively, also contributed to the overall increase. These increases were
partially offset by decreases in lease dealer commissions,
 
                                       27
<PAGE>   25
 
NSD BANCORP
           ---------------------------------------------------------------------
 
asset recovery expense, demand deposit account losses and teller shortages of
$33,396, $8,925, $16,542 and $9,800, respectively.
 
Total other expenses increased $194,025 from $7,958,632 in 1995 to $8,152,657 in
1996. Salary and employee benefits increased $88,025 to $4,015,567, compared to
$3,927,542 in 1995. Salary expense increased $56,421 due to normal inflation
adjustments and growth of the organization. Employee health insurance premiums
also increased by $15,509. An increase in the employer portion of payroll taxes
of $6,719 corresponded to the increase in salary expense and an increase in
temporary employee expense of $8,906 also contributed to the overall increase.
Offsetting these increases was a slight decline in retirement plan related
expenses of $7,526.
 
Occupancy expense increased $53,230 to $766,869 in 1996 from $713,639 in 1995
primarily due to scheduled additional building and parking lot maintenance
performed at several branch locations. Equipment and supplies expense increased
$108,261 during 1996 due to an increase in depreciation expense of $67,874
primarily related to additional platform and automated teller equipment placed
in service during the fourth quarter of 1995 and in the first quarter of 1996.
Also contributing were increases in equipment maintenance contracts, equipment
repairs and office expense of $12,032, $7,180 and $28,559, respectively, during
1996. Data processing expense increased $13,007 to $507,826 for 1996, compared
to $494,825 for 1995. FDIC insurance expense decreased to $2,000 in 1996, down
from $245,061 in 1995. This decrease is due to a reduction in NorthSide Bank's
FDIC insurance premium from $0.23 per $100 in deposits to a nominal quarterly
assessment of $500 as the Bank is classified by regulator's as
"well-capitalized." Advertising expense increased $29,848 during 1996, from
$167,485 in 1995 to $197,333 in 1996. This increase is due primarily to greater
emphasis on advertising campaigns to develop market awareness and specific
deposit product promotions. Other operating expenses increased to $1,642,006 for
1996, up from $1,497,285 for 1995. The increase is the result of an $11,338
increase in checkbook costs incurred corresponding to the significant growth in
the Bank's Premier Money Market Account product. Also contributing to the
increase in other operating expenses were increases in postage, subscriptions,
legal and entertainment expenses of $12,842, $21,503, $13,385 and $18,806,
respectively. The increase in average shareholders' equity and average assets
during 1996 resulted in an increase in Pennsylvania shares tax of $17,588.
Non-recurring demand deposit account losses, primarily involving three unrelated
transactions, added $40,891 to expense while net teller shortages increased
$18,568. These increases were partially offset by a reduction in asset recovery
expense of $33,813 attributable to expenses incurred in the sale of other real
estate owned during 1995 and a $21,843 reduction in financial services expense.
 
In 1997, the Corporation initiated the process of analyzing its information
systems and vendor supplied application systems to address any year 2000 issues
relating to its business or operations. The process involves internal testing or
obtaining certification of compliance then, if necessary, modifying or replacing
certain hardware and software systems maintained by the Corporation as well as
those provided by outside vendors. Management expects to have substantially all
systems and applications compliant or near completion of any necessary remedial
actions by the end of 1998. Failure of third parties or the Corporation to
adequately resolve year 2000 issues could cause a disruption of operations
resulting in additional unanticipated operating costs. Credit quality could by
affected to the extent customer's financial positions are weakened as a result
of year 2000 issues.
 
It is estimated that the total cumulative cost of this process will approximate
$570,000 which includes costs associated with modifying systems as well as the
cost of purchasing or leasing certain hardware and software. Purchased hardware
and software will be capitalized in accordance with normal policy. Personnel and
all other costs related to this process are being expensed as incurred.
 
INCOME TAXES
 
The Corporation recorded an income tax provision of $1,843,450, $1,624,344 and
$1,500,556 in 1997, 1996 and 1995, respectively. The increase in the tax
provision was the result of higher pre-tax earnings. The effective tax rates for
1997, 1996 and 1995 were 31.4%, 30.5% and 29.0% respectively. These rates were
below the 34% statutory tax rate primarily due to the tax benefits from
tax-exempt interest income. The increases in the effective tax rates during 1997
and 1996 were primarily the result of reduced tax-exempt earnings.
 
                                       28
<PAGE>   26
 
--------------------------------------------------------------------------------
 
FINANCIAL CONDITION
 
The Corporation's total assets increased $14,916,010 from $305,413,560 at
December 31, 1996 to $320,329,570 at December 31, 1997. Securities available for
sale increased $2,510,874 while securities held to maturity decreased
$4,029,633. Loans available for sale increased to $3,419,440 at December 31,
1997 from $2,943,248 at December 31, 1996. The loans available for sale at
December 31, 1997 and 1996 were entirely comprised of student loans. Net loans
increased from $207,315,010 at December 31, 1996 to $228,835,066 at December 31,
1997. The significant loan growth was funded primarily by deposit growth and
borrowings during 1997.
 
INVESTMENT SECURITIES
 
The following summarizes the book value (excluding net unrealized holding gains)
and weighted average yields of the Corporation's securities available for sale
at December 31, 1997 by contractual maturity. Mortgage-backed securities are
presented in the schedule below at contractual maturity without consideration
given to scheduled repayments or accelerated prepayments.
 
<TABLE>
<CAPTION>
                                                         AFTER ONE BUT        AFTER FIVE BUT
                                  WITHIN ONE YEAR      WITHIN FIVE YEARS     WITHIN TEN YEARS      AFTER TEN YEARS
                                 ------------------   -------------------   ------------------   -------------------
                                   AMOUNT     YIELD     AMOUNT      YIELD     AMOUNT     YIELD     AMOUNT      YIELD
                                 ----------   -----   -----------   -----   ----------   -----   -----------   -----
<S>                              <C>          <C>     <C>           <C>     <C>          <C>     <C>           <C>
U.S. Treasury Securities         $3,003,283   5.79%   $ 3,196,025   6.24%       --        --         --         --
Obligations of U.S. Government
  Agencies                           --        --      10,995,119   6.51    $8,622,561   6.72%       --         --
Mortgage-Backed Securities           --        --         --         --         --        --     $27,425,832    7.16%
Obligations of State and
  Political Subdivisions             --        --         --         --        544,955   5.07        --         --
Marketable Equity Securities         --                   --                    --        --       1,502,737   11.54
                                 ----------   ----    -----------   ----    ----------   ----    -----------   -----
                                 $3,003,283   5.79%   $14,191,144   6.45%   $9,167,516   6.62%   $28,928,569    7.38%
                                 ==========   ====    ===========   ====    ==========   ====    ===========   =====
</TABLE>
 
The following summarizes the book value and weighted average yields of the
Corporation's securities held to maturity at December 31, 1997 by contractual
maturity:
 
<TABLE>
<CAPTION>
                                                         AFTER ONE BUT        AFTER FIVE BUT
                                  WITHIN ONE YEAR      WITHIN FIVE YEARS     WITHIN TEN YEARS      AFTER TEN YEARS
                                 ------------------   -------------------   ------------------   -------------------
                                   AMOUNT     YIELD     AMOUNT      YIELD     AMOUNT     YIELD     AMOUNT      YIELD
                                 ----------   -----   -----------   -----   ----------   -----   -----------   -----
<S>                              <C>          <C>     <C>           <C>     <C>          <C>     <C>           <C>
Obligations of State and
  Political Subdivisions         $   24,966   6.19%   $ 2,825,000   5.95%   $2,187,353   6.00%       --         --
Corporate Bonds                      --        --         --         --        250,000   7.50        --         --
                                 ----------   ----    -----------   ----    ----------   ----    -----------   -----
                                 $   24,966   6.19%   $ 2,825,000   5.95%   $2,437,353   6.15%       --         --
                                 ==========   ====    ===========   ====    ==========   ====    ===========   =====
</TABLE>
 
All yields represent weighted average yields computed on the basis of cost,
adjusted for amortization of premium and accretion of discount. For purposes of
calculating yields on obligations of state and political subdivisions and
marketable equity securities, taxable equivalent adjustments were included to
provide a basis for comparison. The taxable equivalent adjustments were
calculated using the current statutory federal income tax rate of 34%. For
federal income tax purposes, corporations were allowed to exclude 70% of
dividend income in 1997.
 
LOANS
 
Loans net of deferred fees, increased $21,933,456 during 1997, from $211,106,328
at December 31, 1996 to $233,039,784 at December 31, 1997. Improved commercial
loan development resulted in an increase of $7,439,451 in commercial, financial
and agricultural loans during 1997. Partially contributing to this increase was
an increase of $1,755,742 in automobile dealer floor plan loans during 1997.
Increases in indirect automobile loans contributed the majority of the overall
in increase in consumer loans to individuals of $15,250,028 during
 
                                       29
<PAGE>   27
 
NSD BANCORP
           ---------------------------------------------------------------------
 
1997. The overall increase in loans, net of deferred fees was offset slightly by
a decrease of $1,515,782 in residential mortgage loans during 1997.
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                ------------------------------------------------------------------------
                                    1997           1996           1995           1994           1993
                                ------------   ------------   ------------   ------------   ------------
<S>                             <C>            <C>            <C>            <C>            <C>
Residential Mortgage Loans      $ 55,125,240   $ 56,641,022   $ 35,830,068   $ 30,906,568   $ 21,331,840
Non-Residential Mortgage Loans    29,082,042     29,167,461     30,300,560     28,283,368     28,870,838
Commercial, Financial and
  Agricultural Loans              38,134,540     30,695,089     35,037,875     34,699,061     34,403,782
Consumer Loans to Individuals     95,357,873     80,107,845     67,709,305     63,021,691     59,543,438
Lines of Credit                    5,487,417      5,433,560      5,681,628      5,528,808      5,541,594
Lease Financing                    8,900,409      8,248,698      8,797,060      8,171,420      5,809,844
Nonaccrual Loans                   1,355,617      1,234,467        443,727        516,244        105,716
                                ------------   ------------   ------------   ------------   ------------
  Total Loans                    233,443,138    211,528,112    183,397,223    171,127,160    155,607,052
Deferred Fees                       (403,354)      (421,784)      (459,234)      (461,020)      (426,390)
                                ------------   ------------   ------------   ------------   ------------
Loans, Net of Deferred Fees      233,039,784    211,106,328    182,937,989    170,666,140    155,180,662
Unearned Income                   (1,290,389)    (1,212,814)    (1,402,670)    (1,517,598)    (1,216,782)
                                ------------   ------------   ------------   ------------   ------------
  Total Loans, Net of Unearned
     Income and Fees             231,749,395    209,893,514    181,535,319    169,148,542    153,963,880
Allowance for Loan Losses         (2,914,329)    (2,578,504)    (2,676,352)    (2,281,598)    (1,865,704)
                                ------------   ------------   ------------   ------------   ------------
Net Loans                       $228,835,066   $207,315,010   $178,858,957   $166,866,944   $152,098,176
                                ============   ============   ============   ============   ============
</TABLE>
 
The following table of commercial financial and agricultural loans shows the
Corporation's loan maturities, net of deferred fees, as of December 31, 1997 (in
thousands).
 
<TABLE>
<CAPTION>
                                                                AFTER ONE
                                                     WITHIN     BUT WITHIN      AFTER
                                                    ONE YEAR    FIVE YEARS    FIVE YEARS
                                                    --------    ----------    ----------
<S>                                                 <C>         <C>           <C>
Commercial, Financial and Agricultural              $24,558      $16,739       $16,368
</TABLE>
 
Commercial, financial and agricultural loans approximating $20 million have
floating or adjustable interest rates.
 
NON-PERFORMING ASSETS
 
At December 31, 1997, nonaccrual loans were $1,355,617, compared to $1,234,467
in 1996. The $121,150 increase during 1997 is considered to be normal given the
increase in outstanding loans during 1997. Other real estate owned decreased
$189,849 to $182,133 during 1997 from $371,982 in 1996. Loans 90 days past due
and still accruing interest increased $597,759 during 1997 and represent only
 .5% of net loans at December 31, 1997.
 
The current quality of the loan portfolio can be demonstrated by the following
table which details total non-performing loans and past due loans:
 
<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                            ------------------------------------------------------------
                                               1997         1996         1995         1994        1993
                                            ----------   ----------   ----------   ----------   --------
<S>                                         <C>          <C>          <C>          <C>          <C>
Nonaccrual Loans                            $1,355,617   $1,234,467   $  443,727   $  516,244   $105,716
Other Real Estate Owned                        182,133      371,982       43,966      221,770    570,479
Other Assets Held for Sale                      69,710       60,705       31,775       18,137     28,180
                                            ----------   ----------   ----------   ----------   --------
       Total Non-Performing Assets           1,607,460    1,667,154      519,468      756,151    704,375
Loans 90 Days Past Due and Still Accruing    1,213,225      615,466      801,743      802,552    292,909
                                            ----------   ----------   ----------   ----------   --------
       Total Non-Performing Assets and
          Past Due Loans                    $2,820,685   $2,282,620   $1,321,211   $1,558,703   $997,284
                                            ==========   ==========   ==========   ==========   ========
</TABLE>
 
                                       30
<PAGE>   28
 
--------------------------------------------------------------------------------
 
RESERVE FOR LOAN LOSSES
 
The Corporation's policies provide for loan loss reserves to adequately protect
against potential unidentified and/or identified loan losses consistent with
sound and prudent banking practice. These policies consider historical data of
actual losses and loans classified by specific loan credit evaluation. They also
consider loan delinquency and economic conditions.
 
The Corporation follows a loan review program to evaluate the credit risk in its
loan portfolio for substantially all loans greater than $50,000. Through the
loan review process, the Corporation maintains a classified account list which,
along with the delinquency list of loans, helps management assess the overall
quality of the loan portfolio and the adequacy of the reserve for loan losses.
Loans classified as "substandard" are those loans with clear and defined
weaknesses such as highly leveraged positions, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may jeopardize
recoverability of the asset. Loans classified as "doubtful" are those loans
which have characteristics similar to substandard accounts but with an increased
risk that a loss may occur, or at least a portion of the loan may require a
charge-off if immediately liquidated. Although loans classified as substandard
do not duplicate loans classified as doubtful, both substandard and doubtful
loans include some loans that are delinquent or on nonaccrual status. As of
December 31, 1997, substandard loans totaled $761,061 and doubtful loans totaled
$899,718. All substandard and doubtful loans were designated as delinquent or
nonaccrual as of December 31, 1997.
 
In addition to its classified account list and delinquency list of loans, the
Corporation maintains a separate "watch list" which further aids the Corporation
in monitoring its loan portfolio. Watch list loans show warning elements where
the present status portrays one or more deficiencies that require attention in
the short run or where pertinent ratios of the loan account have weakened to a
point where more frequent monitoring is warranted. These loans do not have all
the characteristics of a classified loan (substandard or doubtful) but do show
weakened elements as compared with those of a satisfactory credit. The
Corporation reviews these loans to assist in assessing the adequacy of the
reserve for loan losses.
 
In order to determine the adequacy of the reserve for loan losses, management
considers the risk classification or delinquency status of loans and other
factors. Specific reserves are established for credits which management believes
require reserves greater than those allocated according to their classification
or delinquent status. For smaller loans which are not individually reviewed,
management considers delinquencies, historical charge-off experience and
economic conditions in determining the amount to be allocated to the allowance.
 
The following schedule sets forth the allocation of the reserve for loan losses
among individual loan categories. A portion is allocated to general risk to
protect the Corporation against potential yet undetermined losses and is based
on historical experience. The entire reserve for loan losses is available to
absorb future loan losses in any category.
 
<TABLE>
<CAPTION>
                                                            FOR THE YEARS ENDED DECEMBER 31,
                                   ----------------------------------------------------------------------------------
                                        1997             1996             1995             1994             1993
                                   --------------   --------------   --------------   --------------   --------------
                                   AMOUNT   TOTAL   AMOUNT   TOTAL   AMOUNT   TOTAL   AMOUNT   TOTAL   AMOUNT   TOTAL
                                   ------   -----   ------   -----   ------   -----   ------   -----   ------   -----
<S>                                <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
Commercial, Financial and
  Agricultural Loans               $ 926    31.8%   $ 782    30.3%   $ 969    36.2%   $ 891    39.0%   $ 788    42.2%
Real Estate Mortgage Loans           320    11.0      358    13.9      388    14.5      350    16.9      350    18.8
Installment Loans                    991    34.0      819    31.8      679    25.4      646    28.3      547    29.3
Lease Financing                      239     8.2      229     8.9      180     6.7      136     6.0       98     5.3
Allocation to General Risk           438    15.0      391    15.1      460    17.2      224     9.8       83     4.4
                                   ------           ------           ------           ------           ------
  Total                            $2,914           $2,579           $2,676           $2,282           $1,866
                                   ======           ======           ======           ======           ======
</TABLE>
 
                                       31
<PAGE>   29
 
NSD BANCORP
           ---------------------------------------------------------------------
 
The Corporation's net charge-offs by loan type and changes in the reserve for
loan losses for each of the past five years were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                        1997      1996      1995      1994      1993
                                                       ------    ------    ------    ------    ------
<S>                                                    <C>       <C>       <C>       <C>       <C>
Reserve for Loan Losses at Beginning of Year           $2,579    $2,676    $2,282    $1,866    $1,662
Charge-Offs:
  Commercial, Financial and Agricultural Loans             78       546       155        53       214
  Real Estate Mortgage Loans                               30      --        --        --          91
  Installment Loans                                       367       262       321       168       167
  Lease Financing                                          48        36        29      --        --
                                                       ------    ------    ------    ------    ------
     Total Charge-Offs                                    523       844       505       221       472
Recoveries:
  Commercial, Financial and Agricultural Loans             95         5       329        72        59
  Real Estate Mortgage Loans                                2         2         2         2        62
  Installment Loans                                        42        89        38       103        84
  Lease Financing                                        --        --           1      --        --
                                                       ------    ------    ------    ------    ------
     Total Recoveries                                     139        96       370       177       205
                                                       ------    ------    ------    ------    ------
Net Charge-Offs                                           384       748       135        44       267
Provision for Loan Losses                                 720       650       530       460       471
                                                       ------    ------    ------    ------    ------
Reserve for Loan Losses at End of Year                 $2,914    $2,579    $2,676    $2,282    $1,866
                                                       ======    ======    ======    ======    ======
Net Loan Charge-Offs to Average Loans                    0.17%     0.38%     0.08%     0.03%     0.19%
Loan Loss Reserve to Non-Performing Assets             181.30%   154.67%   515.21%   301.74%   264.87%
</TABLE>
 
LIABILITIES
 
Total liabilities were $289,989,999 at December 31, 1997, an increase of
$11,896,692 from December 31, 1996. The increases in total deposits and total
borrowed funds of $7,739,809 and $3,528,816, respectively, were used to fund
growth in the loan portfolio experienced during 1997.
 
DEPOSITS
 
Total deposits increased $7,739,809 from $260,986,805 at December 31, 1996 to
$268,726,614 at December 31, 1997. Non-interest bearing deposits increased
$6,771,824 during 1997 due to continued emphasis on the development of small
business relationships. The Corporation experienced a slight increase of
$967,985 in interest bearing deposits during 1997.
 
Average deposits and the average cost of deposits for the past three years were
as follows:
 
<TABLE>
<CAPTION>
                                                  1997                     1996                     1995
                                         ----------------------   ----------------------   ----------------------
                                           AVERAGE      AVERAGE     AVERAGE      AVERAGE     AVERAGE      AVERAGE
                                           BALANCE       RATE       BALANCE       RATE       BALANCE       RATE
                                         ------------    ----     ------------    ----     ------------    ----
<S>                                      <C>            <C>       <C>            <C>       <C>            <C>
Non-Interest Bearing Demand              $ 49,144,741    --       $ 45,410,862    --       $ 40,177,135    --
Interest Bearing Demand                    80,482,448    3.17%      67,611,775    2.91%      52,266,567    2.24%
Savings                                    37,025,880    2.69       37,750,180    3.00       41,165,175    2.97
Time Deposits                              94,732,134    5.90       89,352,483    5.60       81,594,789    5.85
                                         ------------    ----     ------------    ----     ------------    ----
  Total Deposits                         $261,385,203    3.49%    $240,125,300    3.38%    $215,203,666    3.34%
                                         ============    ====     ============    ====     ============    ====
</TABLE>
 
                                       32
<PAGE>   30
 
--------------------------------------------------------------------------------
 
At December 31, 1997, outstanding Certificates of Deposit of $100,000 or more
are scheduled to mature as follows (in thousands):
 
<TABLE>
<S>                                                  <C>
Three Months or Less                                 $ 4,377
Over Three Through Six Months                          1,079
Over Six Through Twelve Months                         1,721
Over Twelve Months                                     3,685
                                                     -------
  Total                                              $10,862
                                                     =======
</TABLE>
 
REPURCHASE AGREEMENTS
 
At December 31, 1997, the Corporation had no outstanding repurchase agreements.
 
BORROWED FUNDS
 
At December 31, 1997, the Corporation had outstanding borrowings of $15,000,000,
of which $6,000,000 is due during 1998. The Corporation borrowed these funds as
part of a community investment program to finance mortgage loans to lower income
borrowers and to provide liquidity for specific asset-liability management
strategies. Advances from the Federal Home Loan Bank are collateralized by
qualifying securities and loans and are subject to restrictions or penalties
related to prepayments.
 
SHAREHOLDERS' EQUITY
 
Consolidated shareholders' equity increased $3,019,318 from $27,320,253 at
December 31, 1996 to $30,339,571 at December 31, 1997. This increase was the
result of earnings retention, the issuance of new shares of common stock for the
exercise of employee/director stock options and an increase in the net
unrealized holding gains on securities available for sale offset by dividends
paid to shareholders.
 
The Corporation continues to maintain a strong capital position. Risk-based
capital ratios exceed current regulatory requirements. The Corporation's Tier I
risk-based capital ratio at December 31, 1997 was 12.53% compared to 12.41% at
December 31, 1996. The Corporation's total risk-based capital ratio at December
31, 1997 was 13.78% compared to 13.66% at December 31, 1996. Regulatory
requirements for Tier I and total risk-based capital ratios are 4.00% and 8.00%,
respectively.
 
SALES PRICE AND CASH DIVIDENDS PER SHARE
 
The following table sets forth the high and low sale prices and cash dividends
declared for the Corporation's common stock as reported by the NASDAQ National
Market System. Prices and dividends set forth below have been adjusted to
reflect a 3-for-2 stock split paid on December 31, 1997 to shareholders of
record on December 1, 1997, a 5% stock dividend paid on May 30, 1997 to
shareholders of record on April 30, 1997 and a 5% stock dividend paid on May 31,
1996 to shareholders of record on April 30, 1996.
 
<TABLE>
<CAPTION>
                                              SALES PRICE     CASH DIVIDENDS
                                            ---------------      DECLARED
                                             HIGH     LOW       PER SHARE
                                             ----     ---       ---------
<S>                                         <C>      <C>      <C>
1997
First Quarter                               $18.89   $16.51       $0.159
Second Quarter                               19.92    16.67        0.167
Third Quarter                                22.83    18.33        0.167
Fourth Quarter                               35.00    21.50        0.166
 
1996
First Quarter                               $16.33   $14.51       $0.121
Second Quarter                               16.35    13.61        0.127
Third Quarter                                15.87    14.60        0.127
Fourth Quarter                               17.94    14.92        0.190
</TABLE>
 
                                       33
<PAGE>   31
 
NSD BANCORP
           ---------------------------------------------------------------------
 
MARKET RISK
 
The Corporation operates as a traditional commercial banking institution
investing in securities and loans with funding primarily provided by retail
deposits and wholesale borrowings. The primary source of revenue is the net
spread between interest earned on investments and the cost of related funding.
Inherent in this business is market risk or the risk of an adverse impact on
earnings from changes in market interest rates. Other types of market risks such
as foreign currency exchange rate risk and commodity price risk do not arise in
the normal course of the Corporation's business activities. The Corporation has
an asset/liability management process in place to monitor and control risks
associated with changing interest rates and the potential impact on future
financial performance. Management's objective is to provide an optimum return
while maintaining an appropriate mix of earning assets and funding sources
consistent with acceptable exposure to market risk. Ultimately, the Corporation
seeks to produce consistent profitability in all interest rate environments.
 
Simulation modeling enables management to quantify the extent of the
Corporation's interest rate exposure by forecasting how net interest income, and
consequently net income, varies under alternative interest rate scenarios based
on the Corporation's current position. At December 31, 1997, a simulation
analysis assuming a one-time 200 basis point increase in interest rates, results
in a negative impact of less than 1.5% or approximately $200,000 on projected
net interest income over a one-year period. Conversely, a 200 basis point
decrease in interest rates results in an increase in projected net interest
income by slightly more than 1.0% or approximately $160,000 over the same
period. These findings are the result of normal projected growth in interest
earning assets and interest related liability levels based on the Corporation's
position at December 31, 1997. The results reflect the impact of a relatively
short repricing or rate adjustment period of the Corporation's loan products and
the effect of investment security prepayments matched with the relative short
term nature of interest sensitive deposit and borrowing liabilities. In a rising
rate environment, the increased cost of funding would be offset by increases in
yields on prime rate, LIBOR and Treasury indexed loans and securities and the
repricing of significant cashflow in the consumer loan portfolio. In a declining
rate environment, the declining yield on loans and securities due to prepayments
and index adjustments would be offset by a shortening of deposit maturities and
the repricing of a significant interest bearing demand deposit portfolio. In any
event, a sudden, substantial and protracted shift in interest rates may
adversely impact the Corporation's earnings to the extent that the interest
rates on interest earning assets and interest earning liabilities change at
varying frequencies and market forces may limit the ability to appropriately
respond to such changes.
 
Interest rate risk is also analyzed by comparing the maturity and repricing
relationships between interest earning assets and interest bearing liabilities
at specific points in time or "GAP" analysis. Management, however, recognizes
that a simplified GAP analysis may not adequately reflect the degree to which
asset and liabilities with similar repricing characteristics react to changes in
market interest rates. In addition, repricing characteristics identified under a
specific GAP position may vary significantly under different interest rate
environments. Therefore, simulation modeling is also performed to evaluate the
extent and direction of the Corporation's interest rate exposure under upward or
downward changes in interest rates.
 
Based upon historical trends, the Corporation has typically considered all
demand and savings deposits as core deposits and relatively non-rate sensitive.
The following table has been prepared, as required, presenting interest bearing
demand deposits and savings deposits as repricing within the earliest period. As
a result, the table reflects a negative, or liability sensitive, cumulative
interest GAP position of $63,431 in the first one-year GAP. Results of
simulation modeling and historical experience indicate, however, that the
overall potential effect on net interest income should not have an adverse
result on future financial performance.
 
                                       34
<PAGE>   32
 
--------------------------------------------------------------------------------
 
The following table summarizes the Corporation's interest rate sensitivity or
GAP position, which is the estimated aggregate maturity/repricing structure of
interest earning assets and interest bearing liabilities, at December 31, 1997
(in thousands):
 
<TABLE>
<CAPTION>
                                      0-3      OVER 3-6   OVER 6-12   OVER 1-5    OVER 5
                                     MONTHS     MONTHS     MONTHS      YEARS      YEARS      TOTAL
                                    --------   --------   ---------   --------   --------   --------
<S>                                 <C>        <C>        <C>         <C>        <C>        <C>
Loans, Net of Unearned Income       $ 24,685   $ 15,951   $ 20,395    $ 64,447   $106,777   $232,255
Securities Available for Sale          6,093      5,740      4,013      18,858     23,475     58,179
Securities Held to Maturity               --         10        215       2,995      2,067      5,287
Other Interest Earning Assets          2,000         --         --          --         --      2,000
Non-Interest Earning Assets               --         --         --          --     22,609     22,609
                                    --------   --------   --------    --------   --------   --------
     Total Assets                   $ 32,778   $ 21,701   $ 24,623    $ 86,300   $154,928   $320,330
                                    ========   ========   ========    ========   ========   ========
 
Interest Bearing Demand Deposits    $ 25,325   $ 11,141   $ 26,023    $ 20,189         --   $ 82,678
Savings Deposits                       7,348      3,674      3,674      22,043         --     36,739
Time Deposits <$100,000               17,266     15,306     13,777      30,172      3,714     80,235
Time Deposits >$100,000                5,477      1,079      1,721       3,170        515     11,962
Repurchase Agreements                     --         --         --          --         --         --
Borrowed Funds                         1,000      5,000         --       9,000         --     15,000
Other Liabilities                         --         --      4,722          --     58,654     63,376
Shareholders' Equity                      --         --         --          --     30,340     30,340
                                    --------   --------   --------    --------   --------   --------
     Total Liabilities and
       Shareholders' Equity         $ 56,416   $ 36,200   $ 49,917    $ 84,574   $ 93,223   $320,330
                                    ========   ========   ========    ========   ========   ========
Period GAP                          $(23,638)  $(14,499)  $(25,294)   $  1,726   $(61,705)
Cumulative GAP                      $(23,638)  $(38,137)  $(63,431)   $(61,705)  $  --
</TABLE>
 
LIQUIDITY AND CASH FLOWS
 
Liquidity is the ability to generate cash flows or obtain funds at a reasonable
cost to satisfy customer credit needs and the requirements of depositors. Liquid
assets include cash, federal funds sold, investments maturing in less than one
year and loan repayments. The Corporation's ability to obtain deposits and
purchase funds at reasonable rates determines its liability liquidity. As a
result of liquid asset management and the ability to generate liquidity through
deposit funding, management feels that the Corporation maintains overall
liquidity sufficient to satisfy customer needs. In the event that such measures
are not sufficient, the Corporation has established alternative sources of funds
in the form of borrowing and repurchase agreements.
 
Operating activities provided net cash of $4,679,545 during 1997, compared to
$4,910,907 and $4,967,522 at December 31, 1996 and 1995, respectively. The
primary source of operating cash flows for 1997 was net income adjusted for the
effect of noncash expenses such as the provision for loan losses, depreciation
of premises and equipment and amortization of intangible assets.
 
Investing activities used cash flows of $19,610,435 during 1997, compared to
$37,778,471 at December 31, 1996 and $18,704,984 at December 31, 1995. A
significant portion of borrowings were used to fund the loan growth experienced
during 1997. Proceeds from the sales, repayments and maturities of investment
securities available for sale and investment securities held to maturity were
reinvested primarily in investment securities available for sale. Cash flows
from investing activities were also primarily used to fund the growth in the
loan portfolio during 1996 and 1995.
 
Financing activities provided cash of $9,675,632, $41,664,124 and $12,218,393 at
December 31, 1997, 1996 and 1995, respectively. An increase in demand deposits,
savings and borrowings provided cash for 1997 while cash was used by payments of
cash dividends, repayment of repurchase agreements and a slight decrease in
certificates of deposit. During 1996, an increase in demand deposits, savings,
certificates of deposit and borrowings provided cash, while cash was used by
payments of cash dividends. Net proceeds from borrowings were used to fund loan
growth experienced during 1997 and 1996.
 
                                       35