S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the year ended December 31, 2001.

Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Options, warrants and other potentially dilutive securities are excluded from the basic calculation, but are included in computing diluted earnings per share. Average shares outstanding for computing basic earnings per share were 26,580,679 and 26,926,253 for the nine-month periods ending September 30, 2002 and 2001, respectively. Average shares outstanding for computing dilutive earnings per share were 26,792,489 and 27,097,480 for the nine-month periods ending September 30, 2002 and 2001, respectively. In computing dilutive earnings per share, average shares outstanding have been increased by the common stock equivalents relating to S&T's available stock options.

Components of comprehensive income for S&T include net income and unrealized gains or losses on S&T's available-for-sale securities. During the nine months ended September 30, 2002 and 2001, total comprehensive income amounted to $28,424,000 and $36,507,000.

NOTE B - ACQUISITIONS

Pursuant to the definitive agreement signed by S&T Bancorp, Inc. (S&T) and Evergreen Insurance Associates, Inc. (Evergreen) on July 2, 2002, S&T completed its acquisition of Evergreen on August 1, 2002. The acquisition was accounted for under the purchase method of accounting. The acquisition had an aggregate transaction value of $2.4 million. As a result of the transaction, $1.1 million of purchase intangible ($0.7 million, net of taxes) was recorded and will be amortized over 10 years. Estimated goodwill arising from the transaction totaled $1.3 million, which will be accounted for in accordance with Financial Accounting Standards Board Statement 142, Goodwill and Other Intangible Assets.

Pursuant to the definitive agreement signed by S&T and Peoples Financial Corp., Inc. (Peoples) on March 20, 2002, S&T completed its acquisition of Peoples on September 7, 2002. The acquisition was accounted for under the purchase method of accounting. The shareholders of Peoples received $52.50 per share in cash. The acquisition had an aggregate transaction value of $87.4 million.

At the acquisition date, the fair value of Peoples net assets totaled approximately $52.0 million, which included cash of $42.6 million, loans receivable with a fair value of $238.1 million, investment securities and other assets of $69.7 million, deposits with a fair value of $295.4 million and other liabilities of $3.0 million. As a result of the transaction, $2.7 million of core deposit intangible ($1.8 million, net of taxes) was recorded and will be amortized over 11 years. Additionally, the fair value adjustments required by purchase accounting rules consisted of $2.7 million ($1.8 million, net of taxes) for deposits and will be amortized over an estimated 6 years and $2.8 million ($1.8 million, net of taxes) for loans and will be amortized over an estimated 11 years. The resulting estimated goodwill arising from the transaction totaled $43.4 million, which will be accounted for in accordance with Financial Accounting Standards Board Statement 142, Goodwill and Other Intangible Assets.

Pro forma combined historical results of operations for the current year up to the most recent interim statement of financial condition date as though S&T and Peoples had been combined at the beginning of the year are presented below. These unaudited condensed pro forma combined statements of operations are presented as if the acquisition had been effective on January 1, 2002 and 2001, respectively.

The unaudited condensed pro forma combined statements of operations include the estimated effect of pro forma adjustments that would have been realized had the Peoples acquisition actually occurred at the beginning of the respective periods.


S&T BANCORP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - ACQUISITION
Continued

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of Long-Lived Assets and Long-Lived Assets to Be Disposed. This statement is effective for fiscal years beginning after December 15, 2001. Management has evaluated the impact of this statement and has determined that there is no material effect on S&T's financial position or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement. S&T plans to adopt the provisions of this Statement related to the rescission of Statement 4 in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses the accounting and reporting for one-time employee termination benefits, certain contract termination costs, and other costs associated with exit or disposal activities such as facility closings or consolidations and employee relocations. The standard is effective for exit or disposal activities initiated after December 31, 2002. S&T plans to adopt SFAS No. 146 prospectively as of January 1, 2003.

In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions. This new Standard, which becomes effective October 1, 2002, provides interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Accordingly, the requirement to amortize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverabilit y test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. In accordance with FAS No. 147, S&T may cease amortization of certain intangible assets upon completion of its analysis of FAS No. 147 effective October 1, 2002.

In October 2002, the FASB issued an Exposure Draft, Accounting for Stock-Based Compensation-Transition and Disclosure, that would amend FASB Statement No. 123, Accounting for Stock-Based Compensation. The purpose of the proposed amendment is to i) enable companies that choose to adopt the fair value based method to report the full effect of employee stock options in their financial statements immediately upon adoption and ii) make available to investors more frequent disclosure about the cost of employee stock options. The proposed changes would provide three methods of transition for companies that voluntarily adopt the fair value method of recording expenses relating to employee stock options. In addition, the amendment proposes more prominent disclosures about the cost of stock-based employee compensation and an increase in the frequency of those disclosures to include publication in quarterly financial statements. Currently, companies are not required to present stock option disclosures in interim fin ancial statements. The FASB plans to issue the amendment to Statement 123 by the end of 2002 and its provisions would be effective immediately upon issuance. The proposed disclosures to be provided in annual financial statements would be required for fiscal years ending after December 15, 2002. The proposed disclosures to be provided in interim financial information would be required as of the first interim period beginning after December 15, 2002, with earlier application encouraged.

NOTE D - GOODWILL AND OTHER INTANGIBLES

S&T's balance sheet shows both tangible assets (such as loans, buildings, and investments) and intangible assets (such as goodwill and core deposit intangibles). Goodwill resulting from the Peoples and Evergreen acquisitions will be accounted for in accordance with Statement 142 and will be periodically reviewed for impairment as required. The remaining goodwill and other intangibles are comprised of the 1998 purchase of a branch office in Clarion, Pennsylvania with $39.0 million in deposits and other mortgage servicing assets.

NOTE E - SECURITIES

During the period ended September 30, 2002, S&T realized net gains of $5,641,854 from its available for sale securities portfolio. S&T may receive an exchange of shares relative to mergers; gains and losses are recognized on shares held of acquired institutions in accordance with Emerging Issues Task Force #91-5, Nonmonetary Exchange of Cost-Method Investments (EITF 91-5). At September 30, 2002, $0.8 million was the result of EITF 91-5.

The following table represents S&T's investment in loans considered to be impaired and related information on those impaired loans at September 30, 2002 and December 31, 2001.

NOTE G - FINANCIAL INSTRUMENTS

S&T, in the normal course of business, commits to extend credit and issue standby letters of credit. The obligations are not recorded in S&T's financial statements. Loan commitments and standby letters of credit are subject to S&T's normal credit underwriting policies and procedures and generally require collateral based upon management's evaluation of each customer's financial condition and ability to satisfy completely the terms of the agreement. S&T's exposure to credit loss in the event the customer does not satisfy the terms of agreement equals the notional amount of the obligation less the value of any collateral. Unfunded loan commitments totaled $516,158,000 and obligations under standby letters of credit totaled $200,640,000 at September 30, 2002.

NOTE H - LITIGATION

S&T, in the normal course of business, is subject to various legal proceedings in which claims for monetary damages are asserted. No material losses are anticipated by management as a result of these legal proceedings.


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

The following discussion and analysis is presented so that shareholders may review in further detail the financial condition and results of operations of S&T Bancorp, Inc. and subsidiaries (S&T). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the selected financial data presented elsewhere in this report.

FINANCIAL CONDITION

Total assets averaged $2.4 billion in the first nine months of 2002 and $2.3 billion for the full year 2001. Average loans increased $42.1 million and average securities and federal funds increased $38.2 million in the first nine months of 2002 compared to the 2001 full year average. Average deposits increased $68.7 million and average borrowings increased $6.7 million. During the third quarter of 2002, S&T acquired Evergreen Insurance, Inc. (Evergreen), a full service insurance agency, and finalized the merger with Peoples Financial Corporation (Peoples), a $330 million community bank. The merger of Peoples had minimal impact on the average balance sheet because this acquisition was consummated late in the third quarter of 2002.

Lending Activity

Average loans increased $42.1 million to $1.7 billion for the nine months ended September 30, 2002 from the 2001 full year average. Changes in the composition of the average loan portfolio during 2002 included increases of $33.7 million of commercial loans and $50.0 million of commercial real estate loans, offset by decreases of $36.3 million of residential mortgages and $5.3 million of installment loans. Total loans at September 30, 2002 increased $338.3 million from December 31, 2001. The increase is attributable to $237.4 million of primarily 1-4 family loans acquired in the Peoples merger. The remaining growth of $100.9 million is internal growth in the commercial loan category of $157.3 million, offset by a decrease in residential mortgage balances as borrowers refinanced portfolio mortgages into the secondary mortgage market.

Real estate construction and commercial loans, including mortgage and industrial, currently comprise 71% of the loan portfolio. Although commercial loans can be an area of higher risk, management believes these risks are mitigated by limiting concentrations and a rigorous underwriting review by loan administration.

Residential mortgage loans currently comprise 24% of the loan portfolio. Residential mortgage lending continued to be a strategic focus for the third quarter of 2002 through our centralized mortgage origination department, product redesign, secondary market activities and the utilization of commission compensated originators. Management believes that S&T is fairly well insulated from the impact of potential future declines in its local real estate market due to its past conservative mortgage lending policies. These policies generally require, for portfolio loans, a maximum term of twenty years for fixed rate mortgages and private mortgage insurance for loans with less than a 20% down payment. At September 30, 2002 the residential mortgage portfolio had a 10% composition of adjustable rate mortgages.

Much of the decline in average residential loans is due to more active participation in the secondary mortgage markets. S&T periodically sells longer-term, lower-yielding 1-4 family mortgages to the Federal National Mortgage Association (FNMA). The rationale for these sales is to mitigate interest rate risk associated with holding long-term residential mortgages in the loan portfolio, to generate fee revenue from servicing, and still maintain the primary customer relationship. During the first nine months of 2002, S&T sold $53.3 million of 1-4 family mortgages to FNMA. S&T will continue to sell longer-term loans to FNMA in the future on a selective basis, especially during periods of lower interest rates.

Consumer installment loans currently comprise 5% of the loan portfolio. Direct auto loans decreased $2.8 million for the nine months ending September 30, 2002 as compared to the 2001 full year average due to lower origination and higher payoff activity.

Loan underwriting standards for S&T are established by a formal policy administered by the S&T Bank Credit Administration Department, and subject to the periodic review and approval of the S&T Bank Board of Directors.

Rates and terms for commercial real estate and equipment loans normally are negotiated, subject to such variables as economic conditions, marketability of collateral, credit history of the borrower and future cash flows. The loan to value policy guideline for commercial real estate loans is generally 75-80%.

The residential, first lien, mortgage loan to value policy guideline is 80%. Higher loan to value loans can be approved with the appropriate private mortgage insurance coverage. Second lien positions are sometimes incurred with home equity loans, but normally only to the extent that the combined credit exposure for both first and second liens do not exceed 100% of loan to value.

A variety of unsecured and secured installment loan and credit card products are offered by S&T. However, the majority of the consumer loan portfolio is automobile loans. Loan to value guidelines for direct loans are 90%-100% of invoice for new automobiles and 80%-90% of National Automobile Dealer Association value for used automobiles.

Management intends to continue to pursue quality loans in a variety of lending categories within our market area in order to honor our commitment to provide the best service possible to our customers. S&T's loan portfolio primarily represents loans to businesses and consumers in our market area of Western Pennsylvania rather than to borrowers in other areas of the country or to borrowers in other nations. S&T has not concentrated its lending activities in any industry or group. During the past several years, management has concentrated on building an effective credit and loan administration staff, which assists management in evaluating loans before they are made and identifies problem loans early.

Security Activity

Average securities increased by $65.9 million in the first nine months of 2002 compared to the 2001 full year average. The average increase was comprised of $6.4 million of states and political subdivisions and $122.3 million of mortgage-backed securities. Offsetting these increases were average decreases of $3.8 million in U.S. treasury securities, $33.7 million in U.S. government agency securities, $16.1 million of corporate securities, $5.3 million of corporate equity securities and $3.9 million of Federal Home Loan Bank (FHLB) stock. Average federal funds decreased by $27.7 million during the first nine months of 2002 as compared to the first nine months of 2001.

The equity securities portfolio is primarily comprised of bank holding companies, as well as preferred and utility stocks to take advantage of the dividends received deduction for corporations. During 2002, the equity portfolio yielded 7.3% on a fully taxable equivalent basis and had unrealized gains, net of nominal unrealized losses, of $21.0 million. The equity securities portfolio consists of securities traded on the various stock markets and are subject to changes in market value. The FHLB capital stock is a membership and borrowing requirement and is acquired and sold at stated value.

S&T's policy for security classification includes U.S. treasuries, U.S. government agencies, mortgage-backed securities, collateralized mortgage obligations, municipal securities, corporate securities and marketable equity securities as available for sale. Five municipal securities are classified as held to maturity. On a quarterly basis management evaluates the equity portfolio for other than temporary declines in fair value. At September 30, 2002, $0.7 million of realized losses were taken on two permanently impaired equity securities. The underlying performance of the equities market could generate further impairment in future periods. At September 30, 2002, unrealized gains, net of unrealized losses, for securities classified as available for sale were $40.3 million.

Allowance for Loan Losses

The balance in the allowance for loan losses was $29.5 million or 1.49% of total loans at September 30, 2002 as compared to $26.9 million or 1.64% of total loans at December 31, 2001. The decrease in the allowance for loan losses as a percent of total loans is a result of internal loan growth and acquiring $237.4 million of loans in the Peoples merger. The acquired portfolio was primarily 1-4 family residential loans and consumer installment loans with a lower credit risk profile and allowance coverage of .60%. The adequacy of the allowance for loan losses is determined by management through evaluation of the loss potential on individual nonperforming, delinquent and high-dollar loans; review of economic conditions and business trends; historical loss experience; and growth and composition of the loan portfolio, as well as other relevant factors.

A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of the high and low historical charge-off rates for loan categories, fluctuations and trends in the amount of classified loans and economic factors. Economic factors consider the level of S&T's historical charge-offs that have occurred within the credits' economic life cycle.

Significant to this analysis is the shift in the loan portfolio composition to an increased mix of commercial loans. These loans are generally larger in size and, due to our continuing growth, many are not well seasoned and could be more vulnerable to an economic slowdown. Management relies on its risk rating process to monitor trends, which may be occurring relative to commercial loans to assess potential weaknesses within specific credits. Current economic factors and trends in risk ratings
are considered in the determination of the allowance for loan losses. At this time S&T's risk rating analysis of the portfolio remains relatively stable even though there has recently been a definitive decline in the general economy.

Net loan charge-offs totaled $3.6 million in the first nine months of 2002 compared to $2.5 million in the first nine months of 2001. The increase in net charge-offs is primarily related to two troubled commercial loans in the wholesale supply and telemarketing industries that were charged down to the estimated market value of collateral. The balance of nonperforming loans, which included nonaccrual loans past due 90 days or more, at September 30, 2002, was $9.1 million or 0.46% of total loans. This compares to nonperforming loans of $8.3 million or 0.50% of total loans at December 31, 2001.

Asset quality is a major corporate objective at S&T, and management believes that the allowance for loan losses is adequate to absorb probable loan losses.

Deposits

Average total deposits increased by $68.7 million, or 4% for the nine months ended September 30, 2002 as compared to the 2001 full year average. Changes in the average deposit mix included a $35.1 million increase in demand accounts, $22.3 million increase in money market and NOW accounts, and a $15.3 million increase in savings accounts, offset by a $3.9 million decrease in time deposits. Some of these changes can be partially explained by customers shifting funds into demand, savings and money market accounts in anticipation of higher interest rates in the future, and strategic initiatives to increase cash management type accounts. Total deposits at September 30, 2002 increased $320 million compared to December 31, 2001. The increase is attributable to $293 million of deposits acquired in the Peoples merger. The remaining period-end increase is attributable to internal core deposit growth.

Management believes that the S&T deposit base is stable and that S&T has the ability to attract new deposits, mitigating a funding dependency on volatile liabilities. Special rate deposits of $100,000 and over were 9% of total deposits at September 30, 2002 and 7% at December 31, 2001, respectively, and primarily represent deposit relationships with local customers in our market area. In addition, S&T has the ability to access both public and private markets to raise long-term funding if necessary.

Borrowings

Average borrowings increased $6.7 million for the first nine months ended September 30, 2002 compared to the 2001 full year average and were comprised of retail repurchase agreements (REPO's), wholesale REPO's, federal funds purchased and long-term borrowings. S&T defines repurchase agreements with its local, retail customers as retail REPOS; wholesale REPOS are those transacted with other banks and brokerage firms with terms normally ranging from one to 14 days.

The average balance in retail REPOS decreased approximately $6.0 million for the first nine months of 2002 compared to the full year 2001 average. S&T views retail REPOS as a relatively stable source of funds since most of these accounts are with local, long-term customers. Average wholesale REPOS and federal funds increased by $101.8 million for the first nine months of 2002 compared to the full year 2001 average, in order to take advantage of low rate short-term funds and to better match commercial borrower shifts into more variable rate products.

Average long-term borrowings have decreased by $89.1 million in the first nine months of 2002 as compared to the full year 2001 average. At September 30, 2002, S&T had long-term borrowings outstanding of $145.6 million at a fixed rate with the FHLB. The purpose of these borrowings was to provide matched, fixed rate fundings for newly originated loans, to mitigate the risk associated with volatile liability fundings, to take advantage of lower cost funds through the FHLB's Community Investment Program and to fund stock buy-backs.

Capital Resources

Shareholders' equity increased $5.3 million at September 30, 2002, compared to December 31, 2001. Net income was
$35.7 million and dividends paid to shareholders were $19.2 million for the nine months ended September 30, 2002. Also affecting capital is a decrease of $7.3 million in unrealized gains on securities available for sale, stock buybacks of 210,500 shares during 2002 and 122,500 shares retired, previously owned by Peoples. Authorization for repurchasing up to 1,000,000 shares remains in effect for 2002.

On September 7, 2002, S&T completed the acquisition of Peoples Financial Corp., Inc. a $330 million community bank headquartered in Ford City, PA. Under the terms of the agreement, the shareholders of Peoples received $52.50 in cash for each share of Peoples for an aggregate transaction value of $87.4 million. S&T views the acquisition as an opportunity to leverage existing capital and operations infrastructure. The transaction was funded with borrowings and by restructuring the Peoples bond and equities portfolios.

S&T paid 54% of net income in dividends, equating to an annual dividend rate of $0.96 per share during the first nine months of 2002. The book value of S&T's common stock increased from $11.01 at December 31, 2001 to $11.26 at September 30, 2002. The market price of S&T's common stock was $25.18 per share at September 30, 2002, compared to $24.28 per share at December 31, 2001.

S&T continues to maintain a strong capital position with a leverage ratio of 8.9% as compared to the minimum regulatory guideline of 3.0%. S&T's risk-based capital Tier I and Total ratios were 9.8% and 11.5% respectively, at September 30, 2002. These ratios place S&T above the Federal Reserve Board's risk-based capital guidelines of 4.0% and 8.0% for Tier I and Total, respectively.

Net Income

Net income was $35.7 million or $1.33 per share diluted earnings for the first nine months of 2002 as compared to $35.4 million or $1.31 per share diluted earnings for the same period of 2001. The increase during the first nine months of 2002 was primarily the result of increases in net interest income, improvements in noninterest income and a lower effective tax rate offset by increased operating expenses.

Net Interest Income

On a fully taxable equivalent basis, net interest income increased $0.6 million or 1% in the first nine months of 2002 compared to the same period of 2001. The net yield on interest-earning assets was 4.20% in the first nine months of 2002 as compared to the 4.31% in the same period of 2001. This modest performance in net interest income was primarily the result of net interest spreads contracting during the 475 basis point decline in short-term interest rates that has occurred over the past eighteen months, as well as the general slowing of loan demand during the late 2001 and early 2002.

In the first nine months of 2002, average loans increased $42.1 million, average securities increased $65.9 million and average federal funds sold decreased $27.7 million. The yields on average securities decreased by 390 basis points during the period and the yield on average loans decreased by 119 basis points. The yield on federal funds declined 271 basis points.

In the first nine months of 2002, balances of average interest-bearing deposits increased by $33.6 million and the mix change from time deposits to core deposits was beneficial to the overall cost of funds. The cost of deposits totaled 2.83%, a decrease of 113 basis points from 2001 due to reduced rates paid on both core and time deposits and the aforementioned shift in deposit mix. The cost of REPOS and other borrowed funds decreased 145 basis points to 4.24%.

Positively affecting net interest income was a $40.0 million increase to average net free funds. Average net free funds are the excess of demand deposits, other non-interest bearing liabilities and shareholders' equity over nonearning assets.

Maintaining consistent spreads between earning assets and interest-bearing liabilities is very significant to S&T's financial performance since net interest income comprises 79% of operating revenue. A variety of asset/liability management strategies were successfully implemented within prescribed Asset/Liability Committee risk parameters that enabled S&T to maintain a net interest margin reasonably consistent with historical levels during a volatile interest rate environment. The level and mix of funds is monitored by Asset/Liability Committee in order to mitigate the interest rate sensitivity and liquidity risks of the balance sheet.

Provision for Loan Losses

The provision for loan losses was $4.8 million for the first nine months of 2002 and $3.9 million for the same period of 2001. The provision is the result of management's assessment of economic conditions, credit quality statistics, loan administration effectiveness and other factors that would have an impact on probable losses in the loan portfolio. Also affecting the amount of provision expense is loan growth, portfolio composition and trends within risk ratings.

Credit quality statistics are an important factor in determining the amount of provision expense. Net loan charge-offs totaled $3.6 million for the first nine months of 2002 compared to $2.5 million for the same period of 2001. Nonperforming loans to total loans was 0.46% at September 30, 2002 compared to 0.71% at September 30, 2001 and 0.50% at December 31, 2001. Also affecting the amount of provision expense is the amount and types of loan growth and portfolio composition. All of the loan growth in 2002 and 2001 is attributable to larger-sized commercial loans.

Noninterest Income

Noninterest income increased $2.5 million or 16% in the first nine months of 2002 as compared to the same period of 2001. Increases included $0.6 million in service charges and fees, $0.3 million in wealth management income and $1.6 million in other income. Security gains decreased $2.5 million in the first nine months of 2002 as compared to the same period of 2001.

The $0.6 million increase in service charges on deposit accounts was primarily the result of management's continual effort to implement reasonable fees for services performed, and to manage closely the collection of these fees. The $0.3 million in wealth management fees was the result of better performance in the development of new business offset by the decline in market value of the wealth management portfolios over the last 12 months which also affects fee revenue. The $1.6 million increase in other income was related to higher performance levels for mortgage banking and insurance. These areas were the focus of several strategic initiatives and product enhancements implemented in order to expand this source of revenue. Other fee revenue was also affected by heavy refinancing activities by mortgage customers in response to the low-interest rate environment and the additional insurance commission revenue being generated by Evergreen that was acquired by S&T on August 1, 2002.

S&T recognized $5.6 million of gains on available for sale equity securities in the first nine months of 2002 as compared to $8.2 million in the same period of 2001. The equity security gains were taken on available for sale securities in the first nine months of 2002 and 2001 in order to maximize returns in the portfolio by taking advantage of market opportunities when presented. There have been reduced market opportunities in 2002 as a result of the general decline in the equities market over the last 18 months. Unrealized gains, net of unrealized losses, in the available for sale portfolio, which includes debt and equity securities, totaled $40.3 million at September 30, 2002.

Noninterest Expense

Noninterest expense increased by $2.5 million or 7% at September 30, 2002 compared to September 30, 2001. Staff expense increased $1.2 million or 6% primarily attributable to higher medical and pension costs, and higher staffing levels required to implement new initiatives in fee based business lines and from the Evergreen and Peoples acquisitions. Offsetting those increased costs were increases in deferred loan origination costs resulting from increased lending activity. Data processing expense increased $0.3 million or 16% as compared to the same period of 2001 and is attributable to conversion costs of $0.2 million relating to the Peoples acquisition and increases in electronic banking services.

Other expense increases of $0.9 million reflect normal changes due to activity levels and $0.4 million of expenses related to the Evergreen and Peoples acquisitions. Average full-time equivalent staff was 757 at September 30, 2002 and 671 at September 30, 2001. Staffing increases are primarily related to the Evergreen and Peoples acquisitions and the expansion of mortgage banking, brokerage, wealth management and retail banking functions. S&T's efficiency ratio, which measures noninterest expense as a percent of recurring noninterest income plus net interest income on a fully taxable equivalent basis, was 42% at September 30, 2002 and 41% at September 30, 2001. The increase to the efficiency ratio is primarily the result of a relatively flat net interest margin, the addition of new employees in order to start-up several new strategic initiatives and the insurance and bank acquisitions and the one-time expensed merger costs of $0.6 million for the Peoples acquisition.

Federal Income Taxes

Federal income tax expense decreased $1.3 million at September 30, 2002 as compared to September 30, 2001. This decrease is primarily the result of the tax benefit from a recent tax law change that now allows for a tax deduction of dividends paid to participants in the S&T defined contribution retirement plan. The effective tax rate for the first nine months of 2002 was 28% and 29% in 2001, which is below the 35% statutory rate due to benefits resulting from tax-exempt interest, excludable dividend income, low income housing tax credits and the new defined contribution retirement plan deduction.

Net Income

Net income was $12.4 million or $0.46 per share diluted earnings in the third quarter of 2002 compared to $11.9 million or $0.44 per share diluted earnings for the same period of 2001.

Net Interest Income

On a fully taxable equivalent basis, net interest income increased $1.6 million or 7% in the third quarter of 2002 compared to the same period of 2001. This increase in net interest income resulted from increases in average earning assets, the addition of assets and liabilities from the Peoples acquisition and a stabilizing trend of the net interest margin. Net interest margin on a fully taxable equivalent basis was 4.20% for the third quarter of 2002, as compared to 4.23% for the same period of 2001.

Average earning assets increased by $167.3 million as compared to the third quarter of 2001, primarily as a result of a $76.0 million increase in investment securities and federal funds and a $126.8 million increase in loans. Funding for this asset growth was primarily provided by an increase of $114.5 million in deposits and retained earnings.

Provision for Loan Losses

The provision for loan losses was $2.3 million in the third quarter of 2002 and $0.9 million for the same period of 2001. Net loan charge-offs totaled $2.6 million for the third quarter of 2002 compared to $0.5 million for the same period of 2001. The third quarter net charge-offs is primarily related to two commercial loans in the wholesale supply and telemarketing industries that were considered in the determination of the provision for loan losses. The provision expense in 2002 and 2001 is the result of an effort to maintain S&T's allowance for loan losses to total loans at a relatively consistent level. Factors considered are net charge-offs, loan growth, a continuing mix change in the loan portfolio to a greater percentage of commercial loans and management's assessment of economic conditions, credit quality statistics, loan administration effectiveness and other factors that would have an impact on future probable losses in the loan portfolio.

Noninterest Income

Noninterest income, not including security gains, increased $1.3 million or 24% in the third quarter of 2002 as compared to 2001. Increases included, $0.3 million in service charges, $0.2 million in wealth management fees and $0.8 million in other income. Security gains decreased $2.1 million in the third quarter of 2002 as compared to the same period of 2001 primarily due to less market opportunities in a declining equities market.

The 19% increase in service charges on deposit accounts was primarily the result of management's continual effort to implement reasonable fees for services performed, and to manage closely the collection of these fees. Increased cash management fees were a significant factor in this performance. Wealth management fees increased 19% due to higher brokerage and traditional trust activities. The 32% increase in other income was primarily a result of increased performance for merchant and debit card income, mortgage banking, insurance and letters of credit fees. These areas were the focus of several strategic initiatives and product enhancements implemented in order to expand this source of revenue. Other fee revenue was also affected by heavy refinancing activities of mortgage customers in response to the low interest rate environment and increased insurance revenue resulting from the Evergreen acquisition in August 2002.

S&T recognized $2.2 million of gains on available for sale securities in the third quarter of 2002 as compared to $4.3 million in the same period of 2001. The decrease is partially explained by less market opportunities in a declining equities market. Unrealized gains, net of unrealized losses, in the available for sale portfolio, which includes debt and equity securities, totaled $40.3 million at September 30, 2002.

Noninterest Expense

Noninterest expense increased $1.5 million in the third quarter of 2002 as compared to the third quarter of 2001. $0.6 million of this increase is directly related to one-time merger/conversion expenses related to the Peoples acquisition. Staff expense, increased $0.4 million or 7% primarily attributable to higher medical and pension costs, and higher staffing levels required to implement new initiatives in fee based business lines and the Evergreen and Peoples acquisitions. Offsetting these increased costs were increases in deferred loan origination costs resulting from increased lending activity. Data processing expense increased $0.2 million as compared to the same period of 2001 primarily due to conversion costs associated with the Peoples merger. Other expense increases of $0.7 million were primarily attributable to merger costs related to the Evergreen and Peoples acquisitions and normal changes due to activity levels.

Federal Income Taxes

Federal income tax expense decreased $0.2 million in the third quarter of 2002 as compared to the third quarter of 2001. This decrease is primarily the result of the tax benefit from a recent tax law change that now allows for a tax deduction of dividends paid to participants in the S&T defined contribution retirement plan. The effective tax rate for the third quarter of 2002 and 2001 was approximately 29%, which is below the 35% statutory rate due to benefits resulting from tax-exempt interest, excludable dividend income and low income housing tax credits.

Forward Looking Information

The integration and conversion phases for both the Evergreen and Peoples acquisitions have exceeded expectations. The one-time, non-recurring charges previously anticipated to go as high as $4.0 million in 2002 for potential branch divestitures associated with the Peoples acquisition will not be incurred, as these issues have been satisfactorily resolved. This will allow S&T to reiterate our full year earnings projections for 2002 of $1.81 - $1.83 per share reported earnings. Significant risk factors that could affect the 2002 performance projections would include a continued decline in the general economy that could affect loan demand and credit quality. We are also anticipating that uncertainties in the stock market will limit realized equity security gains.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995

The statements in this Quarterly Report, which are not historical fact, are forward looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of economic conditions, the impact of competitive products and pricings, and other risks detailed in S&T's Securities and Exchange Commission filings.