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