S&T BANCORP INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended	September 30, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from	To
Commission file number	0-12508
S&T BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania	25-1434426
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
43 South Ninth Street, Indiana, PA	15701
(Address of principal executive offices)	(zip code)
800-325-2265
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
Common Stock, $2.50 Par Value - 26,530,195 shares as of October 19, 2004

Page 1

INDEX S&T BANCORP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements
	Condensed consolidated balance sheets - September 30, 2004 and December 31, 2003	3
	Condensed consolidated statements of income - Three and nine months ended September 30, 2004 and 2003	4
	Condensed consolidated statements of changes in shareholders' equity - Nine months ended September 30, 2004 and 2003	5
	Condensed consolidated statements of cash flows - Nine months ended September 30, 2004 and 2003	6
	Notes to condensed consolidated financial statements	7-11
Item 2. Item 3. Item 4.	Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Controls and Procedures	12-19 20 20
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 5.	Other Information	21
Item 6.	Exhibits	21
	SIGNATURES	22

Page 2 S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
			September 30, 2004 (unaudited)	December 31, 2003 (Note A)
			(thousands, except share data)
ASSETS
	Cash and due from banks		$47,746	$52,361
	Securities:
		Available for sale	536,518	610,818
		Held to maturity (market value $265 at September 30, 2004 and $268 at December 31, 2003)	265	265
	Total Securities		536,783	611,083
	Loans, net of allowance for loan losses of $32,127 at September 30, 2004 and $31,478 at December 31, 2003		2,260,126	2,069,142
	Premises and equipment		24,419	23,037
	Goodwill		48,021	48,021
	Other intangibles, net		5,331	5,455
	Other assets		87,350	91,173
TOTAL ASSETS			$3,009,776	$2,900,272
LIABILITIES
	Deposits:
		Noninterest-bearing	$416,748	$382,364
		Interest-bearing	1,662,434	1,579,889
	Total Deposits		2,079,182	1,962,253
	Securities sold under repurchase agreements		139,934	161,370
	Long-term borrowings		86,359	116,933
	Short-term borrowings		316,750	270,650
	Other liabilities		48,976	56,348
TOTAL LIABILITIES			2,671,201	2,567,554
SHAREHOLDERS' EQUITY
	Preferred stock, without par value, 10,000,000 shares authorized and none outstanding		- -	- -
	Common stock ($2.50 par value)
		Authorized - 50,000,000 shares at September 30, 2004 and December 31, 2003
		Issued - 29,714,038 shares at September 30, 2004 and December 31, 2003	74,285	74,285
	Additional paid-in capital		23,405	21,939
	Retained earnings		290,324	271,699
	Accumulated other comprehensive income		20,246	27,185
	Treasury stock (3,200,169 shares at September 30, 2004 and 3,061,627 shares at December 31, 2003)		(69,685)	(62,390)
TOTAL SHAREHOLDERS' EQUITY			338,575	332,718
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY			$3,009,776	$2,900,272

See Notes to Condensed Consolidated Financial Statements

Page 3 S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
	Three Months Ended September 30,		Nine Months Ended September 30,
	2004	2003	2004	2003
	(thousands, except per share data)
INTEREST INCOME
Loans, including fees	$32,230	$30,391	$92,616	$94,391
Deposits with banks and federal funds sold	4	-	4	1
Investment securities:
Taxable	4,421	5,418	13,748	17,053
Tax-exempt	531	518	1,589	1,236
Dividends	542	584	1,606	2,268
Total Interest Income	37,728	36,911	109,563	114,949
INTEREST EXPENSE
Deposits	7,717	7,167	22,123	23,923
Securities sold under repurchase agreements	490	278	1,158	1,277
Short-term borrowings	1,345	593	3,295	1,625
Long-term borrowings	997	3,403	3,027	9,918
Total Interest Expense	10,549	11,441	29,603	36,743
NET INTEREST INCOME	27,179	25,470	79,960	78,206
Provision for loan losses	1,500	1,500	4,900	5,800
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	25,679	23,970	75,060	72,406
NONINTEREST INCOME
Security gains, net	1,144	1,099	4,372	3,310
Wealth management fees	1,471	1,326	4,513	4,050
Service charges on deposit accounts	2,316	2,335	6,906	6,795
Insurance	1,219	1,071	3,410	3,147
Other	1,814	3,426	6,336	7,233
Total Noninterest Income	7,964	9,257	25,537	24,535
NONINTEREST EXPENSE
Salaries and employee benefits	8,438	8,100	24,736	23,330
Occupancy, net	989	1,015	3,105	3,022
Furniture and equipment	763	541	2,076	2,125
Other taxes	590	524	1,934	1,735
Data processing	956	956	2,930	2,589
Other	3,162	3,563	9,664	10,068
Total Noninterest Expense	14,898	14,699	44,445	42,869
INCOME BEFORE INCOME TAXES	18,745	18,528	56,152	54,072
Income taxes	5,468	5,251	16,346	15,481
NET INCOME	$13,277	$13,277	$39,806	$38,591
PER COMMON SHARE
Net Income - Basic	$0.50	$0.50	$1.50	$1.46
Net Income - Diluted	0.50	0.50	1.49	1.45
Dividends	0.27	0.26	0.80	0.76
Average Common Shares Outstanding - Basic	26,391	26,428	26,494	26,433
Average Common Shares Outstanding - Diluted	26,710	26,711	26,768	26,682
See Notes to Condensed Consolidated Financial Statements

Page 4

S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
	Comprehensive Income	Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Income	Treasury Stock
(in thousands, except share and per share data)
Balance at January 1, 2003		$74,285	$20,746	$246,920	$26,499	$(62,336)
Net income for nine months ended September 30, 2003	$38,591			38,591
Other comprehensive income, net of tax: Unrealized gains on securities of $3,591 net of reclassification adjustment for gains included in net income of $4,347	(756)				(756)
Comprehensive Income	$37,835
Cash dividends declared ($0.76 per share)				(20,090)
Treasury stock acquired (266,504 shares)						(6,866)
Treasury stock issued for stock options exercised (165,114 shares)			(383)			3,364
Recognition of restricted stock compensation expense			360
Tax benefit from nonstatutory stock options exercised			602
Balance at September 30, 2003		$74,285	$21,325	$265,421	$25,743	$(65,838)

Balance at January 1, 2004		$74,285	$21,939	$271,699	$27,185	$(62,390)
Net income for nine months ended September 30, 2004	$39,806			39,806
Other comprehensive income, net of tax: Unrealized losses on securities of ($4,100) net of reclassification adjustment for gains included in net income of $2,839	(6,939)				(6,939)
Comprehensive Income	$32,867
Cash dividends declared ($0.80 per share)				(21,181)
Treasury stock acquired (542,600 shares)						(15,970)
Treasury stock issued for stock options exercised (404,058 shares)			(468)			8,675
Recognition of restricted stock compensation expense			189
Tax benefit from nonstatutory stock options exercised			1,745
Balance at September 30, 2004		$74,285	$23,405	$290,324	$20,246	($69,685)
See Notes to Condensed Consolidated Financial Statements

Page 5

S&T BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
			Nine Months Ended September 30,
			2004		2003
			(dollars in thousands)
Operating Activities
Net Income			$39,806		$38,591
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses		4,900	5,800
	Provision for depreciation and amortization		2,097	1,445
	Net amortization of investment security premiums		1,822	2,423
	Security gains, net		(4,372)	(3,310)
	Deferred income taxes		(600)	(2,995)
	Mortgage loans originated for sale		(33,071)	(81,364)
	Proceeds from the sale of loans		33,680	82,787
	Decrease in interest receivable		1,499	1,476
	Increase (decrease) in interest payable		231	(254)
	Decrease in other assets		2,556	4,099
	Decrease in other liabilities		(3,803)	(3,437)
	Net Cash Provided by Operating Activities		44,745	45,261
Investing Activities
	Net decrease of interest-earning deposits with banks		-	21
	Proceeds from maturities of securities held for sale		-	95
	Proceeds from maturities of securities available for sale		93,940	195,256
	Proceeds from sales of securities available for sale		16,806	55,804
	Purchases of securities available for sale		(44,643)	(236,399)
	Net increase in loans		(196,493)	(61,956)
	Purchases of premises and equipment		(3,219)	(1,075)
	Net Cash Used in Investing Activities		(133,609)	(48,254)
Financing Activities
		Net increase in demand and savings deposits	41,135		51,844
		Net increase (decrease) in certificates of deposit	75,794		(40,762)
		Net decrease in repurchase agreements	(21,436)		(55,764)
		Net increase in short-term borrowings	46,100		64,200
		Net (redemption) proceeds from long-term borrowings	(30,574)		5,536
		Net treasury stock activity	(7,574)		(3,525)
		Tax benefit from nonstatutory stock options exercised	1,745		602
		Cash dividends paid to shareholders	(20,941)		(20,330)
		Net Cash Provided by Financing Activities	84,249		1,801
		Decrease in Cash and Cash Equivalents	(4,615)		(1,192)
		Cash and Cash Equivalents at Beginning of Period	52,361		50,258
		Cash and Cash Equivalents at End of Period	$47,746		$49,066

See Notes to Condensed Consolidated Financial Statements

Page 6

S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States 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 in the United States for complete annual 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 three and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The condensed consolidated balance sheet as of December 31, 2003, has been extracted from the audited financial statements included in S&T's 2003 Annual Report to Shareholders. 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, 2003.

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.

NOTE B - STOCK-BASED COMPENSATION

S&T accounts for stock options using the intrinsic value method. The following proforma information regarding net income and earnings per share assumes stock options had been accounted for under the fair value method and the estimated fair value of the options was amortized to expense over the vesting period. Compensation expense, net of related tax, of $248,000 and $81,000 for the three months ended, and $743,000 and $243,000 for the nine months ended September 30, 2004 and 2003, is included in the proforma net income as reported below.

	Three months ended September 30,		Nine months ended September 30,
	2004	2003	2004	2003
	(dollars in thousands, except per share data)
Proforma net income	$13,029	$13,196	$39,063	$38,348
Proforma earnings per share - Basic	$0.49	$0.50	$1.47	$1.45
Proforma earnings per share - Diluted	$0.49	$0.49	$1.46	$1.44

The fair value was estimated at the grant dates using a Black-Scholes option pricing model with the following assumptions at September 30, 2004 and September 30, 2003, respectively: risk-free interest rates of 3.27% and 3.03%; a dividend yield of 3.30% and 3.60%; volatility of the expected market price of S&T's common stock of .266 and .275; and a weighted-average expected life of five years.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. S&T's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.

Page 7

S&T BANCORP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

On October 13, 2004, the Financial Accounting Standards Board (FASB) concluded that Statement No. 123R, "Share Based Payment", which will require all companies to measure compensation costs for all share-based payments (including employee stock options) at fair value, would be effective for interim or annual periods beginning after June 15, 2005. Retroactive application of the requirements of Statement No. 123 (not Statement No. 123R) to the beginning of the fiscal year that includes the effective date would be permitted, but not required. Early adoption of Statement No. 123R is encouraged. S&T will be required to apply Statement No. 123R beginning July 1, 2005 in its consolidated financial statements for the quarter ending September 30, 2005. S&T is currently assessing the impact of this pending guidance, but it does not expect the adoption to have a material effect on S&T's consolidated financial statements, based on the current level of stock options granted.

In March 2004, the Emerging Issues Task Force (EITF), revised EITF No. 03-1, "The Meaning of Other than Temporary Impairment and its Application to Certain Investments." In the revised guidance, the EITF reached a consensus regarding the model to be used in determining whether an investment is other-than-temporarily impaired, and the required disclosures about unrealized losses on available-for-sale debt and equity securities. The other-than-temporary impairment evaluation guidance was effective for S&T on July 1, 2004. The additional annual disclosures prescribed by this guidance are required for S&T beginning with the year ending December 31, 2004.

In September 2004, the Financial Accounting Standards Board (FASB) issued two draft Financial Statement Positions (FSPs), one deferring the effective date for a portion of EITF 03-1, (The Meaning of Other Than Temporary Impairment,) and the other providing implementation guidance. Both draft FSPs only relate to debt securities under paragraph 16 of EITF 03-1with impairments that are solely due to interest rate changes, including changes in interest rates due to increases in sector credit spreads. Paragraph 16 is applicable to debt that cannot be contractually prepaid or otherwise settled such that the investor would not recover substantially all of its cost.

NOTE D - GOODWILL AND OTHER INTANGIBLES

S&T's balance sheet includes both tangible assets (such as loans, buildings, and investments) and intangible assets (such as goodwill and core deposit intangibles). Goodwill is periodically reviewed for impairment. Other intangibles are comprised of core deposit intangibles and other mortgage servicing assets, which are also reviewed for impairment on a periodic basis.

NOTE E - EMPLOYEE BENEFITS

The following table summarizes the components of net periodic pension expense for S&T's defined benefit plan:

	Nine months ended September 30,
	2004	2003
	(dollars in thousands)

Service cost - benefits earned during the period	$1,151	$915
Interest cost on projected benefit obligation	1,734	1,630
Expected return on plan assets	(2,233)	(1,691)
Net amortization and deferral	15	81
Net Periodic Pension Expense	$667	$935

S&T previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $3.0 million to its pension plan in 2004. As of September 30, 2004, $3.0 million of contributions have been made. No further contributions are expected to be made during 2004.

Page 8

S&T BANCORP INC. AND SUBSIDIARIES NOTE F - SECURITIES The amortized cost and estimated market value of securities are as follows:
September 30, 2004	Available for Sale
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Market Value
	(dollars in thousands)
Obligations of U.S. government corporations and agencies	$255,667	$4,774	$(654)	$259,787
Collateralized mortgage obligations of U.S. government corporations and agencies	42,991	384	- -	43,375
Mortgage-backed securities	50,209	549	(288)	50,470
U.S. treasury securities	5,124	245	-	5,369
Obligations of state and political subdivisions	68,507	740	(242)	69,005
Corporate securities	16,233	459	-	16,692
Debt securities available for sale	438,731	7,151	(1,184)	444,698
Marketable equity securities	41,807	24,983	(201)	66,589
Other securities	25,231	-	-	25,231
Total	$505,769	$32,134	$(1,385)	$536,518

September 30, 2004	Held to Maturity
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Market Value
	(dollars in thousands)
Obligations of states and political subdivisions	$265	-	-	$265
Total	$265	-	-	$265


December 31, 2003	Available for Sale
	Amortized Cost	Gross Unrealized Gains		Gross Unrealized Losses	Estimated Market Value
	(dollars in thousands)
Obligations of U.S. government corporations and agencies	$318,581		$8,020	$(698)	$325,903
Collateralized mortgage obligations of U.S. government corporations and agencies	43,846		452	(47)	44,251
Mortgage-backed securities	45,325		643	(199)	45,769
U.S. treasury securities	5,223		521	-	5,744
Obligations of state and political subdivisions	66,428		1,247	(136)	67,539
Corporate securities	20,286		1,178	-	21,464
Debt securities available for sale	499,689		12,061	(1,080)	510,670
Marketable equity securities	42,077		30,833	(319)	72,591
Other securities	27,557		-	-	27,557
Total	$569,323		$42,894	$(1,399)	$610,818

December 31, 2003	Held to Maturity
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Estimated Market Value
	(dollars in thousands)
Obligations of states and political subdivisions	$265		$3	-	$268
Total	$265		$3	-	$268

Page 9

S&T BANCORP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - SECURITIES - continued

The amortized cost and estimated market value of debt securities at September 30, 2004, by contractual maturity, are as set forth below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based upon the current estimated prepayment rates. The mortgage-backed securities may mature earlier or later than their weighted-average estimated maturities because of principal prepayments.

Available for Sale	Amortized Cost	Estimated Market Value
	(dollars in thousands)
Due in one year or less	$82,668	$83,773
Due after one year through five years	290,346	295,333
Due after five years through ten years	62,337	62,218
Due after ten years	3,380	3,374
Total	$438,731	$444,698

Held to Maturity	Amortized Cost	Estimated Market Value
	(dollars in thousands)
Due in one year or less	$265	$265
Total	$265	$265

At September 30, 2004 and December 31, 2003, investment securities with a principal amount of $336,695,000 and $389,922,000, respectively, were pledged to secure repurchase agreements, public funds and trust fund deposits.

NOTE G - LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio was as follows:
	September 30, 2004	December 31, 2003
	(dollars in thousands)
Real estate - construction	$259,156	$193,874
Real estate - mortgages:
Residential	482,543	499,661
Commercial	881,916	794,420
Commercial and industrial	598,590	533,958
Consumer installment	70,048	78,707
Gross Loans	$2,292,253	$2,100,620
Allowance for loan losses	(32,127)	(31,478)
Total Loans	$2,260,126	$2,069,142

Page 10

S&T BANCORP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - LOANS AND ALLOWANCE FOR LOAN LOSSES - continued

Changes in the allowance for loan losses for the nine months ended September 30, were as follows:
	2004	2003
	(dollars in thousands)
Balance at beginning of period	$31,478	$30,138
Charge-offs	(5,614)	(5,083)
Recoveries	1,363	859
Net charge-offs	(4,251)	(4,224)
Provision for loan losses	4,900	5,800
Balance at end of period	$32,127	$31,714

The following table represents S&T's investment in loans considered to be impaired and related information on those impaired loans as of September 30, 2004 and December 31, 2003.

	September 30, 2004	December 31, 2003
	(dollars in thousands)
Recorded investment in loans considered to be impaired	$11,438	$4,087
Loans considered to be impaired that were on a nonaccrual basis	10,588	3,392
Allowance for loan losses related to loans considered to be impaired	268	-
Average recorded investment in impaired loans	6,455	3,629
Total interest income per contractual terms on impaired loans	619	518
Interest income on impaired loans recognized on a cash basis	515	458

NOTE H - GUARANTEES

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 the agreement equals the notional amount of the obligation less the value of any collateral. Unfunded commercial loan commitments totaled $530,093,000, unfunded other loan commitments totaled $133,373,000 and obligations under standby letters of credit totaled $185,237,000 at September 30, 2004.

NOTE I - LITIGATION

S&T, in the normal course of business, is subject to various legal proceedings in which claims for monetary damages are asserted. Management does not believe that the outcome of any current proceedings will have a material adverse effect on the consolidated financial position of S&T.

Page 11

S&T BANCORP, INC. AND SUBSIDIARIES
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 financial data presented elsewhere in this report.

Business Summary

S&T is a financial holding company with its headquarters located in Indiana, Pennsylvania with assets of $3.0 billion at September 30, 2004. S&T provides a full range of financial services through a branch network of 49 offices located in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland counties of Pennsylvania. S&T provides full service retail and commercial banking products as well as cash management services; insurance; estate planning and administration; employee benefit investment management and administration; corporate trust services and other fiduciary services.

Financial Condition

Total assets averaged $3.0 billion in the first nine months of 2004. Average loans increased $170.5 million and average securities and federal funds decreased $60.3 million in the first nine months of 2004 compared to the 2003 full year average. Average deposits increased $70.0 million and average borrowings increased $29.8 million during the nine months ended September 30, 2004 as compared to the 2003 full year average.

Lending Activity

Average loans increased $170.5 million to $2.2 billion during the nine months ended September 30, 2004 from the 2003 full year average. Changes in the composition of the average loan portfolio during the first nine months of 2004 included increases of $60.7 million of commercial loans and $146.9 million of commercial real estate loans, offset by decreases of $24.5 million of residential mortgages and $12.6 million of installment loans.

Real estate construction and commercial loans, including mortgage and industrial, comprised 75% of the average loan portfolio as of September 30, 2004. 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 comprised 22% of the average loan portfolio as of September 30, 2004. Residential mortgage lending continued to be a strategic focus for the third quarter of 2004 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 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, 2004, 13% of the residential mortgage portfolio consisted of adjustable rate mortgages.

S&T periodically sells longer-term, lower-yielding 1-4 family mortgages to Fannie Mae. 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 2004, S&T sold $33.7 million of 1-4 family mortgages to Fannie Mae compared to $64.6 million during the first nine months of 2003. S&T will continue to sell longer-term loans to Fannie Mae in the future on a selective basis, especially during periods of lower interest rates.

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