S&T Bancorp - 10-Q quarterly report FY

See Notes to Condensed Consolidated Financial Statements

See Notes to Condensed Consolidated Financial Statements

At September 30, 2001 and December 31, 2000 investment securities with a principal amount of $287,543,000 and $321,549,000, respectively, were pledged to secure repurchase agreements, public funds and trust fund deposits.

The following table represents S&T's investment in loans considered to be impaired and related information on those impaired loans at September 30, 2001 and December 31, 2000.

NOTE D--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 $430,720,000 and obligations under standby letters of credit totaled $180,279,000 at September 30, 2001.

At September 30, 2001, S&T had marketable equity securities, totaling $245,622 at amortized cost and $631,408 at estimated market value, that were subject to covered call option contracts. The purpose of these contracts was to generate fee income for S&T.

NOTE E--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.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 $2.3 billion in the first nine months of 2001, an $82.1 million increase from the 2000 full year average. Average loans increased $88.6 in the first nine months of 2001 compared to the 2000 full year average. Funding for this loan growth was primarily provided by a $93.1 million increase in average deposits, an increase of $36.7 million in average earnings retained and a $38.2 million decrease in average securities and federal funds, offset by a $58.4 million decrease in average borrowings.

Lending Activity

Average loans increased $88.6 million, or 6% to $1.6 billion for the nine months ended September 30, 2001 from the 2000 full year average. Changes in the composition of the average loan portfolio during 2001 included increases of $62.3 million of commercial loans and $51.3 million of commercial real estate loans, offset by decreases of $15.0 million of residential mortgages and $10.0 million of installment loans.

Commercial real estate loans comprise 37% of the loan portfolio. Although commercial real estate loans can be an area of higher risk, management believes these risks are mitigated by limiting the percentage amount of portfolio composition, a rigorous underwriting review by loan administration and the fact that many of the commercial real estate loans are owner-occupied or rental properties, and many are seasoned properties. During 2001, S&T sold $2.3 million of participations of originated commercial real estate loans. The purpose of these sales was to diversify credit risk on larger loans and to generate fee income from servicing.

Residential mortgage lending continued to be a strategic area of focus during the first nine months of 2001 through a centralized mortgage origination department, ongoing product redesign, the utilization of commission compensated originators and a mortgage banking function. Management believes that if a downturn in the local residential real estate market occurs, the impact of declining values on the real estate loan portfolio will be negligible because of S&T's 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, 2001 the residential mortgage portfolio had an 18% 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 2001, S&T sold $18.1 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.

Installment loan decreases are primarily associated with significantly lower volumes in the indirect auto loan category. Pricing pressures have been unusually intense in the indirect auto loan market during recent years and the decision was made to exit this line of business and allow the portfolio to liquidate via normal paydowns and pay-off activities. At September 30, 2001 the indirect auto loan portfolio had an outstanding balance of $2.1 million. Direct loans decreased $2.9 million for the nine months ending September 30, 2001 as compared to the 2000 full year average due to lower origination and higher payoff activity.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

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 bulk 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 "NADA" 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 decreased by $53.6 million in the first nine months of 2001 compared to the 2000 full year average. The average decrease was comprised of $3.6 million in U.S. treasury securities, $76.1 million in U.S. government agency securities, $3.5 million of states and political subdivisions and $14.5 million of Federal Home Loan Bank (FHLB) stock. Offsetting these decreases were average increases of $5.1 million of corporate equity securities, $0.1 million of corporate securities and $38.9 million of mortgage-backed securities. Average federal funds increased by $15.4 million during the same period.

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 2001, the equity portfolio yielded 8.1% on a fully taxable equivalent basis and had unrealized gains, net of nominal unrealized losses, of $38.7 million. The equity securities portfolio consists of securities traded on the various stock markets and are subject to change 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 and corporate equities as available for sale. Municipal securities and other debt securities are classified as held to maturity. At September 30, 2001, unrealized gains, net of unrealized losses, for securities classified as available for sale were $51.7 million.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Allowance for Loan Losses

The balance in the allowance for loan losses was $28.8 million or 1.75% of total loans at September 30, 2001 as compared to $27.4 million or 1.71% of total loans at December 31, 2000. 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.

Net loan charge-offs totaled $2.5 million in the first nine months of 2001 compared to $0.1 million in the first nine months of 2000. Charge-offs for the first nine months of 2000 were reduced by the proceeds received on a previously charged-off floor plan loan in 1998. The balance of nonperforming loans, which included nonaccrual loans past due 90 days or more, at September 30, 2001, was $11.6 million or 0.71% of total loans. This compares to nonperforming loans of $2.9 million or 0.18% of total loans at December 31, 2000. The increase in nonperforming loans is primarily due to two manufacturing credits that S&T is currently in the process of liquidating collateral which is believed to be written down to fair market values.

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 $93.1 million, or 6% for the nine months ended September 30, 2001 as compared to the 2000 full year average. Changes in the average deposit mix included a $26.0 million increase in money market and NOW accounts, a $66.0 million increase in time deposits and an $8.0 million increase in demand accounts, offset by a $6.9 million decrease in savings accounts. A successful strategy for money market account pricing was implemented in order to make these accounts more competitive with money funds offered at brokerage firms. Time deposit increases reflect successes in promotional programs.

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 8% of total deposits at September 30, 2001 and December 31, 2000, 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.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Borrowings

Average borrowings decreased $58.4 million for the first nine months ended September 30, 2001 compared to the 2000 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 1 to 14 days.

The average balance in retail REPOS decreased approximately $16.8 million for the first nine months of 2001 compared to the full year 2000 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 decreased by $20.4 million for the first nine months of 2001 compared to the full year 2000 average. The increase in core deposits decreased the usage of REPO type fundings in 2001.

Average long-term borrowings have decreased by $21.2 million in the first nine months of 2001 as compared to the full year 2000 average. During the third quarter of 2001, S&T incurred a one-time extraordinary charge of $2.9 million, $1.9 million after-tax, as a prepayment penalty on callable long-term debt. At September 30, 2001, S&T had long-term borrowings outstanding of $190.6 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 $14.3 million at September 30, 2001, compared to December 31, 2000. Net income was $35.4 million and dividends paid to shareholders were $18.1 million for the nine months ended September 30, 2001. Also affecting capital is an increase of $1.1 million in unrealized gains on securities available for sale. There were 225,005 shares of S&T common stock repurchased during the first nine months of 2001. An authorization is in effect to buy-back up to 1,000,000 shares until December 31, 2001.

S&T paid 51% of net income in dividends, equating to an annual dividend rate of $0.92 per share during the first nine months of 2001. The book value of S&T's common stock increased from $10.28 at December 31, 2000 to $10.88 at September 30, 2001. The market price of S&T's common stock was $23.40 per share at September 30, 2001, compared to $21.63 per share at December 31, 2000.

S&T continues to maintain a strong capital position with a leverage ratio of 10.8% as compared to the minimum regulatory guideline of 3.0%. S&T's risk-based capital Tier I and Total ratios were 12.8% and 14.9% respectively, at September 30, 2001. These ratios place S&T well above the Federal Reserve Board's risk-based capital guidelines of 4.0% and 8.0% for Tier I and Total, respectively.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Nine months ended September 30, 2001 compared to

Nine months ended September 30, 2000

Net Income

Net income increased to $35.4 million or $1.31 per diluted earnings per share in the first nine months of 2001 from $33.3 million or $1.23 per diluted earnings per share for the same period of 2000, representing a 7% improvement. Earnings include an extraordinary one-time charge of $.07 per share or $1.9 million, after-tax, for the early repayment of $50 million of long-term debt. The improvement during the first nine months of 2001 was the result of strong increases in noninterest income, offset by normal increases in 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 2001 compared to the same period of 2000. The net yield on interest-earning assets was 4.31% in the first nine months of 2001 comparable to the 4.40% in the same period of 2000. This relatively flat performance in net interest income was primarily the result of the dramatic drop in short-term interest rates, higher delinquent loan interest and the general slowing of loan demand.

In the first nine months of 2001, average loans increased $88.6 million and average securities decreased $53.6 million and average federal funds sold increased $15.4 million. The yields on average securities decreased by 52 basis points during the period and the yield on average loans decreased by 46 basis points. The yield on federal funds declined 189 basis points. During 2001, $193.0 million of U.S. agency securities were called causing reinvestment into lower yielding securities and the reduction in securities leveraging programs.

In the first nine months of 2001, average interest-bearing deposits provided $85.1 million of the funds for the growth in the loan portfolio; cost of deposits totaled 4.16%, a decrease of 35 basis points from 2000 due to reduced rates paid on core deposits and time deposits. The cost of REPOS and other borrowed funds decreased 22 basis points to 5.94%.

Also positively affecting net interest income was a $23.6 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 non-earning assets.

Maintaining consistent spreads between earning assets and costing liabilities is very significant to S&T's financial performance since net interest income comprises 74% of operating revenue. A variety of asset/liability management strategies were successfully implemented within prescribed ALCO risk parameters that enabled S&T to maintain a net interest margin reasonably consistent with historical levels. The level and mix of funds is monitored by ALCO 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 $3.9 million for the first nine months of 2001 and $3.0 million for the same period of 2000. 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.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Credit quality statistics are an important factor in determining the amount of provision expense. Net loan charge-offs totaled $2.5 million for the first nine months of 2001 compared to $0.1 million for the same period of 2000. The reduction in net charge-offs for the first nine months of 2000 was primarily due to proceeds received on a previously charged-off floor plan loan in 1998. Nonperforming loans to total loans was 0.71% at September 30, 2001 compared to 0.49% in the same period of 2000 and 0.18% at December 31, 2000. Also affecting the amount of provision expense is the amount and types of loan growth and portfolio composition. Most of the loan growth in 2001 and 2000 is attributable to larger-sized commercial loans.

Noninterest Income

Noninterest income increased $1.7 million or 12% in the first nine months of 2001 as compared to the same period of 2000. Increases included $0.4 million in service charges and fees, $0.9 million in other income and $0.4 million in wealth management income. Security gains increased $5.8 million in the first nine months of 2001 as compared to the same period of 2000.

The $0.4 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 $0.4 million in wealth management income was primarily attributable to increased performance levels for brokerage and insurance activities. The $0.9 million increase in other income was related to higher performance levels for merchant and debit card income, mortgage banking 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.

S&T recognized $8.2 million of gains on available for sale securities in the first nine months of 2001 as compared to $2.4 million in the same period of 2000. The equity security gains were taken on available for sale securities in the first nine months of 2001 and 2000 in order to maximize returns in the portfolio by taking advantage of market opportunities when presented. Equity security gains of $5.3 million were taken in the first nine months of 2001 along with $2.9 million of debt security gains. The debt securities gains were taken on the sale of $62.0 million of callable U.S. agency securities, classified as available for sale, as part of a strategy to reduce imbedded options in the securities and long-term debt positions. Unrealized gains, net of unrealized losses, in the available for sale portfolio totaled $51.7 million at September 30, 2001.

Noninterest Expense

Noninterest expense increased by $1.0 million or 3% at September 30, 2001 compared to September 30, 2000. Staff expense increased $1.0 million or 6% primarily attributable to normal merit increases, staffing increases and higher benefit plan costs. Occupancy expense increased $0.4 million or 10% as compared to the same period of 2000. The increase is attributable to the opening of a new branch office in Allegheny County, expanded operations and administrative facilities and higher energy and maintenance costs. Offsetting these increases were decreases of $0.5 million or 5% in other expenses at September 30, 2001 as compared to the same period of 2000. The decrease is primarily attributable to a decrease in legal expenses due to costs associated with increased collection activities and the formation of S&T Insurance Group, LLC in 2000. Average full-time equivalent staff was 671 at September 30, 2001 and 660 at September 30, 2000. Staffing increases are primarily related to 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 41% at September 30, 2001 and September 30, 2000, respectively.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Federal Income Taxes

Federal income tax expense increased $1.3 million at September 30, 2001 as compared to September 30, 2000 primarily as a result of higher pre-tax income and a higher effective tax rate. The effective tax rate for the first nine months of 2001 was 29% and 28% in 2000, which is below the 35% statutory rate due to benefits resulting from tax-exempt interest, excludable dividend income and low income housing tax credits (LIHTC).

RESULTS OF OPERATIONS

Three months ended September 30, 2001 compared to

Three months ended September 30, 2000

Net Income

Net income increased to $11.9 million or $0.44 per diluted earnings per share in the third quarter of 2001 from $11.4 million or $0.42 per diluted earnings per share for the same period of 2000. During the third quarter of 2001, S&T incurred a extraordinary one-time charge of $.07 per share or $1.9 million, after-tax. Earnings improvement is due to higher noninterest income and relatively flat operating expenses.

Net Interest Income

On a fully taxable equivalent basis, net interest income decreased $0.5 million or 2% in the third quarter of 2001 compared to the same period of 2000. This decline in net interest income resulted from the dramatic drop in short-term interest rates, delinquent loan interest and the general slowing of loan demand. The comparison between quarters is also affected by a $0.4 million delinquent interest recovery in the third quarter of 2000, as compared to higher delinquent interest for two manufacturing credits classified as nonperforming in the third quarter of 2001.

Average earning assets increased by $61.4 million as compared to the third quarter of 2000, primarily as a result of $105.5 million of loan growth offset by a decrease of $44.1 million in investment securities and federal funds. Funding for this asset growth was primarily provided by an increase of $143.9 million in deposits and earnings retained. During 2001, declining interest rates and a relatively flat yield curve caused limited opportunities for securities leveraging programs. Excess funds from deposit growth and called securities were utilized to pay-down borrowings until better yielding opportunities are presented.

Net interest margin on a fully taxable equivalent basis was 4.23% for the third quarter of 2001, as compared to 4.40% for the same period of 2000.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Provision for Loan Losses

The provision for loan losses was $0.9 million in the third quarter of 2001 and $1.0 million for the same period of 2000. Net loan charge-offs totaled $0.5 million for the third quarter of 2001 compared to $0.9 million for the same period of 2000. The provision expense in 2001 and 2000 is the result of an effort to maintain S&T's allowance for loan losses to total loans at a relatively consistent level with 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 increased $0.7 million or 15% in the third quarter of 2001 as compared to 2000. Increases included, $0.1 million in service charges, $0.1 million in wealth management fees and $0.5 million in other income. Security gains increased $3.3 million in the third quarter of 2001 as compared to the same period of 2000.

The 6% 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. Wealth management fees increased $0.1 million due to higher brokerage and traditional trust activities. The 28% increase in other income was primarily a result of increased performance for merchant and debit card income, mortgage banking 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.

S&T recognized $4.3 million of gains on available for sale securities in the third quarter of 2001 as compared to $1.0 million in the same period of 2000. The equity security gains were taken on available for sale securities in the third quarter of 2001 and 2000 in order to maximize returns in the portfolio by taking advantage of market opportunities when presented. Equity security gains of $1.4 million were taken in the third quarter of 2001 and $2.9 million of debt security gains were recognized. The debt securities gains were taken on the sale of $62.0 million of callable U.S. agency securities, classified as available for sale, as part of a strategy to reduce imbedded options in the securities and long-term debit positions.

Noninterest Expense

Noninterest expense was relatively flat in the third quarter of 2001 as compared to the third quarter of 2000. Employment, occupancy expense and data processing expenses increased in the third quarter of 2001 as compared to the same period of 2000. Staff expense increased $0.3 million or 5% as compared to the same period of 2000. The increase is a result of normal merit increases, staff increases and higher benefit plan costs. Occupancy and data processing expense increased $0.2 million or 12% as compared to the same period of 2000. The increase is attributable to the opening of a new branch office in Allegheny County, expanded operations and administrative facilities and higher energy and maintenance costs. Offsetting these increases were decreases of $0.5 million or 12% in other expenses in the third quarter of 2001 as compared to the third quarter of 2000. The decrease is primarily attributable to a decrease in legal expenses of $0.5 million due to costs associated with increased loan collection activities and the formation of S&T Insurance Group, LLC in 2000.

S&T BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Federal Income Taxes

Federal income tax expense increased $0.3 million in the third quarter of 2001 as compared to the third quarter of 2000. The increase is primarily attributable to higher pre-tax income offset by a higher effective tax rate. The effective tax rate for the third quarter of 2001 was 29% and 28% for the third quarter of 2000, which is below the 35% statutory rate due to benefits resulting from tax-exempt interest, excludable dividend income and low income housing tax credits (LIHTC).

Forward Looking Information

Loan demand has been negatively affected by the slowdown in the economy and recent political events. As such, we are adjusting our loan growth projections for 2001 from 6-8 percent to 2-4 percent. This economic and loan demand contraction will almost certainly affect earnings, so we are also adjusting our 2001 earnings per share estimate from $1.75 - $1.79 to $1.73 - $1.75. Other current financial projections for 2001 are: deposit growth of 5-7 percent; fee increases of 10-12 percent; net margin rate decline of 8-12 basis points; loan loss provision of $4-5 million; and equity security gains of $6-7 million.

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

The statements in this Annual 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.