ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

For the fiscal year ended December 31, 2004

Commission file number 1-12508

(Exact name of registrant as specified in its charter)

The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 16, 2005:

Portions of the proxy statement for the annual shareholders meeting to be held April 18, 2005 are incorporated by reference into Part III on this Form 10-K.

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As of December 31, 2004, S&T had approximately $3.0 billion in total assets, $349.1 million in total shareholder's equity and $2.2 billion in total deposits. The deposits of S&T Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent provided by law.

Total wealth management assets were approximately $1.2 billion at December 31, 2004. Wealth Management Services include services as executor and trustee under wills and deeds, as guardian and custodian of employee benefit trusts and brokerage services.

S&T Bank is a full service bank with its Main Office at 800 Philadelphia Street, Indiana, Pennsylvania, providing service to its customers through a branch network of 51 offices located in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland counties of Pennsylvania.

S&T Bank's services include accepting time and demand deposit accounts, originating commercial and consumer loans, providing letters of credit, offering discount brokerage services, personal financial planning and credit card services. Management believes that S&T Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including federal, state and local governments). S&T Bank has not experienced significant fluctuations in deposits.

S&T Bank has three wholly owned subsidiaries, S&T Insurance Group, LLC, S&T Bancholdings, Inc. and S&T Professional Resources Group, LLC. In May 2002, S&T Professional Resources Group, LLC was formed to market software developed by S&T. In August 2002, S&T Bancholdings, Inc. was formed as an investment holding company. In August 2002, S&T Bank acquired Evergreen Insurance Associates, Inc., a multi-line insurance agency with a client base of approximately 2,000 customers in Pennsylvania, Maryland and West Virginia. Evergreen Insurance Associates, Inc. was merged into Evergreen Insurance, LLC, with a resulting name change to Evergreen Insurance Associates, LLC, a wholly owned subsidiary of S&T Insurance Group, LLC.

As of December 31, 2004, S&T Bank and subsidiaries had 774 full-time equivalent employees. S&T provides a variety of employment benefits and considers its relationship with its employees to be good.

All reports filed electronically by S&T with the United States Securities and Exchange Commission ("SEC"), including the annual report on Form 10-K, quarterly reports on Form 10-Q, and current event reports on Form 8-K, as well as any amendments to those reports, are accessible at no cost on S&T's website at www.stbank.com. These filings are also accessible on the SEC's website at www.sec.gov.

S&T and S&T Bank are each extensively regulated under both federal and state law. The following information describes certain aspects of that regulation applicable to S&T and S&T Bank and does not purport to be complete.

To the extent statutory or regulatory provisions are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures and before the various bank regulatory agencies. The likelihood and timing on any changes and the impact such changes might have on S&T or S&T Bank are impossible to determine with any certainty. A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on the business, operations and earnings of S&T and S&T Bank.

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S&T is a bank holding company subject to regulation under the BHCA, and the examination and reporting requirements of the Board of Governors of the Federal Reserve Board (the "Federal Reserve Board"). Under the BHCA a bank holding company may not directly or indirectly acquire ownership or control of more than five percent of the voting shares or substantially all of the assets of any additional bank, or merge or consolidate with another bank holding company, without the prior approval of the Federal Reserve Board. S&T also is subject to the supervision and regulation of the Pennsylvania Department of Banking ("PADB"). S&T has received such approvals from the Federal Reserve Board for the following passive ownership positions:

S&T became a financial holding company under BHCA as amended by the Gramm-Leach-Bliley Act of 1999 ("GLB") in 2001. In order to maintain its status as a financial holding company, all depository institutions controlled by the bank holding company must be well capitalized and well managed, and have at least a "satisfactory" Community Reinvestment Act ("CRA") rating. S&T and S&T Bank currently satisfy these criteria. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The GLB defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Re serve Board has determined to be closely related to banking. Banks also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a "satisfactory" CRA rating. The GLB also establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the ("SEC") will regulate their securities activities and state insurance regulators will regulate their insurance activities. In addition, rules developed by the federal banking agencies pursuant to the GLB require disclosure of privacy policies to consumers and in some circumstances, allow consumers to prevent the disclosure of certain personal information to nonaff iliated third parties.

S&T is presently engaged in nonbanking activities through the following five entities: 9th Street Holdings, Inc., S&T Bancholdings, Inc., Commonwealth Trust Credit Life Insurance Company ("CTCLIC"), S&T Insurance Group, LLC and S&T Professional Resources Group, LLC. 9th Street Holdings, Inc. was formed in June 1988 and S&T Bancholdings, Inc. was formed in August 2002 to hold and manage a group of investments previously owned by S&T Bank and to give S&T additional latitude to purchase other investments. CTCLIC, which is a joint venture with another financial institution, acts as a reinsurer of credit life, accident and health insurance policies sold by S&T Bank and the other institution. S&T Insurance Group, LLC distributes high-quality life insurance and long-term disability income insurance products through Evergreen Insurance Associates, LLC. During 2002, S&T Insurance Group, LLC expanded into the property and casualty insurance business with the acquisition of Evergreen Insurance, LLC. S&T Professional Resources Group, LLC markets software developed by S&T.

There are a number of obligations and restrictions imposed on financial holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise.

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As a state-chartered, commercial bank, the deposits of which are insured by the Bank Insurance Fund ("BIF") of the FDIC, S&T Bank is subject to the supervision and regulation of the PADB and the FDIC. S&T Bank also is subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount, terms and conditions of loans that may be granted, and limits on the type of other activities in which S&T Bank may engage and the investments it may make.

S&T Bank also is subject to federal laws that limit the amount of transactions between itself and S&T or S&T's nonbank subsidiaries. Under these provisions, transactions by a bank with its parent company or any nonbank affiliate generally are limited to 10 percent of the bank subsidiary's capital and surplus or 20 percent in the aggregate. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. The GLB imposes similar restrictions on transactions between a bank and its financial subsidiaries. A bank, such as S&T Bank is prohibited from purchasing any "low quality" asset from an affiliate. S&T Bank is in compliance with these provisions.

The deposits of S&T Bank are insured up to $100,000 per insured depositor by the Bank Insurance Fund ("BIF") of the FDIC. As an FDIC-insured bank, S&T Bank also is subject to FDIC insurance assessments. Currently, the amount of FDIC assessments paid by individual insured depository institutions ranges from zero to $0.27 per $100 of insured deposits, based on their relative risk to the deposit insurance funds, as measured by the institutions' regulatory capital position and other supervisory factors. S&T Bank currently pays the lowest premium rate based upon this risk assessment. However, the FDIC retains the ability to increase regular assessments and to levy special additional assessments.

In addition to deposit insurance fund assessments, beginning in 1997 the FDIC assessed BIF-assessable and Savings Association Insurance Fund ("SAIF")-assessable deposits to fund the repayment of debt obligations of the Financing Corporation ("FICO"). FICO is a government-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation. At December 31, 2004, the current annualized rate established by the FDIC for both BIF-assessable and SAIF-assessable deposits was 1.46 basis points (hundredths of one percent).

Under federal law, deposits and certain claims for administrative expenses and employee compensation against insured depository institutions are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver appointed by regulatory authorities. Such priority creditors would include the FDIC.

The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements, S&T and S&T Bank each generally is required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit), of 8.00 percent. At least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of the loan loss allowance ("Tier 2 capital") and, together with Tier 1 capital, ("Total capital"). At December 31, 2004, S&T's Tier 1 and Total capital ratios were 10.84 percent and 12.58 percent, respecti vely, and the ratios of Tier 1 capital and Total capital to total risk-adjusted assets for S&T Bank were 9.98 percent and 11.36 percent, respectively.

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In addition, each of the federal bank regulatory agencies has established minimum leverage capital ratio requirements for banking organizations. These requirements provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets equal to 3.00 percent for bank and bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing significant growth or expansion. All other banks and bank holding companies will generally be required to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. S&T's leverage ratio at December 31, 2004 was 9.51 percent, and S&T Bank's leverage ratio was 8.73 percent at December 31, 2004.

Both the Federal Reserve Board's and the FDIC's risk-based capital standards explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a bank's capital adequacy. The Federal Reserve Board also has issued additional capital guidelines for certain bank holding companies that engage in trading activities. S&T does not believe that consideration of these additional factors will affect the regulators' assessment of S&T's or S&T Bank's capital position.

S&T is a legal entity separate and distinct from its banking and other subsidiaries. A major portion of the revenues of S&T result from amounts paid as dividends to S&T by S&T Bank. S&T Bank, in turn, is subject to state laws and regulations that limit the amount of dividends it can pay to S&T. In addition, both S&T and S&T Bank are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only if (1) the organization's net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition. S&T does not expect that any of these laws, regulations or policies w ill materially influence its ability or the ability of S&T Bank to pay dividends. During the year ended December 31, 2004, S&T Bank paid $28.1 million in cash dividends to S&T.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") the federal banking agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is, "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized," as defined by the law. Under regulations established by the federal banking agencies, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6.00 percent, a Total capital ratio of at least 10.00 percent and a leverage ratio of at least 5.00 percent and not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 capital ratio of at least 4.00 percent, a Total capital ratio of at least 8.00 percent and a leverage ra tio of at least 4.00 percent, or 3.00 percent in some cases. As of December 31, 2004, S&T Bank was classified as "well capitalized." The classification of depository institutions is primarily for the purpose of applying the federal banking agencies' prompt corrective action provisions and is not intended to be, and should not be interpreted as a representation of overall financial condition or prospects of any financial institution.

The federal banking agencies' prompt corrective action powers (which increase depending upon the degree to which an institution is undercapitalized) can include, among other things, requiring an insured depository institution to adopt a capital restoration plan which cannot be approved unless guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval and, ultimately, appointing a receiver for the institution. Among other things, only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval.

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As required by FDICIA, the federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not in compliance with any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the prompt corrective action provisions described above.

The enforcement powers available to federal banking agencies are substantial and include, among other things and in addition to other powers described herein, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banks and bank holding companies and "institution affiliated parties," as defined in the Federal Deposit Insurance Act ("FDIA"). In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

The PADB also has broad enforcement powers over S&T Bank, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator or receiver.

The BHCA currently permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nation-wide and state-imposed deposit concentration limits. S&T Bank has the ability, subject to certain restrictions, to acquire by acquisition or merger, branches of banks located outside of Pennsylvania, its home state. The establishment of de novo interstate branches is also possible in those states where expressly permitted. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.

In connection with its lending activities, S&T Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act and the Community Reinvestment Act (the "CRA.")

The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low and moderate-income neighborhoods. Furthermore, such assessment also is required of any bank that has applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office. In the case of a bank holding company (including a financial holding company) applying for approval to acquire a bank or bank holding company, the Federal Reserve Board will assess the record of each subsidiary bank of the applicant bank holding company in considering the application. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "unsatisfactory." S&T Bank was rated "satisfactory" in its most recent CRA evaluation.

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S&T Bank is subject to the Bank Secrecy Act and its implementing regulations and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. Among other things, these laws and regulations require S&T Bank to take steps to prevent the use of S&T Bank for facilitating the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports. S&T Bank also is required to develop and implement a comprehensive anti-money laundering compliance program. Banks also must have in place appropriate "know your customer" policies and procedures. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, accounting obligations and corporate reporting for companies, such as S&T, with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act established: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws.

S&T operates 51 banking offices in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson, Westmoreland and surrounding counties in Pennsylvania.

S&T owns land and banking offices at the following locations:

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Land is leased where S&T owns the banking offices and remote ATM buildings at the following locations:

The nature of S&T's business generates a certain amount of litigation involving matters arising in the ordinary course of business. However, in the opinion of management, there are no proceedings pending to which S&T is a party or to which its property is subject, which, if determined adversely to S&T, would be material in relation to its shareholders' equity or financial condition. In addition, no material proceedings are pending nor are known to be threatened or contemplated against S&T by governmental authorities or other parties.

There were no matters during the fourth quarter of the fiscal year covered by this report that were submitted to a vote of the security holders through solicitation of proxies or otherwise.

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S&T's common stock is listed on the NASDAQ National Market System ("NASDAQ") under the symbol STBA. The range of sales prices for the years 2004 and 2003 is as follows and is based upon information obtained from NASDAQ. As of the close of business February 23, 2005, there were 3,149 shareholders of record of S&T. Dividends paid by S&T are primarily provided from S&T Bank's dividends to S&T. The payment of dividends by S&T Bank to S&T is subject to the restrictions described in Note J to the Consolidated Financial Statements. The cash dividends declared shown below represent the historical per share amounts for S&T common stock.

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S&T is a financial holding company with its headquarters located in Indiana, Pennsylvania with assets of approximately $3.0 billion at December 31, 2004. S&T provides a full range of financial services through a branch network of 51 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 and administration; corporate trust services and other fiduciary services.

Average earning assets grew $118.9 million in 2004 primarily as a result of growth in commercial lending activities. During 2004, average loan balances increased by $190.6 million, and average securities and federal funds sold decreased $71.7 million. The funding for this loan growth was primarily provided by a $100.9 million increase in average deposits, an increase of $19.3 million in average earnings retained and a $5.6 million increase in average borrowings.

Average loans for the year ended December 31, 2004 were $2.2 billion, a $190.6 million or 9.4 percent increase from December 31, 2003. The increase in average loans for 2003 compared to 2002 was $275.7 million. Changes in the composition of the average loan portfolio during 2004 included increases of $229.8 million in commercial loans and $23.1 million in home equity loans offset by decreases of $48.8 million in residential mortgages and $13.5 million in installment loans. Total loans at December 31, 2004 increased $186.7 million from December 31, 2003. The increase is primarily attributable to $208.4 million of loan growth within the commercial loan category, offset by a $21.7 million decrease in consumer loan balances due to paydowns and sales into the secondary mortgage market.

Average commercial, mortgage and industrial loans comprised 75 percent of the loan portfolio in 2004 compared to 71 percent in 2003. The changes are primarily attributable to increased organizational growth related to increased business activity, primarily in the commercial lending and credit administration areas. Although commercial loans can be an area of higher risk, management believes these risks are mitigated by limiting concentrations and applying rigorous underwriting review by loan administration. During 2004, commercial loans experienced a shift toward variable-rate loan products as customers took advantage of record low short-term interest rates. At December 31, 2004, variable-rate commercial loans were 57 percent of the commercial loan portfolio as compared to 53 percent at December 31, 2003.

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Average residential mortgage loans comprised 22 percent of the loan portfolio in 2004 compared to 25 percent in 2003. Residential mortgage lending continued to be a strategic focus during 2004 through the establishment of a centralized mortgage origination department, product redesign, secondary market activities and the utilization of commission compensated originators. 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 mitigated because of S&T's conservative mortgage lending policies for portfolio loans, which generally require a maximum term of 20 years for fixed-rate mortgages, a maximum term of 30 years for adjustable-rate mortgages and private mortgage insurance for loans with less than a 20 percent down payment. Adjustable-rate mortgages with repricing terms of one, three and five years comprised 15 percent of the residential mortgage portfolio in 2004 and 12 percent in 2003. Home equity loans increased $11.3 million during 2004 and $34.1 million in 2003 and totaled $192.8 million at December 31, 2004 and $181.5 million at December 31, 2003, respectively.

Most of the decline in residential loans was due to active participation in the secondary mortgage markets. S&T periodically designates specific loan originations, generally longer-term, lower-yielding 1-4 family mortgages, as held for sale and sells them to Fannie Mae. The intent of these sales is to mitigate interest-rate risk associated with holding long-term residential mortgages in the loan portfolio, generate fee revenue from servicing, and maintain the primary customer relationship. During 2004, S&T sold $43.2 million of 1-4 family mortgages to Fannie Mae and currently services $175.9 million of secondary market loans. Fees and gains from mortgage servicing activities were $1.5 million in 2004 and $2.0 million in 2003. Management of S&T intends to continue to sell longer-term loans to Fannie Mae in the future on a selective basis, especially during periods of lower interest rates.

Average consumer installment loans comprised 3 percent of the loan portfolio in 2004 compared to 4 percent in 2003. Installment loan decreases were primarily the result of significantly lower origination volumes. The balance of consumer installment loans at December 31, 2004 was $69.2 million compared to $78.7 million at December 31, 2003.

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

Rates and terms for commercial real estate, equipment loans and commercial lines of credit 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 percent.

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

A variety of unsecured and secured installment loan and credit card products are offered by S&T. Loan to value guidelines for direct loans are 90-100 percent of invoice for new automobiles and 80-90 percent of National Automobile Dealer Association (NADA) value for used automobiles.

S&T continues to pursue quality loans in all lending categories within our market area in order to honor our commitment to provide comprehensive financial services 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. S&T has not concentrated its lending activities in any industry or group.

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The following table shows S&T's loan distribution at the end of each of the last five years:

The following table shows the maturity of loans (excluding residential mortgages of 1-4 family residences and installment loans) outstanding as of December 31, 2004. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates.

The equity securities portfolio is primarily comprised of bank holding companies. At December 31, 2004, the equity portfolio had a total market value of $74.6 million and net unrealized gains of $27.7 million. The equity security portfolio consists of securities traded on the various stock markets and is subject to changes in market 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. One municipal security is classified as held to maturity. On a quarterly basis, management evaluates the security portfolios for other than temporary declines in fair value in accordance with Emerging Issues Task Force No. 03-1. During 2004, there were $0.4 million of realized losses taken for an other than temporary impairment on one equity investment security. The performance of the equities and debt securities markets could generate further impairment in future periods. At December 31, 2004, net unrealized gains on securities classified as available for sale, including equity securities, were approximately $31.7 million as compared to $41.5 million at December 31, 2003.

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S&T invests in various securities in order to provide a source of liquidity, increase net interest income and as a tool of ALCO to quickly reposition the balance sheet for interest rate risk purposes. Securities are subject to similar interest rate and credit risks as loans. In addition, by their nature, securities classified as available for sale are also subject to market value risks that could negatively affect the level of liquidity available to S&T, as well as equity.

Risks associated with various securities portfolios are managed and monitored by investment policies annually approved by the S&T Board of Directors, and administered through ALCO and the Treasury function of S&T Bank. As of December 31, 2004, management is not aware of any risk associated with securities that would be expected to have a significant, negative effect to S&T's statement of condition or statement of operations.

The following table sets forth the carrying amount of securities at the dates indicated:

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The following table sets forth the maturities of securities at December 31, 2004, and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of debt securities and estimated prepayment rates on mortgage-backed securities). Tax-equivalent adjustments (using a 35 percent federal income tax rate) for 2004 have been made in calculating yields on obligations of states and political subdivisions.

Average non-interest earning assets increased $1.8 million in 2004 and $50.9 million in 2003. The 2003 increase was primarily attributable to the goodwill and other intangibles recorded in the 2002 acquisitions, as well as increases in cash and due from banks and accrued interest receivable on a higher earning asset balance.

The balance in the allowance for loan losses increased to $34.3 million or 1.50 percent of total loans at December 31, 2004 as compared to $31.5 million or 1.50 percent of total loans at December 31, 2003.

Management evaluates the degree of loss exposure for loans on a continuous basis through a formal allowance for loan loss policy as administered by the Loan Administration Department of S&T Bank and various management and director committees. Problem loans are identified and continually monitored through detailed reviews of specific commercial loans, and the analysis of delinquency and charge-off levels of consumer loan portfolios. Charged-off and recovered loan amounts are applied to the allowance for loan losses. Monthly updates are presented to the S&T Board of Directors as to the status of loan quality.

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Amounts are added to the allowance for loan losses through a charge to current earnings through the provision for loan losses, based upon management's assessment of the adequacy of the allowance for loan losses for probable loan losses. A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of the historical charge-off rates for all loan categories, fluctuations and trends in various risk factors. Factors consider the level of S&T's historical charge-offs that have occurred within the credits economic life cycle. Management also assesses qualitative factors such as portfolio credit trends, unemployment trends, vacancy trends, peer loss trends, loan growth and variable interest rate factors.

Significant to this analysis and assessment is the shift in 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 risk factors, trends in risk ratings and historical charge-off experiences are considered in the determination of the allowance for loan losses. During 2004, the risk rating profile of the portfolio remained relatively stable.

Management believes its quantitative and qualitative analysis and risk-rating process is sufficient and enables it to conclude that the total allowance for loan losses is adequate to absorb probable loan losses.

The allowance for loan losses is established based on management's assessment of the factors noted above along with the growth in the loan portfolio. The additions to the allowance charged to operating expense has maintained the allowance as a percent of loans at the following levels at the end of each year presented below:

S&T has considered impaired loans in its determination of the allowance for loan losses. The allowance for loan losses for all impaired loans was $5,712,000 and $3,914,000 at December 31, 2004 and 2003, respectively.

This table summarizes S&T's loan loss experience for each of the five years presented below:

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This table shows allocation of the allowance for loan losses as of the end of each of the last five years:

Net loan charge-offs totaled $1.6 million in 2004 and $6.0 million in 2003. During the fourth quarter of 2004, two significant troubled commercial loan relationships were satisfactorily resolved, resulting in the recovery of $3.9 million of previously charged-off loans. The first relationship was a $7.7 million hotel loan, auctioned in the fourth quarter of 2004 that produced a recovery of $1.1 million. The other was a commercial loan relationship, partially charged-off in the fourth quarter of 2000, which resulted in a $2.8 million recovery through the sale of collateral. No additional exposure remains for either of these loan relationships. The ratio of net charge-offs to average loans excluding these items was 0.20 percent consistent with historical levels. The balance of nonperforming loans, which include nonaccrual loans past due 90 days or more, at December 31, 2004, was $6.3 million or 0.28 percent of total loans. This compares to nonperforming loans of $9.1 million or 0.43 percent of total loans at December 31, 2003. Other real estate owned decreased slightly by $0.2 million in 2004 to $2.1 million.

The following table summarizes S&T's nonaccrual and past due loans:

It is S&T's policy to place loans in all categories on non-accrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due. The accrual of interest on impaired loans is discontinued when the loan is 60 days past due or, in management's opinion, the account should be placed on nonaccrual status. At December 31, 2004 and 2003, there was $2,138,000 and $3,392,000, respectively, of impaired loans that were on nonaccrual. There are no foreign loan amounts required to be included in this table. There were no restructured loans in the periods presented.

Average total deposits increased by $100.9 million in 2004 and $208.6 million in 2003. The mix of average deposits changed in 2004 with average time deposits increasing $54.2 million and average savings accounts increasing $32.3 million. Partially offsetting these increases is a decrease of $30.4 million in average money market and interest-bearing demand accounts. Average noninterest-bearing deposits increased by $44.8 million or 13 percent in 2004 and were approximately 19 percent and 18 percent of average total deposits during 2004 and 2003, respectively. The changes are attributable to strategic initiatives through new products, promotions and cash management services to commercial customers. Total deposits at December 31, 2004 increased $214.0 million compared to December 31, 2003.

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The daily average amount of deposits and rates paid on such deposits is summarized for the periods indicated in the following table:

Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2004, are summarized as follows:

S&T believes its deposit base is stable and 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 percent and 8 percent of total deposits at December 31, 2004 and 2003, 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. At December 31, 2004, there were $37.3 million of brokered retail certificates of deposit outstanding compared to $8.8 million at December 31, 2003. The purchase of brokered retail certificates of deposits was an ALCO strategy to increase liquidity for commercial loan demand, as an alternative to increased borrowings, and to better align interest rate risks in an asset sensitive balance sheet.

Average borrowings increased $5.6 million in 2004 and were comprised of securities sold under repurchase agreements ("REPOS"), federal funds purchased, FHLB advances and long-term borrowings at the FHLB. S&T defines REPOS with its retail customers as retail REPOS; wholesale REPOS are those transacted with other banks and brokerage firms with terms normally ranging from one to 365 days.

The average balance in retail REPOS increased by $11.4 million in 2004 and decreased by $5.2 million in 2003. S&T views retail REPOS as a relatively stable source of funds because most of these accounts are with local, long-term customers.

Wholesale REPOS, federal funds purchased and FHLB advances averaged $389.0 million in 2004, an increase of $119.0 million from the 2003 averages. The increase was made in order to take advantage of low rate short-term funds and to better match commercial borrower shifts into more variable-rate products.

During 2004, average fixed rate borrowings decreased $125.1 million. At December 31, 2004, S&T had long-term borrowings outstanding of $33.0 million at a fixed-rate with the FHLB and $53.3 million of long-term repurchase agreement borrowings. The purpose of these borrowings was to provide matched 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.

During the fourth quarter of 2003, S&T prepaid $89.3 million of fixed-rate borrowings, with average maturities of approximately nine months and an average cost of 6.56 percent, resulting in a pretax prepayment charge of $3.6 million. The prepayment penalties are reflected in S&T's Consolidated Statements of Income as noninterest expense. The funds were replaced with short-term borrowings having an average cost of 1.25 percent. The expense savings approximated $3.0 million in 2004 and $0.5 million in 2003. The reduction in higher-cost long-term debt was an ALCO strategy intended to mitigate the asset sensitivity position of S&T's balance sheet and exposure to declining interest rates or a flattening yield curve.

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The following table shows the distribution of S&T's short-term borrowings and the weighted average interest rates thereon at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates for the last three years.

The year-end market value balance of the S&T Bank Wealth Management assets, which are not accounted for as part of the assets of S&T, increased 15 percent in 2004 to $1.2 billion from December 31, 2003, with $869.0 million in Wealth Management Services and $299.0 million in Brokerage Services. The 2004 increase is attributable to increased performance in the stock markets and newly developed business relationships.

In addition to the results of operations presented in accordance with generally accepted accounting principles ("GAAP"), S&T management uses, and this annual report contains or references, certain non-GAAP financial measures, such as net interest income on a fully tax-equivalent basis and operating revenue. S&T believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends, as they facilitate comparisons with the performance of others in the financial services industry. Although S&T believes that these non-GAAP financial measures enhance investors' understanding of S&T's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

S&T believes the presentation of net interest income on a fully tax-equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Net interest income on a fully tax-equivalent basis is reconciled to net interest income in the table on page 20.

Operating revenue is the sum of net interest income and noninterest income less security gains. In order to understand the significance of net interest income to S&T business and operating results, S&T management believes it is appropriate to evaluate the significance of net interest income as a component of operating revenue.

Net income was a record $54.4 million or $2.03 per diluted earnings per share in 2004, a 5 percent increase from the $51.8 million or $1.94 per diluted earnings per share in 2003. The increase in earnings was primarily the result of increases in net interest income and lower provision for loan losses, offset by lower security gains. The return on average assets was 1.83 percent for 2004, as compared to 1.81 percent for 2003. The return on average equity at 16.07 percent for 2004 compared to 16.23 percent for 2003.

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On a fully taxable equivalent basis, net interest income increased $3.4 million or 3.2 percent for 2004 compared to 2003. The net yield on interest-earning assets decreased to 3.99 percent in 2004 as compared to 4.04 percent in 2003. The decline in net interest margin is primarily due to significant loan refinancing activities and the shift of customer preferences for lower-rate variable loans during a period of historically low interest rates. This effect on net interest income was offset by higher-earning asset volumes, the growth in core deposits and the replacement of some fixed-rate borrowings with short-term borrowings.

In 2004, average loans increased $190.6 million and average securities decreased $72.7 million. The yields on average loans decreased by 46 basis points and the yields on average securities decreased 19 basis points. Overall funding costs decreased 35 basis points.

Average interest-bearing deposits provided $56.1 million of the funds for the growth in average earning assets, at a cost of 1.88 percent in 2004 as compared to 1.98 percent in 2003. The cost of repurchase agreements and other borrowed funds decreased 102 basis points to 1.83 percent.

Positively affecting net interest income was a $57.2 million increase in average net free funds during 2004 compared to 2003. Average net free funds are the excess of demand deposits, other noninterest-bearing liabilities and shareholders' equity over nonearning assets. Most of this increase is due to the successful marketing of new demand accounts and corporate cash management services.

Maintaining consistent spreads between interest-earning assets and interest-bearing liabilities is very significant to S&T's financial performance because net interest income comprised 79 percent of operating revenue, (net interest income plus noninterest income, excluding security gains) in 2004 and 2003. The level and mix of earning assets and funds are continually monitored by ALCO in order to mitigate the interest-rate sensitivity and liquidity risks of the balance sheet. A variety of ALCO strategies were successfully implemented, within prescribed ALCO risk parameters, that enabled S&T to maintain a net interest margin consistent with historical levels.

Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest yields and rates. Interest on loans to and obligations of state, municipalities and other public entities is not subject to federal income tax. As such, the stated (pre-tax) yield on these assets is lower than the yields on taxable assets of similar risk and maturity. In order to make the pre-tax income and resultant yields comparable to taxable loans and investments, a taxable equivalent adjustment was added to interest income in the tables below. This adjustment has been calculated using the U.S. federal statutory corporate income tax rate of 35 percent for 2004, 2003 and 2002.

The following table demonstrates the amount that has been added to interest income per the summary of operations:

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The following tables set forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

Credit quality is the most important factor in determining the amount of the allowance, and the resulting, provision. Also affecting the amount of the allowance and resulting provision is loan growth and portfolio composition. Most of the loan growth in 2004 and 2003 is attributable to larger-sized commercial loans. Net loan charge-offs totaled $1.6 million for 2004 and $6.0 million in 2003. Included in the 2004 net charge-offs is the aforementioned $3.9 million recovery in the fourth quarter of 2004 of two previously charged-off loans that were considered in the determination of the allowance for loan losses. Nonperforming loans to total loans decreased to 0.28 percent at December 31, 2004 as compared to 0.43 percent at December 31, 2003. The 2004 charge-offs primarily consist of commercial loans in the hotel and manufacturing industries that were considered in the determination of the prior period allowance for loan losses. The 2003 charge-offs were mostly related to commercial loans in the food processing, hotel and automotive sales industries that were also considered in the determination of the prior period allowance for loan losses.

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Noninterest income, excluding net security gains, increased $0.7 million or 3 percent in 2004 compared to 2003. Increases included $0.1 million or 1 percent in service charges and fees, a $0.8 million or 15 percent increase in wealth management fees, a $0.3 million or 7 percent increase in insurance activities, a $0.1 million or 2 percent increase in other revenue offset by a $0.5 million or 27 percent decrease in mortgage banking income. Security gains totaled $5.3 million in 2004. S&T recognized $6.3 million of gains on securities during 2004 and recognized losses of $1.0 million on the sale of securities. Security gains were primarily attributable to the sales of equity securities in order to maximize returns by taking advantage of market opportunities when presented and to reduce the price and concentration risks developing in the equity portfolio as a result of increasing valuations in the stock market in general and with financial stocks in particular. The equities portfolio is comprised primarily of bank holding company common stock. Debt securities were sold as part of an ALCO strategy to reduce the interest rate risk of an asset sensitive balance sheet position in a declining interest rate environment or a flattening yield curve.

The increases in wealth management fees were a result of new business and general market improvements. Assets under management increased 15 percent in 2004 to $1.2 billion. Insurance commissions increased $0.3 million from 2003 primarily as a result of new revenue being generated by Evergreen. These areas were the focus of several strategic initiatives and product enhancements implemented in order to expand these sources of noninterest income. Mortgage banking revenue decreased $0.5 million from 2003 as the result of a decline in mortgage banking due to lower residential mortgage originations in 2004. Other fee revenue increases of $0.1 million reflect normal organization expansion and include $0.2 million of losses on the sale of real estate owned acquired through foreclosure.

Noninterest expense decreased $0.5 million or 1 percent in 2004 compared to 2003. The primary factor in this reduction of noninterest expense relates to a $3.6 million prepayment penalty incurred in the fourth quarter of 2003 for early repayment of $89.0 million of long-term debt. S&T's efficiency ratio, which measures noninterest expense as a percent of noninterest income, excluding security gains plus net interest income on a fully taxable equivalent basis, was 43 percent in 2004 and 45 percent in 2003. This compares favorably with our peers, whose average is 59 percent.

Staff expense increased 4 percent or $1.3 million in 2004. The increase is primarily attributable to higher medical plan costs, merit increases, higher staffing levels required to implement new initiatives in fee-based business lines in wealth management and retail banking products and services. Average full-time equivalent staff was 774 in 2004 and 764 in 2003.

S&T's net periodic defined benefit plan cost is based primarily on three assumptions: the discount rate for plan liabilities, the expected return on plan assets and the rate of compensation increase. Net periodic pension expense of $0.9 million and $1.2 million was recorded for S&T's defined benefit plan for 2004 and 2003, respectively. The decrease in expense for 2004 primarily relates to a decrease in the discount rate from 6.3 percent to 6 percent. Net periodic pension expense is expected to approximate $0.8 million for the year 2005, assuming no other significant changes in plan assumptions.

Occupancy and equipment expense increased 5 percent or $0.2 million as compared to 2003. The increase is primarily attributable to the 2004 opening of new offices in the Wildcat Commons Wal-Mart in Latrobe and Allegheny Towne Center in Leechburg, as well as the new Strawberry Meadows office in Altoona that opened in December, 2003. Data processing increased 14 percent or $0.5 million in 2004 as compared to 2003. The changes are primarily attributable to increased organizational growth related to increased business activity, primarily in the commercial lending and credit administration areas. Other taxes increased 11 percent or $0.3 million in 2004 as compared to 2003 as a result of an increase in Pennsylvania shares tax. Marketing expense increased 18 percent or $0.4 million in 2004 as compared to 2003, primarily as a result of organizational expansion and strategic initiatives. Other expenses increased 4 percent or $0.4 million in 2004 as compared to 2003 primarily the result of normal ch anges due to activity increases, organizational expansion and fee increases from vendors. Other expenses also included a $0.5 million funding of S&T's Charitable Foundation in 2004 as compared to $0.4 million in 2003.

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Federal income tax expense increased $2.1 million to $23.0 million in 2004 as compared to 2003. This increase is primarily attributable to a higher level of taxable income. The effective tax rate of 30 percent in 2004 and 29 percent in 2003 was below the 35 percent statutory tax rate due to the tax benefits resulting from tax-exempt interest, excludable dividend income and the tax benefits associated with Low Income Housing Tax Credit ("LIHTC") and Federal Historic Tax Credit projects. S&T currently does not incur any alternative minimum tax.

Net income was a record $51.8 million or $1.94 per diluted earnings per share in 2003, a 7 percent increase from the $48.6 million or $1.81 per diluted earnings per share in 2002. The increase in earnings was primarily the result of increases in net interest income, improvements in noninterest income, higher equity security gains and by slightly lower provision expense, offset by higher noninterest expenses including the aforementioned penalty on the prepayment of long-term debt. The return on average assets was 1.81 percent for 2003, as compared to 1.94 percent for 2002. The return on average equity was relatively unchanged at 16.23 percent for 2003 compared to 16.15 percent for 2002.

On a fully taxable equivalent basis, net interest income increased $9.5 million or 10.0 percent for 2003 compared to 2002. The net yield on interest-earning assets decreased to 4.04 percent in 2003 as compared to 4.13 percent in 2002. The decline in net interest margin is primarily due to significant loan refinancing activities, accelerated repayments in mortgage-backed securities and the shift of customer preferences for lower-rate variable loans during a period of historically low interest rates. This affect to net interest income was offset through higher-earning asset volumes and the growth in core deposits, $1.2 million of prepayment fees collected on commercial loans and the replacement of some fixed-rate borrowings with short-term borrowings.

In 2003, average loans increased $275.7 million and average securities increased $27.0 million. The yields on average loans decreased by 76 basis points and the yields on average securities decreased 65 basis points. Overall funding costs decreased 80 basis points.

Average interest-bearing deposits provided $143.6 million of the funds for the growth in average earning assets, at a cost of 1.98 percent in 2003 as compared to 2.70 percent in 2002. The cost of repurchase agreements and other borrowed funds decreased 119 basis points to 2.85 percent.

Positively affecting net interest income was a $38.8 million increase in average net free funds. Average net free funds are the excess of demand deposits, other noninterest-bearing liabilities and shareholders' equity less nonearning assets. Most of this increase is due to the acquisition of Peoples Financial Corp., Inc. ("PFC") and the successful marketing of new demand accounts and corporate cash management services.

Maintaining consistent spreads between interest-earning assets and interest-bearing liabilities is very significant to S&T's financial performance because net interest income comprised 79 percent of operating revenue (net interest income plus noninterest income, excluding security gains) in 2003. The level and mix of earning assets and funds are continually monitored by ALCO in order to mitigate the interest-rate sensitivity and liquidity risks of the balance sheet. A variety of ALCO strategies were successfully implemented, within prescribed ALCO risk parameters, that enabled S&T to maintain a net interest margin consistent with historical levels.

The provision for loan losses is an amount added to the allowance against which loan losses are charged. The provision for loan losses was $7.3 million and $7.8 million for 2003 and 2002, respectively. The provision is the result of management's assessment of credit quality statistics and other risk factors that would have an impact on probable losses in the loan portfolio, and the model used for determination of the adequacy of the allowance for loan losses. Changes in the provision and allowance for loan losses are directionally consistent with changes in credit quality and other risk factors.

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Credit quality is the most important factor in determining the amount of the allowance, and the resulting, provision. Also affecting the amount of the allowance and resulting provision is loan growth and portfolio composition. Most of the loan growth in 2003 and 2002 is attributable to larger-sized commercial loans. Net loan charge-offs totaled $6.0 million for 2003 and 2002. Included in the 2003 net charge-offs is $2.0 million for a single commercial loan. Nonperforming loans to total loans increased to 0.43 percent at December 31, 2003 from 0.29 percent at December 31, 2002. The remaining balance of that partially charged-off loan is $2.0 million and is included in nonperforming loans. Included in the 2002 net charge-offs is an additional $1.7 million incurred during the fourth quarter of 2002 for commercial real estate loan and $0.5 million for a loan that was previously placed in nonperforming status and partially charged off. The additional 2002 charge was made to reflect the estimate d decline in fair market value of the collateral.

Noninterest income, excluding net security gains, increased $2.5 million or 10 percent in 2003 compared to 2002. Increases included $0.9 million or 10 percent in service charges and fees, a $0.2 million or 11 percent increase in letter of credit fees, a $0.8 million or 23 percent increase in insurance activities, a $0.3 million or 20 percent increase in mortgage banking activities and a $0.3 million or 6 percent increase in other income. Security gains totaled $8.1 million in 2003. S&T recognized $9.1 million of gains on equity securities during 2003 and recognized losses of $1.0 million on the sale of debt securities. Security gains were primarily attributable to the sales of equity securities in order to maximize returns by taking advantage of market opportunities when presented and to reduce the price and concentration risks developing in the equity portfolio as a result of increasing valuations in the stock market in general and with financial stocks in particular. The equities portfolio is comprised primarily of bank holding company common stock. The debt securities sales were sold as an asset liability management strategy to reduce the interest risk associated with an increasingly asset sensitive balance sheet.

The increase in service charges on deposit accounts was primarily the result of management's continued effort to implement reasonable fees for services performed and to manage closely the collection of these fees, as well as to expand new cash management relationships.

The increases in letters of credit fees, insurance and mortgage banking activities were related to higher activity 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. Insurance commissions increased $0.8 million from 2002 primarily as a result of revenue being generated by Evergreen that was acquired by S&T on August 1, 2002. Mortgage banking revenue increased $0.3 million from 2002 as the result of heavy refinancing activities by mortgage customers in response to the low-interest rate environment. Other fee revenue increases of $0.3 million reflect normal organization expansion.

Noninterest expense increased $8.9 million or 17 percent in 2003 compared to 2002. The increase is primarily attributable to increased employment and benefit-related costs and the aforementioned prepayment charge on early extinguishment of fixed-rate borrowings totaling $3.6 million. 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 45 percent in 2003 and 42 percent in 2002, respectively.

Staff expense increased 15 percent or $4.2 million in 2003. The increase is primarily attributable to higher pension and other benefit plan costs, higher staffing levels required to implement new initiatives in fee-based business lines and from the Evergreen and PFC acquisitions. Average full-time equivalent staff was 764 in 2003 and 707 in 2002. Non-acquisition related staffing increases are primarily due to expansion of mortgage banking, wealth management and retail banking products and services.

S&T's net periodic defined benefit plan cost is based primarily on three assumptions: the discount rate for plan liabilities, the expected return on plan assets and the rate of compensation increase. Net periodic pension expense of $1.2 million and $0.6 million was recorded for S&T's defined benefit plan for 2003 and 2002, respectively. The increase in expense for 2003 reflects decreases in the discount rate from 7.5 percent to 7 percent, the assumed rate of compensation increase from 5 percent to 4 percent and the expected rate of return on plan assets from 9 percent to 8 percent and a decline in the value of plan assets. Net periodic pension expense is expected to approximate $0.8 million for the year 2004, assuming a decrease in the discount rate to 6.25 percent and no other significant changes in assumptions.

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Occupancy and equipment expense increased 4 percent or $0.3 million as compared to 2002. This increase is primarily attributable to the opening of new offices in Cranberry, Delmont and Altoona, as well as increased facilities acquired in the PFC and Evergreen mergers. Other taxes increased 23 percent or $0.4 million primarily due to increased shares tax as a result of the PFC merger. Data processing increased 14 percent or $0.4 million in 2003 as compared to 2002 and is attributable to the increase in organizational size following the 2002 acquisitions and increases in electronic banking services. PFC data processing conversion costs of $0.2 million were incurred in 2002.

Other expenses decreased 2 percent or $0.2 million as compared to 2002. One-time merger expenses related to the Evergreen and PFC acquisitions of $0.4 million were incurred in 2002. Other expenses also included a $0.4 million funding of S&T's Charitable Foundation in 2003 and $0.3 million in 2002.

Federal income tax expense increased $1.5 million to $20.9 million in 2003 as compared to 2002. This increase is primarily attributable to a higher level of taxable income. The effective tax rate of 29 percent in 2003 and 28 percent in 2002 was below the 35 percent statutory tax rate due to the tax benefits resulting from tax-exempt interest, excludable dividend income, the tax benefits associated with Low Income Housing Tax Credit ("LIHTC") and Federal Historic Tax Credit projects and the defined contribution retirement plan deduction for dividends paid for S&T common stock retained in the plan. S&T currently does not incur any alternative minimum tax.

Shareholders' equity increased $16.4 million at December 31, 2004 compared to December 31, 2003. The primary source of equity growth for S&T is earnings retention. Capital growth is a function of net income less dividends paid to shareholders and treasury stock activities.

Net income was $54.4 million and dividends paid to shareholders were $28.1 million for 2004. S&T paid 52 percent of 2004 net income in dividends, equating to an annual dividend rate of $1.07 per share. Also affecting capital was a decrease of $6.3 million in unrealized gains on securities available for sale, net of tax. During 2004, S&T repurchased 542,600 shares of its common stock at an average price of $29.43 per share and reissued 490,584 shares primarily through the exercise of employee stock options. In December 2004, the S&T Board of Directors authorized the plan for S&T to repurchase up to one million shares or approximately 4 percent of shares outstanding during the period January 1, 2005-December 31, 2005.

The following information describes the activity that has taken place during 2004 with respect to S&T's share repurchase plan:

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The book value of S&T's common stock increased 5.2 percent from $12.48 at December 31, 2003 to $13.12 at December 31, 2004, primarily due to earnings retention.

S&T continues to maintain a strong capital position with a leverage ratio of 9.5 percent as compared to the 2004 minimum regulatory guideline of 3 percent. S&T's risk-based capital Tier 1 and Total ratios were 10.8 percent and 12.6 percent, respectively, at December 31, 2004, which places S&T well above the Federal Reserve Board's risk-based capital guidelines of 4 percent and 8 percent for Tier 1 and Total capital. Included in the total ratio is 45 percent of the pretax unrealized holding gains on available for sale equity securities as prescribed by banking regulations effective October 1, 1998. In addition, management believes that S&T has the ability to raise additional capital if necessary.

During 2003, S&T filed a shelf registration statement on Form S-3 under the Securities Act of 1933 with the SEC for the issuance of up to $150.0 million of a variety of securities including, debt and capital securities, preferred and common stock and warrants. S&T can use the proceeds from the sale of any securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to, its subsidiaries, possible acquisitions and stock repurchases. As of December 31, 2004, S&T had not utilized the shelf registration statement.

In April 1993, shareholders approved the S&T Incentive Stock Plan ("Stock Plan") authorizing the issuance of a maximum of 1.2 million shares of S&T's common stock to assist in attracting and retaining employees of outstanding ability and to align their interests with those of the shareholders of S&T. On October 17, 1994, the Stock Plan was amended to include outside directors. On April 21, 1997, shareholders approved an amendment to the plan increasing the number of authorized shares to 3.2 million. As of December 31, 2002, 3,181,822 nonstatutory stock options and 35,600 restricted stock awards had been granted to key employees and outside directors under the Stock Plan; 1,095,022 of these awards are currently exercisable. In April 2003, shareholders approved the 2003 S&T Incentive Stock Plan ("2003 Stock Plan") authorizing the issuance of 1.5 million shares, subject to capital adjustments as provided in the 2003 Stock Plan. The purpose of the 2003 Stock Plan is to promote the long-term interests of S&T and its shareholders by attracting and retaining directors, officers and key employees. S&T believes that directors, officers and employees who own shares of its common stock will have a closer identification with S&T and a greater motivation to work for S&T's success, because, as shareholders, they will participate in S&T's growth and earnings. As of December 31, 2004, 731,300 nonstatutory stock options had been granted under the 2003 Stock Plan to employees and directors; none of these awards are currently exercisable.

S&T has various financial obligations, including contractual obligations and commitments, that may require future cash payments. The following table presents as of December 31, 2004, significant fixed and determinable contractual obligations to third parties by payment date:

S&T's operating lease obligations represent short-term lease arrangements as described in Note F to the consolidated financial statements. Purchase obligations represent obligations under agreement with Metavante, S&T's third party data processing servicer, for operational services outsourced.

S&T has one interest-rate swap with a notional value totaling $25.0 million and a positive fair value of $0.1 million, paying a variable rate and receiving a fixed rate as described in Note A to the consolidated financial statements. The interest-rate swap matures on March 7, 2005.

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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 and are renewed on an annual basis. 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 $547,627,000 and $467,166,000 at December 31, 2004 and 2003, respectively. Unfunded other loan commitments totaled $134,059,000 and $118,256,000 at December 31, 2004 and 2003, respectively; and obligations under standby letters of credit totaled $213,409,000 and $223,888,000 at December 31, 2004 and 2003, respectively.