amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to the allowance for loan losses and accounting for acquisitions and the related review of goodwill and intangible assets for impairment. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from managementGLYPH<213>s estimates under different assumptions or conditions. 

Management believes the allowance for loan losses (GLYPH<210>ALLGLYPH<211>) is a critical accounting policy that requires the most significant estimates and assumptions used in the preparation of the Consolidated Financial Statements. The ALL is based on managementGLYPH<213>s evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. 

Management regularly evaluates the ALL for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and managementGLYPH<213>s estimation of probable losses. The use of different estimates or assumptions could produce different provisions for loan losses. Please see GLYPH<210>Allowance for Loan Losses/Provisions for Loan LossesGLYPH<211> and GLYPH<210>Certain Factors Affecting Future Operating ResultsGLYPH<209>Our Allowance for Loan Losses may not be adequate to cover actual loan lossesGLYPH<211> for more information. 

Periodically the Company acquires property in connection with foreclosures or in satisfaction of debt previously contracted. The valuation of this property is accounted for individually at the lower of the GLYPH<210>book value of the loan satisfiedGLYPH<211> or its net realizable value on the date of acquisition. 

At the time of acquisition, any excess in the book value of the loan satisfied over the net realizable value of the property is charged against the ALL. If the value of the property becomes permanently impaired, as determined by an appraisal or an evaluation in accordance with the CompanyGLYPH<213>s appraisal policy, the Company will record the decline by showing a charge against current earnings. Upon acquisition of a property valued at $25,000 or more, a current appraisal or a brokerGLYPH<213>s opinion must substantiate GLYPH<210>market valueGLYPH<211> for the property. 

Management utilizes numerous techniques to estimate the value of various assets held by the Company. As previously discussed, management utilized various methods to determine the appropriate carrying value of goodwill as required under Statement of Financial Accounting Standards (GLYPH<210>SFASGLYPH<211>) No. 142. In addition, goodwill from a purchase acquisition is subject to ongoing periodic impairment tests. Goodwill is evaluated for impairment using several standard valuation techniques including discounted cash flow analyses, as well as an 

estimation of the impact of business conditions. Different estimates or assumptions are also utilized to determine the appropriate carrying value of other assets including, but not limited to, property, plant and equipment, mortgage servicing rights, overall collectibility of loans and receivables. The use of different estimates or assumptions could produce different estimates of carrying value. 

## RESULTS OF OPERATIONS 

## Summary Financial Overview 

The Company reported net income after the cumulative effect of a change in accounting for goodwill (GLYPH<210>SFAS No. 142GLYPH<211>) of $17.0 million, or $2.11 per diluted share, for 2002 compared to $15.4 million and $1.89 per diluted share in 2001. The improved results were attributable to increases of 6.1% and 10.4% in net interest income and non-interest income respectively, over 2001, including a gain on the sale of the CompanyGLYPH<213>s merchant business credit card product during 2002, which were partially offset by an increase of 4.2% in non-interest expenses and the previously mentioned SFAS No. 142 adjustment. Return on average assets was 1.48% in 2002 compared to 1.47% in 2001 and return on average shareholdersGLYPH<213> equity was 15.38% in 2002 compared to 15.55% in 2001. The slight increase in return on average assets was primarily due to growth in both the loan and investment portfolios resulting in increased net interest income and non-interest income. The decline in return on average equity was primarily due to increased retained earnings and the increase in the fair value of securities available for sale and derivative instruments, 

which resulted in higher levels of equity. The CompanyGLYPH<213>s consolidated provision for loan losses was $3.1 million during 2002 compared to $3.7 million in 2001. This resulted in the Company increasing its ratio of ALL to total loans from 1.87% in 2001 to 1.88% in 2002. 

Non-performing assets, defined as non-accrual loans, accruing loans 90 days or more past due, and other real estate owned, increased from $8.3 million in 2001 to $8.8 million in 2002, however, as a percentage of total loans outstanding non- performing assets actually decreased during 2002 due to the growth in the loan portfolio. Non-performing assets to total loans was 1.09% at December 31, 2002 compared to 1.14% at December 31, 2001. 

## Net Interest Income 

Net interest income accounted for 76.4% of total revenues for the Company, and is the CompanyGLYPH<213>s largest source of revenue. Net interest income reflects revenues generated through income from earning assets plus loan fees, less interest paid on interest bearing deposits and borrowings. Net interest income was $47.2 million on a fully-taxable equivalent basis in 2002 compared to $44.7 million in 2001, an increase of 5.6%. The CompanyGLYPH<213>s level of net interest income fluctuates over time 

for three primary reasons. First, interest earned from earning assets and expenses from interest bearing deposits and borrowings fluctuate due to changes in interest rates. This is referred to as the GLYPH<210>yieldGLYPH<211> or GLYPH<210>rateGLYPH<211> component of net interest income. Second, net interest income changes due to the amount of earning assets the Company maintains as well as the amount of non-interest bearing deposits and borrowings the Company holds. This is referred to as the GLYPH<210>volumeGLYPH<211> component of net interest income. Finally, net interest income fluctuates as a result of the change over time in the components of earning assets and non-interest bearing deposits, interest bearing 

deposits and borrowings. This is referred to as the GLYPH<210>mixGLYPH<211> component of net interest income. It is the CompanyGLYPH<213>s goal to ultimately maximize net interest income by providing competitive products to its customers that, within various risk parameters, maximize interest income while minimizing interest expense. Management uses several analytical models, such as the tables presented on pages 24 and 25, to assess and monitor these factors that affect net interest income and to assess the CompanyGLYPH<213>s performance in meeting its goals and to determine future strategies. 

