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## MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

Corporation’s subsidiary banks and followed an adverse pre- trial judgment by the trial judge on procedural grounds. A partial recovery from insurance for the claim related to the litigation settlement was received in 2003. 

In addition to the restructuring and litigation expenses that were incurred during 2002, the decrease in net income from the 2001 period to the 2002 period included a decrease in security gains. 

Diluted earnings per share was $0.90 for 2003 compared to $0.74 and $0.86 for 2002 and 2001, respectively. Return on average assets was 1.12% and return on equity was 12.95% during 2003 compared to 0.96% and 11.09%, respectively for 2002 and 1.11% and 13.85%, respectively for 2001. 

The following is an analysis of the impact of changes in net income on diluted earnings per share: 

<img src='content_image/65321.jpg'>

## Net Interest Income 

Net interest income, the engine that powers revenue growth for the Corporation, is defined as the difference between income on earning assets and the cost of funds supporting those assets. Net interest income declined to $143.5 million in 2003 compared to $152.9 million in 2002 and $141.7 million in 2001. Both interest income and interest expense declined compared to 2002 levels primarily as a result of the dramatic decrease in interest rates that began in 2001 and continued through 2002 into 2003. During this unparalleled period of low interest rates, the Corporation, as well as the financial services industry in general, has been challenged by margin compression, as the cost of funds has not declined in the same magnitude or at the same pace as asset yields. The following is an analysis of the average balance sheets and net interest income for each of the three years in the period ended December 31, 2003: 

