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

The following table shows the effect of changes in volumes and rates on interest income and interest expense: 

<img src='content_image/9203.jpg'>

Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to interest sensitivity of consolidated assets and liabilities. 

## Provision for Credit Losses 

The provision for credit losses is an amount added to the allowance against which credit losses are charged. The amount of the provision is determined by management based upon its assessment of the size and quality of the loan portfolio and the adequacy of the allowance in relation to the risks inherent within the loan portfolio. The provision for credit losses was $12.8 million in 2003 compared to $12.2 million in 2002 and $11.5 million in 2001. The allowance for credit losses was $37.4 million at December 31, 2003, which represents a ratio of 1.42% of average loans outstanding, slightly up from the 1.33% reported at December 31, 2002. 

Net charge-offs for 2003 rose $1.1 million over 2002 levels. The most significant components of this year-to-year change 

were increases in net charge-offs in the following categories: commercial loans not secured by real estate (up $579 thousand), loans secured by 1-4 family real estate (up $1.1 million) and construction loans (up $381 thousand). These increases in net charge-offs were partially offset by decreases in commercial real estate loans of $204 thousand, loans to individuals of $683 thousand and lease financing receivables of $103 thousand. Net charge-offs as a percent of average loans outstanding at December 31, 2003 were 0.49% compared to 0.46% and 0.43% at December 31, 2002 and 2001, respec- tively. For an analysis of credit quality, see the “Credit Review” section of this discussion. 

The following table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31, 2003: 

