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

While the allowance for credit losses as a percentage of average total loans outstanding increased from 1.33% in 2002 to 1.44% in 2003, the allowance for credit losses as a percentage of actual loans outstanding remained at 1.32% for both periods. The allowance as a percentage of average total loans outstanding for 2003 was impacted by the inclusion of BankPittsburgh loans since the acquisition. 

Other than those described below, there are no material credits that management has serious doubts as to the borrower’s ability to comply with the present loan repayment terms. The 

## Nonperforming and Impaired Assets and Effect on Interest Income Due to Nonaccrual 

following table identifies nonperforming loans at December 31. A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt. Past due loans are those loans which are contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower. 

(Dollar Amounts in Thousands) 

<img src='content_image/38964.jpg'>

The reduction of income due to renegotiated loans was less than $50 thousand in any year presented. 

Nonperforming loan levels at December 31, 2003 decreased $15.2 million compared to 2002 levels as nonaccrual loans and past due loans decreased by $11.0 million and $4.2 million, respectively. The decrease in nonaccrual loans was due to eight commercial loans that paid in full or were charged down and/or charged off. The largest improvement was related to a credit with a balance of $6.2 million at December 31, 2002 and bearing an 80% guaranty of a U.S. government agency. The credit was resolved in the fourth quarter of 2003 without any additional charge-off being recorded. A second credit, which was $3.2 million at year-end 2002, continues to be resolved through the liquidation of collateral and exercising other remedies. The balance outstanding at December 31, 2003 for this credit was $1.8 million, a decrease of $1.4 million from the prior year. While the final resolution of this credit is uncertain, management’s estimate of the potential loss on this credit is reserved. 

The decrease in past due loans for the 2003 period included decreases in all major categories with the most significant decreases in loans secured by residential real estate (down $2.5 million), loans secured by commercial real estate (down $607 thousand) and other commercial loans (down $839 thousand). The decrease in past due loans was due to successful collection strategies. The renegotiated loan category at December 31, 2003, included the one credit that 

was outstanding at the end of December 31, 2002. Interest income on nonaccrual loans increased for 2003 due to final resolution of several large credits that included collection of some interest income. 

The Corporation’s loan portfolio continues to be monitored by senior management to identify potential portfolio risks and detect potential credit deterioration in the early stages. The Corporation has a “Watchlist Committee” which includes credit workout officers of the bank and meets bi-weekly to review watchlist credits for workout progress or deterioration. Loan loss adequacy and the status of significant nonperforming credits are monitored on a quarterly basis by a committee made up of senior officers of the bank and parent company. These committees were established to provide additional internal monitoring and analysis in addition to that provided by the Credit Committees of the bank and parent company. Credit risk is mitigated during the loan origination process through the use of sound underwriting policies and collateral requirements and its previously described committee structure. Management also attempts to minimize loan losses by analyzing and modifying collection techniques on a periodic basis. Management believes that the allowance for credit losses and nonperforming loans remained safely within acceptable levels. 

## Capital Resources 

Equity capital stood at $430.9 million at December 31, 2003, a $29.6 million rise compared to December 31, 2002. Dividends declared reduced equity by $37.2 million during 2003 as 

