FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Interest Income 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: 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:  2003 2002  vs.  vs.   2002   2001 Net income per share, prior year  $  0.74  $  0.86 Increase (decrease) from changes in:  Net interest income  (0.18)  0.16 Provision for credit losses  (0.01)  (0.01) Security transactions  0.09  (0.05) Insurance commissions  (0.01)  0.01 Income from bank owned life insurance  0.00 Service charges on deposits  0.02  Sale of branches  0.05  (0.01) Other income  0.02  Salaries and employee benefits  (0.04)  (0.05) Occupancy and equipment costs  (0.01)  (0.01) Outside data processing expense  0.00  0.02 Goodwill amortization  Litigation settlement  0.15  (0.14) Restructuring charges  0.10  (0.10) Rebranding costs  0.03  (0.03) Other operating expenses  Applicable income taxes  (0.07)  0.11 Net income per share  $  0.90  $  0.74 44