MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL continued ASSET QUALITY/PROVISION FOR LOAN LOSSES December 31, (Dollars in Thousands) 2003 2002 ======================================================================================== Average Goodwill..................................... $ 107,232 $ 67,391 Average Core Deposit Intangible (CDI)................ 24,393 16,906 Average Deferred Tax on CDI.......................... (8,951) (6,249) ---------- ---------- Intangible Adjustment.............................. $122,674 $ 78,048 ========== ========== Average Shareholders’ Equity (GAAP Capital).......... $ 293,603 $ 261,129 Intangible Adjustment................................ (122,674) (78,048) ---------- ---------- Average Tangible Capital........................... $ 170,929 $ 183,081 ========== ========== Average Assets....................................... $2,960,195 $2,406,251 Intangible Adjustment................................ (122,674) (78,048) ---------- ---------- Average Tangible Assets............................ $2,837,521 $2,328,203 ========== ========== Net Income........................................... $ 27,571 $ 27,836 CDI Amortization, net of tax......................... 2,341 1,619 ---------- ---------- Tangible Net Income................................ $ 29,912 $ 29,455 ========== ========== Diluted Earnings per Share........................... $ 1.50 $ 1.69 Diluted Tangible Earnings per Share.................. $ 1.63 $ 1.78 Return on Average GAAP Capital....................... 9.39% 11.72% Return on Average Tangible Capital................... 17.50% 16.09% Return on Average Assets............................. 0.93% 1.16% Return on Average Tangible Assets.................... 1.05% 1.27% At December 31, 2003, impaired loans totaled $44,772,000, an increase of $421,000 from year end 2002. At December 31, 2003, an allowance for losses was not deemed necessary for impaired loans totaling $32,047,000, but an allowance of $5,728,000 was recorded for the remaining balance of impaired loans of $12,725,000 and is included in the Corporation’s allowance for loan losses. The average balance of impaired loans for 2003 was $50,245,000. 9 At December 31, 2003, non-performing loans totaled $26,624,000, an increase of $3,306,000, as noted in the table on the following page. This increase was primarily due to one loan totaling $5,000,000, related to declining collateral values of this borrower being placed on non-accrual status during 2003. Loans 90 days past due other than non-accrual and restructured loans decreased by $2,013,000. The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings. The amount provided for loan losses and the determination of the adequacy of the allowance are based on a continuous review of the loan portfolio, including an internally administered loan "watch" list and an independent loan review primarily provided by an outside accounting firm. The evaluation takes into consideration identified credit problems, as well as the possibility of losses inherent in the loan portfolio that are not specifically identified. (See Critical Accounting Policies)