MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ASSET QUALITY/PROVISION FOR LOAN LOSSES continued At December 31, 2003, the allowance for loan losses was $25,493,000, an increase of $3,076,000 from year end 2002. As a percent of loans, the allowance was 1.08 percent at December 31, 2003 and 1.11 percent at December 31, 2002. The provision for loan losses in 2003 was $9,477,000, an increase of $2,303,000 from $7,174,000 in 2002. The Corporation’s allowance for loan losses reflects increased non-performing loans, increased specific reserves and increased impaired loans, resulting in increased provision expense. The provision expense increase was primarily attributable to declining collateral values of a single commercial borrower, with the remaining based on the regular ongoing evaluation of the loan portfolios of the Corporation’s bank subsidiaries. Current non-performing and impaired loan balances indicate that some decline in loan asset quality has occurred, which management believes is a result of current economic conditions. The following table summarizes the non-accrual, contractually past due 90 days or more other than non-accruing and restructured loans for the Corporation. The table below presents loan loss experience for the years indicated. Liquidity management is the process by which the Corporation ensures that adequate liquid funds are available for the Corporation and its subsidiaries. These funds are necessary in order for the Corporation and its subsidiaries to meet financial commitments on a timely basis. These commitments include withdrawals by depositors, funding credit obligations to borrowers, paying dividends to shareholders, paying operating expenses, funding capital expenditures, and maintaining deposit reserve requirements. Liquidity is 10 LIQUIDITY (Dollars in Thousands) 2003 2002 2001 =================================================================================================================================== Allowance for loan losses: Balance at January 1 ............................................... $22,417 $15,141 $12,454 ------- ------- ------- Chargeoffs ......................................................... 12,139 8,113 3,547 Recoveries ......................................................... 2,011 1,313 573 ------- ------- ------- Net chargeoffs ..................................................... 10,128 6,800 2,974 Provision for loan losses .......................................... 9,477 7,174 3,576 Allowance acquired in acquisitions.................................. 3,727 6,902 2,085 ------- ------- ------- Balance at December 31 ............................................. $25,493 $22,417 $15,141 ======= ======= ======= Ratio of net chargeoffs during the period to average loans outstanding during the period ....................... .44% .37% .23% (dollars in thousands) December 31, 2003 2002 ================================================================================ Non-accrual loans .............................. $19,453 $14,134 Loans contractually past due 90 days or more other than non-accruing ..................... 6,530 6,676 Restructured loans ............................. 641 2,508 ------- ------- Total ....................................... $26,624 $23,318 ======= =======