44 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES Net interest margin (net interest income, on a tax- equivalent basis as a percentage of average earning assets) improved to 3.80% for 2002, a rise of 27 basis points (0.27%) compared to 2001. The year to year increase in the margin was due to the cost of funds declining more quickly than asset yields as interest rates fell to historic lows. Continued pressure on net interest income is anticipated by the Corporation despite active management of interest rate risk. The Corporation’s use of computer simulation to manage interest rate risk is described in the “Interest Sensitivity” section of this discussion. The following table shows the effect of changes in volumes and rates on interest income and interest expense: 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 $12.2 million in 2002 compared to $11.5 million in 2001 and $10.0 million in 2000. The allowance for credit losses was $34.5 million at December 31, 2002, which represents a ratio of 1.33% of average loans outstanding, down slightly from the 1.34% reported at December 31, 2001. Net charge-offs for 2002 rose $945 thousand over 2001 levels. The most significant components of this year to year change were increases in the following categories: commercial loans not secured by real estate (up $1.0 million), secured by 1-4 family real estate (up $661 thousand) and other loans (up $925 thousand). These increases were partially offset by decreases in commercial real estate loans of $985 thousand and revolving credit loans secured by 1-4 family real estate of $411 thousand. Net charge-offs as a percent of average loans outstanding at December 31, 2002 were 0.46% compared to 0.43% and 0.40% at December 31, 2001 and 2000, respectively. For an analysis of credit quality, see the “Credit Review” section of this discussion. Analysis of Year-to-Year Changes in Net Interest Income (Dollar Amounts in Thousands) 2002 Change from 2001 2001 Change from 2000 Total Change Due Change Due Total Change Due  Change Due Change to Volume to Rate Change to Volume to Rate Interest-earning assets: Time deposits with banks $ (39) $ (2) $ (37) $ (12) $ 42 $ (54) Securities (10,526)  (1,950) (8,576) 3,138 10,491  (7,353) Federal funds sold (486)  (473) (13) 258 349  (91) Loans (22,272) 3,995  (26,267)  (6,375) 3,871 (10,246) Total interest income (33,323)  1,570  (34,893)  (2,991)  14,753 (17,744) Interest-bearing liabilities: Deposits (39,593)  (5,925)  (33,668) 2,658 8,865  (6,207) Short-term borrowings  (5,198) 1,486  (6,684) (10,991)  (4,256)  (6,735) Long-term debt 294 410 (116) 964 1,758 (794) Total interest expense (44,497)  (4,029)  (40,468)  (7,369) 6,367 (13,736) Net interest income $ 11,174 $ 5,599 $ 5,575 $ 4,378 $ 8,386 $ (4,008)