FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS stock repurchase. (See NOTE 16 to the financial statements for a description of the Company obligated mandatorily redeemable capital securities of subsidiary trust.) Net interest margin (net interest income, on a tax-equivalent basis as a percentage of average earning assets), was 3.53% during 2001 compared to 3.59% in 2000 and 3.76% in 1999. Although net interest margin decreased for the full year of 2001, net interest margin for the fourth quarter of 2001 improved to 3.66%, up 20 basis points (0.20%) from the fourth quarter of 2000, primarily because of the ability to reprice liabilities in the declining interest rate environment. The Corporation’ s use of computer modeling to manage interest rate risk is described in the “ Interest Sensitivity” section of this discussion herein. The following table shows the effect of changes in volumes and rates on interest income and interest expense: Analysis of Year-to-Year Changes in Net Interest Income (Dollar Amounts in Thousands) 2001 Change from 2000 2000 Change from 1999 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 $ (12) $ 42 $ (54) $ (39) $ (41) $ 2 Securities 3,138 10,491 (7,353) 2,165 (2,383) 4,548 Federal funds sold 258 349 (91) 129 86 43 Loans (6,375) 3,871 (10,246) 13,538 7,765 5,773 Total interest income (2,991) 14,753 (17,744) 15,793 5,427 10,366 Interest-bearing liabilities: Deposits 2,658 8,865 (6,207) 12,176 2,922 9,254 Short-term borrowings (10,991) (4,256) (6,735) 8,386 4,558 3,828 Long-term debt 964 1,758 (794) 1,324 (601) 1,925 Total interest expense (7,369) 6,367 (13,736) 21,886 6,879 15,007 Net interest income $ 4,378 $ 8,386 $ (4,008) $ (6,093) $ (1,452) $ (4,641) 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 $11.5 million in 2001 compared to $10.0 million in 2000 and $9.5 million in 1999. The allowance for credit losses was $34.2 million at December 31, 2001, for a ratio of 1.33% of actual loans outstanding. The ratio of the allowance for credit losses to total loans outstanding as of December 31, 2001 has decreased slightly from the 1.35% reported as of December 31, 2000. Net charge-offs for 2001 reflected increases in net charge-offs of residential mortgages of $937 thousand and commercial loans secured by real estate of $2.2 million which were partially offset by decreases in net charge-offs of loans to individuals and commercial loans not secured by real estate of $1.3 million and $454 thousand, respectively. Net charge-offs against the allowance for credit losses were $10.9 million, or 0.43% of average total loans in 2001. This compared to net charge- offs of $10.0 million in 2000 and $8.2 million in 1999. Net charge-offs were 0.40% and 0.34% of average total loans during 2000 and 1999, respectively. For an analysis of credit quality, see the “ Credit Review”  section of this discussion. 43