FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate. (b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets. (c) Loan income includes net loan fees. (d) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were made for regulatory purposes. Earning assets yields, on a tax-equivalent basis, declined 95  basis points (0.95%) during 2003 to 5.71% from 6.66%  registered in 2002, after decreasing from 7.43% in 2001. The  cost of funds for 2003 dropped 72 basis points (0.72%) below  2002 costs of 3.27%, after decreasing 117 basis points  (1.17%) from 2001 costs of 4.44%. Average earning assets  were $4,474.6 million and average interest-bearing liabilities  were $3,923.6 million for 2003, compared to $4,294.5 million  and $3,746.9 million, respectively in 2002. 2002 averages  were basically flat when compared to 2001 averages in both components. loan yields fell 67 basis points (0.67%) during 2003 to 6.46%  from 7.13% after a decline of 98 basis points (0.98%) during  2002 from the 2001 levels. Installment loan yields fell 92 basis  points (0.92%) and the yields on home equity lines of credit  declined 81 basis points (0.81%) compared to the prior year. The increase in average loan volumes was not enough to  offset the reduced interest income caused by declining yields.  During 2003, the Corporation took advantage of the lower  interest rate cycle and continued to change the mix of the loan  portfolio. Average mortgage loans declined during 2003 as  consumers refinanced their loans at near record levels. The  Corporation continued to offer competitive mortgage loans  but generally sold them immediately after origination along  with the related servicing rights. The Corporation has recently  started to retain fixed rate mortgages with maturities of 15  Interest and fees on loans declined $15.5 million for 2003 com- pared to 2002 after declining $22.3 million for 2002 compared  to 2001 levels. The decreases are primarily the result of declin- ing yields in a lower interest rate environment. Tax-equivalent  45 Average Balance Sheets and Net Interest Analysis (Dollar Amounts in Thousands) 2003 2002  2001 Average  Income/  Yield or Average  Income/  Yield or  Average  Income/  Yield or  Balance  Expense  Rate(a) Balance  Expense  Rate(a)  Balance  Expense  Rate(a) Assets  Interest-earning assets:  Time deposits with banks  $  1,289  $  13  1.03% $  1,785  $  31  1.74%  $  1,842  $  70  3.81% Tax free investment securities  226,780  10,561  7.16 198,687  9,520  7.37  197,544  9,534  7.42  Taxable investment securities  1,605,191 68,754  4.28  1,495,824 86,110  5.76 1,527,181 96,622  6.33  Federal funds sold  358 4  1.05 359 6  1.72 9,521 492  5.17  Loans, net of unearned income (b)(c) 2,640,935 164,441  6.46  2,597,862 179,901  7.13 2,548,596 202,173  8.11  Total interest-earning assets  4,474,553 243,773  5.71  4,294,517 275,568  6.66 4,284,684 308,891  7.43  Noninterest-earning assets: Cash  66,614 69,735 72,806 Allowance for credit losses  (36,172)  (34,813)  (34,078)  Other assets  233,040 211,302 198,051 Total noninterest-earning assets  263,482 246,224 236,779 Total Assets  $ 4,738,035 $ 4,540,741 $ 4,521,463 Liabilities and Shareholders’ Equity Interest-bearing liabilities: Interest-bearing demand deposits (d)  $  457,327 $  1,699  0.37% $  416,184 $  3,410  0.82%  $  388,495 $ 7,039  1.81% Savings deposits (d)  792,755 7,028  0.89  727,996 9,375  1.29 684,298 16,061 2.35  Time deposits  1,524,974 51,373  3.37  1,592,585 65,787  4.13 1,728,056 95,065  5.50  Short-term borrowings  554,133 6,755  1.22  339,908 6,029  1.77 300,173 11,227  3.74  Long-term debt   594,383  33,386  5.62  670,258  38,072  5.68  663,063  37,778  5.70  Total interest-bearing liabilities  3,923,572 100,241  2.55 3,746,931 122,673  3.27 3,764,085  167,170  4.44  Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (d)  380,772 380,878 368,983 Other liabilities  22,241  20,493  26,008 Shareholders’ equity  411,450  392,439 362,387 Total noninterest-bearing funding sources  814,463  793,810 757,378 Total Liabilities and  Shareholders’Equity  $ 4,738,035 $ 4,540,741 $ 4,521,463 Net Interest Income and Net Yield  on Interest-Earning Assets  $ 143,532  3.47%  $ 152,895  3.80%  $141,721  3.53%