FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity 46 Income tax expense was $15.3 million during 2001 representing an increase of $965 thousand over the 2000 amount of $14.3 million and compared to $19.6 million in 1999. The Corporation’ s effective tax rate was 23.3% for 2001 compared to 23.2% for 2000 and 27.0% for 1999. The Corporation’ s effective tax rate continues to be favorably impacted by tax free income from certain loans, investments and bank owned life insurance. Other operating expenses for the 1999 period included an increase in the write-down of mortgage servicing rights in the amount of $336 thousand related to the disposition of BSI. The disposition of BSI in 1999 also resulted in a loss on sale of $202 thousand. Included in other operating expense increases for 2000 compared to 1999 were increases in collection and repossession expenses as accelerated collection efforts attempted to reduce nonperforming loan levels and minimize risk of loss in future periods. FDIC expenses increased $180 thousand during 2000, primarily as a result of rate changes implemented when the FDIC Bank Insurance Fund and Savings and Loan Insurance Fund rates were standardized. Other operating expenses for 2000 also included increases in advertising and promotions, express freight charges, charge card interchange and checkbook printing expenses, which were partially offset by decreases in other professional fees, postage and printing costs compared to 1999 costs. data processing needs are evaluated based on technology, efficiency and cost considerations. This cost is expected to be reduced in 2002 as the benefits of Southwest Bank being converted from an outsourced environment to our internal systems is realized. Pennsylvania shares tax expense of $3.8 million for 2001 reflected an increase of $330 thousand over the $3.5 million reported for each of the two previous years. Other operating expenses for 2001 were $27.8 million, an increase of $2.4 million over the $25.4 million reported for 2000 and compared to $24.6 million for 1999. The 2001 period included increases in filing and recording fees, legal fees, other professional fees and telephone expenses of $165 thousand, $216 thousand, $666 thousand and $352 thousand, respectively, compared to 2000 levels. The 2001 period also included increases in losses on sale of leased vehicles as the used auto market continues to be weak compared to expected residual values. Customer disclosures, required as a result of new privacy legislation and changes in customer loan and deposit accounts due to standardization during 2001 system conversions, caused increases for postage and printing costs for 2001. The Corporation also continues to support the communities in which we serve, resulting in additional charitable contributions for 2001. The 2001 period included decreases in insurance expense, Pennsylvania use tax, promotions and deferred loan origination costs compared to 2000 levels. Liquidity is a measure of the Corporation’ s ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source) and the maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, the banking subsidiaries are members of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements. The sale of earning assets may also provide an additional source of liquidity. Increased competition from nonbanking sources such as mutual funds, insurance companies and brokerage and investment banking firms have required banks to rely more heavily on alternative funding from other borrowings. Many of our competitors have significantly greater resources (financial and other) than us and may offer certain services that our banks do not provide at this time. In addition, certain of our banks’  competitors are not subject to the regulation and supervision to which we and our banks are subject, and therefore may have competitive advantages over our banks. The impact of increased competition for deposits could become more consequential in the future. The Corporation monitors liquidity through regular computations of prescribed liquidity ratios. The Corporation actively manages liquidity within a defined range and has developed liquidity contingency plans, including ensuring availability of alternate funding sources to maintain liquidity under a variety of business conditions. In addition to the previously described funding sources, the Corporation’ s ability to access the capital markets was demonstrated during 1999 through the issuance of $35 million of capital securities. The Corporation’ s long-term liquidity source is a large core deposit base and a strong capital position. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. Deposits increased $29.0 million in 2001 and included increases in noninterest-bearing deposits and savings deposits which were partially offset by decreases in time deposits. Non-core deposits, which are time deposits in denominations of $100 thousand or more represented 16.08% of total deposits at December 31, 2001, up from 14.86% of total deposits at December 31, 2000. Non-core deposits increased by $41.9 million in 2001 and $97.1 million in 2000 due in part to an increase in public funds. The increase in non-core deposits during 2000 also included the issuance of brokered time deposits in the amount of $26.1 million.