FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS compared to 2000 averages and included increases in commercial loans and municipal loans which were partially offset by decreases in average consumer loans. The Corporation continued to focus lending activities on variable rate commercial loans to counter-balance the interest rate risk inherent in fixed rate consumer lending during the current period of historically low interest rates. Enhanced marketing strategies continue to enable the Corporation to capitalize on lending opportunities with small to mid-sized commercial customers, including Small Business Administration (“ SBA” ) loans generated through the Corporation’ s preferred lender status. The Corporation has been successful in competing with larger financial institutions for small business customers becoming one of the top small business lenders in Pennsylvania during 2001. Interest and fees on loans reflected decreases due to rate of $10.2 million during 2001 as loan yields decreased 39 basis points (0.39%) during 2001 to 8.11% from 8.50% reported for 2000 and compared to 8.21% during 1999. Time and demand (primarily commercial) loan yields decreased 93 basis points (0.93%) for the 2001 period while yields on home equity and personal credit lines decreased 166 basis points (1.66%) and 170 basis points (1.70%), respectively compared to 2000 yields, reflecting a decrease in general interest rates. Interest income on investments increased $3.1 million for 2001 compared to 2000, as volume increases during 2001 were only partially offset by rate decreases. Volume increases which accounted for the increase in interest income for U.S. government agency securities, corporate bonds and asset backed securities were $1.9 million, $7.6 million and $1.8 million, respectively for the 2001 period. Yields on investments for 2001 were 6.45% compared to 6.88% for 2000 and 6.59% for 1999. Decreases in interest income due to rate for U.S. government agency securities were $5.0 million during 2001 as yields on U.S. government agency securities decreased 45 basis points (0.45%) compared to 2000 yields. Prepayment speeds of mortgage backed securities (“ MBS” ) which had slowed during 1999 as interest rates rose, began to accelerate at the end of 2000 and into 2001 as interest rates began to decline. The primary risk of owning MBS relates to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact on prepayment speeds. As interest rates increase, prepayment speeds generally decline, resulting in a longer average life of a MBS. Conversely as interest rates decline, prepayment speeds increase, resulting in a shorter average life of a MBS. Using computer simulation models, the Corporation tests the average life and yield volatility of all MBS under various interest rate scenarios on a continuing basis to insure that volatility falls within acceptable limits. The Corporation holds no “ high risk”  securities nor does the Corporation own any securities of a single issuer exceeding 10% of shareholders’  equity other than U.S. government and agency securities. Interest on deposits increased $2.7 million for 2001 compared to 2000 as increases due to volume of $8.9 million were partially offset by decreases due to rate of $6.2 million over 2000 levels. Average time deposits increased $142.4 million for 2001 compared to 2000 averages, resulting in an increase in interest expense due to volume of $8.0 million. Additional increases in interest expense due to volume during 2001 also occurred for money market deposit accounts and savings accounts. The cost of interest-bearing demand deposits for 2001 decreased by 67 basis points (0.67%) compared to 2000 costs of 2.48%, resulting in a decrease in interest expense due to rate of $2.6 million. Interest expense on total savings deposits and time deposits for 2001 also reflected decreases due to rate of $1.8 million for both savings deposits and time deposits as deposit costs for these categories decreased 26 basis points (0.26%) and 11 basis points (0.11%), respectively for 2001 compared to 2000. Interest expense on short-term borrowings decreased $11.0 million during 2001 as a result of volume decreases of $4.3 million and rate decreases of $6.7 million compared to 2000. Average short-term borrowings decreased $71.1 million for 2001 over 2000 averages while the cost of short-term borrowings decreased 224 basis points (2.24%) compared to 2000 costs. Interest on repurchase agreements decreased $7.9 million for the 2001 period as average balances decreased $60.9 million and costs decreased 197 basis points (1.97%) compared to the corresponding period of 2000. Interest expense on long-term debt increased $964 thousand for 2001 compared to the 2000 period as increases due to volume of $1.8 million were partially offset by decreases due to rate of $794 thousand. Average long-term debt for 2001 increased $30.2 million compared to 2000 averages as maturities were extended for short-term borrowings from the Federal Home Loan Bank, to take advantage of lower interest rates. Long-term debt also reflected an increase for 2000 compared to 1999 levels, primarily due to funding of the repurchase of 3.8 million shares of the Corporation’ s common stock through a “ modified Dutch Auction”  tender offer during 1999. The aggregate amount of $49.7 million paid by the Corporation in connection with the repurchase of common shares was funded through the issuance of capital securities and the issuance of a bank loan from an unrelated financial institution. Capital securities borrowings in the amount of $35 million were issued during the third quarter of 1999 bearing an interest rate of 9.50% and maturing in thirty years, consequently interest expense on capital securities for 2000 was $3.3 million compared to $1.0 million for 1999. The parent company also incurred a $16 million bank loan during 1999, primarily to fund the remaining cost of the 42