FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continue expansion into growth markets. The execution of  these initiatives may continue to impact occupancy and other  expenses in future periods. Increases in building insurance,  building rental costs and building repairs and maintenance in  2002 were only partially offset by declines in most other  building expense categories.  Furniture and equipment expenses increased $126 thousand to  $10.1 million in 2003. Increases were largely due to continued  increases in depreciation expense. Furniture and equipment  expenses of $10.0 million for 2002 reflected increases of $920  thousand over 2001 levels resulting primarily from increases in  depreciation on computer software and software maintenance  offset in part by reduced equipment lease expense. The 2002  period was also impacted by a full year of depreciation as well  as maintenance charges on systems that were placed in service  during the later part of 2001. The systems were replacements of  software that is utilized by the Corporation’s data processing  subsidiary to process loan and deposit accounts. The new  application software has enabled the Corporation’s banking  subsidiary to provide enhanced products and services,  including internet banking. Technology advances continue to  drive the ability of financial services companies to provide  expanded services through traditional channels as well as  nontraditional and emerging delivery systems to meet the  changing needs of our clients. Outside data processing expense increased $396 thousand for the 2003 period to $2.5 million compared to $2.1 million  for the 2002 period and $3.3 million for 2001. This category was positively impacted in 2002 by the conversion of Southwest Bank from outsourced processing to that provided by a subsidiary of the Corporation. This category will be unfavorably impacted by the acquisition of PFC until  the systems, which are processed through an outsourced processing vendor, are converted to the systems that are  provided by a subsidiary of the Corporation. These conversions are scheduled to be completed by the end of the  second quarter of 2004. Outside data processing costs are  managed by the Corporation’s data processing subsidiary. Its needs are evaluated based on technology, efficiency and cost considerations. Other operating expenses decreased $3.4 million to $27.7  million for 2003. Other operating expenses for 2002 increased  $2.9 million compared to $28.2 million for 2001. The 2003  period included decreases in other professional fees and  services, advertising, expenses related to training and seminars,  telephone and loss on the sale of other assets (primarily  vehicles previously leased) in the amounts of $1.4 million,  $637 thousand, $428 thousand, $420 thousand and $402  thousand, respectively, compared to 2002 costs. Directors’ fees  for the 2003 period reflected decreases of $349 thousand  resulting from the restructuring of the Corporation’s Boards of  Directors and committees during 2002.  The 2002 period includes increased losses on sale of assets of  $472 thousand, due primarily to the loss on sale of vehicles  previously leased, compared to 2001. Other professional fees in  2002 rose by $822 thousand over 2001 and included consulting  fees related to implementation of the Corporation’s “Balanced  Scorecard” performance measurement system, enhancements  to product and customer profitability systems, corporate  restructuring and common branding and identity. Consultants  were also utilized to assist in the ongoing efforts to develop a  world class sales culture and to generate new deposit dollars  and relationships. Corporate restructuring and movement  toward a sales culture also impacted the decision to have  employee benefit plans reviewed by outside specialists during  2002. Advertising and promotion expenses rose a combined  $2.3 million for the 2002 period due partially to expenditures  related to the $1.8 million launch of the new corporate brand  and identity. This exciting campaign was designed to educate  and build enthusiasm among current as well as potential clients  and the communities we serve. Also impacting these categories  were expenses incurred in the successful marketing campaign  for free checking products introduced during 2002. These  products are expected to have a favorable impact on deposit  growth, interest expense and service charge revenue in future  periods as well as providing potential add-on sales of other  financial products and services.  Income tax expense was $13.3 million during 2003 representing an increase of $4.4 million above the 2002  amount of $8.9 and compared to $15.3 million in 2001. The  Corporation’s effective tax rate was 19.9% for 2003  compared to 17.0% for 2002 and 23.3% for 2001. Although  the 2003 effective tax rate was an increase over the 2002 rate,  it was still favorable to the statutory tax rate and the 2001  effective rate. The Corporation’s 2003 effective tax rate  continues to be favorably impacted by tax-free municipal  income. Pretax income in the 2002 period was reduced by the  $8.0 million litigation settlement as well as the $6.1 million  restructuring charges. The decline in pretax income from the  2001 period allowed the effect of nontaxable income to have  a greater impact on the effective tax rate in 2002 than in 2001.  50