FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS expense. The 2001 period also included increases in depreciation on computer software and software maintenance compared to 2000. Computer software depreciation and maintenance increases were principally related to the replacement of software utilized by the Corporation’s data processing subsidiary to process loan and deposit accounts. The 2002 period was also impacted as a full year of depreciation, as well as maintenance was incurred for systems placed in service during the later part of 2001. 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 non traditional and emerging delivery systems to meet the changing needs of our clients. Outside data processing expense fell $1.2 million for the 2002 period to $2.1 million compared to $3.3 million for 2001 and 2000. This category was positively impacted by the conversion of Southwest Bank from outsourced processing to that provided by a subsidiary of the Corporation. Outside data processing costs are managed by the Corporation’s data processing subsidiary along with management of internal data processing costs. Outsourced data processing needs are evaluated based on technology, efficiency and cost considerations. Adoption of FAS No. 142 resulted in no goodwill amortization for 2002 compared to $920 thousand for 2001 and $865 thousand for 2000. Under the new pronouncement, goodwill amortization was discontinued January 1, 2002. Goodwill is now subject to evaluation for impairment on an annual basis. Other operating expenses for 2002 increased $3.8 million or 14.3% to $30.2 million for 2002 compared to $26.4 million for 2001 and the $24.0 million reported for 2000. The 2002 period includes increased loss on sale of assets of $472 thousand, due primarily to the loss on sale of vehicles previously leased, compared to 2001. Other professional fees 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 are also being 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 towards a sales culture also impacted the decision to have employee benefit plans reviewed by outside specialists during 2002. Advertising and promotions 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 is designed to educate and build 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 Corporation’s Income tax expense was $8.9 million during 2002 representing a decrease of $6.4 million below the 2001 amount of $15.3 million and compared to $14.3 million in 2000. The Corporation’s effective tax rate was 17.0% for 2002 compared to 23.3% for 2001 and 23.2% for 2000. Excluding the nonrecurring charges (litigation settlement and corporate restructuring) and rebranding costs, the Corporation’s effective tax rate would have been 21.2% in 2002. The Corporation’s effective tax rate continues to be favorably impacted by tax-free income from securities and bank owned life insurance. Other operating expense for the 2000 period included increases in collection and repossession expenses. FDIC expense rose $180 thousand during 2000 due to standardization of insurance fund rates. 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. Included in other operating expense increases for 2001 compared to 2000 were increases in filing and recording fees, legal fees, other professional fees and telephone expense of $165 thousand, $216 thousand, $666 thousand and $352 thousand, respectively. The 2001 period also included increases in losses on sale of leased vehicles and increased postage and printing costs related to privacy legislation and changes due to standardization during 2001 system conversions. The 2001 period included decreases in insurance expense, Pennsylvania use tax, promotions and deferred loan origination costs compared to 2000 levels. 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. Expenditures for the branding efforts and marketing campaigns are expected to continue in 2003. Liquidity 47