FORM 10-K   SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C  20549

 Annual Report Under Section  13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December  31, 2001 commission file number 0-11242

FIRST COMMONWEALTH FINANCIAL  CORPORATION(Exact name of registrant as specified in its charter)

               PENNSYLVANIA                                                                           25-1428528 (State or other jurisdiction                                                        (I.R.S.  Employer Identification No.) of incorporation or organization)   22 NORTH SIXTH STREET INDIANA, PA                                                   15701(Address of principal executive offices)                                                        (Zip  Code) 

Registrant's telephone number, including area code:   (724) 349-7220 

Securities registered pursuant to Section 12(b)  of the Act: 

      TITLE OF EACH  CLASS                        NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $1 PAR VALUE                                 NEW YORK STOCK EXCHANGE 

Indicate by checkmark whether the registrant (1)  has filed all reports required to be filed by Section 13 or 15 (d) of the Securities  Exchange Act of 1934 during the preceding 12 months (or for such shorter period  that the registrant was required to file such reports), and (2) has been subject  to such filing requirements for the past 90 days.  Yes XX No    . 

Indicate the number of shares outstanding of each  of the issuer's classes of common stock.

        TITLE  OF CLASS                                                        OUTSTANDING AT March 22, 2002

Common Stock, $1 Par Value                                                            58,627,137 Shares

The aggregate market value of the voting common  stock, par value $1 per share, held by non-affiliates of the registrant (Based  upon the closing sale price on March 22, 2002), was approximately $734,518,248.

DOCUMENTS INCORPORATED BY REFERENCE   

Portions of the definitive Proxy Statement related  to the annual meeting of security holders to be held April 22, 2002 are incorporated  by reference into Part III.

FIRST COMMONWEALTH FINANCIAL CORPORATION  AND SUBSIDIARIESFirst Commonwealth Financial CorporationFORM 10-KINDEX

PART 1

 

PAGE

 

 

 

ITEM 1.  

Business

 

 

 

 

 

Description of business 

2

 

Competition 

4

 

Supervision and regulation 

5

 

 

 

ITEM 2.

Properties 

7

 

 

 

ITEM 3.

Legal Proceedings 

8

 

 

 

ITEM 4.

Submission of Matters to a Vote of Security Holders

8

 

 

 

PART II

 

 

 

 

 

ITEM 5.

Market for Registrant's common Stock and Related        Security Holder Matters

 8

 

 

 

ITEM 6.

Selected Financial Data 

 9

 

 

 

ITEM 7.

Management's Discussion and Analysis of Financial        Condition and Results of Operation 

10

 

 

 

ITEM 7A.

Quantitative and Qualitative Disclosures About        Market Risk 

31

 

 

 

ITEM 8.

Financial Statements and Supplementary Data 

32

 

 

 

ITEM 9.

Disagreements on Accounting and Financial Disclosures        

74

 

 

 

PART III

 

 

 

 

 

ITEM 10.

Directors and Executive Officers of the Registrant        

74

 

 

 

ITEM 11.

Management Renumeration and Transactions 

75

 

 

 

ITEM 12.

Security Ownership of Certain Beneficial Owners        and Management.. 

75

 

 

 

ITEM 13.

Certain Relationships and Related Transactions        

75

 

 

 

PART IV

 

 

 

 

 

ITEM 14.

Exhibits, Financial Statement Schedules and Reports        on Form 8-K 

76

 

Signatures 

78

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Business

Description of Business

First Commonwealth Financial Corporation (the "Corporation")  was incorporated as a Pennsylvania business corporation on November 15, 1982  and is registered as a bank holding company under the Bank Holding Company Act  of 1956, as amended.  The Corporation operates two chartered banks, First  Commonwealth Bank and Southwest Bank.  Personal financial planning and  other financial services and insurance products are also provided through First  Commonwealth Trust Company and First Commonwealth Insurance Agency.  The  Corporation enhanced its financial services and products during the first quarter  of 2002 through the acquisition of Strategic Capital Concepts and Strategic  Financial Advisors.  As a registered investment advisor, Strategic Capital  Concepts provides financial planning, asset management and consulting services  while Strategic Financial Advisors offers investment and insurance products  as well as employee benefit services.  The Corporation also operates through  Commonwealth Systems Corporation, a data processing subsidiary and First Commonwealth  Professional Resources Inc., ("FCPRI") a subsidiary providing professional  services to affiliated organizations. 

First Commonwealth Bank ("FCB"), a Pennsylvania-chartered  banking corporation headquartered in Indiana, Pennsylvania operates through  divisions doing business under the following names:  NBOC Bank, Deposit  Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central Bank, Peoples  Bank of Western Pennsylvania, Unitas Bank and Reliable Bank.  

On December 31, 1998 the Corporation affiliated,  as a result of a statutory merger, with Southwest National Corporation ("SNC")  and its wholly-owned subsidiary, Southwest Bank ("Southwest").   SNC was a Pennsylvania-chartered bank holding company headquartered in Greensburg,  Pennsylvania.  Southwest Bank is a Pennsylvania-chartered, federally insured  commercial bank also headquartered in Greensburg, Pennsylvania which traces  its origin to 1900.  Upon merger, SNC was combined with the Corporation  and Southwest Bank became a subsidiary of the Corporation.

Through FCB, the Corporation traces its banking  origins to 1866.  FCB and Southwest ("Subsidiary Banks") conduct  business through 90 community banking offices in the counties of Allegheny (4),  Armstrong (3), Beaver (1), Bedford (4), Blair (8), Cambria (11), Centre (2),  Clearfield (5), Elk (3), Franklin (2), Huntingdon (6), Indiana (9), Jefferson  (4), Lawrence (5), Somerset (5), Washington (1), and Westmoreland (17).   The Subsidiary Banks engage in general banking business and offer a full range  of financial services including such general retail banking services as demand,  savings and time deposits and mortgage, consumer installment and commercial  loans.

The Subsidiary Banks operate a network of 85 automated  teller machines ("ATMs") which permits customers to conduct routine  banking transactions 24 hours a day.  Of the ATMs, 61 are located on the  premises of their main or branch offices and 24 are in remote locations.    All the ATMS's are part of the STAR network which consists of over 180,000 ATMs  owned by numerous banks, savings and loan associations and credit unions located  throughout 31 states.  STAR serves more than 124 million ATM/debit cardholders  and more than 6,500 financial institution members.  The ATMs operated by  the Subsidiary Banks are also part of the global MasterCard/Cirrus network which  is comprised of more than 300,000 ATMs located in the United States, Canada  and 58 other countries and territories, which services over 365 million card  holders.  Such networks allow the Subsidiary 

2

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Business (Continued)

Description of Business (Continued)

Banks' customers to withdraw cash and in certain  cases conduct other banking transactions from ATMs of all participating financial  institutions.

In addition to funds access through the use of  ATMs, the STAR debit card offered to the Subsidiary Banks' deposit customers  may be used at nearly 720,000 point-of-sale retail locations on the STAR system  as well as being used on the global MasterCard system for the purchase of goods  and services.  The STAR debit card provides customers with the almost universal  acceptability of a credit card combined with the convenience of direct debit  to the customers' checking account.

Commonwealth Systems Corporation ("CSC")  was incorporated as a Pennsylvania business corporation in 1984 by the Corporation  to function as its data processing subsidiary and it has its principal place  of business in Indiana, Pennsylvania.  Before August 1984, it had operated  as the data processing department.  CSC provides on-line general ledger  accounting services and bookkeeping services for deposit and loan accounts to  the Corporation, the Banking Subsidiaries and its other nonbank subsidiaries.   CSC also acts as a centralized purchasing agent for the purchase of computer  hardware and software products by the Corporation and subsidiaries as well as  providing technical support for the installation and use of these products.   It competes, principally with data processing subsidiaries of other, mostly  larger, banks, on the basis of the price and quality of its services and the  speed with which such services are delivered.

First Commonwealth Trust Company ("FCTC")  was incorporated on January 18, 1991 as a Pennsylvania chartered trust company  to render general trust services.  The trust departments of subsidiary  banks were combined to form FCTC, and the corporate headquarters are located  in Indiana, Pennsylvania.  FCTC has eight branch offices in the service  areas of the Subsidiary Banks and offers personal and corporate trust services,  including administration of estates and trusts, individual and corporate investment  management and custody services and employee benefit trust services. 

First Commonwealth Insurance Agency ("FCIA")  was incorporated as a Pennsylvania business corporation with its principal place  of business in Indiana, Pennsylvania.  FCIA began operations in January  1998 as a wholly-owned subsidiary of FCB and provides a full range of insurance  and annuity products to retail and commercial customers.  

On June 1, 1989 Commonwealth Trust Credit Life  Insurance Company ("Commonwealth Trust") began operations.  The  Corporation owns 50% of the voting common stock of Commonwealth Trust.   Commonwealth Trust provides reinsurance for credit life and credit accident  and health insurance sold by the subsidiaries of the two unrelated holding company  owners under a joint venture arrangement whereby the net income derived from  such reinsurance inures proportionally to the benefit of the holding company  selling the underlying insurance to its banks' customers.     

3

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Business (Continued)

Description of Business (Continued)

First Commonwealth Capital Trust I, a business  trust created under the laws of the State of Delaware, is a wholly-owned subsidiary  of the Corporation.  The trust was formed during September 1999 for the  exclusive purposes of issuing and selling trust preferred securities, using  the proceeds from the sale of the trust preferred securities to acquire subordinated  debentures issued by the Corporation and engaging in only those other activities  necessary or incidental thereto.

The Corporation and its subsidiaries employed approximately  1,465 persons (full-time equivalents) at December 31, 2001.  The Corporation  does not engage in any significant business activities other than holding the  stock of its subsidiaries.  The Corporation does not at present have any  plans to expand or modify its business or that of its subsidiaries, other than  as described herein.  Nevertheless, it will be receptive to and may actively  seek out mergers and acquisitions in the event opportunities which management  considers advantageous to the development of the Corporation's business arise,  and may otherwise expand or modify its business as management deems necessary  to respond to changing market conditions or the laws and regulations affecting  the business of banking.

Competition

The Subsidiary Banks, FCTC and FCIA face intense  competition, both from within and without their service areas, in all aspects  of business.  The Subsidiary Banks compete for deposits, in such forms  as checking, savings and NOW (negotiable order of withdrawal) accounts, MMDA  (money market deposit accounts) and certificates of deposit, and in making consumer  loans and loans to smaller businesses, with numerous other commercial banks  and savings banks doing business within their service area.  With respect  to loans to larger businesses the Subsidiary Banks also compete with much larger  banks located outside of their service area.  The Subsidiary Banks also  compete, primarily in making consumer loans and for deposits, with state and  federally chartered savings and loan associations and with credit unions.   In recent years the Subsidiary Banks have encountered significant competition  for deposits from money market funds, mutual funds and institutions that offer  annuities located throughout the United States.  Money market funds pay  dividends to their shareholders (which are the equivalent of the interest paid  by banks on deposits) and they are able to offer services and conveniences similar  to those offered by the Subsidiary Banks.  Annuities accumulate interest  on the amounts deposited over a predetermined time period.  The depositor  is then entitled to withdraw his funds for a fixed period of time or until death.   The effect of such

competition has been to increase the costs of the  rest of deposits, which provide the funds with which loans are made.  In  addition to savings and loan associations and credit unions, the Subsidiary  Banks also compete for consumer loans with local offices of national finance  companies and finance subsidiaries of automobile manufacturers and with national  credit card companies such as MasterCard and VISA, whose cards, issued through  financial institutions, are held by consumers throughout their service area.   The Subsidiary Banks believe that the principal means by which they compete  for deposits and consumer and smaller commercial loans are the number and desirability  of the locations of their offices and ATMs, the sophistication and quality of  their services and the prices (primarily interest rates) of their services.   Additionally, the Subsidiary Banks intend to remain competitive by offering  financial services that target specific customer needs.  Development of  an integrated advisory sales model to integrate products between our Banks,  Insurance Agency and Trust Company as well as utilization of an employee team  to deliver products and services to our

4  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Business (Continued)

Competition (Continued)

commercial customers through our "Total Solutions  Financial Management" approach have been positively received by our customers.   Specific customer needs are also met through an enhanced customer delivery system  that includes telephone banking, which provides convenient access to financial  services and hours of operation that extend past those of the Subsidiary Banks'  branch offices.  The Corporation introduced "WebBank" early in  2002, providing customers access to their bank account information via the internet  24 hours a day - 7 days a week.  Features of WebBank include the ability  to monitor account balances, view account history, perform account balance transfers  and issue stop payments.

Supervision and Regulation

The Corporation is a bank holding company within  the meaning of the Bank Holding Company Act of 1956, as amended ("the Bank  Holding Company Act") and is registered such with the Federal Reserve Board.   As a registered bank holding company ("BHC"), it is required to file  with the Federal Reserve Board an annual report and other information.   The Federal Reserve Board is also empowered to make examinations and inspections  of the Corporation and its subsidiaries.

The Bank Holding Company Act and Regulation Y of  the Federal Reserve Board require every bank holding company to obtain the prior  approval of the Federal Reserve Board before it may acquire direct or indirect  ownership or control of more than 5% of the outstanding voting shares or substantially  all of the assets of a bank or merge or consolidate with another bank holding  company.  The Federal Reserve Board may not approve acquisitions by the  Corporation of such percentage of voting shares or substantially all the assets  of any bank located in any state other than Pennsylvania unless the laws of  such state specifically authorize such an acquisition.

The Bank Holding Company Act generally prohibits  a bank holding company from engaging in a non-banking business or acquiring  direct or indirect ownership or control of more that 5% of the outstanding voting  shares of any non-banking corporation subject to certain exceptions, the principal  exception being where the business activity in question is determined by the  Federal Reserve Board to be closely related to banking or to managing or controlling  banks to be a proper incident thereto.  The Bank Holding Company Act does  not place territorial restrictions on the activities of such banking related  subsidiaries of bank holding companies.

Under the Federal Reserve Act, subsidiary banks  of a bank holding company are subject to certain restrictions on extensions  of credit to the bank holding company or any of its subsidiaries, investments  in the stock or other securities thereof, or acceptance of such stock or securities  as collateral for loans to any one borrower.  A bank holding company and  its subsidiaries are prohibited from engaging in certain tie-in arrangements  in connection with the extension of credit or the furnishing of property or  services.  Under the Pennsylvania Banking Code, there is no limit on the  number of Pennsylvania banks that may be owned or controlled by a Pennsylvania  bank holding company.

The Gramm-Leach-Bliley Act ("GBLA") of  1999 revolutionizes the regulation of financial services companies.  GBLA  amends the Bank Holding Company Act of 1956 to create a new type of bank

 5  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Business (Continued)

Supervision and Regulation (Continued)

holding company, a financial holding company ("FHC"),  which is permitted to engage in all activities permitted by a bank holding company  as well as securities, merchant banking and insurance activities that were prohibited  to BHCs.  GLBA also repeals Sections 20 and 32 of the Glass-Steagall Act,  which prohibited affiliations between a member bank and a company principally  engaged in securities activities.  The activities of a BHC that does not  qualify to become a FHC will be limited to those the Federal Reserve Board had,  prior to enactment of GBLA, deemed closely related to banking.  In order  to qualify as a FHC, each depository institution subsidiary of a BHC must be  well capitalized, well managed and if insured have a satisfactory or better  rating under the Community Reinvestment Act of 1977 ("CRA") as of  its most recent examination and the BHC must file an election with the Federal  Reserve Board certifying that it meets the requirements of a FHC.  GBLA  expands the range of business opportunities for commercial banking organizations  and enables banking companies and other types of financial companies such as  securities, insurance and financial technology companies to combine more readily.   A FHC does not need to obtain prior Federal Reserve Board approval in order  to engage in, or acquire a nonbank company that engages in financial activities.   The FHC only needs to provide notice to the Federal Reserve Board, describing  the activity commenced or conducted by the acquired company, within 30 days  after commencing the activity or consummating the acquisition.

Subsidiary Banks

FCB and Southwest are Pennsylvania-chartered banks  and are subject to the supervision of and regularly examined by the Pennsylvania  Department of Banking and the Federal Deposit Insurance Corporation ("FDIC"),  and subject to certain regulations of the Federal Reserve Board.  The areas  of operation subject to regulation by Federal and Pennsylvania laws, regulations  and regulatory agencies include reserves against deposits, maximum interest  rates for specific classes of loans, truth-in-lending disclosures, permissible  types of loans and investments, trust operations, mergers and acquisitions,  issuance of securities, payment of dividends, Community Reinvestment Act evaluations,  mandatory external audits, establishment of branches and other aspects of operations.   Under the Pennsylvania Banking Code, a state bank located in Pennsylvania may  establish branches anywhere in the state.

Reciprocal Regional Interstate Banking

As already noted, a bank holding company located  in one state cannot acquire a bank or a bank holding company located in another  state unless the law of such other state specifically permits such acquisition.   On June 25, 1986, Pennsylvania passed a law (Act No. 1986-69) which provides  that a bank holding company located in any state or the District of Columbia  can acquire a Pennsylvania bank or bank holding company if the jurisdiction  where the acquiring bank holding company is located has passed an enabling law  that permits a Pennsylvania bank holding company to acquire a bank or a bank  holding company in such jurisdiction.  As of December 31, 2001 enabling  laws have been passed so that the required reciprocity presently exists with  approximately 34 states, including New York, New Jersey, Ohio, Delaware, Maryland  and West Virginia.  A similar law is applicable to savings associations  and savings and loan holding companies.

6  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1. Business (Continued)

Reciprocal Regional Interstate Banking  (Continued)

It is difficult to determine the precise effects  that reciprocal regional interstate banking will have on the Corporation in  the future, but the law has increased, and as reciprocity becomes effective  for additional states will increase further, the number of potential buyers  for Pennsylvania banks and bank holding companies.  The law also permits  Pennsylvania bank holding companies and Pennsylvania savings and loan holding  companies that desire to expand outside Pennsylvania to acquire banks, savings  institutions and bank holding companies located in jurisdictions with which  Pennsylvania has reciprocity.

Effects of Governmental Policies

The business and earnings of the Corporation are  affected not only by general economic conditions, but also by the monetary and  fiscal policies of the United States Government and its agencies, including  the Federal Reserve Board.  An important function of the Federal Reserve  Board is to regulate the national supply of bank credit.  Among the instruments  of monetary policy used by the Federal Reserve Board to implement these objectives  are open market operations in United States government securities, changes in  the discount rate on borrowings by member banks and savings institutions from  the Federal Reserve System and changes in reserve requirements against bank  and savings institution deposits.  These instruments, together with fiscal  and economic policies of various governmental entities, influence overall growth  of bank loans, investments and deposits and may also affect interest rates charged  on loans, received on investments or paid for deposits.

The monetary policies of the Federal Reserve Board  have had a significant effect on the operating results of bank holding companies  and their subsidiary banks in the past and are expected to continue to do so  in the future.  In view of changing conditions in the national and Pennsylvania  economies and in the money markets, as well as the effect of actions by monetary  and fiscal authorities, including the Federal Reserve Board, no prediction can  be made as to possible future changes in interest rates, deposit levels and  loan demand or the effect of such changes on the business and earnings of the  Corporation or its subsidiaries.

ITEM 2.  PROPERTIES

The Corporation's principal office is located in  the old Indiana County Courthouse complex.  This certified Pennsylvania  and national historic landmark was built in 1870 and restored by NBOC in the  early 1970s.  The Corporation, NBOC, CSC and FCB occupy this grand structure,  which provides 32,000 square feet of floor space, under a 25-year restoration  lease agreement with Indiana County, which NBOC entered into in 1973 and renewed  during 1998 for an additional 25 years.  Under the lease, NBOC is obligated  to pay all taxes, maintenance and insurance on the building and to restore it  in conformity with historic guidelines.  In order to support future expansion  needs and centralization of various functional areas such as loan processing,  marketing, and accounting, the Corporation also owns two additional structures,  free of all liens and encumbrances.  These facilities currently provide  office space for the Corporation, CSC, FCTC, FCB, FCIA and FCPRI.  The  Subsidiary Banks have 90 banking facilities of which 24 are leased and 66 are  owned in fee, free of all liens and encumbrances.  All of the facilities  utilized by the Corporation and its subsidiaries are used primarily for banking  activities.  Management believes all such facilities to be in good repair  and well suited to their uses.  Management presently expects that such  facilities will be adequate to meet the anticipated needs of the Corporation  and its subsidiaries for the immediate future.

7  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 3.  LEGAL PROCEEDINGS

Information appearing in NOTE 23 to the Consolidated  Financial Statements on page 64 is incorporated herein by reference in response  to this item.  

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE  OF SECURITY HOLDERS

Not applicable
**Part II**
ITEM 5.  Market for Registrant's Common  Stock and Related Security Holder Matters

First Commonwealth Financial Corporation (the "Corporation")  is listed on the New York Stock Exchange under the symbol "FCF".   The approximate number of holders of record of the Corporation's common stock  is 13,000.  The table below sets forth the high and low sales prices per  share and cash dividends declared per share for common stock of the Corporation.

Period

High Sale

Low Sale

CashDividends Per Share

** **

**2001**

 

 

 

First Quarter

$11.45

$  9.50

$0.145

Second Quarter

$15.00

$10.30

$0.145

Third Quarter

$14.35

$10.80

$0.145

Fourth Quarter

$13.00

$11.10

$0.150

 

 

 

 

Period

High Sale

Low Sale

CashDividendsPer Share

** **

**2000**

 

 

 

First Quarter

$12.000

$8.625

$0.140

Second Quarter

$11.625

$9.063

$0.140

Third Quarter

$10.188

$8.750

$0.140

Fourth Quarter

$10.875

$8.875

$0.145

 

  

8

FIRST COMMONWEALTH FINANCIAL CORPORATION

ITEM 6.  Selected Financial Data (Dollar  Amounts in Thousands, except per share data)

The following selected financial data is not covered  by the auditor's report and should be read in conjunction with Management's  Discussion and Analysis of Financial Condition and Results of Operations, which  follows, and with the consolidated financial statements and related notes.   All amounts have been restated to reflect the poolings of interests.  Financial  statement amounts for prior periods have also been reclassified to conform to  the presentation format used in 2001.  The reclassifications had no effect  on the Corporation's financial condition or results of operations.

 

 

Years Ended December 31,

 

2001

2000

1999

1998

1997

 

 

 

 

 

 

Interest income

  $  308,891

$   311,882

$  296,089

$  282,067

$  253,917

Interest expense

      167,170

     174,539

    152,653

    148,282 

    124,427

Net interest income

141,721

     137,343

    143,436

    133,785

   129,490

Provision for credit losses

        11,495

              10,030

               9,450

             15,049 

             10,152

Net interest income after provision for credit losses

130,226

    127,313

    133,986

    118,736

    119,338

 

 

 

 

 

 

Securities gains 

3,329

       1,745

          565

               1,457

        6,825

Other operating income

36,895

     31,938

     33,660

             27,929

      20,599

Merger and related charges

-0-

          -0-

           -0-

               7,915

           -0-

Other operating expenses

      105,007

              99,461

             95,569

             93,980 

             89,885

    Income before taxes and extraordinary        items

65,443

      61,535

     72,642

             46,227

      56,877

Applicable income taxes

        15,254

              14,289

             19,612

             12,229 

             17,338

                              Net income before extraordinary items

50,189

      47,246

     53,030

    33,998

      39,539

Extraordinary items (less applicable taxes of        $336)

              -0-

                    -0-

                   -0-

                 (624) 

                   -0-

Net income

  $    50,189

 $    47,246

$    53,030

$    33,374 

$    39,539

 

 

 

 

 

 

**Per Share Data (a)**

 

 

 

 

 

Net income before extraordinary items

  $               0.87

 $               0.82

$               0.88

$               0.55

$               0.64

Extraordinary items

            0.00

                  0.00

                 0.00

                (0.01)

                 0.00

Net income

  $               0.87

 $               0.82

$               0.88

$               0.54 

$               0.64

 

 

 

 

 

 

Dividends declared

  $             0.585

 $            0 .565

$             0.515

$             0.445

$             0.410

 

 

 

 

 

 

Average shares outstanding

57,885,478

57,558,929

60,333,092

61,333,572

61,671,898

 

 

 

 

 

 

**Per Share Data Assuming Dilution (a)**

 

 

 

 

 

Net income before extraordinary items

  $               0.86

 $               0.82

$               0.88

$               0.55

$               0.64

Extraordinary items

            0.00

                  0.00

                 0.00

                (0.01)

                 0.00

Net income

  $               0.86

 $               0.82

$               0.88

$               0.54 

$               0.64

 

 

 

 

 

 

Dividends declared

  $             0.585

 $             0.565

$             0.515

$             0.445

$             0.410

 

 

 

 

 

 

Average shares outstanding

58,118,057

57,618,671

60,569,322

61,666,026

61,845,674

 

 

 

 

 

 

**At End of Period**

 

 

 

 

 

Total assets

$4,583,530

$4,372,312

$4,340,846

$4,096,789

$3,668,557

Investment securities

1,762,408

1,636,337

1,592,389

 1,525,332

1,015,798

Loans and leases, net of unearned income

2,567,934

2,490,827

2,500,059

 2,374,850

2,436,337

Allowance for credit losses

34,157

33,601

33,539

     32,304

25,932

Deposits

3,093,150

3,064,146

2,948,829

2,931,131

2,884,343

Company obligated mandatorily redeemable capital        securities of subsidiary trust
35,000
 35,000

 35,000

 -0-

-0-

Other long-term debt

629,220

621,855

603,355

 630,850

193,054

Shareholders' equity

370,066

334,156

286,683

 355,405

354,323

 

 

 

 

 

 
**Key Ratios**
 

 

 

 

 

Return on average assets

1.11%

1.10%

1.25%

        0.85%

1.15%

Return on average equity

13.85%

15.65%

15.44%

9.13%

11.31%

Net loans to deposit ratio

81.92%

80.19%

83.64%

79.92%

83.57%

    Dividends per share as a percent        of net income per share

67.24%

68.90%

58.52%

82.41%

64.06%

    Average equity to average        assets ratio

8.01%

7.00%

8.10%

9.28%

10.16%

 

(a) Where applicable, per share amounts have been  restated to reflect the two-for-one stock split effected in the form of a 100%  stock dividend declared on October 19, 1999.

9

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Introduction**

This discussion and the related financial data  are presented to assist in the understanding and evaluation of the consolidated  financial condition and the results of operations of First Commonwealth Financial  Corporation including its subsidiaries (The "Corporation") for the  years ended December 31, 2001, 2000 and 1999 and are intended to supplement,  and should be read in conjunction with, the consolidated financial statements  and related footnotes.

In addition to historical information, this discussion  and analysis contains forward-looking statements.  The forward-looking  statements contained herein are subject to certain risks and uncertainties that  could cause actual results to differ materially from those projected in the  forward-looking statements.  Important factors that might cause such a  difference include, but are not limited to, those discussed in this "Management's  Discussion and Analysis of Financial Condition and Results of Operations."   Readers are cautioned not to place undue reliance on these forward-looking statements,  which reflect management's analysis only as of the date hereof.  The Corporation  undertakes no obligation to publicly revise or update these forward-looking  statements to reflect events or circumstances that arise after the date hereof.

The Corporation acquired Southwest National Corporation  and its subsidiary ("Southwest") effective December 31, 1998.   The merger was accounted for as a pooling of interests and accordingly, all  financial statements have been restated as though the merger had occurred at  the beginning of the earliest period presented.  During the fourth quarter  of 1997 the Corporation formed First Commonwealth Insurance Agency ("FCIA")  as a subsidiary of First Commonwealth Bank ("FCB"), a commercial banking  subsidiary of the Corporation.  FCIA began marketing a wide range of insurance  and annuity products to the Corporation's retail and commercial customers beginning  January 1, 1998.  

On October 19, 1999, the Corporation's Board of  Directors approved a 2-for-1 stock split effected in the form of a 100% stock  dividend.  Shareholders of record at the close of business November 4,  1999 received one additional share for each share held.  Share data for  all periods presented has been restated to reflect the stock split as if it  had occurred at the beginning of the earliest period presented.

Financial statement amounts in prior periods have  been reclassified to conform to the presentation format used in 2001.   The reclassifications had no effect on the Corporation's financial condition  or results of operations. 

**Results of Operations**

Net income for 2001 was $50.2 million, reflecting  an increase of $3.0 million from 2000 results of $47.2 million and compared  to $53.0 million reported in 1999.  The increase in net income for 2001  resulted primarily from increases in net interest income, gains on sale of assets  and insurance commissions of $4.4 million, $1.8 million and $1.2 million, respectively  compared to 2000 levels.  Gains on the sale of assets includes securities  gains of $3.3 million and $1.7 million in 2001 and 2000, respectively as well  as $999 thousand gain on the sale of a branch and a block of mortgages 

10  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

**Results of Operations** (Continued)

in 2001.  The decrease in net income for 2000  was primarily the result of gains on sale of loans which were realized during  1999.

Basic earnings per share was $0.87 for 2001 compared  to $0.82 for 2000, while diluted earnings per share was $0.86 for 2001 compared  to $0.82 for 2000.  Basic earnings per share and diluted earnings per share  were $0.88 for 1999.  Basic earnings per share excluding gains on sale  of assets, was $0.82 for 2001 compared to $0.79 for 2000 representing an increase  of 3.8%.  Return on average assets was 1.11% and return on average equity  was 13.85% during 2001 compared to 1.10% and 15.65%, respectively for 2000.   Return on average assets was 1.25% during 1999 while return on average equity  was 15.44%.

The following is an analysis of the impact of changes  in net income on basic earnings per share:

 

2001        vs.2000
2000        vs.1999
 

 

 

Net income per share, prior year

$0.82

$0.88

 

 

 

Increase (decrease) from changes in:

 

 

Net interest income

0.06

0.01

Provision for credit losses

(0.02)

(0.02)

Security transactions

0.03

0.02

Insurance commissions

0.02

0.01

Income from bank owned life insurance

0.02

0.02

Other income

0.04

(0.04)

Salaries and employee benefits

(0.03)

(0.09)

Occupancy and equipment costs

(0.01)

(0.02)

Other expenses

(0.04)

(0.03)

Provision for income taxes

(0.02)

        0.08

Net income per share

  $0.87 

      $0.82 

 

Net interest income, the most significant component  of earnings, is the amount by which interest generated from earning assets exceeds  interest expense on liabilities.  Net interest income was $141.7 million  in 2001 compared to $137.3 million in 2000 and $143.4 million in 1999.   The following is an analysis of the average balance sheets and net interest  income for each of the three years in the period ended December 31, 2001.

11

      FIRST COMMONWEALTH  FINANCIAL CORPORATION AND SUBSIDIARIES

      ITEM 7.  MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

**Average Balance Sheets and Net        Interest Analysis**(Dollar Amounts in Thousands)

 

2001

2000

1999

 

AverageBalance

Income/Expense

Yield orRte(a)

AverageBalance

Income/Expense

Yield orRate(a)

AverageBalance

Income/Expense

Yield or Rate(a)
**Assets**
 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

Time deposits with banks

$              1,842

$     70

 3.81%

$              1,220

 $       82

 6.71%

$              1,844

$      121

 6.56%

Investment securities

  1,724,725

106,156

 6.45

 1,572,290

103,018

 6.88

  1,608,467

100,853

 6.59

Federal funds sold

      9,521

492

 5.17

        3,821

234

 6.12

         2,097

105

 5.01

Loans, net of unearned income (b) (c)

  2,548,596

202,173

 8.11

 2,503,036

208,548

 8.50

  2,408,450

195,010

 8.21

Total interest-earning assets

  4,284,684

308,891

 7.43

 4,080,367

311,882

 7.87

  4,020,858

296,089

 7.56

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

Cash

    72,806

 

 

     74,178

 

 

     80,716

 

 

Allowance for credit losses

    (34,078)

 

 

     (34,296)

 

 

      (33,757)

 

 

Other assets

     198,051

 

 

     191,534

 

 

     174,063

 

 

Total noninterest-earning assets

     236,779

 

 

     231,416

 

 

     221,022

 

 

      Total Assets

$4,521,463

 

 

$4,311,783

 

 

$4,241,880

 

 

 

 

 

 

 

 

 

 

 

 
**Liabilities and Shareholders' Equity**
 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits (d)

$    388,495

$   7,039

1.81%

$   386,149

 $    9,593

2.48%

$  386,124

     $          8,375

 2.17%

Savings deposits (d)

   684,298

16,061

 2.35

    652,647

    17,027

  2.61

  712,637

17,769

 2.49

Time deposits

1,728,056

95,065

 5.50

 1,585,694

   88,887

  5.61

 1,499,857

77,187

 5.15

Short-term borrowings

   300,173

11,227

 3.74

   371,286

   22,218

  5.98

  279,269

13,832

 4.95

Long-term debt

     663,063

  * *37,778

 5.70

     632,837

   36,814

  5.82

    643,746

        35,490

 5.51

Total interest- bearing liabilities

  3,764,085

167,170

 4.44

  3,628,613

 174,539

  4.81

 3,521,633

152,653

 4.33

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

 

 

 

 

 

 

 

 

Liabilities and capital:

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits (d)

  368,983

 

 

   349,259

 

 

   345,311

 

 

Other liabilities

    26,008

 

 

     31,971

 

 

     31,439

 

 

Shareholders' equity

     362,387

 

 

     301,940

 

 

     343,497

 

 

Total noninterest-bearing funding sources

     757,378

 

 

     683,170

 

 

     720,247

 

 

Total Liabilities and Shareholders' Equity

$4,521,463

 

 

$4,311,783

 

 

$4,241,880

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income and Net Yield on Interest-earning Assets

 

$141,721

3.53%

 

$137,343

3.59%

 

$143,436

3.76%

 

     (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.

        12

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Both interest income and interest expense decreased  over 2000 levels primarily as a result of rate decreases during 2001 which were  partially offset by volume increases.   Asset yields, on a tax-equivalent  basis, decreased 44 basis points (0.44%) during 2001 to 7.43% from 7.87% reported  in 2000 and compared to 7.56% reported in 1999.  The cost of funds for  2001 decreased 37 basis points (0.37%) over 2000 costs of 4.81% and compared  to costs of 4.33% for 1999.  Average interest-earning assets increased  $204.3 million or 5.0% while average interest-bearing liabilities increased  $135.5 million or 3.7% for 2001 compared to 2000 averages.                 

Interest and fees on loans decreased $6.4 million  for 2001 over 2000 levels, primarily as a result of  rate decreases for  commercial loans and revolving credit loans which were partially offset by increases  due to volume for commercial loans.  Average loans for 2001 increased $45.6  million 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 

13  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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  stock repurchase.  (See NOTE 16 to the financial statements for a description  of the Company obligated mandatorily redeemable capital securities of subsidiary  trust.)

Net interest margin (net interest income, on a  tax-equivalent basis as a percentage of average earning assets), was 3.53% during  2001 compared to 3.59% in 2000, and 3.76% in 1999.  Although net interest  margin decreased for the full year of 2001, net interest margin for the fourth  quarter of 2001 improved to 3.66%, up 20 basis points (0.20%) from the fourth  quarter of 2000, primarily 

14

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

because of the ability to reprice liabilities in  the declining interest rate environment.  The Corporation's use of computer  modeling to manage interest rate risk is described in the "Interest Sensitivity"  section of this discussion herein.

The following table shows the effect of changes  in volumes and rates on interest income and interest expense:

 

**                                                                           Analysis of Year-to-Year Changes in Net Interest Income**                                                                                                  (Dollar        Amounts in Thousands)

 

2001 Change from 2000

2000 Change from 1999

 

Total Change

Change Due to Volume

Change Due to Rate

Total Change

Change Due to Volume

Change Due to Rate

Interest-earning assets:

 

 

 

 

 

 

Time deposits with banks

$     (12)

 $            42

$             (54)

$     (39)

$     (41)

   $               2

Securities

   3,138

 10,491

   (7,353)

   2,165

  (2,383)

   4,548

Federal funds sold

     258

  349

      (91)

    129

    86

        43

Loans

  (6,375)

   3,871

 (10,246)

 13,538

   7,765

   5,773

Total interest income

  (2,991)

 14,753

 (17,744)

 15,793

   5,427

 10,366

Interest-bearing liabilities:

 

 

 

 

 

 

Deposits

  2,658

8,865

   (6,207)

12,176

2,922

  9,254

Short-term borrowings

(10,991)

(4,256)

  (6,735)

   8,386

   4,558

   3,828

Long-term debt

             964 

   1,758

             (794)

   1,324

     (601)

   1,925

Total interest expense

  (7,369)

   6,367

 (13,736)

 21,886

   6,879

    15,007

Net interest income

$ 4,378 

$ 8,386

 $(4,008)

$(6,093)

$(1,452)

$(4,641)

The provision for credit losses is an amount added  to the allowance against which credit losses are charged.  The amount of  the provision is determined by management based upon its assessment of the size  and quality of the loan portfolio and the adequacy of the allowance in relation  to the risks inherent within the loan portfolio.  The provision for credit  losses was $11.5 million in 2001 compared to $10.0 million in 2000 and $9.5  million in 1999.  The allowance for credit losses was $34.2 million at  December 31, 2001, for a ratio of 1.33% of actual loans outstanding.  The  ratio of the allowance for credit losses to total loans outstanding as of December  31, 2001 has decreased slightly from the 1.35% reported as of December 31, 2000.   Net charge-offs for 2001 reflected increases in net charge-offs of residential  mortgages of $937 thousand and commercial loans secured by real estate of $2.2  million which were partially offset by decreases in net charge-offs of loans  to individuals and commercial loans not secured by real estate of $1.3 million  and $454 thousand, respectively.   Net charge-offs against the allowance  for credit losses were $10.9 million, or 0.43% of average total loans in 2001.   This compared to net charge-offs of $10.0 million in 2000 and $8.2 million in  1999.  Net charge-offs were 0.40% and 0.34% of average total loans during  2000 and 1999, respectively.  For an analysis of credit quality, see the  "Credit Review" section of this discussion.

15  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The following table presents an analysis of the  consolidated allowance for credit losses for the five years ended December 31,  2001 (Dollar Amounts in Thousands):

 

 

**Summary of Loan Loss Experience**

 

2001

2000

1999

1998

1997

 

 

 

 

 

 

Loans outstanding at end of year

$2,567,934

$2,490,827

$2,500,059

$2,374,850

$2,436,337

 

 

 

 

 

 

Average loans outstanding

$2,548,596

$2,503,036

$2,408,450

$2,439,436

$2,330,657

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

Balance, beginning of year

$     33,601

$    33,539

$    32,304

$     25,932

$    25,234

 

 

 

 

 

 

Loans charged off:

 

 

 

 

 

  Commercial, financial and agricultural

      3,297

      4,335

     1,821

       1,513

     1,473

  Loans to individuals

      4,199

      5,521

     6,126

       7,293

     8,022

  Real estate-construction

          -0-

          -0-

         -0-

           -0-

         -0-

  Real estate-commercial

      2,300

         130

        427

          812

        664

  Real estate-residential

       1,818

         874

    1,035

          690

        819

  Lease financing receivables

                   606

                  407

                 187

                   319

                   -0-

      Total loans charged        off

              12,220

             11,267

              9,596

              10,627

             10,978

 

 

 

 

 

 

Recoveries of loans previously charged off:

 

 

 

 

 

  Commercial, financial and agricultural

                   456

        406

       290

          462

        223

  Loans to individuals

         757

        826

     1,057

       1,328

     1,218

  Real estate-construction

         -0-

         -0-

                   -0-

           -0-

          -0-

  Real estate-commercial

         -0-

         -0-

         -0-

                  70

          13

  Real estate-residential

          49

         42

         33

           87

          57

  Lease financing receivables

                    19

                   25

                     1

                      3

                    13

      Total recoveries

               1,281

              1,299 

              1,381 

               1,950

               1,524

      Net loans charged        off

             10,939

              9,968

              8,215

               8,677

               9,454

Provision charged to expense

             11,495

     10,030

              9,450

             15,049

             10,152

 

 

 

 

 

 

Balance, end of year

$    34,157

$   33,601

$   33,539

$    32,304

$    25,932

 

 

 

 

 

 

**Ratios:**

 

 

 

 

 

  Net charge-offs as a percentage of average            loans outstanding

                0.43%

        0.40%

        0.34%

        0.36%

 0.41%

  Allowance for credit losses as a percentage            of average loans outstanding

1.34%

1.34%

 1.39%

1.32%

1.11%

 

 

 

 

 

 

 

 

 

 

 

 

 

16

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Net securities gains increased $1.6 million during  2001 from $1.7 million reported in 2000 and compared to $565 thousand in 1999.   The securities gains during 2001 resulted primarily from the sales of fixed  rate corporate bonds classified as "available for sale" and Pennsylvania  bank stocks with book values of $37.4 million and $12.7 million, respectively.   The securities gains during 2000 resulted primarily from the sale of Pennsylvania  bank stocks with a book value of $19.9 million.  The securities gains during  1999 resulted in part from the sales of fixed rate U.S. government agency securities  and U.S. treasury securities classified as securities "available for sale"  having book values of $15.0 million and $21.9 million, respectively, which resulted  in security gains of $167 and $317 thousand, respectively.

Trust income was $5.0 million for 2001 compared  to $5.6 million for 2000 and $5.5 million for 1999.  Trust income for 2001  reflected decreases in income from personal trusts, estates and mutual fund  fees as market values declined.  Enhanced referral programs and integrated  growth plans for financial affiliates have been initiated to help improve sales  in various areas including trust assets managed.  The Corporation's success  in building relationships with commercial customers will also provide fee based  affiliates with additional sales opportunities through the "Total Solutions  Financial Management" process.  This strategy marshals products, services  and professional staff from the Corporation's trust, insurance and banking affiliates  and unites them into a comprehensive financial services offering.

Service charges on deposits increased $598 thousand  for 2001 compared to 2000 and included increases in insufficient funds fees  "NSF" and bank club fees.  Standardization of service charge  routines achieved during conversion of the Corporation's deposit system during  2001 also generated additional fee revenue.  The new deposit processing  system implemented during the third quarter of 2001 will also facilitate the  offering of enhanced deposit products and services such as lockbox and cash  management services, which are expected to increase deposit fees in future periods.   Service charges on deposits decreased $83 thousand for 2000 compared to 1999  as the average balances of transaction accounts which generate fee revenue decreased  compared to 1999 levels.

Insurance commissions, which have continued to  increase since First Commonwealth Insurance Agency's ("FCIA") formation  in 1998, increased $1.2 million for 2001 from 2000 commissions of $2.0 million  and compared to $1.5 million for 1999.  Insurance revenue for 2001 included  increases in credit insurance, employee benefits and annuities compared to 2000  levels.  As part of the previously discussed "Total Solutions Financial  Management" process FCIA will continue to have expanded opportunities to  meet the insurance needs of commercial customers.  In addition, the Corporation  has developed "FOCUS", a financial planning tool designed to help  consumers prioritize and assess their financial needs.  The "FOCUS"  concept results in a systematic approach covering a wide range of personal financial  goals, including personal budgeting, funding for an emergency, using credit  wisely, building financial security and estate planning as well as protecting  what is important through appropriate insurance coverage.

Income from bank owned life insurance was $4.6  million for 2001 compared to $3.4 million for 2000 and $2.1 million for 1999.   The 2001 period included an additional investment in bank owned life insurance  of $15.0 million compared to 2000 levels.  The 2000 period included an  increase in income from bank owned life insurance of $1.3 million compared to  1999, resulting primarily from claim income and the impact of an additional  $15.0 million investment during 2000.

17

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Other income for 2001 was $12.9 million, representing  an increase of $2.4 million over 2000 income of $10.5 million and compared to  $13.8 million for 1999.  As a result of branch analysis including the evaluation  of the potential sale or consolidation of branches competing in the same market  area, the Corporation sold one of its branches during 2001.  The premium  on the sale of $10.4 million of deposits from the branch resulted in a gain  of $767 thousand.  Termination of the Southwest Bank pension plan during  2001 resulted in a gain of $277 thousand (net of applicable excise taxes), which  is included in other income.  Other income for the 2001 period also reflected  increases in bank club income, debit card interchange and merchant discount  of $207 thousand, $173 thousand and $222 thousand, respectively, compared to  2000 revenues.  Mutual fund sales also resulted in an increase in other  income for 2001 of $336 thousand.  Other income for 1999 included gains  on the sale of loans resulting primarily from the sale of $42.2 million of residential  mortgage loans during the first quarter of 1999 and the sale of $20.4 million  of retail credit card loans during the second quarter of 1999 which generated  gains of $890 thousand and $4.0 million, respectively.

Total other operating expenses increased $5.5 million  to $105.0 million for 2001 compared to $99.5 million and $95.6 million for 2000  and 1999, respectively.  Total noninterest expense as a percent of average  assets was 2.32% for the 2001 period compared to 2.31% for 2000.  Employee  costs were $54.5 million in 2001, representing 1.21% of average assets compared  to $52.5 million and 1.22% of average assets for 2000.  Employee costs  for 1999 were $49.8 million or 1.17% of average assets.  Employee benefit  costs increased $331 thousand for 2001 compared to the 2000 period and included  increases in 401(k) plan expenses and employee stock ownership plan "ESOP"  expenses which were partially offset by decreases in hospitalization costs.   The 2000 period included decreases in employee benefit costs for pension and  postretirement benefits totaling $504 thousand at Southwest as a result of plan  curtailment.  The Corporation continues to develop quality employee benefit  plan enhancements while effectively managing costs.

Net occupancy expense has remained stable over  several years at $6.5 million for 2001 and 1999 and $6.6 million for 2000 as  increases in insurance and utility costs have been offset by decreases in building  depreciation, repairs and maintenance.  Furniture and equipment expenses  of $9.1 million for 2001 reflected increases of $896 thousand over 2000 levels,  primarily as a result of increases for depreciation on computer software and  software maintenance.  The 2000 period also reflected increases in computer  software depreciation and maintenance, as well as increases in furniture and  equipment depreciation and repairs compared to 1999.  Computer software  depreciation and maintenance cost increases were primarily related to the replacement  of software utilized by Corporation's data processing subsidiary to process  loan and deposit accounts.  Software depreciation is also expected to increase  for 2002 as a full year of depreciation is included for systems placed in service  during the third and fourth quarters of 2001.  The new application software  will enable the subsidiary banks to provide customers with enhanced products  and services, including internet banking.  Technology continues to have  a great impact on financial services companies and their ability to compete  in the marketplace.  The Corporation is committed to providing banking,  trust and insurance services through traditional branch and telephone channels  in the markets we serve, but is also committed to meeting the changing needs  of our customers.

18

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Outside data processing expenses were $3.3 million  for 2001 compared to $3.3 million for 2000 and $3.4 million for 1999.   Outside data processing expenses 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.  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.

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.  

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.

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.

19

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

**Liquidity**

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.

20  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Although the Corporation's primary source of funds  remains traditional deposits from within the communities served by its banking  subsidiaries, future sources of deposits utilized could include the use of brokered  time deposits offered outside the Corporation's traditional market area.   Time deposits of $100 thousand or more at December 31, 2001, 2000 and 1999 had  remaining maturities as follows:

 

 

**Maturity Distribution of Large Certificates of Deposit**(Dollar Amounts in Thousands)

 

 

 

2001

2000

1999

 

Amount

Percent

Amount

Percent

Amount

Percent

Remaining Maturity:

 

 

 

 

 

 

   3 months or less

$133,017

27%

$358,112

  79%

$273,376

 76%

   Over 3 months through 6 months

   57,222

   11

  36,941

 8

    13,372

             4

   Over 6 months through 12 months

    89,436

   18

  19,241

 4

    14,503

             4

   Over 12 months

  217,643

   44  

    41,088

      9          

    57,010

    16         

                   Total

$497,318

 100%

$455,382

100%

$358,261

100%

 

Net loans increased $76.6 million during 2001 as  commercial loans increased by $134.1 million and  loans to individuals  increased by $23.4 million compared to year-end 2000.  The 2001 period  reflected decreases of $83.1 million in residential real estate loans, due in  part to the sale of $12.9 million of 30 year residential mortgage loans with  significant prepayment exposure during falling interest rates.

Below is a schedule of loans by classification  for the five years ended December 31, 2001:

 

**Loans by Classification**(Dollar Amounts in Thousands)

 

 

 

2001

2000

1999

1998

1997

 

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Commercial, financial,   agricultural and other

        $   529,300

        21%

        $   443,618

        18%

        $   417,300

        16%

        $   377,733

        16%

$ 363,699

 15%

Real estate-construction

14,727

    1

37,146

     2

41,734

     2

33,097

     1

35,308

              1

Real estate-commercial

638,576

   25

560,066

    22

495,789

    20

387,166

    16

384,794

     16

Real estate-residential

849,787

   33

932,915

    37

980,506

    39

1,009,903

    42

1,048,405

     43

Loans to individuals

473,515

   18

450,154

    18

502,465

    20

517,907

    22

569,742

     23

Net leases

     63,326

        2         

      68,975

        3         

      65,893

        3         

     56,423

      3  

      51,245

       2         

 

 

 

 

 

 

 

 

 

 

 

    Gross loans and leases

2,569,231

100%

2,492,874

100%

2,503,687

100%

2,382,229

100%

2,453,193

100%

Unearned income

      (1,297)

 

      (2,047)

 

     (3,628)

 

      (7,379)

 

    (16,856)

 

Total loans, and leases  Net of unearned income

        $2,567,934

 

        $2,490,827

 

        $2,500,059

 

        $2,374,850

 

$2,436,337

 

 

21

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

An additional source of liquidity is marketable  securities that the Corporation holds in its investment portfolio.  These  securities are classified as "securities available for sale."   While the Corporation does not have specific intentions to sell these securities,  they have been designated as "available for sale" because they may  be sold for the purpose of obtaining future liquidity, for management of interest  rate risk or as part of the implementation of tax management strategies.   As of December 31, 2001, securities available for sale had an amortized cost  of $1,456 million and an approximate fair value of $1,469 million.  Gross  unrealized gains were $19.6 million and gross unrealized losses were $6.2 million.    Based upon the Corporation's historical ability to fund liquidity needs from  other sources, the current available for sale portfolio is deemed to be more  than adequate, as the Corporation does not anticipate a need to liquidate the  investments until maturity.  Below is a schedule of the contractual maturity  distribution of securities held to maturity and securities available for sale  at December 31, 2001.

 

 

**Maturity Distribution of Securities Held to Maturity**        (Dollar Amounts in Thousands)

 

 

 

U.S. Government Agencies and Corporations

States and Political Subdivisions

Other Securities

Total Amortized Cost

Weighted Average Yield*

 

 

 

 

 

 

Within 1 year

$  10,032

$    3,031

$     - 0-

$  13,063

6.22%

After 1 but within 5 years

    25,417

    14,595

   22,200

    62,212

     6.47

After 5 but within 10 years

    29,098

    23,923

        275

    53,296

     6.66

After 10 years 

    99,138

    65,581

        - 0-

  164,719

     6.17

     Total

$163,685

$107,130

$22,475

$293,290

6.33%

 

 

 

 

 

 

 

 

 

 

 

 

 

**Maturity Distribution of Securities Available for Sale****At Amoritzed Cost**(Dollar Amounts in Thousands)

 

 

 

U.S. Treasury, and other U.S. Government Agencies and Corporations

States and Political Subdivisions

Other Securities

Total Amortized Cost

Weighted Average Yield*

 

 

 

 

 

 

Within 1 year

$  11,111

$    5,588

$       100

$    16,799

3.89%

After 1 but within 5 years

  143,738

      8,166

 134,431

    286,335

     5.73

After 5 but within 10 years

    99,523

    10,897

   15,000

    125,420

     5.78

Over 10 years

  712,815

   78,841

 235,506

 1,027,162

     6.36

    Total 

$967,187

$103,492

$385,037

$1,455,716

     6.16%

 

 

 

 

 

 

 

 

22

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
**Interest Sensitivity**
The Corporation's "Asset/Liability Management  Committee" ("ALCO") is responsible for the identification, assessment  and management of interest rate risk exposure, liquidity, capital adequacy and  investment portfolio position.  The primary objective of the ALCO process  is to ensure that the Corporation's balance sheet structure maintains prudent  levels of risk within the context of currently known and forecasted economic  conditions and to establish strategies which provide the Corporation with appropriate  compensation for the assumption of those risks.  The ALCO attempts to mitigate  interest rate risk through the use of strategies such as asset disposition,  asset and liability pricing and matched maturity funding.  The ALCO strategies  are established by the Corporation's senior management and are approved by the  Corporation's board of directors. 

The objective of interest rate sensitivity management  is to maintain an appropriate balance between the stable growth of income and  the risks associated with maximizing income through interest sensitivity imbalances.   While no single number can accurately describe the impact of changes in interest  rates on net interest income, interest rate sensitivity positions, or "gaps"  when measured over a variety of time periods may be helpful.  

An asset or liability is considered to be interest-sensitive  if the rate it yields or bears is subject to change within a predetermined time  period.  If interest-sensitive assets ("ISA") exceeds interest-sensitive  liabilities ("ISL") during a prescribed time period, a positive gap  results.  Conversely, when ISL exceeds ISA during a time period, a negative  gap results.  

A positive gap tends to indicate that earnings  will be impacted favorably if interest rates rise during the period and negatively  when interest rates fall during the time period.  A negative gap tends  to indicate that earnings will be affected inversely to interest rate changes.   In other words, as interest rates fall, a negative gap should tend to produce  a positive effect on earnings and when interest rates rise, a negative gap should  tend to affect earnings negatively.

The primary components of ISA include adjustable  rate loans and investments, loan repayments, investment maturities and money  market investments.  The primary components of ISL include maturing certificates  of deposit, money market deposits, savings deposits, N.O.W. accounts and short-term  borrowings.

23

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The following table lists the amounts and ratios  of assets and liabilities with rates or yields subject to change within the  periods indicated as of December 31, 2001 and 2000  (Dollar Amounts in  Thousands): 

 

** 2001**

 

**0-90****Days**

**91-180****Days**

**181-365****Days**

**Cumulative****0-365 Days**

 

Loans 

$   839,279

$ 155,276

$ 276,760

$1,271,315

Investments 

     154,327

     90,890

   180,001

     425,218

Other interest-earning assets 

               4,250

                  -0-

                  -0-

                4,250

 

 

 

 

 

  Total interest-sensitive assets 

    997,856

   246,166

   456,761

  1,700,783

 

 

 

 

 

Certificates of deposits 

    329,825

   284,518

     407,188

  1,021,531

Other deposits 

 1,090,160

                  -0-

                    -0-

  1,090,160

Borrowings 

    430,189

                 350

                   750

     431,289

  Total interest-sensitive liabilities 

 1,850,174

   284,868

     407,938

  2,542,980

  Gap 

$ (852,318)

$  (38,702)

$     48,823

$  (842,197)

 

 

 

 

 

ISA/ISL 

              0.54

     0.86

               1.12

    0.67

Gap/Total assets 

               18.60%

              0.84%

                  1.07%

     18.37%

 

 

2000

 

0-90Days

91-180Days

181-365Days

Cumulative0-365 Days

 

 

 

 

 

Loans 

 $   621,536

$  130,374

$ 244,605

$    996,515

Investments 

   130,220

      47,279

   105,423

      282,922

Other interest-earning assets 

       11,552

                  -0-

                 -0-

               11,552

 

 

 

 

 

  Total interest-sensitive assets 

     763,308

   177,653

   350,028

   1,290,989

 

 

 

 

 

Certificates of deposits 

     274,963

  264,805

   470,828

  1,010,596

Other deposits 

  1,018,205

                 -0-

                  -0-

  1,018,205

Borrowings 

     274,673

               884

                457

        276,014

  Total interest-sensitive liabilities 

  1,567,841

 265,689

     471,285

     2,304,815

  Gap 

$ (804,533)

$ (88,036)

$(121,257)

$(1,013,826)

 

 

 

 

 

ISA/ISL 

              0.49

      0.67

      0.74

                 0.56

Gap/Total assets 

               18.40%

                2.01%

                 2.77%

                  23.19%

 

Although the periodic gap analysis provides management  with a method of measuring current interest rate risk, it only measures rate  sensitivity at a specific point in time.  Therefore, to more precisely  measure the impact of interest rate changes on the Corporation's net interest  income, management simulates the potential effects of changing interest rates  through computer modeling.  The income simulation model used by the Corporation  captures all assets, liabilities, and off-balance

sheet financial instruments, accounting for significant  variables that are believed to be affected by interest rates.  These variables  include prepayment speeds on mortgage loans and mortgage backed securities,  cash flows from loans, deposits and investments and balance sheet growth assumptions.   The model also captures embedded options, such as interest rate caps/floors  or call options, and

24  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

accounts for changes in rate relationships as various  rate indices lead or lag changes in market rates.  The Corporation is then  better able to implement strategies which would include an acceleration of a  deposit rate reduction or lag in a deposit rate increase.  The repricing  strategies for loans would be inversely related.

The Corporation's asset/liability management policy  guidelines limit interest rate risk exposure for the succeeding twenty-four  month period.  Simulations are prepared under the base case where interest  rates remain flat and most likely case where interest rates are defined using  projections of economic factors.  Additional simulations are produced estimating  the impact on net interest income of a 300 basis point (3.00%) movement upward  or downward from the base case scenario.  The Corporation's current asset/liability  management policy indicates that a 300 basis point (3.00%) change in interest  rates up or down cannot result in more than a 7.5% change in net interest income  when compared to a base case without Board approval and a strategy in place  to reduce interest rate risk below the established maximum level.  The  analysis at December 31, 2001, indicated that a 300 basis point (3.00%) movement  in interest rates in either direction over the next twelve months would not  have a significant impact on the Corporation's anticipated net interest income  over that time and the Corporation's position would remain well within current  policy guidelines.

Final loan maturities and rate sensitivities of  the loan portfolio excluding consumer installment and mortgage loans and before  unearned income at December 31, 2001 were as follows (Dollar Amounts in Thousands):

 

 

Within OneYear

One to5 Years

After5 Years

        Total

Commercial and industrial

$252,739

$  62,121

$  32,204

$   347,064

Financial institutions

235

-0-

-0-

235

Real estate-construction

11,945

440

2,342

14,727

Real estate-commercial

408,820

33,083

196,673

638,576

Other

               49,908

    11,149

  120,944

     182,001

   Totals

$723,647

$106,793

$352,163

$1,182,603

Loans at fixed interest rates

 

89,715

222,095

 

Loans at variable interest rates

 

    17,078

 130,068

 

   Totals

 

$106,793

$352,163

 

 
**Credit Review**
Maintaining a high quality loan portfolio is of  great importance to the Corporation.  The Corporation manages the risk  characteristics of the loan portfolio through the use of prudent lending policies  and procedures and monitors risk through a periodic review process provided  by internal auditors, regulatory authorities and our loan review staff.   These reviews include the analysis of credit quality, diversification of industry,  compliance to policies and procedures, and an analysis of current economic conditions.

In the management of its credit portfolio, the  Corporation emphasizes the importance of the collectibility of loans and leases  as well as asset and earnings diversification.  The Corporation immediately  recognizes as a loss all credits judged to be uncollectible and has established  an allowance for credit losses that may exist in the portfolio at a point in  time, but have not been specifically identified.  

25  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Corporation's written lending policy requires  certain underwriting standards to be met prior to funding any loan, including  requirements for credit analysis, collateral value coverage, documentation and  terms.  The principal factor used to determine potential borrowers' creditworthiness  is business cash flows or consumer income available to service debt payments.   Secondary sources of repayment, including collateral or guarantees, are frequently  obtained.  

The lending policy provides limits for individual  and bank committees lending authorities.  In addition to the bank loan  approval process, requests for borrowing relationships which will exceed one  million dollars must also be approved by the Corporation's Credit Committee.   This Committee consists of a minimum of three members of the Corporation's board  of directors.  Early in 2000, the Corporation initiated an additional level  of approval for credit relationships between $500 thousand and $1.0 million.   This procedure requires approval of those credits by a committee consisting  of senior lenders of the Corporation.

Commercial and industrial loans are generally granted  to small and middle market customers for operating, expansion or asset acquisition  purposes.  Operating cash flows of the business enterprise are identified  as the principal source of repayment, with business assets held as collateral.   Collateral margins and loan terms are based upon the purpose and structure of  the transaction as set forth in loan policy.

Commercial real estate loans are granted for the  acquisition or improvement of real property.  Generally, commercial real  estate loans do not exceed 75% of the appraised value of property pledged to  secure the transaction.  Repayment of such loans are expected from the  operations of the subject real estate and are carefully analyzed prior to approval.

Real estate construction loans are granted for  the purposes of constructing improvements to real property, both commercial  and residential.  On-site inspections are conducted by qualified individuals  prior to periodic permanent project financing, which is generally committed  prior to the commencement of construction financing.

Real estate loans secured by 1-4 family residential  housing properties are granted subject to statutory limits in effect for each  bank regarding the maximum percentage of appraised value of the mortgaged property.   Residential loan terms are normally established in compliance with secondary  market requirements.  Residential mortgage portfolio interest rate risk  is controlled by secondary market sales, variable interest rate loans and balloon  maturities.

Loans to individuals represent financing extended  to consumers for personal or household purposes, including automobile financing,  education, home improvement and personal expenditures.  These loans are  granted in the form of installment, credit card or revolving credit transactions.   Consumer creditworthiness is evaluated on the basis of ability to repay, stability  of income sources and past credit history.

The Corporation maintains an allowance for credit  losses at a level deemed sufficient to absorb losses which are inherent in the  loan and lease portfolios at each balance sheet date.  Management and the  Corporation's Board of Directors review the adequacy of the allowance on a quarterly  basis to ensure that the provision for credit losses has been charged against  earnings in an amount 

26  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

necessary to maintain the allowance at a level  that is appropriate based on management's assessment of probable estimated losses.   The Corporation's methodology for assessing the appropriateness of the allowance  for credit losses consists of several key elements.  These elements include  a specific allowance for primary watch list classified loans, a formula allowance  based on historical trends, an additional allowance for special circumstances  and an unallocated allowance.  The Corporation consistently applies the  following comprehensive methodology and procedure at the subsidiary bank level.

The allowance for primary watch list classified  loans addresses those loans maintained on the Corporation's primary watch list  which are assigned a rating of substandard, doubtful, or loss.  Substandard  loans are those with a well-defined weakness or a weakness which jeopardizes  the repayment of the debt.  A loan may be classified as substandard as  a result of impairment of the borrower's financial condition and repayment capacity.   Loans for which repayment plans have not been met or collateral equity margins  do not protect the Corporation may also be classified as substandard.   Doubtful loans have the characteristics of substandard loans with the added  characteristic that collection or liquidation in full, on the basis of presently  existing facts and conditions, is highly improbable.  Although the possibility  of loss is extremely high for doubtful loans, the classification of loss is  deferred until pending factors, which might improve the loan, have been determined.   Loans rated as doubtful in whole or in part are placed in nonaccrual status.   Loans which are classified as loss are considered uncollectible and are charged  to the allowance for credit losses at the next meeting of the Corporation's  credit committee after placement in this category.  There were no loans  classified as loss on the primary watch list as of December 31, 2001.

Loans on the primary watch list may also be impaired  loans, which are defined as nonaccrual loans or troubled debt restructurings.   Each of the classified loans on the primary watch list are individually analyzed  to determine the level of the potential loss in the credit under the current  circumstances.  The specific reserve established for these criticized and  impaired loans is based on careful analysis of the loan's performance, the related  collateral value, cash flow considerations and the financial capability of any  guarantor.  The allowance for primary watch list classified loans is equal  to the total amount of potential unconfirmed losses for the individual classified  loans on the watch list.  Primary watch list loans are managed and monitored  by assigned account officers within the Corporation in conjunction with senior  management.

The allowance based on historical trends uses charge-off  experience of the Corporation to estimate potential unconfirmed losses in the  balances of the loan and lease portfolios.  The historical loss experience  percentage is based on the charge-off history for the greater of the eight most  recent quarters or the twenty most recent quarters.  Historical loss experience  percentages are applied to non-classified loans from the primary watch list  as well as all other loans and leases which are not on the watch list to obtain  the portion of the allowance for credit losses which is based on historical  trends.  Before applying the historical loss experience percentages, loan  balances are reduced by the portion of the loan balances which are subject to  guarantee by a government agency.  Loan balances are also adjusted for  unearned discount on installment loans.

27  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The additional allowance for special circumstances  provides management with the opportunity to estimate additional potential allowance  amounts which may be needed to cover specific factors.  The specific factors  that management currently evaluates consist of portfolio risk or concentrations  of credit, off balance sheet risk, economic conditions, management or staff  considerations, and comparative peer analysis variances.  Portfolio risks  include unusual changes or recent trends in specific portfolios such as unexpected  changes in the trends or levels of delinquency, unusual repossession activities  or large levels of unsecured loans in a portfolio.

The Corporation also maintains an unallocated allowance.   The unallocated allowance is used to cover any factors or conditions which may  cause a potential credit loss but are not specifically identifiable.  It  is prudent to maintain an unallocated portion of the allowance because no matter  how detailed an analysis of potential credit losses is performed these estimates  by definition lack precision.  Management must make estimates using assumptions  and information which is often subjective and changing rapidly.

Since all identified losses are immediately charged  off, no portion of the allowance for credit losses is restricted to any individual  credit or groups of credits, and the entire allowance is available to absorb  any and all credit losses.  However, for analytical purposes, the following  table sets forth an allocation of the allowance for credit losses at December  31 according to the categories indicated:

      

 

**Allocation of the Allowance for        Credit Losses**        (Dollar Amounts in Thousands)

 

2001

2000

1999

1998

1997  

 

 

 

 

 

 

Commercial, industrial, financial, agricultural and other

$  6,315

$  6,263

$  6,321

$  4,375

$  3,726

Real estate-construction

432

643

831

414

415

Real estate-commercial

9,808

9,064

7,675

5,119

4,912

Real estate-residential

7,379

10,211

9,928

10,319

8,595

Loans to individuals

3,845

4,938

5,131

5,223

4,583

Lease financing receivables

401

638

586

512

393

Unallocated

   5,977

    1,844

    3,067

    6,342

    3,308

     Total

$34,157

$33,601

$33,539

$32,304

$25,932

Allowance as percentage of average total loans

   1.34%

   1.34%

   1.39%

   1.32%

   1.11%

Other than those described below, there are no  material credits that management has serious doubts as to the borrower's ability  to comply with the present loan repayment terms.  The following table identifies  nonperforming loans at December 31.  A loan is placed in a nonaccrual status  at the time when ultimate collectibility of principal or interest, wholly or  partially, is in doubt.  Past due loans are those loans which were contractually  past due 90 days or more as to interest or principal payments but are well secured  and in the process of collection.  Renegotiated loans are those loans which  terms have been renegotiated to provide a reduction or deferral of principal  or interest as a result of the deteriorating financial position of the borrower.

 

28FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

**Nonperforming and Impaired        Assets and Effect****on Interest Income Due to Nonaccrual**(Dollar Amounts in Thousands)

 

 

 

 

 

 

 

2001

2000

1999

1998

1997

 

 

 

 

 

 

Loans on nonaccrual basis

$22,899

$10,698

$ 12,765

$   9,677

$ 11,387

Past due loans 

17,781

22,086

15,815

15,780

13,955

Renegotiated loans

       832

    2,263

          62

          64

          67

   Total nonperforming loans

$41,512

$35,047

$ 28,642

$ 25,521

$ 25,409

 

 

 

 

 

 

Nonperforming loans as a percentage of total        loans

   1.62%

  1.41%

    1.15%

    1.07%

    1.04%

 

 

 

 

 

 

 Allowance as percentage of nonperforming        loans

 82.28%

95.87%

117.10%

126.58%

102.06%

 

 

 

 

 

 

Other real estate owned

$  1,619

$ 1,661

$   1,707

$   2,370

$   1,950

 

 

 

 

 

 

Gross income that would have been recorded at        original rates

$  1,422

$    750

$     724

$      961

$   1,017

 

 

 

 

 

 

 Interest that was reflected in income

      750

      333

       458

       286

       146

 

 

 

 

 

 

 Net reduction to interest income due to        nonaccrual

$    672

$    417

$     266

$     675

$     871

 

The reduction of income due to renegotiated loans  was less than $50 thousand in any year presented.

The level of nonperforming loans at year-end 2001  increased by $6.5 million over 2000 levels as increases in nonaccrual loans  were only partially offset by decreases in past due loans and renegotiated loans.   The increase in nonaccrual loans since year-end 2000 is primarily related to  two loans.  One is a $6.7 million credit that is not past due and carries  an 80% guaranty of a U.S. government agency but is experiencing cash flow difficulties  and has therefore been placed in nonaccrual status.  A resolution of this  credit is expected later in 2002.  The second credit is in the amount of  $5.9 million and the Corporation is in the process of liquidating the collateral.   The Corporation anticipates a final resolution of this credit in the first quarter  of 2002 without a significant loss.

Past due loans for the 2001 period decreased $4.3  million compared to the corresponding period of 2000 and included decreases  of $3.1 million for commercial loans secured by real estate and $1.7 million  for commercial and industrial loans.  Past due loans secured by residential  real estate and loans to individuals increased $622 thousand and $110 thousand,  respectively over the same time period.  Nonperforming loans as a percentage  of total loans was 1.62% at December 31, 2001 compared to 1.41% at December  31, 2000.

29  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Corporation's loan portfolio continues to be  monitored by senior management to identify potential portfolio risks and detect  potential credit deterioration in the early stages.  During 2001 the Corporation  established a "Watchlist Committee" which includes credit workout  officers of the bank and meets bi-weekly to review watchlist credits for workout  progress or deterioration.  Loan loss adequacy and the status of significant  nonperforming credits are monitored on a quarterly basis by a committee made  up of senior officers of the bank and parent company.  These committees  were established to provide additional internal monitoring and analysis in addition  to that provided by the credit committees of the banks and parent company.  Credit  risk is mitigated during the loan origination process through the use of sound  underwriting policies and collateral requirements.  The Corporation has  also initiated an additional level of approval for credit relationships between  $500 thousand and $1.0 million.  This procedure requires approval of those  credits by a committee consisting of senior lenders of the Corporation.    Management also attempts to minimize loan losses by analyzing and modifying  collection techniques on a periodic basis.   Management believes that  the allowance for credit losses and nonperforming loans remained safely within  acceptable levels.

**Capital Resources**

Equity capital increased $35.9 million in 2001  to $370.1 million.  Dividends declared decreased equity by $34.1 million  during 2001, an increase over dividends for the 2000 period.  The retained  net income of $16.1 million remained in permanent capital to fund future growth  and expansion.  Long-term debt payments and fair value adjustments to unearned  ESOP shares increased equity capital by $1.2 million.  The market value  adjustment to securities available for sale increased equity by $16.5 million  during 2001.  Amounts paid to fund the discount on reinvested dividends  reduced equity by $612 thousand.  Proceeds from the reissuance of treasury  shares to provide for stock options exercised increased equity by $2.5 million  during 2001, while the tax benefit related to the stock options, increased equity  by $269 thousand.

A capital base can be considered adequate when  it enables the Corporation to intermediate funds responsibly and provide related  services while protecting against future uncertainties.  The evaluation  of capital adequacy depends on a variety of factors, including asset quality,  liquidity, earnings history and prospects, internal controls and management  caliber.  In consideration of these factors, management's primary emphasis  with respect to the Corporation's capital position is to maintain an adequate  and stable ratio of equity to assets.  See NOTE 25 to the Consolidated  Financial Statements for an analysis of regulatory capital guidelines and the  Corporation's capital ratios relative to these measurement standards.

**Inflation and Changing Prices**

Management is aware of the impact inflation has  on interest rates and therefore the impact it can have on a bank's performance.   The ability of a financial institution to cope with inflation can only be determined  by analyzing and monitoring its asset and liability structure.  The Corporation  monitors its asset and liability position with particular emphasis on the mix  of interest-sensitive assets and liabilities in order to reduce the effect of  inflation upon its performance.  However, it must be 

30  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

remembered that the asset and liability structure  of a financial institution is substantially different from an industrial corporation  in that virtually all assets and liabilities are monetary in nature, meaning  that they have been or will be converted into a fixed number of dollars regardless  of changes in general

price levels.  Examples of monetary items  include cash, loans and deposits.  Nonmonetary items are those assets and  liabilities which do not gain or lose purchasing power solely as a result of  general price level changes.  Examples of nonmonetary items are premises  and equipment.

Inflation can have a more direct impact on categories  of noninterest expenses such as salaries and wages, supplies and employee benefit  costs.  These expenses are very closely monitored by management for both  the effects of inflation and increases relating to such items as staffing levels,  usage of supplies and occupancy costs.

ITEM 7A.  Quantitative and Qualitative  Disclosures About Market Risk

Information appearing in Item 7 of this report  under the caption "Interest Sensitivity" is incorporated herein by  reference in response to this item.

31

FIRST COMMONWEALTH FINANCIAL CORPORATION  AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS   (Dollar Amounts in Thousands) 

 

December 31,

 

      2001

      2000

**ASSETS**

 

 

      Cash and due from        banks 

$      98,130

$     90,723

      Interest-bearing bank deposits 

      4,250

      427

      Federal funds        sold                                                                                               

                  -0-

 11,125

      Securities available        for sale, at market 

   1,469,118

  1,238,230

      Securities held to        maturity, at amortized cost, (Market value                 $298,643 in 2001 and $398,661        in 2000) 

        293,290

        398,107

 

 

 

      Loans 

  2,569,231

  2,492,874

            Unearned        income 

      (1,297)

   (2,047)

                   Allowance for credit losses 

             (34,157)

             (33,601)

                               Net        loans 

  2,533,777 

  2,457,226 

 

 

 

      Premises and equipment        

    46,366

 44,671

      Other real estate owned        

      1,619

   1,661

      Other assets 

             136,980 

     130,142        

 

 

 

                                          Total        assets

$ 4,583,530 

$4,372,312 

 

 

 
**LIABILITIES**
 

 

      Deposits (all        domestic):

 

 

            Noninterest-bearing        

$   412,695 

$   349,804

            Interest-bearing              

  2,680,455 

  2,714,342 

                               Total        deposits 

  3,093,150

  3,064,146

 

 

 

      Short-term borrowings        

 427,736

272,171

      Other liabilities 

   28,358

  44,984

 

 

 

      Company obligated mandatorily        redeemable                     capital        securities of subsidiary trust 

 35,000

35,000

      Other long-term debt                                                                                           

     629,220

     621,855        

 

 

 

                                      Total long-term debt 

     664,220

     656,855        

                                                   Total        liabilities 

  4,213,464

  4,038,156

 

 

 
**SHAREHOLDERS' EQUITY**
 

 

      Preferred stock,        $1 par value per share, 3,000,000 shares                     authorized,        none issued 

 -0-

 -0-

      Common stock $1 par        value per share, 100,000,000 shares authorized;                     62,525,412        shares issued and 58,451,624 shares outstanding in 2001;                            62,525,412 shares issued and 58,195,450 shares outstanding in 2000 

         62,525

 62,525

      Additional paid-in        capital 

   66,176

  67,223

      Retained earnings 

 288,219

272,169

     Accumulated other comprehensive        income (loss) 

     8,703

    (7,808)

      Treasury stock (4,073,788        and 4,329,962 shares at December 31, 2001 and                    2000,        respectively at cost) 

(51,431)

(54,666)

      Unearned ESOP shares        

               (4,126)

               (5,287)

                               Total        shareholders' equity 

     370,066        

     334,156        

                                            Total        liabilities and shareholders' equity 

$4,583,530 

$4,372,312 

*The accompanying notes are an integral part  of these consolidated financial statements.*

 

32

FIRST COMMONWEALTH FINANCIAL CORPORATION  AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME   (Dollar Amounts in Thousands, except per share data)

 

 

 

Years Ended December 31,

 

 

2001

 

2000

 

1999

**Interest Income**

 

 

 

 

 

 

   Interest and fees on loans 

 

$  202,173

 

$   208,548

 

$  195,010

   Interest and dividends on investments:-

 

 

 

 

 

 

     Taxable interest 

  93,961

 

     89,723

 

 88,266

     Interest exempt from        Federal income taxes 

 

       9,534

 

       9,638

 

        9,479

     Dividends 

 

   2,661

 

         3,657

 

   3,108

   Interest on Federal funds sold 

 

          492

 

            234

 

      105

   Interest on bank deposits 

 

                   70

 

                     82

 

           121

                Total interest income 

 

   308,891

 

     311,882

 

    296,089

    

 

 

 

 

 

 
**Interest Expense**
 

 

 

 

 

 

   Interest on deposits 

 

   118,165

 

     115,507

 

103,331

   Interest on short-term borrowings

 

     11,227

 

       22,218

 

      13,832

   Interest on mandatorily redeemable capital securities        of                 subsidiary trust

 

 3,325

 

 3,325

 

 1,007

   Interest on other long-term debt        

 

     34,453

 

       33,489

 

      34,483

      Total interest        on long-term debt 

 

     37,778

 

       36,814

 

      35,490

                Total interest expense  

 

   167,170

 

     174,539

 

    152,653

 

 

 

 

 

 

 
**Net interest income**
 

   141,721

 

     137,343

 

    143,436

   Provision for credit losses 

 

     11,495

 

       10,030

 

        9,450

 

 

 

 

 

 

 
**Net interest income after provision for credit losses**
 

   130,226

 

     127,313

 

    133,986

 

 

 

 

 

 

 
**Other Income**
 

 

 

 

 

 

   Securities gains 

 

    3,329

 

       1,745

 

      565

   Trust income 

 

    4,995

 

         5,555

 

        5,525

   Service charges on deposits 

 

  11,160

 

     10,562

 

  10,645

   Insurance commissions 

 

    3,192

 

       1,951

 

    1,537

   Income from bank owned life insurance        

 

    4,618

 

       3,419

 

    2,126

   Other income 

 

     12,930

 

       10,451

 

      13,827

                Total other income 

 

     40,224

 

       33,683

 

      34,225

 

 

 

 

 

 

 
**Other Expenses**
 

 

 

 

 

 
**   Salaries and employee benefits**
 

   54,521

 

     52,529

 

  49,806
**   Net occupancy expense**
 

     6,520

 

       6,577

 

     6,537
**   Furniture and equipment expense**
 

     9,050

 

       8,154

 

     7,653
**   Data processing expense**
 

     3,296

 

       3,310

 

     3,449
**   Pennsylvania shares tax expense**
 

     3,825

 

       3,495

 

     3,477
**   Other operating expenses**
 

      27,795

 

       25,396

 

       24,647
**                Total other expenses**
 

    105,007

 

       99,461

 

       95,569
 
 

 

 

 

 

 
**Income before income taxes**
 

      65,443

 

       61,535

 

      72,642
**   Applicable income taxes**
 

      15,254

 

       14,289

 

      19,612
**Net Income**
 

$    50,189

 

$     47,246

 

$    53,030
 
 

 

 

 

 

 
**Average Shares Outstanding**
 

57,885,478

 

57,558,929

 

60,333,092
**Average Shares Outstanding Assuming Dilution**
 

58,118,057

 

57,618,671

 

60,569,322
 
 

 

 

 

 

 
**Per Share Data:**
 

 

 

 

 

 
**   Basic Earnings Per Share**
 

       $0.87

 

       $0.82

 

     $0.88
**   Diluted Earnings Per Share**
 

       $0.86

 

       $0.82

 

     $0.88

  *The accompanying notes are an integral  part of these consolidated financial statements*.

 

33

FIRST COMMONWEALTH FINANCIAL CORPORATION  AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY   (Dollar Amounts in Thousands)

 

         Common     Stock   

         Additional        Paid-in    Capital    
        RetainedEarnings
Accumulated        Other        Comprehensive  Income (Loss)      

        Treasury    Stock   

         Unearned        ESOP    Shares   

         Total        Shareholders'       Equity             
**Balance at December 31, 1998**
 $62,525

$68,978

$235,623

     $         2,199

 $(5,913)

  $ (8,007)

  $ 355,405

  Comprehensive income

 

 

 

 

 

 

 

     Net income 

                -0-

      -0-

   53,030

    -0-

     -0-

     -0-

       53,030             

     Other comprehensive        income, net of tax:

 

 

 

 

 

 

 

                 Unrealized holding gains (losses) on                               securities arising during the period 

-0-

-0-

-0-

(42,137)

-0-

-0-

(42,137)

          Less:        reclassification adjustment for gains                             on securities included in net income 

                -0-

                 -0- 

                -0- 

      (366)

               -0- 

                -0-

                 (366)

     Total other comprehensive        income 

         -0-

                 -0- 

                -0- 

      (42,503)

               -0- 

                -0-

     (42,503)

                 Total comprehensive income 

                -0-

                 -0-

  53,030

(42,503)

     -0-

                -0-

 10,527

  Cash dividends declared 

                -0-

                 -0-

 (30,880)

      -0-

     -0-

                -0-

 (30,880)

  Net increase in unearned ESOP shares 

                -0-

                  53

              -0-

      -0-

     -0-

     1,814

   1,867

  Discount on dividend reinvestment plan        purchases

                -0-

               (358)

       -0-

      -0-

     -0-

      -0-

     (358)

  Treasury stock acquired 

                 0-

                 -0-

              -0-

      -0-

(51,331)

      -0-

(51,331)

  Treasury stock reissued 

                  -0-

               (343)

                -0- 

             -0-        

    1,796 

         -0-

               1,453 
**Balance at December 31, 1999**
   62,525

    68,330

257,773

(40,304)

(55,448)

  (6,193)

    286,683 

 

 

 

 

 

 

 

 

  Comprehensive income

 

 

 

 

 

 

 

    Net income 

               -0-

                  -0-

  47,246

    -0-

     -0-

      -0-

      47,246

    Other comprehensive income,        net of tax:                Unrealized holding gains (losses)        on                    securities        arising during the period 

        -0-

        -0-

        -0-

        33,630

        -0-

        -0-

        33,630

                Less: reclassification adjustment for gains                            on securities included in net income 

                   -0-

                  -0- 

                -0- 

 (1,134)

               -0- 

                 -0- 

       (1,134)

     Total other comprehensive         income 

                  -0-

                  -0- 

                -0- 

              32,496 

               -0- 

                 -0- 

             32,496

                Total comprehensive income 

                 -0-

                 -0-

 47,246

32,496

     -0-

                 -0-

             79,742

  Cash dividends declared 

                 -0-

                 -0-

 (32,850)

     -0-

     -0-

              -0-

     (32,850)

  Decrease in unearned ESOP shares 

                 -0-

               (113)

                -0-

    -0-

     -0-

      906

     793

  Discount on dividend reinvestment plan        purchases

                 -0-

               (593)

         -0-

    -0-

     -0-

              -0-

     (593)

  Treasury stock acquired 

                 -0-

                 -0-

                -0-

    -0-

    (873)

              -0-

     (873)

  Treasury stock reissued 

                 -0-

               (476)

                -0-

    -0-

 1,655

              -0-

  1,179

  Tax benefit of stock options 

                  -0-

                  75 

                -0- 

                   -0- 

               -0- 

                 -0- 

                    75 
**Balance at December 31, 2000**
   62,525

    67,223

272,169

(7,808)

(54,666)

   (5,287)

    334,156

  Comprehensive income

 

 

 

 

 

 

 

    Net income 

                -0-

                  -0-

  50,189

    -0-

    -0-

              -0-

             50,189

    Other comprehensive income,        net of tax:                Unrealized holding gains (losses)        on                            securities arising during the period 

        -0-

        -0-

        -0-

        18,639

          -0-

        -0-

        18,639

                Less: reclassification adjustment for gains                            on securities included in net income 

 

                  -0-

 

                  -0- 

 

                -0- 

 

       (2,128)

 

               -0- 

 

                 -0- 

 

              (2,128)

      Total other comprehensive         income 

                  -0-

                  -0- 

                -0- 

             16,511 

               -0- 

                 -0- 

             16,511 

                Total comprehensive income 

               -0-

         -0-

 50,189

             16,511

      -0-        

                 -0-

             66,700

  Cash dividends declared 

               -0-

                -0-

 (34,139)

     -0-

      -0-

              -0-

     (34,139)

  Decrease in unearned ESOP shares 

               -0-

                31

               -0-

     -0-

      -0-

  1,161

               1,192

  Discount on dividend reinvestment plan        purchases

               -0-

              (612)

               -0-

     -0-

      -0-

              -0- 

     (612)

  Treasury stock reissued 

               -0-

              (735)

               -0-

     -0-

   3,235

              -0-

  2,500

  Tax benefit of stock options 

                - 0-

                269 

                -0- 

                    -0- 

                -0- 

                 -0- 

                  269 
**Balance at December 31, 2001**
 $ 62,525

  $66,176 

$288,219 

             $ 8,703 

$(51,431)

  $(4,126)

 $ 370,066 

* The accompanying  notes are an integral part of these consolidated financial statements.*

* *

34**               FIRST COMMONWEALTH FINANCIAL CORPORATION  AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS             (Dollar Amounts in Thousands)   

 

Years Ended December 31,

 

 2001

2000

1999

**Operating Activities**

 

 

 

  Net income 

$   50,189

$ 47,246

 $  53,030

  Adjustments to reconcile net income to        net cash provided by operating activities:

 

 

 

     Provision for credit        losses 

   11,495

  10,030

    9,450

     Depreciation and amortization        

     7,760

   7,480

    7,735

     Net gains on sales of        assets 

     (4,169)

   (1,929)

    (5,192)

     Income from increase        in cash surrender value of bank owned life insurance 

     (4,618)

   (3,419)

    (2,126)

     Decrease (increase)        in interest receivable 

     3,559

      (932)

              (773)

     Increase (decrease)        in interest payable 

   (19,387)

    7,620

    1,815

     Increase in income taxes        payable 

     3,491

              255

              445

     Change in deferred taxes        

               (831)

    1,533

              287

     Other-net 

     (1,165)

   (1,751)

   (11,922)

        Net        cash provided by operating activities 

    46,324 

   66,133 

    52,749 

  

 

 

 
**Investing Activities**
 

 

 

  Transactions with securities held to maturity:        

 

 

 

       Sales 

              -0-

               -0-

              -0-

       Maturities        and redemptions 

 133,666

   67,735

127,566
**      **Purchases      of investment securities 
   (28,772)

 (17,458)

  (93,151)

  Transactions with securities available        for sale:

 

 

 

       Sales 

   85,737

 22,391

  39,282

       Maturitiies        and redemptions 

497,640

108,636

193,605

       Purchases        of investment securities 

(785,610)

(173,514)

(398,933)

  Proceeds from sales of loans and other        assets.................................................................        

 90,241

  36,482

 99,692

  Sale of subsidiary 

              -0-

               -0-

  (2,431)

  Investment in bank owned life insurance        

  (15,000)

 (15,000)

 (20,000)

  Net decrease (increase) in interest-bearing        bank deposits 

     (3,823)

      790

              689

  Net increase in loans 

(178,465)

 (36,435)

(227,347)

  Purchases of premises and equipment 

     (7,886)

   (7,736)

     (5,197)

        Net        cash used by investing activities 

 (212,272)

(14,109)

 (286,225)

 

 

 

 
**Financing Activities**
 

 

 

  Proceeds from issuance of other long-term        debt 

   9,500

 89,900

  25,000

  Repayments of other long-term debt 

     (974)

 (70,493)

   (50,319)

  Proceeds from issuance of company obligated        mandatorily redeemable capital securities             of subsidiary trust 

 -0-

              -0-

   35,000
** **Discount on dividend reinvestment      plan purchases 
      (612)

      (593)

               (358)

  Dividends paid 

 (33,809)

 (32,553)

   (27,825)

  Net increase (decrease) in Federal funds        purchased 

 91,425

  13,875

   (45,025)

  Net increase (decrease) in other short-term        borrowings 

 64,138

(166,531)

 329,306

  Sale of branch and deposits, net of cash        received 

   (9,591)

               -0-

                -0-

  Stock option tax benefit 

      269

               75

                -0-

  Acquisition of treasury stock 

              -0-

      (873)

   (51,331)

  Reissuance of treasury stock 

   2,500

      326

     1,453

  Net increase in deposits 

    39,384 

 115,318 

     21,333        

        Net        cash provided (used) by financing activities 

  162,230 

 (51,549)

   237,234 

        Net        increase (decrease) in cash and cash equivalents 

    (3,718)

      475

     3,758

 

 

 

 

  Cash and cash equivalents at January 1        

  101,848 

  101,373 

     97,615        

  Cash and cash equivalents at December        31 

  $98,130 

$101,848

 $101,373 

* *

*The accompanying notes are an integral part  of these consolidated financial statements.*

* *

35**FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999

 NOTE 1--Statement  of Accounting Policies
**General**
The following summary of accounting and reporting  policies is presented to aid the reader in obtaining a better understanding  of the financial statements and related financial data of First Commonwealth  Financial Corporation and its subsidiaries (the "Corporation") contained  in this report.  

The financial information is presented in accordance  with generally accepted accounting principles and general practice for financial  institutions in the United States of America.  In preparing financial statements,  management is required to make estimates and assumptions that affect the reported  amount of assets and liabilities and disclosure of contingent assets and liabilities  at the date of the financial statements.  In addition, these estimates  and assumptions affect revenues and expenses in the financial statements and  as such, actual results could differ from those estimates.

Through its subsidiaries which include two commercial  banks, a nondepository trust company and insurance agency, the Corporation provides  a full range of loan, deposit, trust and insurance services primarily to individuals  and small to middle-market businesses in seventeen counties in central and western  Pennsylvania.  Under current conditions, the Corporation is reporting one  business segment.

The Corporation is subject to regulations of certain  state and federal agencies.  These regulatory agencies periodically examine  the Corporation for adherence to laws and regulations.  As a consequence,  the cost of doing business may be affected.
**Basis of Presentation**
The accompanying consolidated financial statements  include the accounts of the Corporation and its wholly-owned subsidiaries.   All material intercompany transactions have been eliminated in consolidation.

Investments of 20 to 50 percent of the outstanding  common stock of investees are accounted for using the equity method of accounting.
**Reclassifications**
Financial statement amounts in prior periods have  been reclassified to conform to the presentation format used in 2001.   The reclassifications had no effect on the Corporation's financial condition  or results of operations.

36  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements    Years Ended December 31, 2001, 2000 and 1999

NOTE 1--Statement of Accounting Policies (Continued)
**Securities**
Debt securities that the Corporation has the positive  intent and ability to hold to maturity are classified as *securities held-to-maturity*  and are reported at amortized cost.  Debt and equity securities that are  bought and held principally for the purpose of selling them in the near term  are to be classified as *trading securities* and reported at fair value,  with unrealized gains and losses included in earnings.  Debt and equity  securities not classified as either held-to-maturity securities or trading securities  are classified as *securities available-for-sale* and are reported at fair  value, with unrealized gains and losses excluded from earnings and reported  as a separate component of shareholders' equity, net of deferred taxes.

The Corporation has securities classified as either  held-to-maturity or available-for-sale.  The Corporation does not engage  in trading activities.  Net gain or loss on the sale of securities is determined  by using the specific identification method.
**Loans**
Loans are carried at the principal amount outstanding.   Unearned income on installment loans and leases is taken into income on a declining  basis which results in an approximately level rate of return over the life of  the loan or lease.  Interest is accrued as earned on nondiscounted loans.

The Corporation considers a loan to be impaired  when, based on current information and events, it is probable that a creditor  will be unable to collect principal or interest due according to the contractual  terms of the loan.  Loan impairment is measured based on the present value  of expected cash flows discounted at the loan's effective interest rate or,  as a practical expedient, at the loan's observable market price or the fair  value of the collateral if the loan is collateral dependent.

Payments received on impaired loans are applied  against the recorded investment in the loan.  For loans other than those  that the Corporation expects repayment through liquidation of the collateral,  when the remaining recorded investment in the impaired loan is less than or  equal to the present value of the expected cash flows, income is recorded on  a cash basis.
**Mortgage Servicing Rights**
When the Corporation purchases or originates mortgage  loans with a definitive plan to sell or securitize those loans and retain the  mortgage servicing rights, the Corporation measures the mortgage servicing rights  at cost by allocating the cost of the mortgage loans between the mortgage servicing  rights and the mortgage loans (without the mortgage servicing rights) based  on their relative fair values at the date of purchase or origination.   When the Corporation does not have a definitive plan at the purchase or origination  date and later sells or securitizes the mortgage loans and retains the mortgage  servicing rights, the Corporation allocates the amortized cost of the mortgage  loans between the mortgage servicing rights and the mortgage loans (without  mortgage servicing rights)

37   FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999

NOTE 1--Statement of Accounting Policies (Continued)
**Mortgage Servicing Rights** (Continued)
based on their relative fair values at the date  of sale.  The amount capitalized as the right to service mortgage loans  is recognized as a separate asset and amortized in proportion to, and over the  period of, estimated net servicing income (servicing revenue in excess of servicing  cost).  Mortgage servicing rights are periodically evaluated for impairment  based on fair values. 
**Loan Fees**
Loan origination and commitment fees, net of associated  direct costs, are deferred and the net amount is amortized as an adjustment  to the related loan yield on the interest method, generally over the contractual  life of the related loans or commitments.
**Other Real Estate Owned**
Real estate, other than bank premises, is recorded  at the lower of cost or fair value less selling costs at the time of acquisition.   Expenses related to holding the property, net of rental income, are generally  charged against earnings in the current period.

**Allowance for Credit Losses**

The allowance for credit losses represents management's  estimate of an amount adequate to provide for losses which may be incurred on  loans currently held.  Management determines the adequacy of the allowance  based on historical patterns of loan charge-offs and recoveries, the relationship  of the allowance to outstanding loans, industry experience, current economic  trends and other factors relevant to the collectibility of loans currently in  the portfolio.
**Bank-Owned Life Insurance**
The Corporation purchased insurance on the lives  of a certain group of employees.  The policies accumulate asset values  to meet future liabilities including the payment of employee benefits such as  health care.  Increases in the cash surrender value are recorded as other  income in the Consolidated Statements of Income.  The cash surrender value  of bank-owned life insurance is reflected in "other assets" on the  Consolidated Balance Sheets in the amount of $84,788 and $65,961 at 

December 31, 2001 and 2000, respectively.   
**Premises and Equipment**
Premises and equipment are carried at cost less  accumulated depreciation and amortization.  Depreciation is computed on  the straight-line and accelerated methods over the estimated useful life of  the asset.  Charges for maintenance and repairs are expensed as incurred.   Where a lease is

 38  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements     Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 1--Statement of Accounting Policies (Continued)
**Premises and Equipment** (Continued)
involved, amortization is charged over the term  of the lease or the estimated useful life of the improvement, whichever is shorter.   The Corporation records computer software in accordance with the American Institute  of Certified Public Accountants' Statement of Position 98-1, " Accounting  for the Costs of Computer Software Developed or Obtained for Internal Use"  ("SOP 98-1").  The statement identifies the following three stages  of software development:  the preliminary project stage, the application  development stage and the post-implementation stage.  In compliance with  SOP 98-1, the Corporation expenses costs incurred during the preliminary project  stage and capitalizes certain costs incurred during the application development  stage.  Once software is in operation, maintenance costs are expensed over  the maintenance period while upgrades which result in additional functionality  or enhancement are capitalized.  Training and data conversion costs are  expensed as incurred.  Capitalized costs are amortized on a straight-line  basis over a period of 3-7 years, depending on the life of the software license.
**Accounting for the Impairment of Long-Lived  Assets**
The Corporation reviews long-lived assets, such  as premises and equipment and intangibles for impairment whenever events or  changes in circumstances, such as a significant decrease in the market value  of an asset or the extent or manner in which an asset is used indicate that  the carrying amount of an asset may not be recoverable.  If there is an  indication that the carrying amount of an asset may not be recoverable, future  discounted cash flows expected to result from the use of the asset are estimated.   If the sum of the expected cash flows is less than the carrying value of the  asset, a loss is recognized for the difference between the carrying value and  fair market value of the asset.  
**Income Taxes**
The Corporation records taxes in accordance with  the asset and liability method utilized by FASB Statement No. 109 ("FAS  No. 109"), whereby deferred tax assets and liabilities are recognized for  the future tax consequences attributable to differences between the financial  statement carrying amount of existing assets and liabilities and their respective  tax bases given the provisions of the enacted tax laws.  Deferred tax assets  are reduced, if necessary, by the amount of such benefits that are not expected  to be realized based upon available evidence.

**Comprehensive Income Disclosures**

For all periods presented, "other comprehensive  income" (comprehensive income excluding net income) includes only one component,  which is the change in unrealized holding gains and losses on available for  sale securities, net of related tax effects. 
39FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements    Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 1--Statement of Accounting Policies (Continued)
**Cash and Cash Equivalents**
For purposes of reporting cash flows, cash and  cash equivalents include cash on hand, amounts due from banks and Federal funds  sold.  Generally, Federal funds are sold for one-day periods.  
**Stock Split**
On October 19, 1999, the Corporation's Board of  Directors approved a 2-for-1 stock split effected in the form of a 100% stock  dividend.  Shareholders of record at the close of business November 4,  1999 received one additional share for each share held.  The additional  shares were distributed on November 18, 1999.  Pursuant to the foregoing  stock split an additional 31,262,706 common shares were issued, and the sum  of $31,263 ($1 per share) was transferred to the Corporation's common stock  account, and such amount was charged against the Corporation's additional paid-in  capital account.  Common stock, additional paid-in capital, and share data  for prior periods have been restated to reflect the stock split as if it had  occurred at the beginning of the earliest period presented.
**Employee Stock Ownership Plan**
Accounting treatment for the Corporation's Employee  Stock Ownership Plan ("ESOP") described in NOTE 21 follows Statement  of Position 93-6 ("SOP 93-6") "Employers Accounting for Employee  Stock Ownership Plans" for ESOP shares acquired after December 31, 1992  ("new shares").  The Corporation has elected, as permitted under  SOP 93-6, not to adopt this statement for ESOP shares acquired on or before  December 31, 1992 ("old shares").

ESOP shares purchased subject to debt guaranteed  by the Corporation are recorded as a reduction of common shareholders' equity  by charging unearned ESOP shares.  As shares are committed to be released  to the ESOP trust for allocation to plan participants, unearned ESOP shares  is credited for the average cost of the shares to the ESOP.  Compensation  cost recognized for new shares in accordance with the provisions of SOP 93-6  is based upon the fair market value of the shares committed to be released.   Additional paid-in capital is charged or credited for the difference between  the fair value of the shares committed to be released and the cost of those  shares to the ESOP.  Compensation cost recognized for old shares committed  to be released is recorded at the cost of those shares to the ESOP.

Dividends on both old and new unallocated ESOP  shares are used for debt service and are reported as a reduction of debt and  accrued interest payable.  Dividends on allocated ESOP shares are charged  to retained earnings and allocated or paid to the plan participants.  The  average number of common shares outstanding used in calculating earnings per  share excludes all unallocated ESOP shares.

40  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements    Years Ended December 31, 2001, 2000 and 1999

NOTE 1--Statement of Accounting Policies (Continued)
**Employee Stock Option Plan**
FASB Statement No. 123 "Accounting for Stock  Based Compensation" ("FAS No. 123") defines a method of measuring  stock based compensation, such as stock options granted, at an estimated fair  value.  FAS No. 123 also permits the continued measurement of stock based  compensation under provisions of the Accounting Principles Board Opinion No.  25 "Accounting for Stock Issued to Employees" ("APB 25").

As permitted under FAS No. 123, the Corporation  has elected to use the intrinsic value method to measure stock based compensation  under APB 25 and to disclose in a footnote to the financial statements, net  income and earnings per share determined as if the fair value methodology of  FAS No. 123 was implemented (see NOTE 22).  
**Derivative Instruments and Hedging Activities**
Effective January 1, 2001, the Corporation adopted  the Financial Accounting Standards Board ("FASB") Statement No. 133,  "Accounting for Derivative Instruments and Hedging Activities" ("FAS  No. 133") as amended.  FAS No. 133 establishes accounting and reporting  standards for derivative instruments and for hedging activities which require  that an entity recognize all derivatives as either assets or liabilities on  a balance sheet and measure those instruments at fair value.  Changes in  the fair value of derivatives must be recognized in earnings when they occur  unless the derivative qualifies as a hedge.  If a derivative qualifies  as a hedge, a company can elect to use hedge accounting to eliminate or reduce  income statement volatility that would arise from reporting changes in a derivative's  fair value in income.  FAS No. 133 was amended by FASB Statement No. 137  ("FAS No. 137") which delayed the effective date of FAS No. 133 to  the first quarter of fiscal years beginning after June 15, 2000.  FAS No.  133 was also amended by FASB Statement No. 138 ("FAS No. 138") which  addresses and clarifies issues causing implementation difficulties for numerous  entities applying FAS No. 133.  FAS No. 138 includes amendments to FAS  No. 133 which resulted from decisions made by the FASB related to the Derivatives  Implementation Group ("DIG") process.  The DIG was created by  the FASB to facilitate implementation by identifying issues that arise from  applying the requirements of FAS No. 133 and to advise the FASB on how to resolve  those issues.  The Corporation currently has no freestanding derivative  or hedging instruments.  Management reviewed contracts from various functional  areas of the Corporation to identify potential derivatives embedded within selected  contracts.  In accordance with the guidance provided in DIG Issue C13,  management identified embedded derivatives in some loan commitments for residential  mortgages where the Corporation has intent to sell to an investor such as the  Federal Home Loan Mortgage Corporation ("Freddie Mac") or the Federal  National Mortgage Association ("Fannie Mae"). 

41  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements    Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 1--Statement of Accounting Policies (Continued)
**Derivative Instruments and Hedging Activities**(Continued)
Due to the short-term nature of these loan commitments  (30 days or less) and the historical dollar amount of commitments outstanding  at period end, the adoption of FAS No. 133 did not have a material impact on  the Corporation's financial condition or results of operations.
**Earnings Per Common Share**
Basic earnings per share excludes dilution and  is computed by dividing income available to common shareholders less unallocated  ESOP shares by the weighted-average number of common shares outstanding for  the period.  Diluted earnings per share reflects the potential dilution  that could occur if securities or other contracts to issue common stock were  exercised or converted into common stock or resulted in the issuance of common  stock that then shared in the earnings of the entity.  For all periods  presented the dilutive effect on average shares outstanding is the result of  compensatory stock options outstanding.
**New Accounting Pronouncements               **
In September 2000, the FASB issued statement No.  140, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments  of Liabilities" ("FAS No. 140") which replaces FASB Statement  No. 125 ("FAS No. 125"), issued in June 1996.  FAS No. 140 revises  the standards for accounting for securitizations and other transfers of financial  assets and collateral and requires certain disclosures, but it carries over  most of the provisions of FAS No. 125.  The statement provides consistent  standards for distinguishing transfers of financial assets that are sales from  transfers that are secured borrowings.  FAS No. 140 is effective for transfers  occurring after March 31, 2001 and for disclosures relating to securitization  transactions and collateral for years ending after December 15, 2000.   Implementation of FAS No. 140 did not have a material impact on the Corporation's  financial condition or results of operations.

In July 2001, the FASB issued statement No. 141,  "Business Combinations" ("FAS No. 141") which supersedes  APB Opinion No. 16 "Business Combinations" ("Opinion No. 16")  but carries forward the guidance in Opinion No. 16 related to the application  of the purchase method of accounting.  FAS No. 141 requires the purchase  method of accounting for business combinations initiated after June 30, 2001  and eliminates the pooling-of interest method.  FAS No. 141 also specifies  the types of acquired intangible assets that are required to be recognized and  reported separately from goodwill.  Intangible assets are recognized as  assets apart from goodwill if the asset arises from contractual or other legal  rights or the asset is capable of being separated from the acquired entity and  sold or exchanged.  In addition to the disclosure requirements in Opinion  No. 16, FAS No. 141 requires disclosure of the primary reasons for the business  combination and the allocation of the purchase 

42  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 1--Statement of Accounting Policies (Continued)
**New Accounting Pronouncements** (Continued)   
price paid to the assets acquired and liabilities  assumed by major balance sheet caption.  After initial recognition, goodwill  and other intangible assets acquired in a business combination are accounted  for following the provisions of FASB Statement No. 142 "Goodwill and Other  Intangible Assets."   Implementation of FAS No. 141 is not expected  to have material impact on the Corporation's financial condition or results  of operations.

In July 2001, the FASB issued statement No. 142,  "Goodwill and Other Intangible Assets" ("FAS No. 142"),  which supersedes APB Opinion No. 17, "Intangible Assets" and is effective  for fiscal years beginning after December 15, 2001.  FAS No. 142 addresses  how intangible assets acquired other than by business combination should be  accounted for in financial statements upon their acquisition.  This statement  also addresses financial accounting and reporting for goodwill and other intangible  assets subsequent to their acquisition.  Additional provisions of FAS No.  142 include the reclassification of certain existing recognized intangibles  to goodwill and reclassification of certain intangibles out of previously reported  goodwill upon adoption.  FAS No. 142 requires that goodwill and other intangible  assets with indefinite useful lives, including goodwill recorded in past business  combinations, no longer be amortized, but instead be tested for impairment at  least annually and written down and charged to results of operations only in  the periods in which the recorded value is more than the estimated fair value.   Intangible assets that have finite useful lives will continue to be amortized  over their useful lives.  This statement also requires the Corporation  to complete a transitional goodwill impairment test including the identification  of reporting units for the purpose of assessing potential future impairments  of goodwill.  After identifying its reporting units, the Corporation must  determine the carrying value of each reporting unit by assigning the assets  and liabilities, including the existing goodwill and intangible assets to those  reporting units and then determine the fair value of each reporting unit.   If the carrying value of any reporting unit exceeds its fair value, then detailed  fair values for each of the assigned assets (excluding goodwill) and liabilities  will be determined to calculate the amount of goodwill impairment, if any.   Any transitional impairment loss resulting from the adoption of FAS No. 142  will be recognized as the effect of a change in accounting principle in the  Corporation's income statement. 

FAS No. 142 requires disclosure of information  about goodwill and other intangible assets in years subsequent to their acquisition  which was not previously required, including changes in the carrying amount  of goodwill from period to period, the carrying amount of intangible assets  and for assets subject to amortization, the estimated amortization expense for  the next five years.  

43FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 1--Statement of Accounting Policies (Continued)

**New Accounting Pronouncements**(Continued)    

As of December 31, 2001, the Corporation had goodwill,  net of accumulated amortization, of approximately $5,800, which would be subject  to the transitional assessment provisions of FAS No. 142.  Goodwill amortization  expense was $837 during fiscal 2001, or $0.014 per share.  The elimination  of goodwill amortization is expected to reduce other operating expenses in periods  beginning after December 31, 2001, by $837 annually.  Management is currently  assessing, but has not yet determined, the full impact of FAS No. 142 on the  Corporation's financial condition or results of operations.

In June 2001, the FASB issued statement No. 143,  "Accounting for Asset Retirement Obligations" ("FAS No. 143")  which is effective for financial statements issued for fiscal years beginning  after June 15, 2002.  The statement addresses financial accounting and  reporting for obligations associated with the retirement of tangible long-lived  assets and associated asset retirement costs.  FAS No. 143 requires that  the fair value of a liability for an asset retirement obligation be recognized  in the period in which it is incurred if a reasonable estimate of fair value  can be made.   The associated asset retirement costs are capitalized  as part of the carrying amount of the long-lived asset and subsequently allocated  to expense over the asset's useful life.  Implementation of FAS No. 143  is not expected to have a material impact on the Corporation's financial condition  or results of operations.

In August 2001, the FASB issued statement No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS  No. 144") which is effective for financial statements issued for fiscal  years beginning after December 15, 2001, including interim periods.  This  statement supersedes FASB Statement No. 121 "Accounting for the Impairment  of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and  the accounting and reporting provisions of APB Opinion No. 30, "Reporting  the Results of Operations-Reporting the Effects of Disposal of a Segment of  a Business, and Extraordinary, Unusual and Infrequently Occurring Events and  Transactions".  FAS No. 144 requires that long-lived assets be reviewed  for impairment whenever events or changes in circumstances, such as a significant  decrease in the market value of an asset or the extent or manner in which an  asset is used indicate that the carrying amount of an asset may not be recoverable.   If there is an indication that the carrying amount of an asset may not be recoverable,  future undiscounted cash flows expected to result from the use and disposition  of the asset are estimated.  If the sum of the expected cash flows is less  than the carrying value of the asset, a loss is recognized for the difference  between the carrying value and the market value of the asset.  This statement  also requires measurement of long-lived assets classified as held for sale at  the lower of their carrying amount or fair value less cost to sell and to cease  depreciation or amortization on these assets.    Implementation  of FAS No. 144 is not expected to have a material impact on the Corporation's  financial condition or results of operations.

44  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 2--Supplemental Comprehensive Income Disclosures

The following table identifies the related tax  effects allocated to each component of other comprehensive income in the Statements  of Changes in Shareholders' Equity:

 

December 31, 2001

December 31, 2000

December 31, 1999

 

        Pre-taxAmount

Tax        (Expense)    Benefit   

Net of        Tax Amount 

         Pre-taxAmount

Tax        (Expense)    Benefit   

Net of        TaxAmount

        Pre-taxAmount

Tax        (Expense)    Benefit   

        Net of        Tax Amount

Unrealized gains (losses) on           securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

   Unrealized holding gains             (losses) arising during the             period

$28,676

 $(10,037)

$18,639

         $51,739

         $(18,109)

         $33,630

$(64,826)

$22,689

$(42,137)

    Less:  reclassification             adjustment for gains             realized in net income

          (3,274)

               1,146

           (2,128)

           (1,745)

              611

           (1,134)

              (563)

               197

              (366)

        Net        unrealized gains                   (losses)

        25,402 

             (8,891)

          16,511 

          49,994

          (17,498)

          32,496 

         (65,389)

          22,886

         (42,503) 

Other comprehensive income

$25,402 

$   (8,891)

$16,511 

$49,994

$(17,498)

$32,496 

$(65,389)

$22,886

$(42,503)

NOTE 3--Supplemental Cash Flow Disclosures

 

2001

2000

1999

 

 

 

 

Cash paid during the year for:

 

 

 

  Interest

$186,558

$166,919

$150,839

  Income taxes

$  11,890

$  12,842

$  18,832

 

 

 

 

Noncash investing and financing activities:

 

 

 

  ESOP loan reductions

$   1,161

$              906

$    1,814

 

 

 

 

Loans transferred to other real estate owned        and          repossessed assets

        $   5,246

        $    6,405

        $    4,936

 

 

 

 

Gross increase (decrease) in market value          adjustment to securities available for sale 

$ 25,402

$  49,994

$ (65,389)

 

 

 

 

Treasury stock reissued for insurance agency          interest acquired

        $       -0-

        $       852

        $        -0-

45  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements  Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 4--Joint Venture Buy-Out of Insurance Agency

When the Corporation formed First Commonwealth  Insurance Agency ("FCIA"), its wholly-owned subsidiary, it entered  into a joint venture agreement with a partner to assist FCIA in establishing  itself as a full service insurance agency in exchange for an undivided 50% interest  in FCIA's expiring list of policy holders.  Effective August 31, 2000 the  Corporation acquired the 50% interest in the policy holders' list owned by its  joint venture partner; thereby becoming the sole owner of such list.  In  exchange, the joint venture partner received 89,742 shares of the Corporation's  common stock.  

NOTE 5--Sale of Subsidiary

Effective April 1, 1999, the Corporation sold all  of the outstanding common stock of BSI Financial Services, Inc. ("BSI"),  a wholly-owned subsidiary of the Corporation, to a bank headquartered in Richmond,  Indiana.  Cash proceeds in the amount of $1,709 were received, resulting  in a loss on sale of $202 which has been reflected in the financial statements.   BSI provided mortgage banking, loan servicing and collection services to the  Corporation's subsidiary banks and unaffiliated organizations.  Services  performed by BSI for the subsidiary banks have been transferred to the subsidiary  banks or other nonbank subsidiaries of the Corporation.

NOTE 6--Subsequent Event

Effective March 1, 2002, the Corporation acquired  all of the outstanding shares of Strategic Capital Concepts, Inc. ("SCC")  and Strategic Financial Advisors, Inc. ("SFA"), each a Pennsylvania  corporation headquartered in Allison Park, Pennsylvania.  As a registered  investment adviser, Strategic Capital Concepts provides financial planning,  asset management and consulting services to individuals, businesses, retirement  plans, trusts and estates.  Strategic Financial Advisors offers investment  and insurance products as well as employee benefit services.  Each of the  outstanding shares of Strategic Capital Concepts, Inc. and Strategic Financial  Advisors, Inc. were exchanged for shares of the Corporation's common stock.   In addition, the shareholders of SCC and SFA are entitled to receive additional  shares of the Corporation's common stock for each of the years 2002 through  2005 based on a formula defined in the merger agreement which takes into consideration  the financial performance of SCC and SFA after the merger date.  The merger  was accounted for as a purchase transaction whereby the identifiable tangible  and intangible assets and liabilities of SCC and SFA have been recorded at their  fair values at the acquisition date.  As prescribed under the purchase  method of accounting, the results of operations of SCC and SFA from the date  of acquisition will be included in the Corporation's financial statements for  the first quarter of 2002. 

NOTE 7--Cash and Due From Banks on Demand

Regulations of the Board of Governors of the Federal  Reserve System impose uniform reserve requirements on all depository institutions  with transaction accounts (checking accounts, NOW accounts, etc.).    Reserves are maintained in the form of vault cash or a noninterest-bearing balance  

46  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE 7--Cash and Due From Banks on Demand (Continued)

held with the Federal Reserve Bank.  The subsidiary  banks maintained with the Federal Reserve Bank average balances of $4,269 during  2001 and $3,075 during 2000.

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 8--Securities Available For Sale

Below is an analysis of the amortized cost and  approximate fair values of securities available for sale at December 31, 2001  and 2000:

 

 

2001

2000

 

         Amortized     Cost            

Gross        Unrealized    Gains            

Gross        Unrealized    Losses           

Approximate        Fair      Value            

         Amortized      Cost            

Gross        Unrealized      Gains           

Gross        Unrealized     Losses          

Approximate        Fair               Value      

 

 

 

 

 

 

 

 

 
**U.S. Treasury Securities**
$    13,084

$    137

 $    -0-

 $     13,221

$       9,972

$     77

$    -0-

$   10,049
 
 

 

 

 

 

 

 

 

Obligations of U.S.           Government Corporation            and Agencies:

 

 

 

 
 
 

 

 

 

 

 

 

 

 

 

 

 

   Mortgage Backed Securities

    840,639

    8,140

     (954)

      847,825

     752,481

  1,636

   (7,126)

  746,991

 

 

 

 

 

 

 

 

 

   Other

    113,464

    2,181

         (5)

      115,640

     117,585

     125

      (370)

  117,340

 

 

 

 

 

 

 

 

 

Obligations of States and           Political Subdivisions

    103,492

      749

   (1,599)

      102,642

 76,066

 606

 (1,376)

 75,296

 

 

 

 

 

 

 

 

 

Debt Securities Issued             by Foreign Governments

175

       -0-

      -0-

                   175

           425

     -0-

-0-

         425

 

 

 

 

 

 

 

 

 

Corporate Securities

    229,259

    5,382

   (3,657)

      230,984

     142,933

 1,814

   (6,271)

  138,476

 

 

 

 

 

 

 

 

 

Other Mortgage Backed            Securities

    110,512

    2,438

       (32)

     112,918

       97,922

    336

      (418)

     97,840

       Total Debt        Securities

1,410,625

   19,027

  (6,247)

  1,423,405

  1,197,384

 4,594

 (15,561)

 1,186,417

 

 

 

 

 

 

 

 

 

Equities

      45,091

       622

      -0- 

       45,713

       52,824

      -0-

  ( 1,011)

      51,813

    Total Securities Available        for             Sale

$1,455,716

$19,649

$(6,247)

$1,469,118

$1,250,208

$4,594

$(16,572)

$1,238,230

 Mortgage  backed securities include mortgage backed obligations of U.S. Government agencies  and corporations, mortgage backed securities issued by other organizations and  other asset backed securities.  These obligations have contractual maturities  ranging from less than one year to 30 years and have an anticipated average  life to maturity ranging from less than one year to 17 years.  All mortgage  backed securities contain a certain amount of risk related to the uncertainty  of prepayments of the underlying mortgages.  Interest rate changes have  a direct impact upon prepayment speeds, therefore the Corporation uses computer  simulation models to test the average life and yield volatility of all mortgage  backed securities under various interest rate scenarios to insure that volatility  falls within acceptable limits.  At December 31, 2001 and 2000, the Corporation  owned no high risk mortgage backed securities as defined by the Federal Financial  Institutions Examination Council's Supervisory Policy Statement on Securities  Activities.

47FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 8--Securities Available For Sale (Continued)

The amortized cost and estimated market value of  debt securities at December 31, 2001, by contractual maturity, are shown below.   Expected maturities will differ from contractual maturities because borrowers  may have the right to call or repay obligations with or without call or prepayment  penalties.

 

AmortizedCost

ApproximateFair Value

 

 

 

Due within 1 year

$     16,783

$     16,845

Due after 1 but within 5 years

248,220

   255,507

Due after 5 but within 10 years

11,042

     11,098

Due after 10 years

     183,429

     179,212

 

     459,474

   462,662

Mortgage Backed Securities

     951,151

     960,743

  Total Debt Securities

$1,410,625

$1,423,405

     

Proceeds from the sales of securities available  for sale were $85,737, $22,391 and $39,282 during 2001, 2000 and 1999, respectively.   Gross gains of $3,419, $1,752 and $541 and gross losses of $224, $18 and $-0-  were realized on those sales during 2001, 2000 and 1999, respectively.

Securities available for sale with an approximate  fair value of $637,915 and $626,719 were pledged at December 31, 2001 and 2000,  respectively, to secure public deposits and for other purposes required or permitted  by law. 

 

48  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 9--Securities Held  to Maturity

Below is an analysis of the amortized cost and  approximate fair values of debt securities held to maturity at December 31,  2001 and 2000:

 

2001

2000

 

         Amortized     Cost            

Gross        Unrealized    Gains           

Gross        Unrealized    Losses          

Approximate        Fair      Value            

        Amortized      Cost            

Gross        Unrealized     Gains            

Gross        Unrealized    Losses          

Approximate        Fair     Value           

 

 

 

 

 

 

 

 

 

Obligations of U.S. Government           Corporation and Agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Mortgage Backed Securities

$133,687

$2,594

$(166)

$136,115

$148,522

$   635

$   (604)

$148,553

 

 

 

 

 

 

 

 

 

     Other

29,998

1,360

-0-

31,358

99,844

194

(129)

99,909

 

 

 

 

 

 

 

 

 

Obligations of States and           Political Subdivisions

        107,130

        1,545

        (788)

        107,887

        126,514

        1,355

        (807)

        127,062

 

 

 

 

 

 

 

 

 

Debt Securities Issued             by Foreign Governments

        383

        -0-

        -0-

        383

        357

        -0- 

        -0-

        357

 

 

 

 

 

 

 

 

 

Corporate Securities

22,092

808

-0-

22,900

22,154

140

(227)

22,067

 

 

 

 

 

 

 

 

 

Other Mortgage Backed            Securities

        -0-

     -0-

     -0-

       -0-

       716

      -0-

       (3)

       713

  

 

 

 

 

 

 

 

 

        Total        Securities Held to                    Maturity

        $293,290

        $6,307

        $(954)

        $298,643

        $398,107

        $2,324

        $(1,770)

        $398,661 

 

The amortized cost and estimated market value of  debt securities at December 31, 2001, by contractual maturity, are shown below.   Expected maturities will differ from contractual maturities because borrowers  may have the right to call or repay obligations with or without call or prepayment  penalties.

 

        Amortized                    Cost          

Approximate        Fair                    Value                   

 

 

 

Due within 1 year

$  13,029

$   13,365

Due after 1 but within 5 years

    56,795

     58,977

Due after 5 but within 10 years

    24,198

    24,866

Due after 10 years

    65,581

    65,320

 

  159,603

  162,528

Mortgage Backed Securities

  133,687

  136,115

   Total Debt Securities

$293,290

$298,643

There were no sales of securities held to maturity  in 2001, 2000 or 1999.

Securities held to maturity with an amortized cost  of $205,150 and $245,908 were pledged at December 31, 2001 and 2000, respectively,  to secure public deposits and for other purposes required or permitted by law.

49

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements    Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 10--Loans (all domestic)

Loans at year end were divided among these general  categories:

 

 

December 31,

 

2001

2000

 

 

 

Commercial, financial, agricultural and other        

$    529,300

$  443,618

Real estate loans:

 

 

      Construction and        land development

        14,727

    37,146

      1-4 family dwellings

      849,787

  932,915

      Other real estate        loans

      638,576

  560,066

Loans to individuals for household, family and        other personal              expenditures   

     473,515

  450,154

Leases, net of unearned income

               63,326 

      68,975 

                  Subtotal   

  2,569,231

 2,492,874

Unearned income

                (1,297)

              (2,047)

                   Total loans and leases

 $2,567,934 

$2,490,827 

 

Most of the Corporation's business activity was  with customers located within Pennsylvania.  The portfolio is well diversified,  and as of December 31, 2001 and 2000, there were no significant concentrations  of credit.

NOTE 11--Allowance for Credit Losses 

Description of changes:

 

2001

2000

1999

 

 

 

 

Allowance at January 1

$33,601

$33,539

$32,304

Additions:

 

 

 

     Recoveries of previously charged off loans

   1,281

    1,299

   1,381

     Provision charged to        operating expense

 11,495

   10,030

   9,450

Deductions:

 

 

 

     Loans charged off

  12,220

   11,267

    9,596

Allowance at December 31

$34,157

 $33,601

$33,539

 Relationship  to impaired loans:

 

           2001

            2000

 

 

 

Recorded investment in impaired loans at end        of period

$23,731

$12,961

Average balance for impaired loans for the year

$16,133

$13,154

Allowance for credit losses related to impaired        loans

$  3,835

$  2,187

Impaired loans with an allocation of the allowance        for credit losses

$16,266

$  4,679

Impaired loans with no allocation of the allowance        for credit losses

$  7,465

$  8,282

Income recorded on impaired loans on a cash basis

$     750

$     333

 

50FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 12--Financial Instruments with Off-Balance-Sheet  Risk

The Corporation is a party to financial instruments  with off-balance-sheet risk in the normal course of business to meet the financial  needs of its customers.  These financial instruments include commitments  to extend credit, standby letters of credit and commercial letters of credit.   Those instruments involve, to varying degrees, elements of credit and interest  rate risk in excess of the amount recognized in the balance sheet.  The  contract or notional amount of those instruments reflects the extent of involvement  the Corporation has in particular classes of financial instruments.  

As of December 31, 2001 and 2000, the Corporation  did not own or trade any other financial instruments with significant off-balance-sheet  risk including derivatives such as futures, forwards, interest rate swaps, option  contracts and the like, although such instruments may be appropriate to use  in the future to manage interest rate risk.

The Corporation's exposure to credit loss in the  event of nonperformance by the other party of the financial instrument for commitments  to extend credit, standby letters of credit and commercial letters of credit  written is represented by the contract or notional amount of those instruments.   The Corporation uses the same credit policies in making commitments and conditional  obligations as it does for on-balance-sheet instruments.  The following  table identifies the notional amount of those instruments at December 31, 2001  and 2000:

 

                    2001

                 2000

 

 

 

Financial instruments whose contract amounts        represent credit           risk:

 

 

    Commitments to extend credit

$517,587

$445,200

    Standby letters of credit

$  48,739

$  37,787

    Commercial letters of credit

$              390

$              471

 

Commitments to extend credit are agreements to  lend to a customer as long as there is no violation of any condition established  in the contract.  Commitments generally have fixed expiration dates or  other termination clauses and may require payment of a fee.  Since many  of the commitments are expected to expire without being drawn upon, the total  commitment amounts do not necessarily represent future cash requirements.   The Corporation evaluates each customer's creditworthiness on a case-by-case  basis.  The amount of collateral obtained, if deemed necessary by the Corporation  upon extension of credit, is based on management's credit evaluation of the  counter-party.  Collateral held varies but may include accounts receivable,  inventory, property, plant and equipment, residential and income-producing commercial  properties.

Standby letters of credit and commercial letters  of credit written are conditional commitments issued by the Corporation to guarantee  the performance of a customer to a third party.  Those guarantees are primarily  issued to support public and private borrowing arrangements.  The credit  risk involved in issuing letters of credit is essentially the same as that involved  in extending loan facilities to customers. 

51  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements    Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 13--Premises and Equipment

Premises and equipment are described as follows:

 

EstimatedUseful Life

        2001

 2000

 

 

 

 

Land

Indefinite

 $  5,338

$  5,336

Buildings and improvements

7-50 years

45,910

 45,296

Leasehold improvements

7-39 years

9,960

9,839

Furniture and equipment

3-25 years

 50,771

48,643

Software

3-7 years

  14,231

    9,926

      Subtotal

 

126,210

119,040

Less accumulated depreciation and amortization

 

  79,844

  74,369

   

 

 

 

      Total premises        and equipment

 

$46,366

$44,671

 

Depreciation and amortization related to premises  and equipment was $6,153 in 2001, $5,996 and $5,790 in 2000 and 1999, respectively.

NOTE 14--Interest-Bearing  Deposits      

Components of interest-bearing deposits at December  31 were as follows:

 

               2001

      2000

NOW and Super NOW accounts

$     61,791

$     98,552

Savings and MMDA accounts

1,028,368

919,653

Time deposits

  1,590,296

  1,696,137

    Total interest-bearing deposits

$2,680,455

$2,714,342

 

Interest-bearing deposits at December 31, 2001  and 2000, include reallocations from NOW and Super NOW accounts of $323,490  and $279,779, respectively into Savings and MMDA accounts.  These reallocations  are based on a formula and have been made to reduce the Corporation's reserve  requirement in compliance with regulatory guidelines.

Included in time deposits at December 31, 2001  and 2000, were certificates of deposit in denominations of $100 or more of $497,318  and $455,382, respectively.

Interest expense related to $100 or greater certificates  of deposit amounted to $27,922 in 2001, $22,639 in 2000, and $18,103 in 1999.

52  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements      Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 14--Interest-Bearing Deposits (Continued)

Included in time deposits at December 31, 2001,  were certificates of deposit with the following scheduled maturities:

2002

$  977,218

2003

278,473

2004

240,294

2005

54,277

2006 and thereafter

             39,813

 

$1,590,075

NOTE 15--Short-term Borrowings

Short-term Borrowings at December 31 were as follows:

 

2001

2000

 

EndingBalance

AverageBalance

Average   Rate   

EndingBalance

AverageBalance

Average   Rate   

Federal funds          purchased

$108,250

$46,608

3.28%

$16,825

$49,990

6.28%

Borrowings from          FHLB

40,000

9,918

2.45%

-0-

20,814

6.03%

Securities sold          under agreements           to repurchase

216,486

214,900

 

3.95%

 

237,806

 

275,839

 

5.92%

Treasury, tax and          loan note option

    63,000

   28,747

3.39%

    17,540

    24,643

6.04%

 

 

 

 

 

 

 

    Total

$427,736

$300,173

3.74%

$272,171

$371,286

5.98%

 

 

 

 

 

 

 

Maximum total at           any month-end

$427,736

 

 

$455,285

 

 

 

Interest expense on short-term borrowings for the  years ended December 31 is detailed below:

 

2001

2000

1999

 

 

 

 

Federal funds purchased

$ 1,527

$  3,138

$  4,913

Borrowings from FHLB

      243

    1,256

    2,557

Securities sold under agreements to repurchase

   8,483

  16,335

    5,825

Treasury, tax and loan note option

      974

    1,489

       537

    Total interest on short-term        borrowings

$11,227

$22,218

$13,832

53

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                 Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands) 

NOTE 16--Company Obligated Mandatorily Redeemable  Capital Securities of Subsidiary Trust

The Corporation established First Commonwealth  Capital Trust I ("the Trust"), a Delaware business trust and the Trust  issued 35,000 capital securities (liquidation amount of $35,000) during September  1999, through a private offering to qualified investors.  Additionally,  the Trust issued common securities to the Corporation.  The Trust used  the proceeds from the sale to buy a series of 9.50% junior subordinated deferrable  interest debentures due 2029 from the Corporation with the same economic terms  as the capital securities.  The sole asset of the Trust is the $36,083  aggregate liquidation amount of the junior subordinated debentures.  The  Trust will distribute the cash payments it receives from the Corporation on  the debentures to the holders of the capital securities and the common securities.

The original series A capital securities and series  A junior subordinated deferrable interest debentures have since been exchanged  for registered series B capital securities and registered series B junior subordinated  deferrable interest debentures having the same economic terms as the original  series A securities.

The Trust will redeem all of the outstanding capital  securities when the debentures are paid at maturity on September 1, 2029.   Subject to receiving prior approval of the Board of Governors of the Federal  Reserve System, the Corporation may redeem the debentures, in whole or in part,  at any time on or after September 1, 2009, at a redemption price equal to 104.750%  of the principal amount of the debentures on September 1, 2009, declining ratably  on each September 1 thereafter to 100% on or after September 1, 2019, plus accrued  and unpaid interest to the date of redemption.  The Corporation may also  redeem the debentures prior to September 1, 2009, upon the occurrence of certain  tax and bank regulatory events, subject to receiving prior approval of the Board  of Governors of the Federal Reserve System.  If the Corporation redeems  any debentures before their maturity, the Trust will use the cash it receives  on the redemption of the debentures to redeem, on a pro rata basis, capital  securities and common securities having an aggregate liquidation amount equal  to the aggregate principal amount of the debentures redeemed.

The net proceeds (after deduction of offering expenses  and the initial purchaser's commission) from the sale of the debentures to the  Trust were approximately $34,200.  The Corporation used the net proceeds  from the issuance of the debentures to partially finance the purchase of 3,819,420  shares of its outstanding common stock (approximately 6.5% of its outstanding  shares of common stock) pursuant to a "modified Dutch Auction" tender  offer.  Unamortized deferred issuance costs associated with the capital  securities amounted to $909 as of December 31, 1999 and are being amortized  on a straight-line basis over the term of the capital securities.  The  outstanding balance of the capital securities are included as a separate component  of long-term debt on the Consolidated Balance Sheets while interest on the capital  securities is included as a separate component of interest expense on the Consolidated  Statements of Income.  The amortization of the deferred issuance costs  is included in interest expense from the capital securities on the Consolidated  Statements of Income. 

54  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands) 

NOTE 17--Other Long-term Debt

Other Long-term debt at December 31, follows: 

 

2001

2000

 

Amount

Rate

Amount

Rate

 

 

 

 

 

ESOP loan due December, 2005

Borrowings from FHLB due:

$  4,126

Libor +1%

$  5,287

Libor +1%

    November, 2002

50,000

5.82%

50,000

5.82%

    December, 2002

50,000

5.71%

50,000

5.71%

    September, 2007

5,000

6.94%

5,000

6.94%

    February, 2008

100,000

5.45%

100,000

5.45%

    February, 2008

100,000

5.48%

100,000

5.48%

    May, 2008

100,000

5.67%

100,000

5.67%

    November, 2008

50,000

5.03%

50,000

5.03%

    December, 2008

65,000

4.96%

65,000

4.96%

    February, 2010

25,000

6.12%

25,000

6.12%

    December, 2010

55,000

4.70%

55,000

4.70%

    April, 2011

7,121

5.68%

-0-

 

    March, 2016

1,935

5.65%

-0-

 

    December, 2017

6,798

6.17%

7,038

6.17%

    June, 2019

8,375

5.72%

8,644

5.72%

    April, 2020

               865

7.37%

               886

7.37%

 

$629,220

 

$621,855

 

All Federal Home Loan Bank stock, along with an  interest in unspecified mortgage loans and mortgage-backed securities, with  an aggregate statutory value equal to the amount of the preceding advances,  have been pledged as collateral with the Federal Home Loan Bank of Pittsburgh.

Capital securities included in total long-term  debt on the Consolidated Balance Sheets are excluded from NOTE 17, but are described  in NOTE 16.

Scheduled loan payments for other long-term debt  are summarized below:

 

2002

2003

2004

2005

2006

Thereafter

 

 

 

 

 

 

 

Loan payments

$102,321

$2,385

$2,261

$2,624

$1,576

$518,053

55

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 18--Common Share Commitments

At December 31, 2001 and 2000, the Corporation  had 100,000,000 common shares authorized and 62,525,412 shares outstanding.   Outstanding shares were reduced by 4,073,788 shares of treasury stock at December  31, 2001 and 4,329,962 shares at December 31, 2000.  The Corporation may  be required to issue additional shares to satisfy common share purchases related  to the employee stock ownership plan described in NOTE 21.  The dilutive  effect of stock options outstanding on average shares outstanding in the diluted  earnings per share reported on the income statement were 232,579, 59,742 and  236,230 shares at December 31, 2001, 2000 and 1999, respectively.

During 2000, 78,380 shares of treasury stock were  acquired at an average price of $11.14.  Treasury shares consisting of  256,174 and 41,240 were reissued during 2001 and 2000 upon exercise of stock  options.  

During 2000, 89,742 shares of treasury stock were  reissued to fund the buy-out of the insurance agency's joint-venture partner,  as described in NOTE 4.

 NOTE 19--Income Taxes

The income tax provision consists of:

 

2001

2000

1999

Current tax provision for income 

 

 

 

   exclusive of securities transactions:

 

 

 

        Federal

 $14,865

$12,155

$19,111

        State

                55

               (10)

                16

Securities transactions

    1,165

              611

              198

   Total current tax provision

  16,085

  12,756

  19,325

Deferred tax provision (benefit)

             (831)

    1,533

              287

   Total tax provision

$15,254

$14,289

$19,612

 

56

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 19--Income Taxes (Continued)

Temporary differences between financial statement  carrying amounts and tax bases of assets and liabilities that represent significant  portions of the deferred tax assets (liabilities) at December 31, 2001 and 2000,  were as follows:

 

2001

2000

 

 

 

Deferred tax assets:

 

 

    Allowance for credit losses

      $11,965

$11,765

    Postretirement benefits other        than pensions

1,005

       996

    Accumulated depreciation

                    237

       439

    Unrealized loss on securities        available for sale

                     -0-

    4,204

    Other

         1,060        

       894 

       Total deferred        tax assets

       14,267

  18,298

 

 

 

Deferred tax liabilities:

 

 

    Accumulated accretion of bond        discount

                  (295)

        (389)

    Lease financing deduction

      (10,535)

   (10,643)

    Loan origination fees and        costs

                  (999)

     (1,319)

    Basis difference in assets        acquired

                  (453)

       (674)

    Pension expense 

                  (281)

        (231)

    Unrealized gain on securities        available for sale  

        (4,686)

         -0-

    Other

           (315)

                       (280)

       Total deferred        tax liabilities

      (17,564)

                  (13,536)

 

 

 

Net deferred tax asset (liability)

      $(3,297)

                 $  4,762 

The total tax provision for financial reporting  purposes differs from the amount computed by applying the statutory income tax  rate to income before income taxes.  The differences are as follows:

 

2001

2000

1999

 

        Amount

% of        PretaxIncome

         Amount

% of        PretaxIncome

        Amount

% of        PretaxIncome

 

 

 

 

 

 

 

Tax at statutory rate

  $22,905

 35.0

$21,537

 35.0

$25,425

35.0

Increase (decrease)

 

 

 

 

 

 

   resulting from:

 

 

 

 

 

 

   Effect of nontaxable              income

         (7,137)

        (10.9)

          (6,595)

         (10.7)

         (5,247)

         (7.2)

   State income taxes

                 55

  0.1

       (10)

  (0.0)

       16

 0.0

   Other

              (569)

     (0.9)

    ( 643)

  (1.1)

     (582)

 (0.8)

                 Total tax                              Provision

 $15,254 

    23.3 

$14,289 

 23.2 

$ 19,612 

27.0 

 

57  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 20--Retirement Plans                  

All employees with at least one year of service  are eligible to participate in the employee stock ownership plan ("ESOP").   Contributions to the plan are determined by the board of directors, and are  based upon a prescribed percentage of the annual compensation of all participants.    During a prior period, the ESOP acquired shares of the Corporation's common  stock in a transaction, whereby the Corporation borrowed the required funds  and concurrently loaned this amount to the ESOP.  The borrowed amount represents  leveraged and unallocated shares, and accordingly has been recorded as long-term  debt and the offset as a reduction of common shareholders' equity.  Compensation  costs related to the plan were $1,173 in 2001, $1,005 in 2000 and $1,555 in  1999. (See NOTE 21).

The Corporation also has a savings plan pursuant  to the provisions of section 401(k) of the Internal Revenue Code.  Under  the terms of the plan, each participant will receive an automatic employer contribution  to the plan in an amount equal to 3% of compensation.  Each participating  employee may contribute up to 10% of compensation to the plan of which up to  4% is matched 100% by the employer's contribution.  The 401(k) plan expense  was $2,583 in 2001, $2,444 in 2000 and $2,328 in 1999.  Effective February  1, 2002, the Corporation's 401(k) plan was modified to permit each participating  employee to contribute up to 80% of compensation to the plan of which up to  4% is matched 100% by the employer's contribution.

Upon shareholder approval at the regular 1998 meeting  the Corporation established a "Supplemental Executive Retirement Plan"  ("SERP") to provide deferred compensation for a select group of management.   The purpose of this plan is to restore some of the benefits lost to the highly  compensated employees compared to other employees due to limits and restrictions  incorporated into the Corporation's 401(k) and ESOP plans.  The Corporation's  401(k) and ESOP plans include restrictions on maximum compensation, actual deferral  percentage, actual contribution, maximum contribution and maximum salary reduction  which are required in order to meet specific legal requirements.

Participants in the SERP may elect to contribute  up to 10% of plan compensation (compensation in excess of limits of the Corporation's  401(k) and ESOP plans) into the SERP, through salary reduction.  The Corporation  will make an elective contribution to the SERP equal to the elective contribution  of the participant.  Each participant of the SERP will also receive a matching  contribution equal to 100% of the employee's elective contribution up to 4%,  and an additional non-elective contribution from the employer equal to 8% of  plan compensation.

The SERP will continue to supplement the Corporation's  401(k) and ESOP plans and will therefore be modified at the same time and in  the same respect as the basic plans are modified in future periods.  The  SERP plan expense was $150 in 2001, $182 in 2000 and $153 in 1999.

58****FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 20--Retirement Plans (Continued) 

**Pension Plan of Acquired Subsidiary**

The noncontributory defined benefit pension plan  of Southwest Bank covered all eligible employees and provided benefits based  on each employee's years of service and compensation.  On 

December 31, 1998, the participants' accrued benefit  was frozen and participation in the First Commonwealth Financial Corporation  ESOP Plan with no lapse in credited service began.  The Southwest Bank  Pension Plan was terminated effective December 31, 2001.  As the result  of the plan termination, an asset reversion of $1,271 and a gain, net of applicable  excise tax, of $277 were recognized.

Net periodic pension cost of this plan for each  of the last three years was as follows:

 

 2001

2000

1999

 

 

 

 

Service cost

 $  -0-

 $  -0-

$   -0-

Interest cost on projected benefit obligation

   346

   343

   394

Expected return on plan assets

(438)

(542)

  (261)

Net amortization and deferral

    (33)

    93

(153)

Net periodic pension cost (benefit)

$(125)

$(106)

$ (20)

The following table sets forth the plan's funded  status and the amounts recognized on the Corporation's Consolidated Balance  Sheet as of December 31:

 

                        2001

                         2000

Market value of plan assets

                       $1,271

               $6,785

Projected benefit obligation

                             -0-

                        5,822

 

 

 

Plan assets greater than projected benefit obligation

                        1,271

                           963

Unrecognized net transition asset

                             -0-

      (62)

Unrecognized net loss (gain)

                             -0-

    (223)

Settlement loss (gain)

(1,271)

                           -0- 

Prepaid pension expense recognized on the balance        sheet

                      $    -0- 

                      $   678 

Actuarial present value of accumulated benefits,        including vested           benefits of $0 and $5,665

                       $    -0- 

                      $5,822 

 The following  table sets forth the change in benefit obligation:

 

2001

2000

Benefit obligation at beginning of year

      $        5,822

$5,765

Service cost

     -0-

     -0-

Interest cost

   346

    343

Benefit payment

(6,496)

    (242)

Actuarial loss (gain)

    -0-

      (44)

Settlement loss

   328

     -0-

Benefit obligation at end of year

              $    -0-

$5,822

59

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 20--Retirement Plans (Continued)

**Pension Plan of Acquired Subsidiary**  (Continued)

The following table sets forth the change in plan  assets:

 

2001

2000

 

 

 

Fair value of plan assets at beginning of year

       $ 6,785

$6,485

Return on plan assets

      982 

    542

Employer contribution

       -0-

     -0-

Benefits paid

         (6,496)

    (242)

Fair value of plan assets at end of year

       $ 1,271        

$6,785 

Assumptions used in determining the actuarial present  value of the projected benefit obligation were as follows at December31:

 

2001

2000

 

 

 

Discount rates

6.0%

6.0%

Rates of increase in compensation levels

N/A

N/A

Expected long-term rates of return on assets

6.5%

6.5%

 

**Postretirement Benefits other than Pensions  for Acquired Subsidiary**

Employees of Southwest were covered by a postretirement  benefit plan.

Net periodic benefit cost of this plan was as follows:

 

2001

2000

1999

Service cost

$    6

$    7

$   13

Interest cost on projected benefit obligation

  232

  190

   197

Amortization of transition obligation 

      2

      2

      2

Loss amortization

    65

    -0-

                    48

Net periodic benefit cost

$305

$199

$260

 

60  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 20--Retirement Plans (Continued)

**Postretirement Benefits other than Pensions  for Acquired Subsidiary** (Continued)

The following table sets forth the plan's funded  status and the amounts recognized on the Corporation's Consolidated Balance  Sheet as of December 31:

 

2001

2000

Accumulated postretirement benefit obligation:

 

 

    Retirees                

              $3,941

$3,413

    Actives

    210

     177

Total accumulated postretirement benefit obligation

 4,151

  3,590

Plan assets at fair value

     -0-

      -0-

 

 

 

Accumulated postretirement benefit obligation        in excess of          plan assets

           4,151

  3,590

Unrecognized transition obligation

      (18)

      (19)

Unrecognized net loss

 (1,262)

                     (729)

Accrued benefit liability recognized on the balance        sheet

             $2,871 

$2,842 

 The following  table sets forth the change in benefit obligation:

 

2001

2000

Benefit obligation at beginning of year

 $3,590

$2,959

Service cost              

          6

         7

Interest cost   

      232  

     190

Benefit payments

     (276)

     (239)

Actuarial loss (gain)

     599

     673

 

 

 

Benefit obligation at end of year

$4,151

$3,590

 The discount  rate used in determining the actuarial present value of the accumulated postretirement  benefit obligation was 6.75% for 2001 and 2000.  The health care cost trend  rates used for 2001 and 2000 were projected at an initial rate of 6.75% decreasing  over time to an annual rate of 4.25% for indemnity plan participants and an  initial rate of 6.00% decreasing over time to an annual rate of 4.00% for non-indemnity  plan participants.

The health care cost trend rate assumption can  have a significant impact on the amounts reported for this plan.  A one-percentage-point  change in assumed health care cost trend rates would have the following effects:

 

1-Percentage-Point Increase

1-Percentage-Point Decrease

 

 

 

Effect on total of service and interest cost        components

$  18

$  (16)

Effect on postretirement benefit obligation

$259

$(235)

 61FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 21--Unearned ESOP Shares 

The Corporation had borrowed amounts which were  concurrently loaned to the First Commonwealth Financial Corporation Employee  Stock Ownership Plan Trust ("ESOP") on the same terms.  The combined  balances of the ESOP related loans were $4,126 at December 31, 2001 and $5,287  at December 31, 2000.  

The loans have been recorded as long-term debt  on the Corporation's Consolidated Balance Sheets.  A like amount of unearned  ESOP shares was recorded as a reduction of common shareholders' equity.   Unearned ESOP shares, included as a component of shareholders' equity, represents  the Corporation's prepayment of future compensation expense.  The shares  acquired by the ESOP are held in a suspense account and will be released to  the ESOP for allocation to the plan participants as the loan is reduced.   Repayment of the loans are scheduled to occur over a five year period from contributions  to the ESOP by the Corporation and dividends on unallocated ESOP shares.

The following is an analysis of ESOP shares held  in suspense:

(See NOTE 1 for the definition of "old shares"  and "new shares")

 

Total

Old Shares

New Shares

Shares in suspense December 31, 1999

 598,687

  146,578

  452,109

Shares allocated during 2000

(105,166)

   (25,748)

   (79,418)

Shares in suspense December 31, 2000

493,521

  120,830

  372,691

Shares allocated during 2001

(120,961)

   (29,616)

   (91,345)

Shares in suspense December 31, 2001

 372,560 

    91,214 

  281,346 

The fair market value of the new shares remaining  in suspense was approximately $3,241 and $3,727 at December 31, 2001 and 2000,  respectively.

Interest on ESOP loans was $263 in 2001, $446 in  2000 and $460 in 1999.  During 2001, 2000 and 1999, dividends on unallocated  shares in the amount of $301, $354 and $369, respectively, were used for debt  service while all dividends on allocated shares were allocated or paid to the  participants.  

62  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                 Years Ended December 31, 2001, 2000 and 1999(Dollar Amounts in Thousands, except  per share data)

NOTE 22--Stock Option Plan

At December 31, 2001, the Corporation had a stock-based  compensation plan, which is described below.  All of the exercise prices  and related number of shares have been restated to reflect the previously described  stock split.  The plan permits the executive compensation committee to  grant options for up to 4.5 million shares of the Corporation's common stock  through October 15, 2005.  Although the vesting requirements and terms  of future options granted are at the discretion of the executive compensation  committee, all options granted during the years 1997, 1998, 1999, 2000 and 2001  were exercisable by December 31 of each year, respectively, and expire ten years  from the grant date.  The Corporation has elected, as permitted by FAS  No. 123, to apply APB Opinion 25 and related Interpretations in accounting for  its plan.  Accordingly, no compensation cost has been recognized for its  stock options outstanding.  Had compensation cost for the Corporation's  stock option plan been determined based upon the fair value at the grant dates  for awards under the plan consistent with the method of FASB Statement 123,  the Corporation's net income and earnings per share would have been reduced  to the pro forma amounts shown below:

 

2001

2000

1999

 

 

 

 

 

 

 

 

As Reported

Pro Forma

As Reported

Pro Forma

As Reported

Pro Forma

 

 

 

 

 

 

 

Net Income

$50,189

$48,211

$47,246

$47,130

$53,030

$52,197

Basic earnings per share

$    0.87

$    0.83

$    0.82

$    0.82

$    0.88

$    0.87

Diluted earnings per share

$    0.86

$    0.83

$    0.82

$    0.82

$    0.88

$    0.86

 

 

 

 

 

 

 

The fair value of each option granted is estimated  on the date of the grant using the Black-Scholes options pricing model with  the following weighted average assumptions used:  

 

2001

2000

1999

 

 

 

 

Dividend yield

5.59% per annum

5.65% per annum

4.29% per annum

Expected volatility

55.1%

61.7%

31.4%

Risk-free interest rate

  5.1% 

  5.3%

  6.3%

Expected option life

10.0 years

9.1 years

9.1 years

63  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 22--Stock Option Plan (Continued)

A summary of the status of the Corporation's outstanding  stock options as of December 31, 2001, 2000 and 1999 and changes for the years  ending on those dates is presented below:

 

 

2001

2000

1999

 
 Shares
Weighted        Average        ExercisePrice

Shares

Weighted        Average        ExercisePrice

 Shares

Weighted        Average        ExercisePrice

 

 

 

 

 

 

 

Outstanding at beginning of year

2,210,651

$11.12

1,680,178

$11.07

 1,306,346

$10.53

Granted

   796,743

$10.75

 705,429

$11.06

   610,416

$11.56

Exercised

  (256,174)

$  9.76

   (41,240)

$  7.93

  (188,570)

$  8.66

Forfeited

    (63,333)

$11.89

 (133,716)

$11.63

    (48,014)

$12.08

Outstanding at end of year

2,687,887 

$11.13

2,210,651 

$11.12

 1,680,178 

$11.07

Exercisable at end of year

2,687,887 

$11.13

2,210,651 

$11.12

 1,680,178 

$11.07

The following table summarizes information about  the stock options outstanding at December 31, 2001:

Options Outstanding

Options Exercisable

Range ofExercise Prices

        Number OutstandingAt 12/31/01

Weighted-Average         Remaining         Contract Life

Weighted-        Average         Exercise Price

Number         Exercisable         At 12/31/01

 Weighted-        Average         Exercise Price

 

 

 

 

 

 

$2.79

              9,680

0.3

$  2.79

              9,680

        $         2.79

$4.04

              8,800

1.2

$  4.04

              8,800

        $         4.04

$9.19-$9.25

   463,804

4.9

$  9.23

   463,804

        $         9.23

$10.75

   777,076

9.1

$10.75

   777,076

$10.75

$11.06

   592,471

8.0

$11.06

   592,471

$11.06

$11.56

   519,424

7.0

$11.56

   519,424

$11.56

$14.69

   316,632

6.2

$14.69

        316,632

$14.69

Total

2,687,887

 

$11.13

2,687,887

$11.13

 

NOTE 23--Commitments  and Contingent Liabilities

In 1994, a Bank which is now a subsidiary, and  its President at that time, were named as defendants in a lender liability action.   The Plaintiffs filed a multi-million dollar claim, plus punitive damages.   The case, originally scheduled for trial in the first quarter 2002 has been  rescheduled for the second quarter 2002.  Although the Corporation believes  it has meritorious defenses and is vigorously defending itself, it is not possible  to predict the outcome of this matter.  Insurance may cover some or all  of a judgment up to a policy limit of $10 million.  Depending upon the  specific elements of an adverse judgment, it is possible there will be no insurance  coverage for the claims.  It is the opinion of management and its legal  counsel that the resolution of this matter will not produce a material impact  on the Corporation's financial statements.

64  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands, except per share data)

NOTE 23--Commitments  and Contingent Liabilities (Continued)

There are no other material proceedings to which  the Corporation or its subsidiaries are a party, or of which their property  is the subject, except proceedings which arise in the normal course of business  and, in the opinion of management, will not have a material adverse effect on  the consolidated operations or financial position of the Corporation and its  subsidiaries.

NOTE 24--Related Party Transactions

Some of the Corporation's or its subsidiaries'  directors, executive officers, principal shareholders and their related interests,  had transactions with the subsidiary banks in the ordinary course of business.   All loans and commitments to loans in such transactions were made on substantially  the same terms, including collateral and interest rates, as those prevailing  at the time for comparable transactions.  In the opinion of management,  these transactions do not involve more than the normal risk of collectibility  nor do they present other unfavorable features.  It is anticipated that  further such extensions of credit will be made in the future.

The following is an analysis of loans to those  parties whose aggregate loan balances exceeded $60 during 2001:

Balances December 31, 2000

$ 9,416

Advances

   6,432

Repayments

  (6,507)

Other

  (1,454)

Balances December 31, 2001

$ 7,887 

 "Other"  primarily reflects the change in those classified as a "related party"  as a result of mergers, resignations and retirements.  

NOTE 25--Regulatory Restrictions and Capital Adequacy

The amount of funds available to the parent from  its subsidiary banks is limited by restrictions imposed on all financial institutions  by banking regulators.  At December 31, 2001, dividends from subsidiary  banks were restricted not to exceed $74,233.  These restrictions have not  had, and are not expected to have, a significant impact on the Corporation's  ability to meet its cash obligations.  

The Corporation is subject to various regulatory  capital requirements administered by the Federal banking agencies.  Failure  to meet minimum capital requirements can initiate certain mandatory and possibly  additional discretionary actions by regulators that, if undertaken, could have  a direct material effect on the Corporation's financial statements.  Under  capital adequacy guidelines and the regulatory framework for prompt corrective  action, the Corporation and its banking subsidiaries must meet specific capital  guidelines that involve quantitative measures of the Corporation's assets, liabilities  and certain off-balance-sheet items as calculated under regulatory accounting  practices. 

65  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2000, 1999 and 1998  (Dollar Amounts in Thousands)

NOTE 25--Regulatory Restrictions and Capital Adequacy  (Continued)

The Corporation's capital amounts and classification  are also subject to qualitative judgements by the regulators about components,  risk weighting and other factors.

Quantitative measures established by regulation  to ensure capital adequacy require the Corporation to maintain minimum amounts  and ratios of total and Tier I capital (common and certain other "core"  equity capital) to risk weighted assets, and of Tier I capital to average assets.   As of December 31, 2001, the Corporation and its banking subsidiaries meet all  capital adequacy requirements to which they are subject.

As of December 31, 2001, the most recent notifications  from the Federal Reserve Board and Federal Deposit Insurance Corporation categorized  First Commonwealth Bank and Southwest Bank as well capitalized under the regulatory  framework for prompt corrective action.  To be considered as well capitalized,  the banks must maintain minimum total risk-based capital, Tier I risk-based  capital and Tier I leverage ratios as set forth in the table below.  There  are no conditions or events since that notification that management believes  have changed the institutions' category.

66  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2000, 1999 and 1998  (Dollar Amounts in Thousands)

NOTE 25--Regulatory  Restrictions and Capital Adequacy (Continued)

 
        Actual        RegulatoryMinimumTo Be Well        Capitalized Under        Prompt Corrective Action Provisions
 
AmountRatioAmountRatioAmountRatio
As of December 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital to Risk Weighted Assets

 

 

 

 

 

 

   First Commonwealth Financial Corporation

$423,649

14.0%

$241,615

8.0%

N/A

N/A

   First Commonwealth Bank

$299,167

12.4%

$192,870

8.0%

$241,087

10.0%

   Southwest Bank

$  94,835

16.4%

$  46,349

8.0%

$  57,936

10.0%

 

 

 

 

 

 

 

Tier I Capital to Risk Weighted Assets

 

 

 

 

 

 

   First Commonwealth Financial Corporation

$389,492

12.9%

$120,807

4.0%

N/A

N/A

   First Commonwealth Bank

$272,389

11.3%

$  96,435

4.0%

$144,652

  6.0%

   Southwest Bank

$  87,594

15.1%

$  23,174

4.0%

$  34,762

  6.0%

 

 

 

 

 

 

 

Tier I Capital to Average Assets

 

 

 

 

 

 

   First Commonwealth Financial Corporation

$389,492

  8.5%

$138,144

3.0%

N/A

N/A

   First Commonwealth Bank

$272,389

  7.7%

$106,422

3.0%

$177,371

  5.0%

   Southwest Bank

$  87,594

  8.5%

$  30,895

3.0%

$  51,492

  5.0%

 

 

 

 

 

 

 

As of December 31, 2000

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital to Risk Weighted Assets

 

 

 

 

 

 

   First Commonwealth Financial Corporation

$401,516

14.5%

$221,294

8.0%

N/A

N/A

   First Commonwealth Bank

$283,624

12.9%

$175,783

8.0%

$219,728

10.0%

   Southwest Bank

$  91,416

16.9%

$  43,261

8.0%

$  54,077

10.0%

 

 

 

 

 

 

 

Tier I Capital to Risk Weighted Assets

 

 

 

 

 

 

   First Commonwealth Financial Corporation

$367,915

13.3%

$110,647

4.0%

N/A

N/A

   First Commonwealth Bank

$257,789

11.7%

$  87,891

4.0%

$131,837

  6.0%

   Southwest Bank

$  84,656

15.7%

$  21,631

4.0%

$  32,446

  6.0%

 

 

 

 

 

 

 

Tier I Capital to Average Assets

 

 

 

 

 

 

   First Commonwealth Financial Corporation

$367,915

  8.5%

$129,749

3.0%

N/A

N/A

   First Commonwealth Bank

$257,789

  7.8%

$  98,994

3.0%

$164,990

  5.0%

   Southwest Bank

$  84,656

  8.5%

$  29,758

3.0%

$  49,596

  5.0%

 

67FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 26--Condensed Financial Information of First  Commonwealth Financial Corporation   (parent company only)

**Balance Sheets**

 

December 31,

 

2001

2000

 

 

 
**Assets**
 

 

Cash

$     7,667

$   6,169

Securities available for sale

                270

                 81

Loans to affiliated parties

                540

               479

Investment in subsidiaries

  387,626

 355,680

Investment in jointly-owned company

      4,570

     3,980

Premises and equipment

      6,437        

     6,813

Dividends receivable from subsidiaries

      3,986

      3,757

Receivable from subsidiaries 

      8,099

      7,325

Other assets

             2,280

     2,174

 

 

 

      Total assets

$421,475

$386,458

 

 

 
**Liabilities and Shareholders' Equity**
 

 
 
 

 
Accrued expenses and other liabilities
$   2,432

$    2,493
Dividends payable
     8,768

      8,439
Loans payable
     4,126

      5,287
Subordinated debentures payable
   36,083

    36,083
Shareholders' equity
 370,066

  334,156
 
 

 
      Total liabilities and shareholders'      equity
     $421,475

$386,458

**Statements of Income**

 

Years Ended December 31,

 

2001

2000

1999

 

 

 

 

Interest and dividends

 $              42

$              41

    $            149

Dividends from subsidiaries

   40,442

  61,664

 36,506

Interest expense

    (3,724)

    (5,335)

   (1,758)

Net securities gains

         -0-

               -0-

               57

Other revenue

               16

                31

              15

Operating expenses

   (7,033)

         (7,451)

 (11,476)

 

 

 

 

Income before taxes and equity in undistributed           earnings of subsidiaries

           29,743

  48,950

           23,493

Applicable income tax benefits 

    3,495 

    4,340 

    4,421 

Income before equity in undistributed earnings        of           Subsidiaries

           33,238

           53,290

          27,914

Equity in undistributed earnings of subsidiaries

  16,951 

         (6,044)

       25,116        

 

 

 

 

      Net income

$50,189 

$47,246 

$53,030 

 

68****FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 26--Condensed Financial Information of First  Commonwealth Financial Corporation 

(parent company only) (Continued)

**Statements of Cash Flows**

 

Years Ended December 31,

 

 

 

 

 

2001

2000

1999

 

 

 

 
**Operating Activities**
 

 

 

  Net income

$50,189

  $47,246

$53,030

  Adjustments to reconcile net income to        net cash             provided by operating activities:

 

 

 

        Depreciation        and amortization

  1,140

      1,263

  1,655

        Net        losses on sale of assets

              -0-

                 -0-

    144

        Decrease        (increase) in prepaid income taxes

     431

                212

    (242)

        Undistributed        equity in subsidiaries

(16,951)

      6,044

(25,116)

        Other        - net

    (592)

          97        

     (803)

 

 

 

 

        Net        cash provided by operating activities

 34,217 

    54,862 

 28,668 

 

 

 

 
**Investing Activities**
 

 

 

  Transactions with securities available        for sale:

 

 

 

        Purchases        of investment securities

     (123)

              -0-

              -0-

        Sales        of investment securities

      -0-

              -0-

      102

  Net change in loans to affiliated parties

      (61)

                1

               17

  Purchases of premises and equipment

      (90)

      (337)

(1,491)

  Additional net investment in subsidiary

    (792)

   (3,861)

(2,406)

  Sale of subsidiary

              -0- 

               -0- 

    1,709

 

 

 

 

        Net        cash used by investing activities

 (1,066)

    (4,197)

  (2,069)

 

 

 

 
**Financing Activities**
 

 

 

  Issuance of subordinated debentures

     -0-

      -0-

 36,083

  Issuance of other long-term debt

     -0-

  4,000

 16,000

  Repayment of other long-term debt

     -0-

(20,000)

              -0-

  Discount on dividend reinvestment plan        purchases

    (612)

    (593)

(358)

  Treasury stock acquired

     -0-

    (873)

(51,331)

  Treasury stock reissued

  2,499

    326

   1,453

  Cash dividends paid

(33,809)

 (32,553)

(27,825)

  Stock option tax benefit

             269 

         75        

               -0- 

 

 

 

 

                Net cash used by financing activities

(31,653)

 (49,618)

(25,978)

 

 

 

 

  Net increase in cash

  1,498

   1,047

      621

  Cash at beginning of year

   6,169 

   5,122

    4,501 

 

 

 

 

  Cash at end of year

 $7,667 

  $ 6,169

$  5,122 

 

69FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Notes to Consolidated Financial Statements                   Years Ended December 31, 2001, 2000 and 1999  (Dollar Amounts in Thousands)

NOTE 26--Condensed Financial Information of First  Commonwealth Financial Corporation   (parent company only) (Continued)

**Supplemental disclosures**

Proceeds from the issuance of subordinated debentures  and other long-term debt during 1999 were used primarily to fund the purchase  of 3,819,420 shares of the Corporation's common stock pursuant to a "modified  Dutch Auction" tender offer.

NOTE 27--Fair Values of Financial Instruments

Below are various estimated fair values at December  31, 2001 and 2000, as required by Statement of Financial Accounting Standards  No. 107 ("FAS No. 107").  Such information, which pertains to  the Corporation's financial instruments, is based on the requirements set forth  in FAS No. 107 and does not purport to represent the aggregate net fair value  of the Corporation.  It is the Corporation's general practice and intent  to hold its financial instruments to maturity, except for certain securities  designated as securities available for sale, and not to engage in trading activities.  Many of the financial instruments lack an available trading market, as characterized  by a willing buyer and seller engaging in an exchange transaction.  Therefore,  the Corporation had to use significant estimations and present value calculations  to prepare this disclosure.

Changes in the assumptions or methodologies used  to estimate fair values may materially affect the estimated amounts.  Also,  management is concerned that there may not be reasonable comparability between  institutions due to the wide range of permitted assumptions and the methodologies  in absence of active markets.  This lack of uniformity gives rise to a  high degree of subjectivity in estimating financial instrument fair values.

The following methods and assumptions were used  by the Corporation in estimating financial instrument fair values:

Cash and short-term instruments:   The balance sheet carrying amounts for cash and short-term instruments approximate  the estimated fair values of such assets.

Securities:  Fair values  for securities held to maturity and securities available for sale are based  on quoted market prices, if available.  If quoted market prices are not  available, fair values are based on quoted market prices of comparable instruments.   The carrying value of nonmarketable equity securities, such as Federal Home  Loan Bank stock, is considered a reasonable estimate of fair value.

Loans receivable:  Fair  values of variable rate loans subject to frequent repricing and which entail  no significant credit risk are based on the carrying values.  The estimated  fair values of other loans are estimated by discounting the future cash flows  using interest rates currently offered for loans with similar terms to borrowers  of similar credit quality.  The carrying amount of accrued interest is  considered a reasonable estimate of fair value.

70ITEM 8.  Financial Statements and Supplementary Data

Notes to Consolidated Financial Statements     Years Ended December 31, 2001, 2000 and 1999          (Dollar Amounts in Thousands)  

NOTE 27--Fair Values of Financial Instruments (Continued)

Off-balance-sheet instruments:   Many of the Corporation's off-balance-sheet instruments, primarily loan commitments  and standby letters of credit, are expected to expire without being drawn upon,  therefore the commitment amounts do not necessarily represent future cash requirements.   Management has determined that due to the uncertainties of cash flows and difficulty  in predicting the timing of such cash flows, fair values were not estimated  for these instruments.

Deposit liabilities:  For  deposits which are payable on demand at the reporting date, representing all  deposits other than time deposits, management estimates that the carrying value  of such deposits is a reasonable estimate of fair value.  The carrying  amounts of variable rate time deposit accounts and certificates of deposit approximate  their fair values at the report date.  Fair values of fixed rate time deposits  are estimated by discounting the future cash flows using interest rates currently  being offered and a schedule of aggregated expected maturities.  The carrying  amount of accrued interest approximates its fair value.

Short-term borrowings:   The carrying amounts of short-term borrowings such as Federal funds purchased,  securities sold under agreements to repurchase, borrowings from the Federal  Home Loan Bank and treasury, tax and loan notes approximate their fair values.

Long-term debt:  The carrying  amounts of variable rate debt approximate their fair values at the report date.   Fair values of fixed rate debt are estimated by discounting the future cash  flows using the Corporation's estimated incremental borrowing rate for similar  types of borrowing arrangements.

The following table presents carrying amounts and  estimated fair values of the Corporation's financial instruments at December  31, 2001 and 2000:

 

 

2001

2000

 

         CarryingAmount

Estimated        FairValue

         CarryingAmount

Estimated        FairValue

 

 

 

 

 

Financial assets

 

 

 

 

   Cash and due from banks

$     98,130

$     98,130

$     90,723

$     90,723

   Interest-bearing deposits with banks

$       4,250

$       4,250

$          427

$          427

   Federal funds sold

$                  -0-

$                  -0-

$     11,125

$     11,125

   Securities available for sale

$1,469,118

$1,469,118

$1,238,230

$1,238,230

   Investments held to maturity

$   293,290

$   298,643

$   398,107

$   398,661

   Loans, net of allowance

$2,533,777

$2,633,443

$2,457,226

$2,530,430

Financial liabilities

 

 

 

 

   Deposits

$3,093,150

$3,123,845

$3,064,146

$3,047,713

   Short-term borrowings

$   427,736

$   427,736

$   272,171

$   272,171

   Long-term debt

$   664,220

$   650,106

$   656,855

$   630,511

71  FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of First  Commonwealth Financial Corporation:

                         

We have audited the accompanying consolidated balance  sheets of First Commonwealth Financial Corporation and subsidiaries (the "Corporation")  as of December 31, 2001 and 2000, and the related consolidated statements of  income, shareholders' equity, and cash flows for each of the three years in  the period ended December 31, 2001.  These financial statements are the  responsibility of the Corporation's management.  Our responsibility is  to express an opinion on these financial statements based on our audits. 

We conducted our audits in accordance with auditing  standards generally accepted in the United States of America.  Those standards  require that we plan and perform the audit to obtain reasonable assurance about  whether the financial statements are free of material misstatement.  An  audit includes examining, on a test basis, evidence supporting the amounts and  disclosures in the financial statements.  An audit also includes assessing  the accounting principles used and significant estimates made by management,  as well as evaluating the overall financial statement presentation.  We  believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements  present fairly, in all material respects, the financial position of First Commonwealth  Financial Corporation and subsidiaries at December 31, 2001 and 2000, and the  results of their operations and their cash flows for each of the three years  in the period ended December 31, 2001 in conformity with accounting principles  generally accepted in the United States of America.

 

/S/Deloitte & Touche LLP

Pittsburgh, Pennsylvania  January 25, 2002

 

72 FIRST COMMONWEALTH FINANCIAL CORPORATION AND  SUBSIDIARIES

ITEM 8.  Financial Statements and Supplementary  Data

Quarterly Summary of Financial Data - Unaudited  (Dollar Amounts in Thousands, except per share data)

The unaudited quarterly results of operations for  the years ended December 31, 2001 and 2000 are as follows:

 

2001

 

FirstQuarter

SecondQuarter

ThirdQuarter

FourthQuarter

 

 

 

 

 

Interest income 

$79,080

 $77,371

$77,557

$74,883

Interest expense 

  44,848

  43,413

  42,000

  36,909

 

 

 

 

 

    Net interest income 

  34,232

  33,958

   35,557

  37,974

Provision for credit losses 

    2,407

    2,557

    3,542

    2,989

 

 

 

 

 

    Net interest income after provision for        credit losses 

   31,825

   31,401

  32,015

 34,985

 

 

 

 

 

Securities gains 

        205

    1,790

    1,330

          4

Other operating income

     9,062

    8,583

    9,429

    9,821

Other operating expenses 

   25,456

  26,003

  26,033

       27,515

 

 

 

 

 

    Income before income taxes        

   15,636

  15,771

  16,741

 17,295

Applicable income taxes 

     3,613

    3,737

    4,023

    3,881

 

 

 

 

 

    Net income 

$12,023

$12,034

$12,718

$13,414

 

 

 

 

 

Basic earnings per share 

$    0.21

     $           0.21

     $           0.22

     $           0.23

Diluted earnings per share 

$    0.21

     $           0.21

$    0.22

     $           0.23

 

 

 

 

 

Average shares outstanding 

57,721,959

57,799,443

57,975,650

58,040,370

Average shares outstanding assuming dilution        

57,802,012

58,035,585

58,342,525

58,284,340

 

2000

 

FirstQuarter

SecondQuarter

ThirdQuarter

FourthQuarter

 

 

 

 

 

Interest income 

$76,943

$77,317

$78,471

$79,151

Interest expense 

  41,504

  42,443

  44,734

  45,858

 

 

 

 

 

    Net interest income 

  35,439

  34,874

  33,737

 33,293

Provision for credit losses 

    2,505

    2,415

    2,505

   2,605

 

 

 

 

 

    Net interest income after        provision for credit losses 

   32,934

 32,459

  31,232

  30,688

 

 

 

 

 

Securities gains 

        -0-

   1,686

        -0-

         59

Other operating income 

     7,358

   8,254

    8,242

    8,084

Other operating expenses 

   25,150

 25,048

  24,709

  24,554

 

 

 

 

 

    Income before income taxes        

  15,142

 17,351

  14,765

  14,277

Applicable income taxes 

         3,691

    4,261

    3,209

    3,128

 

 

 

 

 

    Net income 

$11,451

$13,090

$11,556

$11,149

 

 

 

 

 

Basic earnings per share 

     $           0.20

     $           0.23

     $           0.20

     $           0.19

Diluted earnings per share 

     $           0.20

     $           0.23

     $           0.20

     $           0.19

 

 

 

 

 

Average shares outstanding 

57,505,462

57,515,772

57,565,411

57,648,021

Average shares outstanding assuming dilution        

57,606,948

57,566,079

57,601,162

57,699,795

 

73

FIRST COMMONWEALTH FINANCIAL CORPORATION

ITEM 9  - CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON                  ACCOUNTING AND FINANCIAL DISCLOSURE                 Not Applicable

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF  THE                  REGISTRANT                  Information appearing in the definitive Proxy Statement related to                    the annual meeting of security holders to be held April 22, 2002                    is incorporated herein by reference in response to the listing of                    directors.

The table below lists the current executive officers  of the Corporation.

Name

 

Age

Positions Held During the Past Five Years

E. James Trimarchi

79

Chairman of the Board of the Corporation; Director        of CSC, FCB, FCIA, CTCLIC, FCPRI, and FCTC; Former President and Chief        Executive Officer of the Corporation

 

Joseph E. O'Dell

56

President, Chief Executive Officer and Director        of the Corporation; Director of FCB, FCTC, Southwest Bank, and FCIA; Vice        Chairman of the Board of CSC and FCPRI; Former Senior Executive Vice President        and Chief Operating Officer of the Corporation; former President and Chief        Executive Officer of FCB

 

David S. Dahlmann

52

Vice Chairman of the Corporation; President and        Chief Executive Officer of Southwest Bank; Former President and Chief        Executive Officer of Southwest National; Director of Southwest Bank and        FCPRI

 

Johnston A. Glass

52

Vice Chairman, Growth of the Corporation; President        and Chief Executive Officer of FCB; Director of FCB, FCTC, FCIA and FCPRI

 

Gerard M. Thomchick

46

Senior Executive Vice President and Chief Operating        Officer of the Corporation; President, Chief Executive Officer and Director        of CTCLIC; President and Director of FCPRI; Director of FCB, FCTC and        FCIA

 

John J. Dolan

45

Executive Vice President and Chief Financial        Officer of the Corporation; Chief Financial Officer of FCB; Comptroller        and Chief Financial Officer of CTCLIC; Treasurer and Assistant Secretary        of FCTC; Chief Financial Officer of FCPRI; Treasurer of FCIA; Administrative        Trustee of First Commonwealth Capital Trust I

74  FIRST COMMONWEALTH FINANCIAL CORPORATION

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF  THE                  REGISTRANT (Continued)

David R. Tomb, Jr.

70

Senior Vice President, Secretary, Treasurer and        Director of the Corporation; Secretary of FCB, FCIA, FCTC, FCPRI and CSC;        Director of FCB, CSC, FCTC, FCPRI, FCIA and CTCLIC

 

 

 

Thaddeus J. Clements

45

Senior Vice President, Human Resources of the        Corporation, FCB and FCPRI 

 

 

 

William R. Jarrett

67

Senior Vice President, Risk Management of the        Corporation and FCPRI

 

 

 

Sue McMurdy

45

Senior Vice President and Chief Information Officer        of the Corporation; President, Chief Executive Officer and Director of        CSC; Director of FCPRI; former Senior Vice President, Technical Services        of Commonwealth Systems Corporation

 

 

 

R. John Previte

52

Senior Vice President, Investments of the Corporation;        Investment Officer of FCB and Southwest; Senior Vice President of FCPRI

Each of the officers identified above has held  the position indicated above or other executive positions with the same entity  (or a subsidiary thereof) for at least the past five years except where noted.

Executive officers of the Corporation serve at  the pleasure of the Board of Directors of the Corporation and for a term of  office extending through the election and qualification of their successors.

ITEM 11 - MANAGEMENT RENUMERATION                 Information appearing in the definitive Proxy Statement related to                   the annual meeting of security holders to be held April 22, 2002                   is incorporated herein by reference in response to this item.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL                 OWNERS AND MANAGEMENT                Information  appearing in the definitive Proxy Statement related to                   the annual meeting of security holders to be held April 22, 2002                   is incorporated herein by reference in response to this item.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                  Information appearing in the definitive Proxy Statement related to                    the annual meeting of security holders to be held April 22, 2002                    is incorporated herein by reference in response to this item.

75  FIRST COMMONWEALTH FINANCIAL CORPORATION

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES  AND                  REPORTS ON FORM 8-K

  (A)     Documents  Filed as Part of this Report

           1)  Financial Statements               All financial statements of the registrant as set forth under                  Item 8 of this Report on Form 10-K.

           2)  Financial Statement Schedules

               Schedule                     Number       Description                                                                   Page

                 I                  Indebtedness to Related Parties                                  N/A                  II                  Guarantees of Securities of Other Issuers                   N/A

                                                                                                           Page Number or                   Exhibit                                                                                Incorporated by            3)  Number       Description                                                         Reference to  

                3.1               Articles of Incorporation                         Exhibit 3(i) to the Corporation's                                                                                                       quarterly report on Form 10Q for the                                                                                                      quarter ended March 31, 1994

                3.2                By-Laws of Registrant                           Exhibit 3.2 to Form S-4                                                                                                        filed October 15, 1993

               10.1               Change in Control Agreement            Exhibit  10.4 to Form 10-K                                      dated October 27, 1995                        filed March 21, 1996                                      Joseph E. O'Dell

               10.2               Change in Control Agreement             Exhibit 10.5 to Form 10-K                                      dated October 27, 1995                        filed March 21, 1996                                      Gerard M. Thomchick

               10.3              Change in Control Agreement               Exhibit 10.6 to Form 10-K                                     dated October 30, 1995,                        filed March 21, 1996                                      entered into between First                                     Commonwealth Financial Corporation                                     and  John J. Dolan, together with a                                     schedule listing substantially identical                                     Change in Control Agreements with                                     the following individuals:  William R. Jarrett,                                      R. John Previte, David L. Dawson,                                      Johnston A. Glass and Robert C. Wagner.

76                

FIRST COMMONWEALTH FINANCIAL CORPORATION

ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES  AND

                  REPORTS ON FORM 8-K

PART IV (Continued)

               10.4    Employment Contract                                   Exhibit 10.4 to Form S-4                            David  S. Dahlmann                                      filed  November 2, 1998

               10.5    Supplemental Executive                               Exhibit 10.7 to Form 10-K                            Retirement  Plan                                             filed March 31, 1999

               10.6    Deferred Compensation                              Exhibit 10.8 to Form 10-K                             Plan                                                                filed March 31, 1999

               10.7    Cash Incentive Bonus                                   Exhibit 10.9 to Form 10-K                            Program                                                         filed March 31, 1999

              10.8   Change  in Control Agreement                      Exhibit 10.8 to Form 10-K                           dated  November 22, 2000,                           filed April 2, 2001                           entered  into between First                           Commonwealth  Financial Corporation                            and  Sue McMurdy 

               21.1   Subsidiaries of the                                         Page 79                                    Registrant

              23.1   Consent  of Deloitte &                                    Page 80                           Touche  LLP Certified                             Public Accountants

              24.1    Power of Attorney                                           Page 81

               

  (B)     Report on  Form 8-K

              None

77  FIRST COMMONWEALTH FINANCIAL CORPORATION

SIGNATURES

     Pursuant to the requirements  of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Registrant  has duly caused this report to be signed on its behalf by the undersigned, thereunto  duly authorized, in Indiana, Pennsylvania, on the 26th day of March 2002.

                      FIRST COMMONWEALTH FINANCIAL CORPORATION                        (Registrant)

 

                                                    /S/JOSEPH E. O'DELL                                                                                                        Joseph E. O'Dell, President and Chief Executive Officer

78