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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 SUBSIDIARIES
First Commonwealth Financial Corporation
FORM 10-K
INDEX

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

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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.   

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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

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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

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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.

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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.

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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.

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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.

(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.

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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

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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:

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.

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      FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

     (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.

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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

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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

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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:

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.

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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):

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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.

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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.

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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.

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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.

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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:

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:

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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.

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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.

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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):

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

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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):

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. 

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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

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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.

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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:

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.

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

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.

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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

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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.

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

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

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