FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Employee Stock Option Plan  (continued) (Dollar Amounts in Thousands, except per share data) 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 had been  implemented. No stock-based employee compensation  expense is reflected in the Corporation’s net income as  reported in the Consolidated Statements of Income because  all stock options granted under the Corporation’s plan had  an exercise price equal to the market value of the underlying  common stock on the date of the grant. Management has considered various factors in its decision  to account for stock-based compensation, including stock  options granted, using the intrinsic value method of APB  25. Generally, expenses are easily measured as of the date  they are incurred. At some point the Corporation must pay  cash to cover these expenses. This is not the case with the  methodology for expensing stock options. The amount  expensed for the purposes of this disclosure is equivalent to a  theoretic value calculated on the date the option was granted.  Calculating a value of the option at the grant date requires  a variety of assumptions that may have little to do with the  actual realization of value by the option holder. In fact, many  of the options are forfeited or expire for a variety of reasons  without ever being exercised. Additionally, valuation models operate under the assumption  that the options are similar to those that are actively traded.  In reality they are not marketable. Also there exists times  where executives are unable to exercise their options due to  trading restrictions. This limits the ability of certain option  holders to benefit from some periods of volatility. Changes in  the assumptions used could affect the estimated impact of the  stock options and this disclosure. The variety of methodologies and assumptions permitted  to be used by each reporting company gives rise to a high  degree of subjectivity in estimating the impact of the options.  Management is concerned that due to the lack of uniformity  and variations in assumptions, there may not be reasonable  comparability between institutions. See NOTE 24 for  additional information. The following table illustrates the effect on net income and  earnings per share if the Corporation had applied the fair  value recognition provisions of FAS No. 123 to stock-based  employee compensation: 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  Basic earnings per share excludes dilution and is computed  by dividing income available to common shareholders by the  weighted-average number of common shares outstanding for  the period less unallocated ESOP shares. Management periodically reviews contracts from various  functional areas of the Corporation to identify potential  derivatives embedded within selected contracts. Management  has identified potential embedded derivatives in certain  loan commitments for residential mortgages where the  Corporation has intent to sell to an outside investor. Due  to the short-term nature of these loan commitments and  the minimal historical dollar amount of commitments  outstanding, the corresponding impact on the Corporation’s  financial condition and results of operation has not been  material. The Corporation had no freestanding derivative or  hedging instruments prior to the third quarter of 2003 when it  entered into an interest rate swap that is described in NOTE 7. The Corporation accounts for derivative instruments and  hedging activities utilizing guidelines established in FASB  Statement No. 133 “Accounting for Derivative Instruments  and Hedging Activities” (“FASB No. 133”), as amended.  The Corporation recognizes all derivatives as either assets  or liabilities on the balance sheet and measures those  instruments at fair value. Changes in fair value of derivatives  designated and accounted for as cash flow hedges, to the  extent they are effective as hedges, are recorded in “Other  Comprehensive Income,” net of deferred taxes. Any hedge  ineffectiveness would be recognized in the income statement  line item pertaining to the hedged item. Derivative Instruments and Hedging Activities Earnings Per Common Share 22 December 31, 2003   2002   2001 Net income, as reported $ 53,300 $ 43,526 $ 50,189 Deduct: Total stock-based  employee compensation expense  determined under fair value  based method for all awards,  net of related tax effect  net of related tax effect (1,352) (2,278) (1,978) Pro forma net income $ 51,948  $ 41,248 $ 48,211 Earnings per share: Basic—as reported $  0.90 $ 0.75 $ 0.87 Basic—pro forma  0.88 0.71 0.83 Diluted—as reported $  0.90 $ 0.74 $ 0.86 Diluted—pro forma  0.87 0.70 0.83 Average shares outstanding 59,002,277 58,409,614 57,885,478 Average shares outstanding  assuming dilution 59,387,055 58,742,018 58,118,057 NOTE 1— Statement of Accounting Policies (continued)