FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTESTO CONSOLIDATED FINANCIAL STATEMENTS General NOTE 1— Statement of Accounting Policies Years Ended December 31, 2003, 2002 and 2001 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 one commercial  bank, a nondepository trust company, insurance agency  and financial advisor, the Corporation provides a full range  of loan, deposit, trust, insurance and financial advisory  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. 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. Financial statement amounts in prior periods have been  reclassified to conform to the presentation format used in  2003. The reclassifications had no effect on the Corporation’s  financial condition or results of operations. 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  A loan is placed in nonaccrual status when based on current  information and events, it is probable that the Corporation will  be unable to fully collect principal or interest due according  to the contractual terms of the loan. A loan is also placed in  nonaccrual status when based on regulatory definitions, the  loan is maintained on a “cash basis” due to the weakened  financial condition of the borrower. When a determination  is made to place a loan in nonaccrual status, all accrued and  unpaid interest for the current year is reversed against interest  income and uncollected interest for previous years is charged  against the allowance for credit losses. Generally, consumer  and residential mortgage loans, which are well-secured  and/or in the process of collection, are not normally placed  in nonaccrual status. Nonaccrual loans are restored to accrual  status when, based on a sustained period of repayment by  the borrower in accordance with the contractual terms of the  loan, the Corporation expects repayment of the remaining  The Corporation considers a loan to be past due and still  accruing interest when payment of interest or principal is  contractually past due but the loan is well secured and in the  process of collection. For installment, mortgage, term and  other loans with amortizing payments scheduled monthly, 90  days past due is reached when four monthly payments are  due and unpaid. For demand, time and other multi-payment  obligations with payments scheduled other than monthly,  delinquency status is calculated using number of days instead  of number of payments. Revolving credit loans, including  personal credit lines and home equity lines, are considered  to be 90 days past due when the borrower has not made the  minimum payment for four billing cycles.  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 has securities classified as either held-to- maturity or available-for-sale. The Corporation does not  engage in trading activities. Effective January 1, 2003 the  Corporation changed the method it utilizes to determine  the net gain or loss on the sale of securities from the  specific identification method to the average cost method.  This change did not result in a material change to the  Corporation’s financial condition or results of operations. 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. Loans Securities Reclassifications 18 Basis of Presentation