FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Bank Owned Life Insurance Allowance for Credit Losses  (continued) NOTE 1— Statement of Accounting Policies (continued) Premises and Equipment Business Combinations 20 (Dollar Amounts in Thousands) 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, 2003. The Corporation purchased insurance on the lives of certain  groups of employees. The policies accumulate asset values  to meet future liabilities including the payment of employee  benefits such as health care. Increases in the cash surrender  value are recorded as other income in the Consolidated  Statements of Income. The cash surrender value of bank  owned life insurance is reflected in “other assets” on the  Consolidated Balance Sheets in the amount of $103,625 and  $92,644 at December 31, 2003 and 2002, respectively. The  increase in cash surrender value of bank owned life insurance  during 2003 includes $6,646 acquired as the result of a  business combination completed during 2003. 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 classified loans on  the primary watch list 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. Premises and equipment are carried at cost less accumulated  depreciation and amortization. Depreciation is computed on the  straight-line and accelerated methods over the estimated useful  life of the asset. Accelerated depreciation methods are used for  furniture and equipment while straight-line depreciation is used  for buildings and improvements. Charges for maintenance and  repairs are expensed as incurred. Where a lease is involved,  amortization is charged over the term of the lease or the  estimated useful life of the improvement, whichever is shorter.  The Corporation records computer software in accordance  with the American Institute of Certified Public Accountants’  Statement of Position 98-1, “Accounting for the Costs of  Computer Software Developed or Obtained for Internal Use”  (“SOP 98-1”). The statement identifies the following three  stages of software development: the preliminary project stage,  the application development stage and the post-implementation  stage. In compliance with SOP 98-1, the Corporation expenses  costs incurred during the preliminary project state and capitalizes  certain costs incurred during the application development stage.  Once software is in operation, maintenance costs are expensed  over the maintenance period while upgrades that result in  additional functionality or enhancement are capitalized. Training  and data conversion costs are expensed as incurred. Capitalized  costs are amortized on a straight-line basis over a period of 3-7  years, depending on the life of the software license. 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. 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 special factors that management  currently evaluates consist of portfolio risk or concentrations  of credit and economic conditions. 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 that 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 that  is often subjective and changing rapidly. The Corporation accounts for business combinations in  accordance with the Financial Accounting Standards Board  (“FASB”) Statement No. 141, “Business Combinations”  (“FAS No. 141”) which requires the purchase method of  accounting for business combinations initiated after June  30, 2001. Under the purchase method, net assets of the  business acquired are recorded at their estimated fair value  as of the date of acquisition with any excess of the cost of  the acquisition over the fair value of the net tangible and  intangible assets acquired recorded as goodwill. Results of the  acquired business are included in the Corporation’s income  statement from the date of the acquisition.