## MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

primarily as the result of increases in NSF and bank club fees. Management strives to implement reasonable fees for services and closely monitors collection of those fees. 

Insurance commissions grew $439 thousand for 2002 after increasing $1.2 million for 2001 from 2000 commissions of $2.0 million. Insurance commissions for 2002 included increases in personal lines, annuities and employee benefit plans compared to 2001. As part of the previously discussed TSFM process the Corporation’s insurance subsidiary will continue to have expanded opportunities to meet the insurance needs of commercial clients. In addition, the Corporation has developed “FOCUS,” a financial planning tool designed to help clients prioritize and assess their financial needs. The “FOCUS” concept results in a systematic approach covering a wide range of personal financial goals including appropriate insurance coverage. This category should also be favorably impacted by the integration of First Commonwealth Financial Advisors into these advisory models. 

Income from bank owned life insurance was $4.7 million for 2002 compared to $4.6 million for 2001 which compared to $3.4 million for 2000. The 2002 period included an additional investment in bank owned life insurance of $5.0 million compared to 2001 levels. The 2001 period included an increase in income from bank owned life insurance of $1.2 million compared to 2000, resulting primarily from claim income and the impact of an additional $15.0 million investment during 2001. 

Other income for 2002 was $11.7 million, representing a $1.2 million decrease compared to 2001 which followed a $2.4 million rise over the $10.5 million achieved in 2000. The decline in other income for 2002 resulted from the sale of one of the Corporation’s branches during 2001 which generated a gain of $767 thousand based on the premium on the sale of $10.4 million of deposits. The 2001 period included $1.3 million of gains related to the sale of a branch and a block of 30 year mortgages as well as a gain from the termination of a subsidiary’s defined benefit pension plan. Other income for 2002 also included increases in merchant discount of $119 thousand and interchange income of $164 thousand. Other income for the 2000 period included a gain on the sale of fixed assets of $515 thousand and increases in merchant discount of $401 thousand as well as a rise in MAC interchange fees of $628 thousand. 

Total other operating expense for 2002 grew $20.4 million or 19.5% to $125.4 million compared to $105.0 million and $99.5 million for 2001 and 2000 respectively. The increase in other operating expense for 2002 was primarily the result of nonrecurring charges for the previously described litigation settlement and corporate restructuring of $8.0 million and $6.1 million, respectively. These restructuring charges resulted from the merger of the Corporation’s banking subsidiaries, Southwest Bank and First 

Commonwealth Bank, which occurred in October, 2002. Because of this merger, there was a consolidation of support functions with some staff positions being eliminated. The personnel within the branches and relationship managers in corporate services continued to serve in the same capacity in order to ensure a smooth transition. Employees whose positions were being eliminated were notified and continued to work in their positions for at least 60 days. Notified employees had the opportunity to seek other positions within the Corporation or to receive a separation package based on years of service. Also, related to the merger, the structure of all of the Boards of Directors and Board committees for the Corporation was realigned. As a result of these activities, restructuring charges of $6.1 million are reported on the income statement for the 2002 period. Ongoing savings from the restructuring are anticipated to be $4.1 million per year. Other charges included during 2002 as a part of the restructuring related principally to writing off obsolete signs and supplies due to the name change under one charter and amounted to $420 thousand. Also impacting other operating expense for the period were $1.8 million of costs incurred principally in the fourth quarter of 2002 associated with development of the First Commonwealth brand. Total noninterest expense as a percent of average assets was 2.76% for 2002 compared to 2.32% for 2001. Excluding the nonrecurring items (legal settlement and restructuring charges) as well as rebranding costs, this ratio would be 2.41% for 2002. 

Employee costs were $58.1 million in 2002, representing 1.28% of average assets compared to $54.5 million and 1.21% of average assets for 2001. Employee costs for 2000 were $52.5 million and 1.22% of average assets. Salary costs for the 2002 period increased $2.2 million or 5.1% compared to 2001 levels of $43.1 million. Employee benefit costs rose $1.4 million or 12.4% for 2002 compared to 2001, with the largest increase being hospitalization costs (up $943 thousand or 24.7%). 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 of hospitalization costs. The Corporation strives to provide quality employee benefits while effectively managing costs. 

Net occupancy expense increased $230 thousand or 3.5% to $6.8 million during 2002 compared to $6.5 million for 2001 and $6.6 million for 2000. Increases in building insurance, building rental costs and building repairs and maintenance in 2002 were only partially offset by declines in most other building expense categories. Furniture and equipment expenses of $10.0 million for 2002 reflected increases of $920 thousand over 2001 levels resulting primarily from increases in depreciation on computer software and software maintenance offset in part by reduced equipment lease 

