Senior Vice President, Risk Management, an executive officer  level position, oversees all aspects of the risk process. Our  committee structure embraces a risk management culture,  which begins with the Risk Committee that provides oversight  and monitoring of key risk areas. The Risk Committee, which  is chaired by the Senior Vice President, Risk Management, and  has representation from all of the disciplines across the  organization, meets to discuss and assess current and emerging  risks as well as to identify solutions and mitigants. Credit  quality and loan loss adequacy issues are addressed by the  Credit Quality, Watch List and Loan Loss Reserve committees.  Additional committees include Security, which is responsible  for coordinating the security program; Privacy, which focuses  on safeguarding client information; ALCO, which monitors  interest rate and liquidity risks; and Disclosure, which evaluates  internal controls regarding information utilized in certain  regulatory reports, as well as reviewing those reports and the  disclosure process to ensure that disclosures are timely,  complete and accurate. The Risk Department has specific procedures to analyze and  quantify risks in the seven major risk categories. Gaps between  inherent risks and mitigants are quantified and presented to the  Risk Committee for their review. Management continually  reviews the mitigants and controls to ensure their continuity.  The Internal Audit Department validates the existence and  effectiveness of the controls. Risk gaps are compiled to develop  a risk rating, which is incorporated into the balanced scorecard  measure and is reported to the Board of Directors. An  analytical review of key indicators, both monetary and  nonmonetary, as well as other current information that may  become available through discussions with management serves  as an early warning system to detect potential deteriorating  internal controls. All significant new initiatives and products  are subject to a risk assessment prior to being presented for  implementation. An annual assessment of risk is also  performed to identify potential threat areas to our computer  systems. Our internal audit staff performs routine and  consistent information technology reviews of identified risk  areas, security measures and control processes.  With these processes in place the Corporation believes that its  objective of establishing a risk culture that identifies, measures,  controls and monitors events or actions that may adversely  affect our organization has been achieved. Our goal is not to  eliminate risk but to understand fully the risk the Corporation is  assuming and appropriately manage those risks. 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  Corporate management has taken strong and wide-ranging  actions to enhance the awareness of and proactively manage  risk within the Corporation. In addition to establishing a  comprehensive policy and procedure manual that is updated  and regularly communicated throughout the Corporation, the  In the normal course of business the Corporation assumes  various types of risk. The Corporation has identified twenty-six  standard risks which have been summarized into seven major  risk categories. The seven major risk categories include credit  risk, market risk, liquidity risk, compliance/legal risk, opera- tional risk, reputation risk and strategic risk. Credit risk, market  risk and liquidity risk are discussed in this Management’s  Discussion and Analysis of Financial Condition and Results of  Operations section. The remaining major risk categories are  defined as follows: compliance/legal risk— the risk rising from  violations of, or noncompliance with laws, rules, regulations,  prescribed practices, or ethical standards; operational risk— threat created by inadequate information systems, operational  problems, weak internal control systems, fraud, or any other  unforeseen catastrophes; reputation risk—the risk to earnings  or capital arising from negative public opinion; and strategic  risk—the risk arising from adverse business decisions or  improper implementation of those decisions. These factors and  others could impact the Corporation’s business, financial  condition and results of operation. 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 27  to the “Consolidated Financial Statements” for an analysis of  regulatory capital guidelines and the Corporation’s capital  ratios relative to these measurement standards. dividends were increased over 2002 levels. 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 adjustment to unearned ESOP shares in 2003  increased equity by $1.2 million. The market value adjustment  to securities available for sale decreased equity by $10.7  million in 2003. Amounts paid to fund the discount on  reinvested dividends reduced equity by $706 thousand.  Proceeds from the issuance of treasury shares to provide for  stock options exercised increased equity by $5.9 million during  2003, while the tax benefit related to the stock options  increased equity by $535 thousand. Equity capital in 2003 was  also impacted by the issuance of stock related to acquisitions  from 2003 and 2002, which resulted in increases in the  amounts of $17.0 million and $203 thousand, respectively.  Inflation and Changing Prices 58 Risk Management MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES