MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES loans is expected from the operations of the subject real estate  and is carefully analyzed prior to approval. Real estate construction loans are granted for the purposes of  constructing improvements to real property, both commercial  and residential. On-site inspections are conducted by qualified  individuals prior to periodic permanent project financing,  which is generally committed prior to the commencement of  construction financing. Real estate loans secured by 1-4 family residential housing  properties are granted subject to statutory limits in effect for the bank regarding the maximum percentage of appraised value of the mortgaged property. Residential loan terms are  normally established in compliance with secondary market  requirements. Residential mortgage portfolio interest rate risk  is controlled by secondary market sales, variable interest rate  loans and balloon maturities. Loans to individuals represent financing extended to consumers  for personal or household purposes, including automobile  financing, education, home improvement and personal  expenditures. These loans are granted in the form of  installment, credit card or revolving credit transactions.  Consumer credit worthiness is evaluated on the basis of ability  to repay, stability of income sources and past credit history. The Corporation maintains an allowance for credit losses at a  level deemed sufficient to absorb losses which are inherent in  the loan and lease portfolios at each balance sheet date.  Management reviews the adequacy of the allowance on a  quarterly basis to ensure that the provision for credit losses has  been charged against earnings in an amount necessary to  maintain the allowance at a level that is appropriate based on  management’s assessment of probable estimated losses. The  Corporation’s methodology for assessing the appropriateness of  the allowance for credit losses consists of several key elements.  These elements include a specific allowance for primary watch  list classified loans, a formula allowance based on historical  trends, an additional allowance for special circumstances and  an unallocated allowance. While the Corporation consistently applies the following  comprehensive methodology and procedure described in Since all identified losses are immediately charged off, no  portion of the allowance for credit losses is restricted to any  individual credit or groups of credits, and the entire allowance  is available to absorb any and all credit losses. For analytical  purposes, the following table sets forth an allocation of the  allowance for credit losses at December 31 according to the  categories indicated. Management feels the unallocated portion  of the reserve is necessary due to the uncertain economic and  geo-political environment and its impact on a variety of sectors  such as health care and lodging. During 2003, the unallocated  allowance was reduced due to an additional allocation to  fourteen commercial loans. The increase in allocations to the  commercial, industrial, financial, agricultural and real estate- commercial portfolios resulted from an increase in loan  volumes in these categories and the BankPittsburgh acquisition  within the metropolitan Pittsburgh market. NOTE 1 “Accounting Policies,” allowance for credit loss  methodologies incorporate management’s current judgments  about the credit quality of the loan portfolio as well as  collection probabilities for problem credits. Although  management considers the allowance for credit losses to be  adequate based on information currently available, additional  allowance for credit loss provisions may be necessary due to  changes in management estimates and assumptions about asset  impairment, information about borrowers that indicate changes  in the expected future cash flows or changes in economic  conditions. The allowance for credit losses and the provision  for credit losses are significant elements of the Corporation’s  financial statements, therefore management periodically  reviews the processes and procedures utilized in determining  the allowance for credit losses to identify potential  enhancements to these processes including development of  additional management information systems to ensure that all  relevant factors are appropriately considered in the allowance  analysis. In addition, the Corporation maintains a system of  internal controls which are independently monitored and tested  by internal audit and loan review staff to ensure that the loss  estimation model is maintained in accordance with internal  policies and procedures as well as generally accepted  accounting principals. (Dollar Amounts in Thousands) Allocation of the Allowance for Credit Losses 2003 2002  2001  2000  1999 Commercial, industrial, financial, agricultural and other  $  10,739 $  7,856  $  6,315  $  6,263  $  6,321 Real estate-construction  330 600  432  643  831 Real estate-commercial  11,361 7,201  9,808  9,064  7,675 Real estate-residential  4,910 5,294  7,379  10,211  9,928 Loans to individuals  4,614 3,035  3,845  4,938  5,131 Lease financing receivables  202 259  401  638  586 Unallocated  5,229 10,251  5,977  1,844  3,067 Total  $  37,385 $  34,496  $  34,157  $  33,601  $  33,539 Allowance as percentage of average total loans  1.42% 1.33%  1.34%  1.34%  1.39% 56