FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Corporation’s “Asset/Liability Management Committee”  (“ALCO”) is responsible for the identification, assessment and  management of interest rate risk exposure, liquidity, capital  adequacy and investment portfolio position. The primary  objective of the ALCO process is to ensure that the  Corporation’s balance sheet structure maintains prudent levels  of risk within the context of currently known and forecasted  economic conditions and to establish strategies which provide  the Corporation with appropriate compensation for the  assumption of those risks. The ALCO attempts to mitigate  interest rate risk through the use of strategies such as asset  sales, asset and liability pricing and matched maturity funding.  The ALCO strategies are established by the Corporation’s  senior management.  The Corporation entered into an interest rate swap transaction  during the third quarter of 2003. The swap has a three-year  maturity and involves hedging adjustable LIBOR based  Maintaining a high quality loan portfolio is of great importance  to the Corporation. The Corporation manages the risk  characteristics of the loan portfolio through the use of prudent  lending policies and procedures and monitors risk through a  periodic review process provided by internal auditors,  regulatory authorities and our loan review staff. These reviews  include the analysis of credit quality, diversification of industry,  compliance to policies and procedures and an analysis of  current economic conditions. In the management of its credit portfolio, the Corporation  emphasizes the importance of the collectibility of loans and  leases as well as asset and earnings diversification. The  Corporation immediately recognizes as a loss all credits judged  to be uncollectible and has established an allowance for credit  losses that may exist in the portfolio at a point in time, but have  not been specifically identified. The Corporation’s written lending policy requires certain  underwriting standards to be met prior to funding any loan,  including requirements for credit analysis, collateral value  coverage and documentation. The principal factor used to  determine potential borrowers’ credit worthiness is business  cash flows or consumer income available to service debt  Commercial real estate loans are granted for the acquisition or  improvement of real property. Generally, commercial real  estate loans do not exceed 75% of the appraised value of  property pledged to secure the transaction. Repayment of such  Commercial and industrial loans are generally granted to small  and middle market customers for working capital, operations,  expansion or asset acquisition purposes. Operating cash flows  of the business enterprise are identified as the principal source  of repayment, with business assets held as collateral. Collateral  margins and loan terms are based upon the purpose and  structure of the transaction as set forth in loan policy. The lending policy provides limits for individual and bank  committee lending authorities. In addition to the bank loan  approval process, requests for borrowing relationships which  will exceed one million dollars must also be approved by the  Corporation’s Credit Committee. This Committee consists of a  minimum of three members of the Corporation’s Board of  Directors. The Corporation has an additional level of approval  for credit relationships between $500 thousand and $1.0  million. This procedure requires approval of those credits by a  committee consisting of senior lenders of the Corporation. payments. Secondary sources of repayment, including  collateral and guarantees, are frequently obtained. commercial loans with a receive-fixed and pay-floating interest  rate swap of $25 million notional amount. The purpose of the  swap was to reduce the Corporation’s exposure to further  declines in interest rates. The ALCO continues to evaluate the  use of additional derivative instruments to protect against the  risk of adverse price or interest rate movements on the values  of certain assets and liabilities.  Another strategy aimed at reducing the Corporation’s exposure  to falling interest rates was implemented during 2003. U.S.  government agency securities maturing in approximately 3.5  years were purchased with short-term borrowings. The amount  of this transaction averaged approximately $138 million for the year. Final loan maturities and rate sensitivities of the loan portfolio  excluding consumer installment and mortgage loans and before  unearned income at December 31, 2003, were as follows  (Dollar Amounts in Thousands): 55 Credit Review Within One Year  One to 5 Years  After 5 Years  Total Commercial and industrial  $ 207,848  $ 110,732  $ 85,942  $ 404,522 Financial institutions  0  115  300  415 Real estate-construction  8,486  739  17,838  27,063 Real estate-commercial  76,495   144,509   550,857  771,861 Other  31,105  15,264   204,434  250,803 Totals  $ 323,934  $ 271,359  $ 859,371  $1,454,664 Loans at fixed interest rate  98,360   245,636  Loans at variable interest rates   172,999   613,735  Totals  $ 271,359  $ 859,371 