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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2002 commission file number 0-11242

FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

         PENNSYLVANIA                                                          25-1428528
(State or other jurisdiction              (I.R.S. Employer
of incorporation or organization         Identification No.)


    22 NORTH SIXTH STREET INDIANA, PA           15701
(Address of principal executive offices)      (Zip Code)

Registrant's telephone number, including area code: (724)349-7220

Securities registered pursuant to Section 12(b) of the Act:

   TITLE OF EACH CLASS                           NAME OF EACH EXCHANGE ON
                                      WHICH REGISTERED

COMMON STOCK, $1 PAR VALUE          NEW YORK STOCK EXCHANGE

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.  Yes XX No__.

Indicate the number of shares outstanding of each of the issuer's classes of common stock.

     TITLE OF CLASS                                         OUTSTANDING AT March 14, 2003
Common Stock, $1 Par Value                       58,986,772 Shares

The aggregate market value of the voting common stock, par value $1 per share, held by non-affiliates of the registrant (Based upon the closing sale price on March 14, 2003), was approximately $633,513,562.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement related to the annual meeting of security holders to be held April 21, 2003 are incorporated by reference into Part III.

FIRST COMMONWEALTH FINANCIAL CORPORATION

First Commonwealth Financial Corporation
FORM 10-K
INDEX

                                   


FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.     Business

Description of Business

First Commonwealth Financial Corporation (the "Corporation") was incorporated as a Pennsylvania business corporation on November 15, 1982 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended.  The Corporation has one chartered bank affiliate which operates under the First Commonwealth Bank name.  Personal financial planning and other financial services and insurance products are also provided through First Commonwealth Trust Company and First Commonwealth Insurance Agency.  The Corporation enhanced its financial services and products during the first quarter of 2002 through the addition of First Commonwealth Financial Advisors.  The Corporation also operates through First Commonwealth Systems Corporation, a data processing subsidiary and First Commonwealth Professional Resources Inc., ("FCPRI") a subsidiary providing professional services to affiliated organizations.

In October 2002, the Corporation brought all 90 of our community bank offices and our other affiliates under a common brand, First Commonwealth.  We unveiled a new logo, colors, and signage through an aggressive marketing strategy to reintroduce ourselves to the marketplace.  A unified brand yields important benefits for our clients.  All of First Commonwealth Bank's community offices have the same identity, products, and professional service that provide a consistent experience throughout the office network.  The insurance, trust, and financial planning affiliates are now clearly linked with First Commonwealth Bank to provide integrated solutions to meet any client need.

First Commonwealth Bank ("FCB"), a Pennsylvania-chartered banking corporation headquartered in Indiana, Pennsylvania operated through divisions doing business under the following names:  NBOC Bank, Deposit Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central Bank, Peoples Bank of Western Pennsylvania, Unitas Bank and Reliable Bank. 

In October 2002, these banking divisions as well as the Corporation's other chartered bank (Southwest Bank) were merged under the First Commonwealth name.  This enhancement will provide our clients with greater flexibility, efficiency and seamless service throughout our market footprint.

Through FCB, the Corporation traces its banking origins to 1866.  FCB conducts business through 89 community banking offices in the counties of Allegheny (4), Armstrong (3), Beaver (1), Bedford (4), Blair (8), Butler (1), Cambria (11), Centre (1), Clearfield (5), Elk (3), Franklin (2), Huntingdon (5), Indiana (9), Jefferson (4), Lawrence (5), Somerset (5), Washington (1), and Westmoreland (17).  FCB engages in general banking business and offers a full range of financial services including such general retail banking services as demand, savings and time deposits and mortgage, consumer installment and commercial loans.

FCB operates a network of 84 automated teller machines ("ATMs") which permit customers to conduct routine banking transactions 24 hours a day.  Of the ATMs, 62 are located on the premises of branch offices and 22 are in remote locations.  All the ATMS's are part of the STAR network which consists of over 180,000 ATMs owned by numerous banks, savings and loan associations and credit unions located throughout 31 states.  STAR serves more than 124 million ATM/debit cardholders and more than 6,500 financial


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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.     Business (Continued)

Description of Business (Continued)

institution members.  The ATMs operated by FCB are also part of the global MasterCard/Cirrus network which is comprised of more than 300,000 ATMs located in the United States, Canada and 58 other countries and territories, which services over 365 million card holders.  Such networks allow FCB clients to withdraw cash and in certain cases conduct other banking transactions from ATMs of all participating financial institutions.

In addition to funds access through the use of ATMs, the STAR debit card offered to FCB's deposit clients may be used at nearly 720,000 point-of-sale retail locations on the STAR system as well as being used on the global MasterCard system for the purchase of goods and services.  The STAR debit card provides clients with almost universal acceptability of a credit card combined with the convenience of direct debit to the clients' checking account.

First Commonwealth Systems Corporation ("FCSC") was incorporated as a Pennsylvania business corporation in 1984 by the Corporation to function as its data processing subsidiary and it has its principal place of business in Indiana, Pennsylvania.  Before August 1984, it had operated as the data processing department.  FCSC provides on-line general ledger accounting services and bookkeeping services for deposit and loan accounts to the Corporation, FCB and its other nonbank subsidiaries.  FCSC also acts as a centralized purchasing agent for the purchase of computer hardware and software products by the Corporation and subsidiaries as well as providing technical support for the installation and use of these products.  It competes, principally with data processing subsidiaries of other, mostly larger, banks, on the basis of the price and quality of its services and the speed with which such services are delivered.  In October 2002, the name was changed to First Commonwealth Systems Corporation from Commonwealth Systems Corporation.

First Commonwealth Trust Company ("FCTC") was incorporated on January 18, 1991 as a Pennsylvania chartered trust company to render general trust services.  The trust departments of the former subsidiary banks were combined to form FCTC, and the corporate headquarters are located in Indiana, Pennsylvania.  FCTC has seven branch offices in the service areas of FCB and offers personal and corporate trust services, including administration of estates and trusts, individual and corporate investment management and custody services and employee benefit trust services.

First Commonwealth Insurance Agency ("FCIA") was incorporated as a Pennsylvania business corporation with its principal place of business in Indiana, Pennsylvania.  FCIA began operations in January 1998 as a wholly-owned subsidiary of FCB and provides a full range of insurance and annuity products to retail and commercial clients.

The Corporation acquired all of the outstanding shares of Strategic Capital Concepts, Inc. ("SCC") and Strategic Financial Advisors, Inc. ("SFA"), effective March 1, 2002.  As a registered investment advisor, SCC provided financial planning, asset management and consulting services to individuals, businesses, retirement plans, trusts





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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.     Business (Continued)

Description of Business (Continued)

and estates.  SFA offered investment and insurance products as well as employee benefit services.  In October 2002, SFA was merged into SCC and the name was changed to First Commonwealth Financial Advisors, Inc. ("FCFA"), which also offers insurance products through FCIA, an affiliate.  This acquisition will expand the Corporation's product offerings and positively impact fee based revenue, which continues to be a priority.

On June 1, 1989, Commonwealth Trust Credit Life Insurance Company ("Commonwealth Trust") began operations.  The Corporation owns 50% of the voting common stock of Commonwealth Trust.  Commonwealth Trust provides
reinsurance for credit life and credit accident and health insurance sold by the subsidiaries of the two unrelated holding company owners under a joint venture arrangement whereby the net income derived from such reinsurance inures proportionally to the benefit of the holding company selling the underlying insurance to its banks' customers.

First Commonwealth Capital Trust I, a business trust created under the laws of the State of Delaware, is included in the consolidated financial statements of the Corporation.  The trust was formed during September 1999 for the exclusive purposes of issuing and selling trust preferred securities, using the proceeds from the sale of the trust preferred securities to acquire subordinated debentures issued by the Corporation and engaging in only those other activities necessary or incidental thereto.

The Corporation and its subsidiaries employed approximately 1,450 (full-time equivalents) at December 31, 2002.  The Corporation does not engage in any significant business activities other than holding the stock of its subsidiaries.  The Corporation does not at present have any plans to expand or modify its business or that of its subsidiaries, other than as described herein.  Nevertheless, it will be receptive to and may actively seek out mergers and acquisitions in the event opportunities which management considers advantageous to the development of the Corporation's business arise, and may otherwise expand or modify its business as management deems necessary to respond to changing market conditions or the laws and regulations affecting the business of banking.

Competition

FCB, FCTC, FCFA and FCIA face intense competition, both from within and out of their service areas, in all aspects of business.  FCB competes for deposits, in such forms as checking, savings and NOW (negotiable order of withdrawal) accounts, MMDA (money market deposit accounts) and certificates of deposit, and in making consumer loans and loans to smaller businesses, with numerous other commercial banks and savings banks doing business within its service area with respect to loans to larger businesses.  FCB also completes, primarily in making consumer loans and for deposits, with state and federally chartered savings and loan associations and with credit unions.  In recent years, FCB has encountered significant competition for deposits from money market funds, mutual funds and institutions that offer annuities located throughout the United States.  Money market funds pay dividends to their shareholders (which are the equivalent of the interest




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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.     Business (Continued)

Competition (Continued)

paid by banks on deposits) and they are able to offer services and conveniences similar to those offered by FCB.  Annuities accumulate interest on the amounts deposited over a predetermined time period.  The depositor is then entitled to withdraw their funds for a fixed period of time or until death.  The effect of such competition has been to increase the costs of the rest of deposits, which provide the funds with which loans are made.  In addition to savings and loan associations and credit unions, FCB also competes for consumer loans with local offices of national finance companies and finance subsidiaries of automobile manufacturers and with national credit card companies such as MasterCard and VISA, whose cards, issued through financial institutions, are held by consumers throughout its service area.  FCB believes that the principal means by which it may compete for deposits and consumer and smaller commercial loans are the number and desirability of the locations of its offices and ATMs, the sophistication and quality of its services and the prices (primarily interest rates) of its services.  Additionally, FCB intends to remain competitive by offering financial services that target specific client needs.  Development of an integrated advisory sales model to integrate products between our bank, insurance agency, trust company and financial advisory affiliates as well as utilization of an employee team to deliver products and services to our commercial clients through our "Total Solutions Financial Management" approach have been positively received by our customers.  Specific client needs are also met through an enhanced client delivery system that includes telephone banking, which provides convenient access to financial services and hours of operation that extend past those of the FCB branch offices.  The Corporation introduced "WebBank" early in 2002, providing clients with access to their bank account information via the internet 24 hours a day - 7 days a week.  Features of WebBank include the ability to monitor account balances, view account history, perform account balance transfers and issue stop payments.  A loan production office was opened in downtown Pittsburgh in 2002 with significant new client acquisitions.  

Supervision and Regulation

The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("the Bank Holding Company Act") and is registered as such with the Federal Reserve Board.  As a registered bank holding company ("BHC"), it is required to file with the Federal Reserve Board an annual report and other information.  The Federal Reserve Board is also empowered to make examinations and inspections of the Corporation and its subsidiaries.

The Bank Holding Company Act and Regulation Y of the Federal Reserve Board require every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire direct or indirect ownership or control of more than 5% of the outstanding voting shares or substantially all of the assets of a bank or merge or consolidate with another bank holding company.  The Federal Reserve Board may not approve acquisitions by the Corporation of such percentage of voting shares or substantially all the assets of any bank located in any state other than Pennsylvania unless the laws of such state specifically authorize such an acquisition.



5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.     Business (Continued)

Supervision and Regulation (Continued)

The Bank Holding Company Act generally prohibits a bank holding company from engaging in a non-banking business or acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any non-banking corporation subject to certain exceptions, the principal exception being where the business activity in question is determined by the Federal Reserve Board to be closely related to banking or to managing or controlling banks to be a proper incident thereto.  The Bank Holding Company Act does not place territorial restrictions on the activities of such banking related subsidiaries of bank holding companies.

Under the Federal Reserve Act, subsidiary banks of a bank holding company are subject to certain restrictions on extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof, or acceptance of such stock or securities as collateral for loans to any one borrower.  Under the Pennsylvania Banking Code, there is no limit on the number of Pennsylvania banks that may be owned or controlled by a Pennsylvania bank holding company.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors.  Certain of the new legislation's more significant reforms are noted below:

*    The new legislation creates a public company accounting oversight
     board which is empowered to set auditing, quality control and ethics
      standards, to inspect registered public accounting firms, to conduct
      investigations and to take disciplinary actions, subject to SEC
      oversight and review.  The new board will be funded by mandatory fees
     paid by all public companies.  The new legislation also improves the
      Financial Accounting Standards Board, giving it full financial
      independence from the accounting industry.

*    The new legislation strengthens auditor independence from corporate
      management by, among other things, limiting the scope of consulting
      services that auditors can offer their public company audit clients.

*    The new legislation heightens the responsibility of public company
      directors and senior managers for the quality of the financial
      reporting and disclosure made by their companies.   Among other
      things, the new legislation provides for a strong public company audit
      committee that will be directly responsible for the appointment,
      compensation and oversight of the work of the public company auditors.

*    The new legislation imposes a range of new corporate disclosure
      requirements.  Among other things, the new legislation requires public
      companies to report all off-balance-sheet transactions and conflicts,
     as well as to present any pro forma disclosures in a way that is not
      misleading and in accordance with requirements to be established by
     the SEC.


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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.     Business (Continued)

Supervision and Regulation (Continued)

Sarbanes-Oxley Act of 2002 (Continued)

*    The new legislation also accelerated the required reporting of
      insider transactions, which now generally must be reported by the end
     of the second business day following a covered transaction.

*    The new legislation requires the Corporation's Chief Executive Officer
     and Chief Financial Officer to each certify that the Corporation's
      Quarterly and Annual Reports do not contain any untrue statements of a
      material fact.  The rules contain several requirements, including
      having these officers certify that:  they are responsible for
      establishing, maintaining and regularly evaluating the effectiveness
     of the Corporation's internal controls; they have made certain
      disclosures to the Corporation's auditors and the Audit Committee of
     the Board of Directors about the Corporation's internal controls; and
     they have included information in the Corporation's Quarterly and
      Annual Reports about their evaluation and whether there have been
      significant changes in the Corporation's internal controls or in other
      factors that could significantly affect internal controls subsequent
     to the evaluation.

*    The new legislation imposes a range of new criminal penalties for
     fraud and other wrongful acts, as well as extends the period during
     which certain types of lawsuits can be brought against a company or
     its insiders.

The Corporation has adopted a series of actions to strengthen and improve its already strong corporate governance practices.  Included in those actions was the adoption of a new Code of Conduct and Ethics by the Corporation and formation of a Financial Disclosure Committee.  This committee includes as members the Chief Executive Officer, Chief Financial Officer and other key members of the Corporation's management team.  The Corporation also requires signed certifications from managers who are responsible for internal controls throughout the Company as to the integrity of the information they prepare.

The Gramm-Leach-Bliley Act ("GBLA") of 1999 revolutionizes the regulation of financial services companies.  GBLA amends the Bank Holding Company Act of 1956 to create a new type of bank holding company, a financial holding company ("FHC"), which is permitted to engage in all activities permitted by a bank holding company as well as securities, merchant banking and insurance activities that were prohibited to BHCs.  GLBA also repeals Section 20 and 32 of the Glass-Steagall Act, which prohibited affiliations between a member bank and a company principally engaged in securities activities.  The activities of a BHC that does not qualify to become a FHC will be limited to those the Federal Reserve Board had, prior to enactment of GBLA, deemed closely related to banking.  In order to qualify as a FHC, each depository institution subsidiary of a BHC must be well capitalized, well managed and if insured have a satisfactory or better rating under the Community Reinvestment Act of 1977 ("CRA") as of its most recent examination and the BHC must file an election with the Federal Reserve Board certifying that it meets the requirements of a FHC.  GBLA expands the range of business opportunities for commercial banking organizations and


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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.     Business (Continued)

Supervision and Regulation (Continued)

enables banking companies and other types of financial companies such as securities, insurance and financial technology companies to combine more readily.  A FHC does not need to obtain prior Federal Reserve Board approval in order to engage in, or acquire a nonbank company that engages in financial activities.  The FHC only needs to provide notice to the Federal Reserve Board, describing the activity commenced or conducted by the acquired company, within 30 days after commencing the activity or consummating the acquisition.

Subsidiary Bank

FCB is a Pennsylvania-chartered bank and is subject to the supervision of and regularly examined by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation ("FDIC"), and subject to certain regulations of the Federal Reserve Board.  The areas of operation subject to regulation by Federal and Pennsylvania laws, regulations and regulatory agencies include reserves against deposits, maximum interest rates for specific classes of loans, truth-in-lending disclosures, permissible types of loans and investments, trust operations, mergers and acquisitions, issuance of securities, payment of dividends, Community Reinvestment Act evaluations, mandatory external audits, establishment of branches and other aspects of operations.  Under the Pennsylvania Banking Code, a state bank located in Pennsylvania may establish branches anywhere in the state.

Reciprocal Regional Interstate Banking

As already noted, a bank holding company located in one state cannot acquire a bank or a bank holding company located in another state unless the law of such other state specifically permits such acquisitions.  On June 25, 1986, Pennsylvania passed a law (Act No. 1986-69) which provides that a bank holding company located in any state or the District of Columbia can acquire a Pennsylvania bank or bank holding company if the jurisdiction where the acquiring bank holding company is located has passed an enabling law that permits a Pennsylvania bank holding company to acquire
a bank or a bank holding company in such jurisdiction.  As of December 31, 2001, enabling laws have been passed so that the required reciprocity presently exits with approximately 34 states, including New York, New Jersey, Ohio, Delaware, Maryland and West Virginia.  A similar law is applicable to savings associations and savings and loan holding companies. 

It is difficult to determine the precise effects that reciprocal regional interstate banking will have on the Corporation in the future, but the law has increased, and as reciprocity becomes effective for additional states will increase further, the number of potential buyers for Pennsylvania banks and bank holding companies.  The law also permits Pennsylvania bank holding companies and Pennsylvania savings and loan holding companies that desire to expand outside Pennsylvania to acquire banks, savings institutions and bank holding companies located in jurisdictions with which Pennsylvania has reciprocity.





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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.     Business (Continued)

Effects of Governmental Policies

The business and earnings of the Corporation are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States Government and its agencies, including the Federal Reserve Board.  An important function of the Federal Reserve Board is to regulate the national supply of bank credit.  Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open market operations in United States government securities, changes in the discount rate on borrowings by member banks and savings institutions from the Federal Reserve System and changes in reserve requirements against bank and savings institution deposits.  These instruments, together with fiscal and economic policies of various governmental entities, influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans, received on investments or paid for deposits.

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of bank holding companies and their subsidiary banks in the past and are expected to continue to do so in the future.  In view of changing conditions in the national and Pennsylvania economies and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels and loan demand or the effect of such changes on the business and earnings of the Corporation or its subsidiaries.

Changes in Regulations

Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies.  The likelihood and timing of any proposals or legislation and the impact they might have on the Corporation and its subsidiaries cannot be determined at this time.

ITEM 2.  Properties

The Corporation's principal office is located in the old Indiana County Courthouse complex.  This certified Pennsylvania and national historic landmark was built in 1870 and restored by the Corporation in the early 1970's.  The Corporation occupies this building, which provides 32,000 square feet of floor space, under a 25-year restoration lease agreement with Indiana County, which the Corporation entered into in 1973 and renewed during 1998 for an additional 25 years.  In order to support future expansion needs and centralization of various functional areas such as loan processing, marketing, and accounting, the Corporation also owns two additional structures.  FCB has 89 banking facilities of which 23 are leased and 66 are owned.  Management presently expects that such facilities will be adequate to meet the anticipated needs of the Corporation and its subsidiaries for the immediate future.

ITEM 3.  Legal Proceedings

Information appearing in Note 23 to the Consolidated Financial Statements on page 76 is incorporated herein by reference in response to this item.



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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 4.  Submission of Matters to Vote of Security Holders

There were no matters submitted to vote by security holders in the fourth quarter of 2002.

Part II

ITEM 5.  Market for Registrant's Common Stock and Related Security Holder
         Matters

First Commonwealth Financial Corporation (the "Corporation") is listed on the New York Stock Exchange under the symbol "FCF".  The approximate number of holders of record of the Corporation's common stock is 13,500.  The table below sets forth the high and low sales prices per share and cash dividends declared per share for common stock of the Corporation.

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 6.  Selected Financial Data (Dollar Amounts in Thousands, except
         per share data)

The following selected financial data is not covered by the auditor's report and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the consolidated financial statements and related notes.  All amounts have been restated to reflect the pooling of interests.  Financial statement amounts for prior periods have also been reclassified to conform to the presentation format used in 2002.  The reclassifications had no effect on the Corporation's financial condition or results of operations.

(a) Where applicable, per share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on October 19, 1999.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (the "Corporation") for the years ended December 31, 2002, 2001 and 2000 and are intended to supplement, and should be read in conjunction with, the consolidated financial statements and related footnotes.

Sections of this financial review, as well as the notes to the consolidated financial statements, contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995), which reflect management's beliefs and expectations based on information currently available and may contain the words "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," "objective," and similar expressions or variations on such expressions.  These forward-looking statements are inherently subject to significant risks and uncertainties, including but not limited to:  changes in general economic and financial market conditions, the Corporation's ability to effectively carry out its business plans, changes in regulatory or legislative requirements, changes in competitive conditions and continuing consolidation of the financial services industry.  Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results could differ materially.  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof.  The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

The Corporation acquired all of the outstanding shares of Strategic Capital Concepts, Inc. ("SCC") and Strategic Financial Advisors, Inc. ("SFA"), effective March 1, 2002.  As required under the purchase method of accounting, the results of SCC and SFA from the date of acquisition were included in the Corporation's financial statements for 2002.  As a registered investment advisor, Strategic Capital Concepts provided financial planning, asset management and consulting services to individuals, businesses, retirement plans, trusts and estates.  Strategic Financial Advisors offered investment and insurance products as well as employee benefit services.  In October 2002, SFA was merged into SCC and the name was changed to First Commonwealth Financial Advisors, Inc., which also offers insurance products through First Commonwealth Insurance Agency, an affiliate.  This acquisition will expand the Corporation's product offerings and positively impact fee based revenue, which continues to be a priority.

Financial statement amounts in prior periods have been reclassified to conform to the presentation format used in 2002.  The reclassifications had no effect on the Corporation's financial condition or results of operations.





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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations

Net income was $43.5 million in 2002, a decline of $6.7 million from 2001 results of $50.2 million and compared to $47.2 million registered in 2000.

Net income for 2002 was negatively impacted by the effects of $6.1 million of restructuring costs and an $8.0 million litigation settlement.  The restructuring charges consisted principally of severance amounts paid to employees as part of the plan to consolidate the multiple bank charters and develop the First Commonwealth brand and identity for all of the financial services subsidiaries.  Payments to retiring directors as part of the realignment for the Corporation's new vision on corporate governance also were included in restructuring charges.  The litigation settlement related to a lender liability action filed in 1994 against one of the Corporation's subsidiary banks and followed an adverse pre-trial judgment by the trial judge on procedural grounds.  Net of tax, these nonrecurring charges reduced net income by $9.2 million in 2002.  Also impacting 2002 results were expenses of $1.8 million ($1.2 million after tax) related to development of the First Commonwealth brand.  The merger of banking operations as well as the establishment of the First Commonwealth branding will help provide our clients with greater flexibility, efficiency and seamless service throughout our market footprint. 

The increase in net income for 2001 resulted primarily from increases in net interest income, gains on sale of assets and insurance commissions of $4.4 million, $1.8 million and $1.2 million, respectively.  Gains on sale of assets included securities gains of $3.3 million and $1.7 million in 2001 and 2000, respectively as well as a $999 thousand gain on the sale of a branch and block of mortgages in 2001. 

Diluted earnings per share was $0.74 for 2002 compared to $0.86 and $0.82 for 2001 and 2000, respectively.  Return on average assets was 0.96% and return on equity was 11.09% during 2002 compared to 1.11% and 13.85%, respectively for 2001.  Return on average assets was 1.10% during 2000 as return on average equity reached 15.65%. 





















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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

The following is an analysis of the impact of changes in net income on diluted earnings per share:

  
Core net income excluding nonrecurring charges as well as securities gains and any nonrecurring gains for 2002 was $52.3 million, an increase of $4.9 million or 10.4% over core net income of $47.4 million for 2001. Core diluted earnings per share was $0.89 per share, a rise of $0.07 or 8.5% compared to the $0.82 achieved in 2001.  Core return on average assets for 2002 advanced to 1.15% compared to 1.05% for 2001 as core return on shareholders' equity for 2002 also improved on a year to year basis.

















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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Results of Operations (Continued)

Net interest income, the engine that powers revenue growth for the Corporation, is defined as the difference between income on earning assets and the cost of funds supporting those assets.  Net interest income rose to $152.9 million in 2002 compared to $141.7 million in 2001 and $137.3 million in 2000.  The following is an analysis of the average balance sheets and net interest income for each of the three years in the period ended December 31, 2002.



























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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations
          (Continued)

Results of Operations (Continued)

(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35%
    Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are
    included in interest-earning assets.
(c) Loan income includes net loan fees.
(d) Average balances do not include reallocations from noninterest-bearing demand deposits and
    interest-bearing demand deposits into savings deposits which were made for regulatory
    purposes.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Both interest income and interest expense fell compared to 2001 levels primarily as the result of the dramatic decrease in interest rates that began in 2001 and continued into 2002.  Earning asset yields, on a tax-equivalent basis, declined 77 basis points (0.77%) during 2002 to 6.66% from 7.43% registered in 2001, after decreasing from 7.87% in 2000.  The cost of funds for 2002 dropped 117 basis points (1.17%) below 2001 costs of 4.44%, after decreasing 37 basis points (0.37%) from 2000 costs of 4.81%.  Average earning assets were $4,294.5 million and average interest-bearing liabilities were $3,746.9 million for 2002, basically flat when compared to 2001 averages in both components.

Interest and fees on loans declined $22.3 million for 2002 compared to 2001 levels primarily as yields declined in the lower interest rate environment.  Loan yields fell 98 basis points (0.98%) during 2002 to 7.13% from 8.11% for 2001 after a decline of 39 basis points (0.39%) from the 2000 level.  Time and demand loan yields fell 149 basis points (1.49%) and the yields on home equity and personal lines of credit declined 163 basis points (1.63%) and 234 basis points (2.34%), respectively compared to the prior year.

The increase in average loan volumes was not enough to offset the reduced interest income caused by declining yields.  During 2002, the Corporation took advantage of the lower interest rate cycle and continued to change the mix of the loan portfolio.  Average mortgage loans declined as consumers refinanced their loans at near record levels.  The Corporation continued to offer competitive mortgage loans but generally sold them immediately after origination along with the related servicing rights.  Average commercial and municipal loans offset the decline in 1-4 family mortgage loans and grew $159.7 million, primarily in shorter term and variable rate lending.  The Corporation has continued to capitalize on lending opportunities with small to mid-sized commercial borrowers, including loans generated through its preferred Small Business Administration ("SBA") lender status.  The Corporation was one of the top small business lenders in Pennsylvania during 2002 and 2001.

Interest income on investments declined $10.5 million for 2002 compared to 2001 primarily due to interest rate decreases.  Yields on investments for 2002 continued to decline, falling to 5.95% compared to 6.45% for 2001 and 6.88% for 2000.  All categories of interest income on investments were negatively impacted by interest rate changes with the largest decline registered in the U.S. Government Agency category, declining $8.3 million or 54 basis points (0.54%) for 2002 compared to 2001.  Prepayment speeds of mortgage backed securities ("MBS") continued to accelerate in 2002 as interest rates continued to decline.  Interest rate changes have a direct impact on prepayment speeds.  As interest rates increase, prepayments tend to decline and average lives of MBS increase.  As interest rates decrease, prepayment speeds tend to increase and average lives of MBS decline and accelerates the amount of premium amortization that is realized, further reducing the yields in current periods.  Using computer simulation modeling, the Corporation tests the average life and yield volatility




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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)


of all MBS under various interest rate scenarios on a continuing basis to insure that volatility falls within acceptable limits.  The Corporation holds no "high risk" securities nor does the Corporation own any securities of a single issuer exceeding 10% of shareholders' equity other than U.S. government and agency securities.

Interest on deposits dropped $39.6 million for 2002 compared to 2001 primarily due to decreases due to interest rates of $33.7 million.  The rate on savings deposits fell 106 basis points (1.06%) resulting in a decrease to interest expense of $7.7 million for 2002 compared to 2001, while the rate on time deposits for 2002 also declined, down 137 basis points (1.37%), compared to 2001 resulting in a decrease to interest expense of $21.8 million.  Although average deposits declined compared to 2001, the deposit mix changed as clients registered a preference for savings products which jumped $43.7 million or 6.4%, while time deposits dropped $135.5 million or 7.8% due to the continuing economic uncertainties.  Average demand deposit balances for 2002 also advanced, up $11.9 million over 2001 balances and represents the highest level in the Corporation's history.  This rise is due principally to the success of the Corporation's "High Performance Checking" product which was rolled out in 2002 and focuses on growing low cost deposits.

Interest expense on short-term borrowings decreased $5.2 million during 2002 primarily as a result of rate decreases of $6.7 million offset in part by volume increases of $1.5 million.  Average short-term borrowings rose by $39.7 million for 2002 compared to 2001 while the cost of short-term borrowings fell by 197 basis points (1.97%) compared to the prior year.  All categories of short-term borrowing costs declined year to year.

Interest expense on long-term debt increased $294 thousand for 2002 compared to the 2001 period as increases due to volume of $410 thousand were partially offset by decreases due to rate of $116 thousand.  Average long-term debt for 2002 rose by $7.2 million compared to 2001 as maturities were extended for short-term borrowings from the Federal Home Loan Bank to take advantage of the lower interest rate environment.  Long-term debt includes capital securities borrowings in the amount of $35 million, which were issued during 1999, bearing an interest rate of 9.50% and maturing in thirty years.  The proceeds were used by the Corporation in connection with the repurchase of common shares.  (See Note 15 to the financial statements for a description of the company obligated mandatorily redeemable capital securities of subsidiary trust.)

Net interest margin (net interest income, on a tax-equivalent basis as a percentage of average earning assets) improved to 3.80% for 2002, a rise of 27 basis points (0.27%) compared to 2001.  The year to year increase in the margin was due to the cost of funds declining more quickly than asset yields as interest rates fell to historic lows.  Continued pressure on net





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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

interest income is anticipated by the Corporation despite active management of interest rate risk.  The Corporation's use of computer simiulation to manage interest rate risk is described in the "Interest Sensitivity" section of this discussion.

The following table shows the effect of changes in volumes and rates on interest income and interest expense:

The provision for credit losses is an amount added to the allowance against which credit losses are charged.  The amount of the provision is determined by management based upon its assessment of the size and quality of the loan portfolio and the adequacy of the allowance in relation to the risks inherent within the loan portfolio.  The provision for credit losses was $12.2 million in 2002 compared to $11.5 million in 2001 and $10.0 million in 2000.  The allowance for credit losses was $34.5 million at December 31, 2002, which represents a ratio of 1.33% of average loans outstanding, down slightly from the 1.34% reported at December 31, 2001.  Net charge-offs for 2002 rose $945 thousand over 2001 levels.  The most significant components of this year to year change were increases in the following categories:  commercial loans not secured by real estate (up $1.0 million), secured by 1-4 family real estate (up $661 thousand) and other loans (up $925 thousand).  These increases were partially offset by decreases in commercial real estate loans of $985 thousand and revolving credit loans secured by 1-4 family real estate of $411 thousand.  Net charge-offs as a percent of average loans outstanding at December 31, 2002 were 0.46% compared to 0.43% and 0.40% at December 31, 2001 and 2000, respectively.  For an analysis of credit quality, see the "Credit Review" section of this discussion.






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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

The following table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31, 2002 (Dollar Amounts in Thousands):

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Net securities gains declined $2.7 million during 2002 from the $3.3 million reported in 2001 and compared to $1.7 million in 2000.  The securities gains during 2002 resulted primarily from the sales of Pennsylvania bank stocks, U.S. Treasury securities and fixed rate corporate bonds classified as securities "available for sale" with book values of $1.1 million, $1.5 million and $3.0 million, respectively.  The securities gains during 2001 resulted primarily from the sale of fixed rate corporate bonds classified as "available for sale" and Pennsylvania bank stocks with book values of $37.4 million and $12.7 million respectively.  The securities gains recognized during 2000 were principally related to the sale of Pennsylvania bank stocks with a book value of $19.9 million.

Trust income of $5.0 million for 2002 was flat compared to 2001 following a $560 thousand decline from 2000.  Although fee revenue continues to be negatively impacted due to low market values, the enhanced referral programs and integrated growth plans for financial affiliates that have been initiated have helped to offset this trend.  The Corporation's continued success in building relationships with commercial clients provides fee based affiliates with additional sales opportunities through the Total Solutions Financial Management ("TSFM") process.  This strategy combines products, services and professional staff from the Corporation's trust, insurance, financial advisory and banking affiliates and partners them in providing comprehensive financial services offerings.

Service charges on deposits are the most significant component of non-interest income and increased $378 thousand for 2002 compared to 2001.  Increases in insufficient funds fees "NSF", bank club and account analysis   fees helped pace the year to year rise.  Standardization of service fee routines accomplished during conversion of the Corporation's deposit system during 2001, and added emphasis on collection of fees had a positive effect on fee revenue for 2002.  Service charges on deposits increased $598 thousand for 2001 compared to 2000 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.





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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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.


22
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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 expense.  The 2001 period also included increases in depreciation on computer software and software maintenance compared to 2000.  Computer software depreciation and maintenance increases were principally related to the replacement of software utilized by the Corporation's data processing subsidiary to process loan and deposit accounts.  The 2002 period was also impacted, as a full year of depreciation as well as maintenance was incurred for systems placed in service during the later part of 2001.  The new application software has enabled the Corporation's banking subsidiary to provide enhanced products and services, including internet banking.  Technology advances continue to drive the ability of financial services companies to provide expanded services through traditional channels as well as non traditional and emerging delivery systems to meet the changing needs of our clients.

Outside data processing expense fell $1.2 million for the 2002 period to $2.1 million compared to $3.3 million for 2001 and 2000.  This category was positively impacted by the conversion of Southwest Bank from outsourced processing to that provided by a subsidiary of the Corporation.  Outside data processing costs are managed by the Corporation's data processing subsidiary along with management of internal data processing costs.  Outsourced data processing needs are evaluated based on technology, efficiency and cost considerations. 

Adoption of FAS No. 142 resulted in no goodwill amortization for 2002 compared to $920 thousand for 2001 and $865 thousand for 2000.  Under the new pronouncement, goodwill amortization was discontinued January 1, 2002.  Goodwill is now subject to evaluation for impairment on an annual basis.

Other operating expenses for 2002 increased $3.8 million or 14.3% to $30.2 million for 2002 compared to $26.4 million for 2001 and the $24.0 million reported for 2000.  The 2002 period includes increased loss on sale of assets of $472 thousand, due primarily to the loss on sale of vehicles

23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

previously leased, compared to 2001.  Other professional fees rose by $822 thousand over 2001 and included consulting fees related to implementation  of the Corporation's "Balanced Scorecard" performance measurement system, enhancements to product and customer profitability systems, corporate restructuring and common branding and identity.  Consultants are also being utilized to assist in the ongoing efforts to develop a world class sales culture and to generate new deposit dollars and relationships.  Corporate restructuring and movement towards a sales culture also impacted the decision to have employee benefit plans reviewed by outside specialists during 2002.  Advertising and promotions expenses rose a combined $2.3 million for the 2002 period due partially to expenditures related to the $1.8 million launch of the new Corporate brand and identity.  This exciting campaign is designed to educate and build enthusiasm among current as well as potential clients and the communities we serve.  Also impacting these categories were expenses incurred in the successful marketing campaign for free checking products introduced during 2002.  These products are expected to have a favorable impact on deposit growth, interest expense and service charge revenue in future periods as well as providing potential add-on sales of other financial products and services.  Expenditures for the branding efforts and marketing campaigns are expected to continue in 2003.

Included in other operating expense increases for 2001 compared to 2000 were increases in filing and recording fees, legal fees, other professional fees and telephone expense of $165 thousand, $216 thousand, $666 thousand and $352 thousand, respectively.  The 2001 period also included increases in losses on sale of leased vehicles and increased postage and printing costs related to privacy legislation and changes due to standardization during 2001 system conversions.  The 2001 period included decreases in insurance expense, Pennsylvania use tax, promotions and deferred loan origination costs compared to 2000 levels.

Other operating expense for the 2000 period included increases in collection and repossession expenses.  FDIC expense rose $180 thousand during 2000 due to standardization of insurance fund rates.  Other operating expenses for 2000 also included increases in advertising and promotions, express freight charges, charge card interchange and checkbook printing expenses which were partially offset by decreases in other professional fees, postage and printing costs.

Income tax expense was $8.9 million during 2002 representing a decrease of $6.4 million below the 2001 amount of $15.3 million and compared to $14.3 million in 2000.  The Corporation's effective tax rate was 17.0% for 2002 compared to 23.3% for 2001 and 23.2% for 2000.  Excluding the nonrecurring charges (litigation settlement and corporate restructuring) and rebranding costs, the Corporation's effective tax rate would have been 21.2% in 2002.  The Corporation's effective tax rate continues to be favorably impacted by tax-free income from securities and bank owned life insurance.

Liquidity

Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors.  In the ordinary course of business, funds are generated from deposits (primary source) and the maturity or repayment of earning assets, such as securities
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity (Continued)

and loans.  As an additional secondary source, short-term liquidity needs
may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank.  Additionally, the Corporation's banking subsidiary is a member of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements.  The sale of earning assets may also provide an additional source of liquidity.  In addition to the previously described funding sources, the Corporation also has the ability to access the capital markets.

Liquidity risk stems from the possibility that the Corporation may not be able to meet current or future financial obligations, or the Corporation may become overly reliant on alternative funding sources.  The Corporation maintains a liquidity risk management policy to manage this risk.  This policy identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements which comply with regulatory requirements.  The policy also includes a liquidity contingency plan to address funding needs to maintain liquidity under a variety of business conditions.  The Corporation's liquidity position is monitored by the "Asset/Liability Management Committee ("ALCO").

The Corporation's long-term liquidity source is a large core deposit base and a strong capital position.  Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer.  Deposits decreased $49.0 million in 2002 and included decreases in noninterest-bearing deposits and time deposits which were partially offset by increases in savings deposits.  Non-core deposits which are time deposits in denominations of $100 thousand or more represented 16.1% of total deposits at December 31, 2002.  Non-core deposits decreased by $7.6 million in 2002 and rose $41.9 million in 2001 due in part to changes in public funds balances.  The increase in non-core deposits during 2001 also included the issuance of brokered time deposits in the amount of $5.0 million.

Although the Corporation's primary source of funds remains traditional deposits from within the communities served by its banking subsidiary, future sources of deposits utilized could include the use of brokered time deposits offered outside the Corporation's traditional market area.  Time deposits of $100 thousand or more at December 31, 2002, 2001 and 2000 had remaining maturities as follows:

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity (Continued)

Net loans increased $40.4 million during 2002 as commercial loans increased by $74.9 million and loans to individuals increased by $31.6 million compared to year-end 2001.  The 2002 period reflected decreases of $110.8 million in residential real estate loans, due in part to the continued runoff of the existing portfolio and sale of new loan production as the Corporation continued to change the mix of its loans.

Below is a schedule of loans by classification for the five years ended December 31, 2002:

An additional source of liquidity is marketable securities that the Corporation holds in its investment portfolio.  These securities are classified as "securities available for sale".  While the Corporation does not have specific intentions to sell these securities, they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies.  As of December 31, 2002, securities available for sale had an amortized cost of $1,443 million and an approximate fair value of $1,483 million.  Gross unrealized gains were $41.8 million and gross unrealized losses were $2.0 million.

Based upon the Corporation's historical ability to fund liquidity needs from other sources, the current available for sale portfolio is deemed more than adequate, as the Corporation does not anticipate a need to liquidate the investments until maturity.  Below is a schedule of the contractual maturity distribution of securities held to maturity and securities available for sale at December 31, 2002:

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Liquidity (Continued)

* Yields are calculated on a tax-equivalent basis.

Interest Sensitivity

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, currency exchange rates or equity prices.  The Corporation's market risk is composed primarily of interest rate risk.  Interest rate risk results principally from timing differences in the repricing of assets and liabilities, changes in the relationship of rate indices and the potential exercise of free standing or embedded options.

The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances.  While no single number can accurately described the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps", when measured over a variety of time periods, can be informative.

An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period.  If interest-sensitive assets ("ISA") exceed interest-sensitive liabilities ("ISL") during a prescribed time period, a positive gap results.  Conversely, when ISL exceeds ISA during a time period, a negative gap results.

The cumulative gap at the 365 day repricing period was negative in the amount of $300 million or 6.63% of total assets at December 31, 2002.  A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the time period.  A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.  In other words, as interest rates fall, a negative gap should tend to produce a positive effect on earnings and when interest rates rise, a negative gap should tend to affect earnings negatively.

27

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Interest Sensitivity (Continued)

The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments.  The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings.

The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of December 31, 2002 and 2001 (Dollar Amounts in Thousands):

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Interest Sensitivity (Continued)

Although the periodic gap analysis provides management with a method of measuring current interest rate risk, it only measures rate sensitivity at a specific point in time, and as a result may not accurately predict the impact of changes in general levels of interest rates or net interest income.  This is exemplified as the gap analysis shows the Corporation's earnings to be negatively impacted by rising rates, but computer modeling indicates that rising rates would have a favorable impact on earnings.  Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest income, management simulates the potential effects of changing interest rates through computer modeling.  The income simulation model used by the Corporation captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates.  These variables include prepayment speeds on mortgage loans and mortgage backed securities, cash flows from loans, deposits and investments and balance sheet growth assumptions.  The model also captures embedded options, such as interest rate caps/floors or call options, and accounts for changes in rate relationships as various rate indices lead or lag changes in market rates.  The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or lag in a deposit rate increase.  The repricing strategies for loans would be inversely related.

The Corporation's asset/liability management policy guidelines limit interest rate risk exposure for the succeeding twelve month period.  Simulations are prepared under the base case where interest rates remain flat, and most likely case where interest rates are defined using projections of economic factors.  Additional simulations are produced estimating the impact on net interest income of a 300 basis point (3.00%) movement upward or a 100 basis point movement downward which cannot result in more than a 7.5% change or 5.0% change, respectively, in net interest income when compared to the base case, without Board approval and a strategy in place to reduce interest rate risk below the established maximum level.  These policy guidelines were changed from simulating a 300 basis point (3.00%) rise and a 300 basis point (3.00%) decline from the base case which could not result in more than a 7.5% change in net interest income, either up or down because the probability of interest rates declining by 300 basis points over the next 12 months is not likely.  The analysis at December 31, 2002 indicated that a 300 basis point (3.00%) increase in interest rates would increase net interest income 208 basis points (2.08%) above the base case scenario and a 100 basis point (1.00%) decline in interest rates would decrease net interest income by 276 basis points (2.76%) below the base case scenario, over the next twelve months, both within policy limits.

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


29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Interest Sensitivity (Continued)

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 ALCO continues to evaluate the use of derivative instruments to protect against the risk of adverse price or interest rate movements on the values of certain assets and liabilities, although none are being utilized currently.

Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans and before unearned income at December 31, 2002, were as follows (Dollar Amounts in Thousands):

Credit Review

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, documentation and terms.  The


30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Review (Continued)

principal factor used to determine potential borrowers' creditworthiness is business cash flows or consumer income available to service debt payments.  Secondary sources of repayment, including collateral or guarantees, are frequently obtained.

The lending policy provides limits for individual and bank committees 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.

Commercial and industrial loans are generally granted to small and middle market customers for operating, 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.

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 loans are expected from the operations of the subject real estate and are 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 each 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 creditworthiness is evaluated on the basis of ability to repay, stability of income sources and past credit history.



31


FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Review (Continued)

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 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.















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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Review (Continued)

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, lodging and energy.

Other than those described below, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms.  The following table identifies nonperforming loans at December 31.  A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt.  Past due loans are those loans which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection.  Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower.

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Credit Review (Continued)

The reduction of income due to renegotiated loans was less than $50 thousand in any year presented.

Nonperforming loan levels at December 31, 2002 decreased $3.1 million compared to 2001 levels as decreases in past due loans and renegotiated loans were slightly offset by an increase in nonaccrual loans.  Nonaccrual loans include two significant credits in both periods.  The largest credit ($6.2 million) carries an 80% guaranty of U.S. government agency.  While approximately $2.9 million is expected to be collected in the second quarter of 2003 as a sale of the underlying assets is pending, the remaining balance should be resolved early in the third quarter of 2003.  The second credit, which was $5.9 million at year-end 2001, continues to be resolved through the liquidation of collateral and exercising other remedies.  The balance outstanding at December 31, 2002 for this credit was $3.2 million.  While the final resolution of this credit is uncertain, management's estimate of the potential loss on this credit is reserved.

Past due loans for the 2002 period decreased $3.0 million compared to the corresponding period of 2001 and included decreases in all major categories including loans secured by residential real estate (down $814 thousand),
commercial real estate (down $999 thousand) and other loans (down $865 thousand).  Renegotiated loans also fell, decreasing by $625 thousand for the 2002 period.  Nonperforming loans as a percentage of total loans was 1.47% at December 31, 2002, down from the 1.62% reported at December 31, 2001.
 
The Corporation's loan portfolio continues to be monitored by senior management to identify potential portfolio risks and detect potential credit deterioration in the early stages.  The Corporation has a "Watchlist Committee" which includes credit workout officers of the bank and meets bi-weekly to review watchlist credits for workout progress or deterioration.  Loan loss adequacy and the status of significant nonperforming credits are monitored on a quarterly basis by a committee made up of senior officers of the bank and parent company.  These committees were established to provide additional internal monitoring and analysis in addition to that provided by the Credit Committees of the bank and parent company.  Credit risk is mitigated during the loan origination process through the use of sound underwriting policies and collateral requirements and its previously described committee structure.  Management also attempts to minimize loan losses by analyzing and modifying collection techniques on a periodic basis.  Management believes that the allowance for credit losses and nonperforming loans remained safely within acceptable levels.

Capital Resources

Equity capital stood at $401.4 million at December 31, 2002, a $31.3 million rise compared to December 31, 2001.  Dividends declared reduced equity by $35.6 million during 2002 as dividends were increased over 2001


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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Capital Resources (Continued)

levels.  The retained net income of $7.9 million remained in permanent capital to fund future growth and expansion.  Long-term debt payments and fair value adjustments to unearned ESOP shares increased equity by $1.2 million.  The market value adjustment to securities available for sale increased equity by $17.1 million in 2002.  Amounts paid to fund the discount on reinvested dividends reduced equity by $637 thousand.  Proceeds from the issuance of treasury shares to provide for stock options exercised increased equity by $5.5 million during 2002, while the tax benefit related to the stock options, increased equity by $224 thousand.

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 25 to the Consolidated Financial Statements for an analysis of regulatory capital guidelines and the Corporation's capital ratios relative to these measurement standards.

Risk Management

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, operational 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 - arises from violations of, or non-compliance 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 - this risk arises 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.

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 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

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Risk Management (Continued)

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 risks 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 reviewed by the Risk Committee, while management continually reviews the mitigants and controls to ensure their continuity with internal audit validating their existence and effectiveness.  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 non-monetary, 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 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.  In addition, the Corporation annually retains outside experts to test potential high-risk areas such as Internet based 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.  

Inflation and Changing Prices

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 effect of inflation upon its performance.  However, it must be remembered that the asset and liability structure of a financial



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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Inflation and Changing Prices (Continued)

institution is substantially different from an industrial corporation in that virtually all assets and liabilities are monetary in nature, meaning that they have been or will be converted into a fixed number of dollars regardless of changes in general price levels.  Examples of monetary items include cash, loans and deposits.  Nonmonetary items are those assets and liabilities which do not gain or lose purchasing power solely as a result of general price level changes.  Examples of nonmonetary items are premises and equipment.

Inflation can have a more direct impact on categories of noninterest expenses such as salaries and wages, supplies and employee benefit costs.  These expenses are very closely monitored by management for both the effects of inflation and increases relating to such items as staffing levels, usage of supplies and occupancy costs.

ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk

Information appearing in Item 7 of this report under the caption "Interest Sensitivity" is incorporated herein by reference in response to this item.

































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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)