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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
INDEX

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

PART I

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, First Commonwealth Financial Advisors and First Commonwealth Insurance Agency.  The Corporation also operates through First Commonwealth Systems Corporation, a data processing subsidiary and First Commonwealth Professional Resources Inc., a subsidiary providing professional services to affiliated organizations.

First Commonwealth Bank ("FCB") is a Pennsylvania-chartered banking corporation headquartered in Indiana, Pennsylvania.  Through FCB, the Corporation traces its banking origins to 1866.  FCB conducts business through 103 community banking offices in the counties of Allegheny (22), Armstrong (2), Beaver (1), Bedford (4), Blair (8), Butler (2), Cambria (10), Centre (1), Clearfield (5), Elk (3), Huntingdon (4), Indiana (9), Jefferson (3), Lawrence (5), Somerset (6), Washington (1) and Westmoreland (17).  FCB engages in general banking business and offers a full range of financial services including traditional retail banking services such as savings and time deposits and mortgage, consumer installment and commercial loans.

Since its inception, FCB has grown primarily through the acquisition of smaller banks and savings associations throughout Western Pennsylvania.  FCB continued to operate locally under the trade names of the acquired banks until October 2002, when all of the branch offices of FCB and its affiliates were consolidated under the common brand "First Commonwealth."  In October 2002, the Corporation unveiled a new logo, colors, and signage through an aggressive marketing strategy to reintroduce First Commonwealth to the marketplace.  As a result of these efforts, all of First Commonwealth Bank's community offices now 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. 

During 2003 and 2004, the Corporation took steps to increase its presence in the Pittsburgh, Pennsylvania market by acquiring Pittsburgh Financial Corp. ("PFC") and GA Financial, Inc. ("GAF").  PFC was a financial holding company that was headquartered in Wexford, Pennsylvania, and was the parent company of Pittsburgh Savings Bank (d/b/a BankPittsburgh).  GAF was a savings and loan holding company that was headquartered in Whitehall, Pennsylvania.  The branches formerly operated by PFC and GAF are now operating under the First Commonwealth Bank name.

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.  Business (Continued)

Description of Business (Continued)
 
FCB operates a network of 105 automated teller machines ("ATMs") which permit customers to conduct routine banking transactions 24 hours a day.  Of the ATMs, 84 are located on the premises of branch offices and 21 are in offsite locations, such as supermarkets, shopping malls and other commercial centers.  All the ATMs are part of the STAR and MasterCard/Cirrus networks.  The STAR network consists of over 260,000 ATMs owned by numerous banks, savings and loan associations and credit unions from coast to coast and serves more than 139 million ATM/debit cardholders and more than 6,200 financial institution members.  The MasterCard/Cirrus network which is comprised of more than 900,000 ATMs located in the United States, Canada and more than 200 other countries and territories, which services over 679 million card holders.  These networks allow FCB clients to withdraw cash and, in certain cases, conduct other banking transactions from ATMs of all participating financial institutions.

FCB is also a member of the 28-bank Freedom ATM Alliance.  The Freedom ATM Alliance gives cardholders of the First Commonwealth Check Card surcharge-free access to a network of more than 600 ATMs in 50 counties, extending north into New York, south into Maryland and west into Ohio, with a majority of the ATMs located in southwestern Pennsylvania.

In addition to the access of funds through the use of ATMs, the STAR debit card offered to FCB's deposit clients may be used at over 1 million point-of-sale retail locations on the STAR system as well as the global MasterCard system for the purchase of goods and services.  The STAR debit card combines the universal acceptability of a credit card with the convenience of direct debit to the clients' checking account.

First Commonwealth Systems Corporation ("FCSC") functions as the Corporation's data processing subsidiary.  FCSC provides on-line general ledger accounting services and bookkeeping services for deposit and loan accounts to FCB and other non-bank subsidiaries of the Corporation.  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.  FCSC competes principally with outside data processing companies as well as 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. 

First Commonwealth Trust Company ("FCTC") is a Pennsylvania chartered trust company that provides general trust services through its headquarters in Indiana, Pennsylvania.  FCTC has six branch offices throughout FCB's market area.  FCTC 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") is a wholly-owned subsidiary of FCB that provides a full range of insurance and annuity products to retail and commercial clients.





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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.  Business (Continued)

Description of Business (Continued)

First Commonwealth Financial Advisors ("FCFA") was formed in 2002 and offers financial planning, asset management and consulting services to individuals, businesses, retirement plans, trusts and estates.  FCFA also offers insurance products through FCIA.  FCFA's office is located in Allegheny County in Pennsylvania.

The Corporation owns 50% of Commonwealth Trust Credit Life Insurance Company ("Commonwealth Trust").  Commonwealth Trust provides reinsurance for credit life and credit accident and health insurance sold by subsidiaries of the Corporation and the other 50% owner of Commonwealth Trust.  The Corporation is allocated net income derived from the sale of reinsurance if underlying insurance policy is sold to customers of First Commonwealth Bank.

The Corporation operates and manages all client services in an integrated fashion through what is referred to as its "Growth Unit."  The Growth Unit is comprised of the four revenue-producing subsidiaries of the Corporation: First Commonwealth Bank, First Commonwealth Trust Company, First Commonwealth Insurance Agency and First Commonwealth Financial Advisors.  Through the Growth Unit, the Corporation delivers our core competencies of banking, insurance, trust, financial management and investment services. 

The Corporation and its subsidiaries employed approximately 1,634 (full-time equivalent) employees at December 31, 2004.  The Corporation does not currently 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 that 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

The Growth Unit faces intense competition, both from within and outside of their service areas, in all aspects of its business.  For example, FCB competes for deposits and consumer and small business loans with numerous other commercial banks and savings banks doing business within its service area.  FCB also competes with state and federally chartered savings and loan associations and with credit unions, primarily in making consumer loans and for deposits.  In recent years, FCB has also encountered significant competition for deposits from money market funds, mutual funds and institutions that offer annuities located throughout the United States.  Money market and mutual funds pay dividends to their shareholders (which are similar to interest 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 his or her funds for a fixed period of time or until death.  In order to compete for deposits, banks, such as FCB, must offer higher interest rates on deposits, resulting in increased costs and lower net interest margins.  FCB also competes for consumer loans with local offices of national finance companies, finance

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.  Business (Continued)

Competition (Continued)

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. In order to remain competitive, FCB must maintain conveniently located and attractive branch offices and ATMs, provide courteous and sophisticated service, and competitive interest rates on deposits and loans.  To enhance it competitive position, FCB and the other Growth Unit affiliates must offer financial services that target specific client needs.  The Corporation has taken steps to integrate product offerings of our bank, insurance agency, trust company and financial advisory affiliates through its "Total Solutions Financial Management" initiative.  This initiative has been positively received by our clients.  The Corporation has also implemented technological improvements to meet client needs, such as telephone banking, which provides convenient access to financial services and hours of operation that extend past those of the FCB branch offices, and Internet-based banking solutions through "WebBank" and "BillPay."  WebBank provides clients with access to bank account information via the Internet 24 hours a day, 7 days a week.  WebBank allows clients to monitor their account balances and transaction history, transfer funds between accounts, issue stop payments and request online customer service such as copies of checks or statements.  BillPay is an Internet bill payment and presentment service that allows clients to pay bills online. 

Supervision and Regulation

Bank Holding Company Act

As a bank holding company, the Corporation is subject to the provisions of the Bank Holding Company Act of 1956, as amended.  The Corporation is registered with and subject to supervision and regulation by the Federal Reserve Board.  As a registered bank holding company, the Corporation is required to file an annual report and other information with the Federal Reserve Board, and the Corporation and its subsidiaries are subject to examinations and inspections by the Federal Reserve Board.

The Bank Holding Company Act and Regulation Y of the Federal Reserve Board require every bank holding company to obtain 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.









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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 nonbank business or acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any nonbank corporation subject to certain exceptions.  The principal exception is 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

The Sarbanes-Oxley Act of 2002 addresses important issues for all public companies in the areas of corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information.  In accordance with Section 302(a) of the Sarbanes-Oxley Act, the Corporation's Chief Executive Officer and Chief Financial Officer are each required to certify that the Corporation's quarterly reports on Form 10-Q and its annual report on Form 10-K do not contain any untrue statement of a material fact.  In addition, these officers certify that (1) they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Corporation's internal controls; (2) 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 (3) 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 Corporation has implemented a program designed to comply with Section 404 of the Sarbanes-Oxley Act which includes the identification of significant processes and accounts, documentation of the design of control effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. 

In order to strengthen its corporate governance practices, the Corporation revised it Code of Conduct and Ethics.  In addition, the Corporation formed a Financial Disclosure Committee.  Members of the Financial Disclosure Committee include the Chief Executive Officer, Chief Financial Officer and other key members of the Corporation's management team.  The Corporation also requires validation of controls and signed certifications from managers who are responsible for internal controls throughout the Company as to the integrity of the information they prepare.


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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.  Business (Continued)

Supervision and Regulation (Continued)
 
Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act ("GLBA") of 1999 revolutionized the regulation of financial services companies.  GLBA amended 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 repealed 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 do not qualify as activities of a FHC will be limited to those that the Federal Reserve Board had, prior to enactment of GLBA, 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.  The BHC must file an election with the Federal Reserve Board certifying that it meets the requirements of a FHC.  GLBA expanded the range of business opportunities for commercial banking organizations and enabled 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. 

GLBA also required financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties.  The statute requires disclosure of privacy policies to consumers and, in some circumstances, allows consumers to prevent disclosure of certain personal information to non-affiliated third parties.

Supervision and Regulation of First Commonwealth 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.  FCB is also subject to certain regulations of the Federal Reserve Board.  The areas of operation that are 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.




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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.

Availability of Financial Information

The Corporation files reports with the SEC. Those reports include the annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials that the Corporation files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains quarterly and annual reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The Corporation's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are also accessible at no cost on the Corporation's web site at http://www.fcbanking.com.  Printed copies are also available upon request to the Corporation, to the attention of the Corporate Secretary.


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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 1.  Business (Continued)
 
Availability of Financial Information (Continued)

Furthermore, the Corporation also makes available on its website, and in print to any shareholder who requests it, the Corporation's Corporate Governance Guidelines, the committee charters for its Audit, Executive Compensation, and Governance Committees, as well as the Code of Conduct and Ethics that applies to all directors, officers and employees of the Corporation.  Amendments to these documents or waivers related to the Code of Conduct and Ethics will be made available on the Corporation's website as soon as practicable after their execution.

First Commonwealth's Chief Executive Officer has certified to the NYSE that, as of the date of the certification, he was not aware of any violation by First Commonwealth of NYSE's corporate governance listing standards.  In addition, First Commonwealth's Chief Executive Officer and Chief Financial Officer have made certain certifications concerning the information contained in this report pursuant to Section 302 of the Sarbanes-Oxley Act. The Section 302 certifications appear as exhibits 31.1 and 31.2 to this annual report on Form 10-K.

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.  The Corporation entered into the lease agreement in 1973 and renewed the agreement in 1998 for an additional 25 years.  In order to support future expansion needs and centralization of various functional areas, the Corporation owns two additional structures in Indiana, Pennsylvania, in close proximity to the Corporation's principal office.  The Corporation also leases additional office space in Indiana, Pennsylvania.  FCB has 103 banking facilities of which 25 are leased and 78 are owned.  Management presently expects that these facilities will be adequate to meet the anticipated needs of the Corporation and its subsidiaries for the immediate future.

ITEM 3.  Legal Proceedings

There are no material proceedings to which the Corporation or its subsidiaries are a party, or of which their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have a material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries.









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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

ITEM 4.  Submission of Matters to a Vote of Security Holders

There were no matters submitted to vote by security holders in the fourth quarter of 2004.

Executive Officers of the Registrant

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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

Executive Officers of the Registrant (Continued)

 
PART II

ITEM 5.  Market for Registrant's Common Stock and Related Stockholder
         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 20,100.  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. 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

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, 2004, 2003 and 2002 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.

Effective May 24, 2004, the Corporation acquired all of the outstanding shares of GA Financial, Inc. ("GAF"), and effective December 5, 2003, the Corporation acquired all of the outstanding shares of Pittsburgh Financial Corporation ("PFC").  In addition, 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 GAF, PFC, SCC and SFA have been included in the Corporation's financial statements since their respective acquisition dates.  In October 2002, SFA was merged into SCC and the name was changed to First Commonwealth Financial Advisors, Inc.

Financial statement amounts in prior periods have been reclassified to conform to the presentation format used in 2004.  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)

Critical Accounting Policies and Significant Estimates

The Corporation considers accounting policies and estimates to be critical to reported financial results if (1) the estimate requires management to make assumptions about matters that are highly uncertain and (2) the different estimates that management reasonably could have used for the accounting estimate in the current period or the changes in the accounting estimates from period to period could have a material impact on the Corporation's financial condition or results of operations.  Accounting policies related to the allowance for credit losses are considered to be critical because they are highly dependent on subjective or complex judgments, assumptions and estimates by management. 

The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management's best estimate of probable losses that are inherent in the existing loan portfolio as of the balance sheet date.  The allowance includes amounts calculated in accordance with FASB Statement No. 114 "Accounting by Creditors for Impairment of a Loan" as amended by FASB Statement No. 118, and amounts determined in accordance with FASB Statement No. 5 "Accounting for Contingencies."

Management and the Corporation's Board of Directors review 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 an assessment of individual problem loans, delinquency and loss experience trends, and other relevant factors.  While allocations are made to specific loans and pools of loans, the total allowance is available for all loan losses.

There are many factors affecting the allowance for credit losses; some are quantitative while others require qualitative judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses based on historical loss experience and consideration of current economic trend and conditions, all of which may be susceptible to significant change.  To the extent that actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect earnings or financial position in future periods.  The loan portfolio represents the largest asset category on the Consolidated Balance Sheet.

Classified loans on the primary watch list are analyzed to determine the level of potential loss in the credits under current circumstances.  The potential loss that is established for these classified loans is based on careful analysis of the loan's performance, the related collateral value, cash flow considerations and the financial capability of any guarantor.  Primary watch list loans are managed and monitored by assigned account officers within the Corporation in conjunction with senior management.




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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)

Critical Accounting Policies and Significant Estimates (Continued)

The process of determining the allowance also considers special circumstances which may warrant an additional allowance.  An additional allowance provides management with the opportunity to estimate additional potential allowance amounts which may be needed to cover specific factors.  The special factors that management currently evaluates consist of portfolio risk or concentrations of credit and economic conditions.  Portfolio risks include unusual changes or recent trends in specific portfolios such as unexpected changes in the trends or levels of delinquency, unusual repossession activities or large levels of unsecured loans in a portfolio.

The Corporation also maintains an unallocated allowance.  Although the unallocated allowance was significantly reduced during 2004 as a result of methodology enhancements, the unallocated allowance is still used to cover any factors or conditions that may cause a potential credit loss but are not specifically identifiable or considered in the methodology that was defined above.  These factors include, but are not limited to potential judgment or data errors or factors not yet considered in the Corporation's methodology.

Accounting policies related to goodwill and other intangible assets are also considered to be critical because the assumptions or judgment that was used in determining the fair value of assets and liabilities that were acquired as part of past acquisitions were subjective and complex.  As a result, changes in these assumptions or judgment could have a significant impact on the financial condition or results of operations of the Corporation.

The Corporation adopted FASB Statement No. 142 ("FAS No. 142"), "Goodwill and Other Intangible Assets", effective January 1, 2001.  FAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives, including goodwill recorded in past business combinations, no longer be amortized, but instead be tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value.  Intangible assets that have finite useful lives will continue to be amortized over their useful lives. 

The fair value of acquired assets and liabilities that was used to record goodwill was based either on quoted market prices or provided by other third-party sources, when available.  When third-party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques.  The assumptions that were used in the cash flow modeling were subjective and are susceptible to significant changes.

Goodwill and other intangible assets with indefinite useful lives are tested for impairment at least annually and written down and charged to results of operations in periods in which their recorded value is more than their estimated fair value.  Although goodwill has not been written down since the adoption of FAS No. 142, changes in future assumptions based on changing economic conditions could result in impairment which could adversely affect earnings or financial position in future periods.

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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 $38.7 million in 2004, a decrease of $14.6 million from the 2003 results of $53.3 million.  This compared to net income of $43.5 million in 2002.  The most significant component of the decrease in the 2004 period was the previously announced penalty related to the prepayment of FHLB long-term advances.  This penalty was $29.5 million or $19.2 million after taxes.  Also impacting the decrease in 2004 was merger and integration costs that were not present in the 2003 period and a gain on the sale of two branches during 2003.  The change in net income for the 2003 period reflected an increase in security gains compared to the corresponding period of 2002.  In addition, the effects of restructuring costs and a litigation settlement negatively impacted net income for 2002.  A partial recovery from insurance for the claim related to the litigation settlement was received in 2003.   

Diluted earnings per share was $0.58 for 2004 compared to $0.90 and $0.74 for 2003 and 2002, respectively.  Return on average assets was 0.66% and return on equity was 7.82% during 2004 compared to 1.12% and 12.95%, respectively for 2003 and 0.96% and 11.09%, respectively for 2002.

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

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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

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 increased $23.8 million in the 2004 period compared to 2003 after declining $9.4 million in 2003 compared to 2002.  Interest income and interest expense both increased during the 2004 period due to increases in the volumes of interest-earning assets and interest-bearing liabilities as average yields continued to decline over 2003 levels.  During 2003, both interest income and interest expense declined compared to 2002 levels primarily as a result of the dramatic decrease in interest rates that began in 2001 and continued into 2003. 

Net interest margin (net interest income, on a tax-equivalent basis as a percentage of average earning assets) declined to 3.30% for 2004, a decrease of 17 basis points (0.17%) compared to 2003, and a decrease compared to 3.80% in 2002.  The year-to-year decrease in the margin was due to asset yields declining more quickly than the cost of funds.  In the lower interest rate environment, deposit costs begin to reach a floor while asset yields have a bigger cushion and can continue to decline.  The Corporation uses computer simulation to help manage interest rate risk.  The Corporation's use of computer simulation is described in the "Interest Sensitivity" 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)

Results of Operations (Continued)

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, 2004:

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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)

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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 (Continued)

Interest and fees on loans increased $25.2 million for 2004 compared to 2003 after declining $15.5 million for 2003 compared to 2002.  The increase in interest and fees on loans during 2004 was due to an increase of $610.7 million in average loan balances.  The volume increase was due in large part to the loans that were acquired in the acquisitions of PFC and GAF.  Commercial loan growth was primarily due to internal growth.  Volume increases in 2004 were noted in all loan categories with the exception of leases, which is a product that the Corporation no longer offers.  Volume increases were also recorded in the 2003 period compared to 2002.  During 2003, the Corporation took advantage of the lower interest rate cycle and changed the mix of the loan portfolio.  Average mortgage loans declined during 2003 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.  The Corporation has since started to retain fixed rate mortgages with maturities of 15 years or less as well as adjustable rate mortgages.  Average commercial and municipal loans offset the decline in mortgage loans during 2003, primarily in shorter term and variable rate lending.  In addition, 2003 included increases in average installment loans over 2002 levels.  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 has consistently been one of the top small business lenders in Pennsylvania.  The declining rate environment has continued to negatively impact interest and fees on loans.  During 2003 compared to 2002, the increase in average loan volumes was not enough to offset the reduced interest income caused by declining yields.  Tax-equivalent loan yields fell 44 basis points (0.44%) during 2004 compared to 2003 after declining 67 basis points (0.67%) during 2003 from the 2002 levels. 

Interest income on investments increased $9.0 million in 2004 compared to 2003 after declining $16.3 million in 2003 compared to 2002.  Both years reported increases in average investment balances with decreases in yields on investment securities.  The most significant volume increases during 2004 were related to U.S. government agency securities.  Average investment securities included increases due to PFC for the full year of 2004 and GAF since May 24, 2004.  Yields on investments for 2004 continued to decline, falling 32 basis points (0.32%) to 4.32%.  Yields for 2003 fell to 4.64% compared to 5.95% for 2002.  As with the loan category, the increase due to average investment security volumes surpassed the loss due to the declining yields, but during 2003 the increase due to volume was not enough to offset the reduced interest income caused by declining rates.  Yields in the 2004 period compared to 2003 decreased for all investment securities with the exception of asset backed securities.  During 2003 compared to 2002, all categories of interest income on investments were negatively impacted by interest rate changes with the largest decline being registered in the U.S. government agency category. 



20

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 (Continued)

Prepayment speeds of mortgage backed securities ("MBS") declined in 2004 after accelerating in 2003 when 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, which 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 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 $1.2 million in 2004 compared to 2003 after a decline of $18.5 million in 2003 compared to 2002.  The decrease in both periods was largely due to the lower interest rate environment.  The cost of deposits declined 28 basis points (0.28%) in 2004 compared to 2003.  Decreases in time deposit yields were partially offset by increases in yields on more non-maturity deposits, such as savings and interest-bearing demand deposits.  Average deposits increased by $490 million in 2004 compared to 2003 and included increases in all categories due to PFC for the full year of 2004 and GAF since May 24, 2004.  The deposit mix continued to change in 2004 as clients registered a preference for savings products, while time deposits dropped due to the prospect of rising interest rates.  During its management of deposit levels and mix, the Corporation continues to evaluate the cost of time deposits compared to alternative funding sources as it balances its goals of providing clients with the competitive rates they are looking for while also minimizing the Corporation's cost of funds.

Interest expense on short-term borrowings rose $5.2 million during 2004 after rising $726 thousand during 2003.  Both years reflected increases in interest expense due to increases in the average volumes of short-term borrowings.  The 2004 period also reflected increases in interest expense due to increases in yields, while 2003 reflected decreases in interest expense due to decreasing yields.  Average short-term borrowings increased $242.5 million in 2004 compared to 2003 and increased $214.2 million for 2003 compared to 2002.  The 2004 period included an increase due to the inclusion of short-term borrowings that were acquired with the GAF acquisition on May 24, 2004.  The 2004 period also included an increase in short-term borrowings which were used to replace a portion of the $440 million of long-term FHLB advances that were paid before their maturity.  Refer to NOTE 19 (Other Long-term Debt) to the Consolidated Financial Statements for additional information on the debt prepayment.  The increase in the average short-term borrowings during 2003 was due in part to $100 million of long-term debt that matured during the fourth quarter of 2002 and was replaced with short-term borrowings.  In addition, the increase in short-term borrowings during 2003 can be attributed to an ALCO strategy implemented to mitigate the risk of further declines in net interest income

21

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 (Continued)

resulting from a low or declining interest rate environment.  This increase in short-term borrowings funded the purchase of U.S. government agency securities maturing in approximately 3.5 years.

Interest expense on long-term debt increased by $6.4 million during 2004 compared to 2003 after a decrease of $4.7 million for 2003 compared to the 2002 period.  The 2003 period recorded decreases in interest expense due to declining average balances of long-term debt and declining yields, while the 2004 period included decreases in interest expense due to declining yields that were offset by increases in interest expense due to increases in average balances of long-term debt.  The increases in volume during 2004 were due in large part to the acquisitions of PFC and GAF.  In addition, subordinated debentures in the amount of $41.2 million were issued during March 2004.  These subordinated debentures along with the subordinated debentures of $30.9 million that were issued during December 2003 were used to fund the acquisition of GAF in May 2004.  Refer to NOTE 18 (Subordinated Debentures) to the Consolidated Financial Statements for further discussion of subordinated debentures that are included in long-term debt.  Average long-term debt for 2003 decreased by $75.9 million compared to 2002.  This was due in part to the $100 million of long-term debt that matured during the fourth quarter of 2002 that was replaced by short-term borrowings.  The interest rate on long-term debt decreased 104 basis points (1.04%) during 2004 compared to 2003.  The rate reduction was anticipated in connection with the prepayment of $440 million in FHLB long-term advances during the third quarter of 2004.  The Corporation was able to replace these advances with $230 million in other lower rate FHLB advances with maturities ranging from two to six years.  The remaining $210 million was replaced with short-term borrowings.  Refer to NOTE 19 (Other Long-term Debt) to the Consolidated Financial Statements for additional information on the debt prepayment. 




















 
22

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 (Continued)

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

(a)  Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to interest sensitivity of consolidated assets and liabilities.

Provision for Credit Losses

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 decreased $4.7 million for 2004 when compared to 2003.  The decrease in the provision reflects the trend in improvement of nonperforming loans, net charge-offs and lower levels of the allowance for loan losses allocated to larger impaired credits.  Nonperforming loans as a percent of average loans outstanding improved to 0.73% at December 31, 2004, compared to 0.82% and 1.47% at December 31, 2003 and 2002, respectively.  The allowance for credit losses was $41.1 million at December 31, 2004, which represents a ratio of 1.26% of average loans outstanding compared to 1.42% and 1.33% reported at December 31, 2003 and 2002, respectively. 

Net charge-offs for 2004 declined $3.6 million over 2003 levels.  The most significant components of this year-to-year change were decreases in the following categories:  residential loans secured by real estate (down $1.8 million); and commercial, financial and agricultural loans (down $1.7 million).  Net charge-offs as a percent of average loans outstanding improved to 0.29% at December 31, 2004, compared to 0.49% and 0.46% at December 31, 2003 and 2002, respectively.  For an analysis of credit quality, see the "Credit Review" section of this discussion.

23

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 table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31, 2004 (Dollar Amounts in Thousands):

24

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)

Noninterest Income

Net securities gains decreased $1.8 million during 2004 to $4.1 million from the $5.9 million reported in 2003.  This compared to $642 thousand reported in 2002.  Securities gains during the 2004 period resulted primarily from the sale of Pennsylvania bank stocks with book values of $19.3 million.  The securities gains during the 2003 period resulted primarily from the sales of Pennsylvania bank stocks with book values of $7.6 million and fixed rate corporate bonds classified as securities "available for sale" with book values of $35 million.  The corporate bonds sold during 2003 had an average remaining life of one year, and the proceeds were reinvested in adjustable rate trust preferred securities with maturities of 30 years and mortgage backed securities with an average life of 3.6 years.  This reinvestment strategy was initiated to partially mitigate the Corporation's exposure to low and declining interest rates.  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.

Trust income has increased slightly over each of the past three years.  The rebound in market values over prior year levels should help trust income to continue to trend in a positive direction.  The referral programs and integrated growth plans for financial affiliates have continued to help grow trust revenues.  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 noninterest income and have continued to increase over the past three years with an increase of $2.0 million for 2004 compared to 2003 and an increase of $1.5 million for 2003 compared to 2002.  Increases in nonsufficient funds ("NSF") fees of $1.9 million in 2004 compared to 2003 and $2.1 million in 2003 compared to 2002 helped to pace the continued year-to-year rise.  The increase in NSF fees is due to the growth of the High Performance Checking products for consumer and business clients as well as the inclusion of PFC and GAF.  In addition, the increase in NSF fees is due in part to better management of the collection process to ensure that fee waivers are kept to a minimum.  Management strives to implement reasonable fees for services and closely monitors collection of those fees.

The 2003 period included a $3.0 million gain which occurred when First Commonwealth Bank, a wholly-owned subsidiary of the registrant, sold two of its branch offices.  The sale included $29.2 million in deposit liabilities and $4.4 million in loans associated with the two offices. 



25

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)

Noninterest Income (Continued)

Insurance commissions remained relatively stable from 2004 compared to 2003 after a decrease of $326 thousand from 2003 compared to 2002.  Decreases in 2003 were primarily due to decreases in annuity commissions.  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. 

Income from bank owned life insurance was $5.2 million for 2004 compared to $4.3 million for 2003 and compared to $4.7 million for 2002.  The 2004 period included an addition of $16.7 million related to the GAF acquisition, while the 2003 period included an addition of $6.6 million due to the PFC acquisition.   The 2002 period included an additional investment in bank owned life insurance of $5.0 million. 

Other changes in noninterest income during 2004 compared to 2003 included increases in card related interchange income in the amount of $1.0 million.  Card related interchange income includes income on debit, credit and ATM cards that are issued to consumers and/or businesses.  The increase was due in part to the inclusion of PFC and GAF.  The card related interchange income growth was favorably affected by additional volume related to card usage and the migration of business accounts from the consumer debit card product.  The business debit card product pays a higher rate than the consumer debit card.  Changes in other noninterest income for 2003 over 2002 levels included increases in card related interchange income in the amount of $338 thousand and income from the increase in cash surrender value of split dollar life insurance in the amount of $248 thousand. 
 
Noninterest Expense

Total noninterest expenses for 2004 increased $51.9 million to $164.6 million from $112.7 million reported in 2003.  The 2003 amount represented a decrease of $13.6 million compared to $126.3 million reported in 2002.  Noninterest expenses during the 2004 period included a one-time penalty of $29.5 million for the prepayment of $440 million in long-term FHLB advances.  The FHLB advances were replaced with other long-term debt with lower interest rates as well as with short-term borrowings.  The transaction is expected to result in an increase in net interest income over the remaining term of the original advances in excess of the prepayment penalty.  Noninterest expenses during the 2004 period also included merger and integration charges in the amount of $2.1 million.  The merger and integration charges included $485 thousand related to the write-off of the unamortized capitalized costs for the subordinated debentures that were previously issued by PFC and were called and paid off in January 







26

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)

Noninterest Expense (Continued)

of 2004.  Merger and integration charges also included $1.6 million of severance related salary and benefit expenses that were accrued during 2004 and were due to the integration of PFC into the Corporation.  Future periods could be impacted by similar costs as the GAF integration continues.  The inclusion of PFC and GAF results since the acquisition dates were the primary causes of the remaining increase in noninterest expenses during the 2004 period.  The 2003 year included the benefit of a $610 thousand partial recovery of the litigation settlement from the 2002 period.  The decrease in noninterest expenses for 2003 was primarily the result of charges that were incurred during 2002 for the previously described litigation settlement of $8.0 million and corporate restructuring of $6.1 million.  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.  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 were also included in restructuring charges.   

Employee costs were $68.9 million in 2004, representing 1.18% of average assets compared to $61.1 million and 1.29%, respectively, in 2003.  Employee costs for 2002 were $58.1 million and 1.28% of average assets.  Salary costs for the 2004 period increased $5.1 million compared to 2003, while salary costs for the 2003 period increased $1.6 million compared to 2002 levels.  Employee benefit costs rose $2.7 million for 2004 compared to 2003 and rose $1.4 million for 2003 compared to 2002.  Hospitalization costs continue to reflect the largest increases in employee benefit costs with increases of $743 thousand or 12.7% in 2004 and $1.1 million or 23.1% in 2003.  The increases in employee costs during 2004 were due in large part to an increase in the number of employees from the addition of PFC and GAF.  Full-time equivalent employees were 1,634 at the end of 2004 compared to 1,474 at the same time in 2003.  The Corporation continues to evaluate its current menu of employee benefits to provide a competitive benefits package while also managing costs.  Current benefit options include coverages fully paid for by the employer, as well as voluntary benefits whereby employees have the option of purchasing additional benefits at reduced group rates.

Net occupancy expense increased $2.2 million during 2004 to $9.7 million compared to expenses of $7.5 million during 2003 and $6.8 million during 2002.  The most significant increases during the 2004 period were related to building rental expense and building repairs and maintenance, largely due to the branches that were acquired with the PFC and GAF mergers.  The 2003 period included increases in building repairs and maintenance,



27

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)

Noninterest Expense (Continued)

net rental expense and utilities compared to 2002 costs.  Much of these increases were due to increased utility costs and snow removal expenses resulting from the harsh winter.  The 2003 period also included an increase in the amortization of the purchase accounting adjustments related to premises of $328 thousand over the 2002 period.  An adjustment of $291 thousand was taken during the 2003 period for the write-off of the remaining purchase accounting adjustment for three branch offices that were closed during 2003.  These branch offices were closed and their clients are served at nearby existing branch offices.  The Corporation continues to actively evaluate its branch delivery network to optimize client service in existing branch offices and to continue expansion into growth markets.  The Corporation expects to open three new branch offices in growth areas of Washington and Allegheny counties as well as renovate or relocate offices in existing markets.  The execution of these initiatives may continue to impact occupancy and other expenses in future periods.  

Furniture and equipment expenses increased $1.6 million to $11.7 million in 2004 after an increase of $126 thousand to $10.1 million in 2003.  Increases during both periods were largely due to continued increases in depreciation expense some of which was related to the inclusion of PFC and GAF since the acquisition dates. 

Outside data processing expense increased $1.3 million for the 2004 period to $3.8 million compared to $2.5 million for the 2003 period and $2.1 million for 2002.  Data processing expense increases during 2004 were due in part to the acquisitions of PFC and GAF.  Additional expenses were incurred until the PFC and GAF systems, some of which were processed through an outsourced processing vendor, were converted to the systems that are provided by a subsidiary of the Corporation.  In addition, the data processing expense in 2004 was unfavorably impacted by a rate increase related to clients using debit and credit cards over the STAR network.  Outside data processing costs are managed by the Corporation's data processing subsidiary.  Its needs are evaluated based on technology, efficiency and cost considerations.

Intangible amortization expense increased by $1.4 million during 2004 compared to the same period of 2003.  The increase was due to the amortization of the core deposit intangibles that were recorded for the recent acquisitions.

Other operating expenses increased $5.2 million to $32.9 million for 2004, while the expenses decreased $3.4 million to $27.7 million for 2003.  Increases in noninterest expense during the 2004 period included increase in telephone and data line expenses, other professional fees and advertising costs in the amounts of $897 thousand, $801 thousand and $599 thousand, respectively.  Telephone and data line expense increases were due in large part to the recent acquisitions.  The increase in other professional services is due in part to the use of a consultant in 2004 to provide targeted marketing services.  Advertising expense increases are due in large part to grand re-opening events that have taken place in branches that have been newly re-built, remodeled or acquired.    

28

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)

Noninterest Expense (Continued)

The 2003 period included decreases in other professional fees and services, advertising, expenses related to training and seminars, telephone and loss on the sale of other assets (primarily vehicles previously leased) in the amounts of $1.4 million, $637 thousand, $428 thousand, $420 thousand and $402 thousand, respectively, compared to 2002 costs.  Directors' fees for the 2003 period reflected decreases of $349 thousand resulting from the restructuring of the Corporation's Boards of Directors and committees during 2002.  Other professional fees in 2002 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 were also 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 promotion expenses in the 2002 period included expenditures related to the $1.8 million launch of the new corporate brand and identity and expenses incurred in the successful marketing campaign for free checking products introduced during 2002.  These products have had a favorable impact on deposit growth, interest expense and service charge revenue since their introduction. 

Income tax expense was $3.7 million during 2004, representing a decrease of $9.6 million from the 2003 amount of $13.3 million and compared to $8.9 million in 2002.  Pretax income in the 2004 period was reduced by the $29.5 million in debt prepayment fees related to the previously mentioned prepayment of FHLB advances, which allowed the effect of nontaxable income and tax credits to have a greater impact on the effective tax rate in 2004.  The Corporation's effective tax rate was 8.75% for 2004 compared to 19.9% for 2003 and 17.0% for 2002.  The Corporation's 2003 effective tax rate was favorably impacted by tax-free municipal income.  Pretax income in the 2002 period was reduced by the $8.0 million litigation settlement as well as the $6.1 million restructuring charges, which allowed the effect of nontaxable income to have a greater impact on the effective tax rate in 2002. 

 














29

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Aggregate Contractual Obligations and Off-Balance Sheet Arrangements

The following table summarizes the Corporation's contractual obligations to make future payments as of December 31, 2004.  Payments for borrowings do not include interest.  Payments related to operating leases are based on actual payments specified in the underlying contracts.
 
(Dollar Amounts in Thousands)

The preceding table excludes unamortized premiums and discounts on Federal Home Loan Bank advances because these premiums and discounts do not represent future cash obligations.  The preceding table also excludes the Corporation's cash obligations upon maturity of certificates of deposit whose maturities are described in NOTE 16 (Interest-Bearing Deposits) to the Consolidated Financial Statements.   

The following table summarizes the Corporation's off-balance sheet commitments as of December 31, 2004.  Commitments to extend credit and standby letters of credit are presented at contractual amounts; however, since many of these commitments are expected to expire unused or only partially used, the total amounts of these commitments do not necessarily reflect future cash requirements.

Commitments to extend credit include unfunded loan commitments as well as the undrawn portions of revolving and closed-end lines of credit as of December 31, 2004.  The contractual provisions of these commitments normally include fixed expiration dates or termination clauses, specific interest rates and clauses indicating that funding is contingent upon borrowers maintaining stated credit standards at the time of loan funding. 

Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a client to a third party.  In the event that the client does not perform in accordance with the terms of the agreement with the third party, the Corporation would be required to fund the commitment.  The maximum potential amount of future payments the Corporation could be required to make is represented by the contractual


30

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Aggregate Contractual Obligations and Off-Balance Sheet Arrangements (Continued)

amount of the commitment.  If the commitment is funded, the Corporation would be entitled to seek repayment from the client.  The Corporation's policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. 

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 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 based on board approved limits.  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 increased $556.2 million in 2004.  This included an increase of $524.2 million for the deposits that were assumed in the acquisition of GAF and an increase due to purchase accounting adjustments in the amount of $5.4 million that were recorded as part of the GAF acquisition transaction.  Excluding the GAF acquisition activity, noninterest-bearing demand deposits and savings deposits increased by $32.4 million and $105.1 million, respectively, while time deposits decreased by $110.9 million.  Noncore deposits, which are time deposits in denominations of $100 thousand or more, represented 10.9% of total deposits at December 31, 2004.  Noncore deposits increased by $19.3 million in 2004. 

The total increase in short-term borrowings of $312.3 million included $53.6 million that was acquired from GAF.  During the third quarter of 2004, the Corporation prepaid $440 million of long-term FHLB advances to



31

FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES

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

Liquidity (Continued)

minimize the impact of maturities in any one year.  The advances were replaced with short-term borrowings and other long-term FHLB advances with lower interest rates.  Refer to NOTE 19 (Other Long-term Debt) to the Consolidated Financial Statements for additional information on the debt repayment.   

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, 2004, 2003 and 2002 had remaining maturities as follows: