Strength and Stability - SNL 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) Results of Operations—2008 Compared to 2007 Summary of 2008 Results The year 2008 was extremely challenging for the banking industry and First Commonwealth. However our operating results were solid despite the challenging conditions in the credit and capital markets. We experienced loan growth and we remain a well-capitalized institution with significant liquidity. First Commonwealth experienced the following developments during 2008: • We raised $115 million of common equity through a public stock offering. • We elected not to participate in the Capital Purchase Program which is part of the federal government’s Troubled Asset Relief Program. • Total loans increased $720.6 million, or 19.5%. • Net interest income increased $27.2 million, or 16.9%, and net interest margin increased 23 basis points. • Impairment charges of $9.2 million, after tax, were recorded relating to bank equity securities, trust preferred collateralized debt obligations, and low income housing partnerships. • We opened three new community banking offices. The banking industry continued to see losses related to the sub-prime loans and investment write-downs. First Commonwealth is not a participant or underwriter in the sub-prime mortgage loan or collateralized debt marketplace and therefore does not have any direct exposure to risks associated with these activities. All mortgage backed securities in First Commonwealth’s investment portfolio are AAA rated and backed by U.S. Government agencies and U.S. Government sponsored-enterprises. Net income was $43.1 million or $0.58 per diluted share compared to $46.3 million or $0.63 per diluted share in 2007. The return on average equity and average assets was 7.45% and 0.70%, respectively, compared to 8.08% and 0.80% for the prior year period. Earnings for 2008 were favorably impacted by a $27.2 million increase in net interest income; a $577 thousand increase in service charges on deposit accounts; a $1.0 million increase in card related interchange income; a $1.7 million increase in letter of credit fees; a $2.2 million increase in fees from interest rate derivatives; and a $564 thousand decrease in advertising. Earnings for 2008 were negatively impacted by a $13.1 million increase in the provision for credit losses; net securities losses of $11.5 million; a $7.4 million increase in salaries and employee benefits; a $1.3 million increase in net occupancy expense; and a $2.5 million increase in other expenses. The provision for income taxes increased $679 thousand due to decreases in tax free income and tax credits. 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—2008 Compared to 2007 (Continued) Summary of 2008 Results (Continued) The following table illustrates the impact on diluted earnings per share of changes in certain components of net income for 2008 compared to 2007: Net income per diluted share, prior year ............................................ $0.63 $ 0.74 Increase (decrease) from changes in: Net interest income ......................................................... 0.32 (0.14) Provision for credit losses ................................................... (0.17) 0.02 Security transactions (a) ..................................................... (0.17) 0.01 Insurance commissions ...................................................... 0.02 0.00 Income from bank owned life insurance ........................................ (0.01) 0.00 Card related interchange income .............................................. 0.01 0.00 Letter of credit fees ......................................................... 0.02 0.00 Fees from interest rate derivatives ............................................. 0.03 0.00 Other operating income ..................................................... 0.00 0.04 Salaries and employee benefits ............................................... (0.08) (0.02) Occupancy and equipment costs ............................................... (0.01) (0.02) Advertising expense ........................................................ 0.01 (0.01) Pennsylvania shares tax expense .............................................. 0.01 0.00 Intangible amortization ...................................................... 0.01 (0.01) Low income housing partnership impairment .................................... (0.02) 0.00 Other professional fees and services ........................................... (0.01) 0.00 Extinguishment of debt ...................................................... 0.00 (0.01) Other operating expenses .................................................... 0.00 (0.02) Provision for income taxes ................................................... (0.01) 0.05 Net income per diluted share ..................................................... $0.58 $ 0.63 2008 vs. 2007 2007 vs. 2006 (a) Includes $13 million for other-than-temporary impairment charges. Reference Note 10 “Impairment of Investment Securities.” Net Interest Income Net interest income, which is our primary source of revenue, is the difference between interest income from earning assets (loans and securities) and interest expense paid on liabilities (deposits, short-term borrowings and long-term debt). The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of earning assets and interest-bearing liabilities. The net interest margin is expressed as the percentage of net interest income, on a fully tax equivalent basis, to average earning assets. To compare the tax exempt asset yields to taxable yields, amounts are adjusted to the pretax equivalent amounts based on the marginal corporate Federal income tax rate of 35%. The tax equivalent adjustment to net interest income for 2008 was $13.1 million compared to $14.7 million in 2007. Net interest income for 2008 was $27.2 million, or 16.9% higher than 2007, primarily due to the $30.7 million decline in interest expense, resulting from an 86 basis point, or 0.86%, decrease in the cost of interest-bearing 25
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