Good day. And welcome to the First Commonwealth Financial Corporation Fourth Quarter 2015 Earnings Release Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Miata. As a reminder, a copy of today’s earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We’ve also included a slide presentation on our Investor Relations page with supplemental financial information that will be referenced throughout today’s call. With me in the room today are Mike Price, President and CEO of First Commonwealth Financial Corporation; and Jim Reske, Executive Vice President and Chief Financial Officer. After brief comments from management, we will open the call to your questions. For that portion of the call, we'll be joined by Bob Emmerich, our Chief Credit Officer; and Mark Lopushansky, our Chief Treasury Officer. Before we begin, I’d like to caution listeners that this conference call will contain forward-looking statements about First Commonwealth, its business, strategies and prospects. Please refer to our forward-looking statements disclaimer on Page 2 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Now, I’d like to turn the call over to Mike Price.

Hey. Thanks, Ryan. And welcome to our fourth quarter earnings call. We sincerely appreciate your interest and investment of time in First Commonwealth. Joining me on the call this afternoon is Jim Reske our CFO. On this morning we reported earnings per share of $0.11 for the fourth quarter. Although this is a decrease of $0.03 earnings per share over the prior quarter on a GAAP basis, the core earnings capacity of the company was in line with the previous quarter and we believe that will be stronger in 2016 than it was in 2015. I would like address some important items impacting the fourth quarter upfront, relating to onetime charges and credit. First regarding the onetime charges, we had $2.1 million of severance costs to evolve the structure and approach of our consumer or retail bank. The payback on the severance should be under a year. There was $900,000 in onetime charges associated with the closing and conversion of First Community Bank in Columbus, Ohio, our first bank acquisition in a number of years. The banking presence, small as it is, has enabled our recruiting of talented residential and commercial lending talent to help build out those platforms in attractive market. We incurred $600,000 in charges associated with the disposal of two branch locations both of which were former corporate headquarters buildings. This too should pay for itself in about one year. Excluding these onetime charges, core operating earnings for the fourth quarter were $0.15 per share which was in line with the previous quarter. Operating expenses continue to be well controlled and came in below our $40 million per quarter targeted run rate. We were particularly pleased with this result given the investments we've made over the past two years to include mortgage, the corporate banking build out…

Thanks, Mike. As Mike described, the fourth quarter results were impacted by the specific reserve of $5.4 million and three unusual expense items. Mike already touched on these items, but I'll take a moment to provide a little more color on each of them. The first expense item was for the recognition of a $2.1 million one-time charge related to the realignment of our consumer businesses. We expect to redeploy the cost savings from this initiative into other revenue producing lines of business and expect that this will help us to keep overall expenses flat. Second, the $900,000 in one-time merger related expenses actually came in a little under our original $1.3 million projection due to lower contract termination charges and lower severance payouts that we had been expecting. Third, we experienced one-time costs of approximately $600,000 related to the disposition of two bank facilities as we continue to work on our total [start] for this number. These two transactions represent the last anticipated dispositions of former branch headquarter buildings within our system for the foreseeable future and we should have lower operating costs by approximately $600,000 per year. Again, we expect this will help us keep overall operating expenses flat. Excluding these unusual items, on an operating basis our total expenses were $38.5 million in the fourth quarter, which was consistent with our $40 million quarterly expense target as we continue to find ways to pay for our new investments and hit our goal of keeping expenses flat to down. Turning to the revenue side of the equation, net interest income on a fully taxable equivalent basis increased $1.6 million on a linked quarter basis. This was a result of an increase in average earning assets of $181 million over the last quarter which was driven by $73 million…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bob Ramsey with FBR. Please go ahead.

I appreciate all the guidance for 2016. The expense number looked really good this quarter and then you said you expected expenses next year will be relatively flat and talked about some of the pieces. But should we think about it flat in total to operating expenses let's see of $155 million or we think in flattish in terms of $38 million to $39 million quarterly run rate or what is sort of the right way to think about that?

As a line item sub-$40 million.

And then on the margin guidance, I know you guys said you think the margin will be more or less flat and I think you said 320 for the year. Did you say mid-320, as I just missed whatever detail you said?

Yes. I said in the 320 range which should -- 320 to 330.

Can you give a little bit more detail maybe on the energy credits this quarter that you had the specific reserve?

There were two credits that tipped and the larger one was an energy related credit. That took the credit I think in the press release was $7.5 million and we have a specific reserve of probably 55% of that credit. And it is really in the call codes they are a servicer.

Could you share what type of business the service is in or any more detail on how much you can and can't say?

Their fortunes are tied to rig counts and as rig counts have fallen off, they are not in the maintenance of wells, they are in the drilling of wells. And that's impacted them.

I think those were the real questions, I guess I'll ask as well on the capital front about share repurchase appetite. I know you don't currently have an existing authorization but you're stock has certainly come in quite a bit over the last couple of months, just curious about appetite for share repurchases here?

Yes, we're looking at that and discussing it. We do have an appetite for that and we do recognize the value of returning capital to shareholders in the form of buybacks at the time but nothing to announce at this time.

The next question comes from John Moran from Macquarie Capital. Please go ahead.

The three that are non-pass in the energy book and I understand that they are a small concentration for you guys, you have managed well. But are those also services credits or is there some reserve based in there too?

There is -- one is exploration production, another one is tanks and water and the other one is oil field services.

And then I guess the provision guide for 2016 is kind of at the same levels as '15 maybe slightly higher, that would incorporate some additional, I don't want to say hooking credits, but some additional migration into kind of adverse grades in that book granted again kind of small concentration?

We do have internally -- we do expect a little bit more strength this year than the past year in our projections. But that doesn’t dissuade the -- we feel there's ability to still grow the earnings per share of the company.

Just switching gears over to mortgage, I'm sorry if I missed this, but is that expansion now at this point hitting profitability? Certainly it seemed like it expected to this year but just curious if it was in the last quarter and if not when it would hit profitability?

We've been I think passed the breakeven point for several quarters now and just really ramping up to a rate we think is commensurate with our market share as a community bank, which is probably on a trajectory to be 50% to 100% more over the next year than it has been in the past.

50% to 100% more and then just we'd see -- regular seasonality kind of in that business now that it's or in the process of ramping?

Our build out has occurred primarily in Ohio, where the mortgages are a little larger in the communities that we are working in. We've been able to attract some talented mortgage loan originators and that is a nice opportunity for us. It's really about the talent you can attract. And we've been able to get some good people in Columbus and Northern Ohio.

And then just maybe just a quick update on First Community opportunities that you see in there, how are things going?

It's just that the team did a terrific job. We had a flawless execution really, hit our milestones in terms of the conversion, not a lot of customer disruption. Typically you see 5%, 10% deposits run off, amazingly we didn't see that, they were actually up a little bit since the legal close in October. But what it becomes albeit small, it's just the chassis for good branches with some good people in them, a market presence and that really surprisingly has allowed us to attract probably better talent than we would otherwise. But we've put some costs on top of that with a couple of commercial lenders from some larger institutions and also three or four mortgage loan originators in some pretty thriving Columbus markets. So we've added some costs and Jim you know the numbers on how that's running, I think we gave some guidance in the past. How are we doing versus that?

Yes, it's coming in line with our expectations from before. I guess really the overall impact to the bank's financial performance is going to be immaterial, it's not going to move the needle up efficiently, any aggregate. It's really more about the build out of the platform that you described Mike. So, but it's revenue positive and actually slightly positive to the net interest margin at this point. Not even 1 basis point but in the right direction.

The next question comes from William Wallace with Raymond James. Please go ahead.

I apologize if I missed it but did you give guidance on fee income for the year?

We just said fee income is expected to improve because of the mortgage build out.

So everything else should be relatively flattish?

Expenses are flat, we expect net interest income to continue to grow.

I mean on the fee income, the various fee income line items the only driver of growth is going to be mortgage or everything else?

No. I am sorry, thank you for asking the question and I will clarify. Mortgage is the primary driver of growth in fee income. We do expect other fee income items to grow as well. I think I mentioned in the comments brokerage has really had a great trajectory throughout the year and we expect that to grow. So mortgage is not the only driver of fee income growth but possibly the primary driver in 2016.

And we've seen some nice traction in debit card and interchange income as well.

In insurance, because the insurance Agency acquisition we did last year, insurance is up year-on-year and that's trending nicely as well.

Okay. And then you called out about $3.6 million in expenses in the quarter that could be considered onetime. I am just wondering, are those spread out, I am just struggling to find one line item that I can back them out of? For example the $2.1 million severance was that in the salary line, so was you salary down?

Yes, that was in the salary line.

When did the severance or when did the changes occur?

The severance was accrued for in the fourth quarter, the $2.1 million and the changes are taking place in the first quarter.

So the realignment was done at the end of the year, not at the beginning of the quarter?

The realignment was paid for at the end of the year by accruing the severance amount. The actual realignment will be taking place starting in first quarter and continue throughout 2016.

It is starting this month.

Yes.

Okay. And then I am curious if you have noticed in your markets any kind of ancillary impacts to low gases. Are you seeing lower vacancy at any of your hotels, any weakness at any restaurants, things like that, just maybe give us a sense of the markets that you guys are operating in based on your anecdotal evidence?

But this is anecdotal and it mostly comes through -- our people are extremely involved in community Chambers of Commerce, non-profits, united way, hospital boards, those types of things, and just a lot of family friends, dozens of people that we probably know in the oil and gas industry, a lot of those have been impacted and really in the last quarter and half. So that's very anecdotal, but I think it's real and so we're looking for the impact of that in local business. A lot of these towns, though I mean the economies are relatively diversified. There is a lot of colleges and universities, hospitals, healthcares, so it's -- that infrastructure preceded really Marcellus. So perhaps it will be muted, but these aren't oil and gas towns. This is a relatively new phenomenon that has been added to, I don’t know if that's helpful or not Wally.

I appreciate that of the 30 credits that are direct to energy, three are not pass grade, are you seeing migration of the other 27 to lower pass ratings and is there, should we be cognizant of a potential for that migration to continue in that portfolio?

I think it could happen depending on the length of the cycle, but with 30 names it's $65 million. Most of the names are small businesses, only 12 borrowers over $1 million, so we're watching those closely. And we're just -- we have four to five that we have our eye on and just watching them closely.

Some of them -- probably the largest exposures Wally, the largest two don't borrow and really never have, they really fund their operations with equity partnerships and so it's an interesting lot, but we're going to follow that closely.

The next question comes from Matt Schultheis with Boenning. And I am sorry if I mispronounced your name.

Really quickly with regard to the retail branch delivery and restructuring that you've announced, for the actual restructuring that you’ve announced this quarter and that's going to be executed in January. Are we looking at actual branch closures, or are we looking at simply staff who are not going to make the successful migration to a universal banker model being migrated into a career change?

It's more of the latter. We've done some pruning with branches. It's more of a focus on delivering broader product and services and less of the historical bifurcation of the platform and the tellers are kind of blurring that distinction having a more robust professional and then we just need probably fewer professionals in each of the offices. And we're working around a lot of operating procedures on how we can run branches just with literally a leaner staff and more flexible staffing. So a lot of moving parts. It's tough stuff. These are really good people that have worked for us for a long period of time but really a lot of change there.

And then with regard to -- you mentioned branch foot traffic, so with regard to looking out towards the second half of 2016, is it possible that we would hear about branch actual physical locations closing the branch consolidation?

You could but our focus is really on the inside of the branch and the customer experience. More so we think that's where we really need to get it right and then certainly as transaction counts change and we track them pretty closely everything from cards over to calendar to HCH to checks to bill pay we have to adopt our cost structure to match how our customers want to do business with us. It's really pretty simple. And we have taken as Jim outlined, in terms of the larger offices -- headquarter offices where we have more costs and more exposures, we've kind of addressed those over the course of last three or four years and there's been probably three or four or five of those that have kind of leaped in and erupted from time-to-time. But this is more the inside of the branch and are good people to deliver to the customers versus a brick and mortar, I think that will come, I hope it will come. It will probably come also with investment in different types of offices that our customers find more appealing.

And then lastly just to make sure I heard right, I think Jim said that this is the last of the former headquarter buildings that we should hear about as far as you guys getting rid of them, is that correct?

Yes, that's the last anticipated disposition that we have really for the foreseeable future and if rates are there like because we do -- there are still some former headquarter buildings from the history of acquisitions that we may have done in the past, but there's nothing really anticipated in change of our decision, any results at this time.

The next question comes from Collyn Gilbert with KBW. Please go ahead.

Just two quick questions. Just on the credits, the two non-performing credits that popped up this quarter, were they on the watch list in the third quarter?

Yes. But the one the -- actually there's three that I'm looking at, but the two, let me check. Yes, on the larger one and on the second one I'm not sure what the grade was, it was either watch -- I don't think it was classified yet.

And was there anything in particular that pushed the oil and gas credit other than saying the obvious but more particular from your internal perspective that moved it to non-performer this quarter?

No, just the lower rig counts, the precipitous drop over the course of the last 12 months and then kind of protracted affected that with the larger company.

And then just did you -- have you covered this Jim, I apologize, but did you say what was it that you'll be asset yield higher on a linked quarter basis?

We had a -- well a couple of things. We had positive commercial loan replacement yields which is nice. I mentioned previously in previous quarters that's fluctuated from quarter-to-quarter but this was a quarter which was positive. And then the bond exchange is executed [indiscernible] it took the overall securities portfolio yield up which upped the yield as well. Deposit costs actually came down slightly over the quarter and that all that worked together to help the NIM.

Thank you. [Operator Instructions] And we have a follow-up by Bob Ramsey with FBR. Please go ahead.

You may have answered this when Wallace sort of asked it. But I know Mike you said that looking about that credit this year you do expect a little bit more strain and I'm just curious if outside of energy if you're seeing anything that gives you pause or is sort of getting maybe as more of a flag today than it was six months ago?

Just one, there would be probably commodities related. We had some -- every business or every community has a scrap dealer and people that make their living with metals and things like that and we bank a few of those families and we have for years. And so we're seeing a little strain there and that's things like aluminum, copper and just the basic scrap business you see in almost every large community. And so that's kind of commodities related and that's probably the big one. We're really not feeling any strain in investment real estate and that's probably about it and then just oil and gas here the last couple of quarters.

This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Mike Price for any closing remarks.

Just as always we sincerely appreciate your interest in our company. And Jim and I are available if you have any questions or follow-up questions from time to time and you want to clarify things. But thank you sincerely for you time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.