Good day, and welcome to the First Commonwealth Financial Corporation first quarter 2016 earnings conference call. [Operator Instructions] I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Chad. 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 have 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 phone lines to your questions. For that portion of the call, we will be joined by Bob Emmerich, our Chief Credit Officer; and Mark Lopushansky, our Chief Treasury Officer. Before we begin, I would like to caution listeners that this conference call will contain forward-looking statements about First Commonwealth, its businesses, 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. And now, I would like to turn the call over to Mike Price.

Thank you, Ryan. And welcome to our first quarter earnings conference call. We appreciate your interest and investment and time in First Commonwealth. Joining me this afternoon is Jim Reske our Chief Financial Officer. Yesterday morning we reported earnings per share of $0.14 for the first quarter of 2016, which is an increase of $0.03 from the previous quarter, but fell some $0.02 short of the first quarter one year ago. The shortfall year-over-year was driven by an outsized provision this quarter, namely a $6 million specific reserve for a single credit tied to the steel and aluminum industries. This credit drove a $6.5 million in total provision expense and really overshadowed the fundamental progress we've made on several fronts. Let me begin with some encouraging trends this quarter. First, we had $115 million in loan growth and $106 million in deposit growth. A few comments here. Commercial loan balances were up $150 million, which more than offset $35 million in consumer loan run-offs. We had a strong first quarter in new commercial loan originations, with roughly half in commercial real estate and construction and the other half in C&I lending. We're also experiencing good traction from our Ohio activities. Our ramp up with our mortgage loan originators on the heels of our Columbus acquisition is exceeding our expectations. Also approximately $50 million or one-third of this quarter's commercial loan growth came from Ohio. We now have $535 million in outstandings in Ohio to include legacy First Community Bank, a new mortgage platform centered in Columbus, our Northern Ohio LPO and other C&I and commercial real estate relationships. Our mortgage loan production continues to increase each quarter and topped $41 million in funded loan volume in the first quarter. A healthy portion of our funded loan dollars are coming from…

Thanks, Mike. The first quarter's results were obviously impacted by the $6 million specific reserve that Mike mentioned earlier. Beyond credit, however, the bank experienced strong underlying financial performance for the quarter in terms of both spread income and expense control. Net interest income hasn't been this high since the fourth quarter of 2010. The net interest margin expanded to 3.29% and combined with $115.1 million of loan growth, produced improved spread income. Because our loan growth was funded by $105.8 million in total deposit growth, the loan to deposit ratio declined slightly, even while the total cost of deposits came down by 2 basis points. Loan yields benefited from the December rise in interest rates, which increased the yield on approximately a-third of our loan portfolio over the course of the first quarter. We had anticipated that increases in deposit rates might be necessary following a rise in rates, but deposit rate increases have not been necessary in our local market. We have seen deposit inflows and have experienced virtually no market pressure to raise rates. Savings, NOW accounts and non-interest deposit balances, all grew in the first quarter. Non-interest bearing deposit now represent 27% of total deposits. Fee income was dragged down by $1 million mark-to-market adjustment on our swap portfolio, which was driven by changes in the yield curve. Core swap income from writing swaps for our commercial loan customers was actually quite strong, at $445,000 in the quarter, as commercial customers sought to lock in fixed rates before anticipated rate rise. Deposit fees were $390,000 ahead of last year and mortgage gain on sale income continued its steady progression, contributing nearly $700,000 of fee income in the quarter. Non-interest expense of $38.1 million is well below our announced target of $40 million per quarter and benefited…

Operator, questions?

[Operator Instructions] The first question comes from Bob Ramsey with FBR.

I guess, my first question I have for you is, in your prepared remarks, you made a comment about expecting some strain in credit costs in coming quarters. Just curious if -- I think back over the last several years the provision kind of bumps around. But it's been in a range of maybe at the high-end of that range is probably this quarter, about $6.5 million. Are you talking about the strain being the higher end of that current range or is there some possibility of credit costs actually moving higher?

I'm talking about the current range. I think the guidance Jim gave last quarter was we would up from our $15 million provision in 2000, and likely be a little up. And I think the range for you as analysts is like $15 million to $19 million. And I think we could, after $6 million or $6.5 million in the first quarter, we could be in the upper-end of that range is what we've talked about. The credit is volatile. Its credit-by-credit and we work through it quarter-by-quarter, and we hope that's not the case. But we've had some strain consistently here over the last three quarters. Now, our list in the dugout of credits that are problematic is steady or coming down, and we're working through them one-by-one. But I just think that's fair to share that perspective with you.

And then I was hoping, you could sort of remind me about the derivative mark-to-market line and the net interest income. You guys obviously had a little margin expansion this quarter. Is it right to think about those two as being offsets? If memory serves me right, that's the interest rate swap. And so what you have is a drag to fee income, you actually have got as a benefit in net interest income to offset, is that right?

Not exactly. I'll just give you a little detail and then we can talk about it. We are in the business of doing swaps for our commercial loan customers, where they want a fixed rate, that's locking the rates, I believe on a variable rate exposure. So we will do a back-to-back swap with them one at a time. And so in addition to just a variable rate commercial that we might originate, if people want that kind of arrangement, we'll do those back-to-back swaps as well, and so we have a little over a $0.25 billion of those on our balance sheet right now. With those we have to estimate the probability of default and then have a loss given default. If one of the underlying credits goes bad, then we have to in that event unwind the swap. So that's what the derivative mark-to-market is all about. It's really driven by corporate bond spreads for the underlying corporate customers to kind of estimate the probability of defaults and then the loss given default is really driven by any changes in the 10-year swap curve. So it's just moves around with interest rates. If no one defaults, the number just converges on to zero over time, any market in one quarter eventually you'll get back. But that's what's really driving it. So what we try to do is parse out that number and its financials. If you look at the supplemental deck, you'll see that line in the adjusted earnings page and the non-GAAP exposures on the separate line, just because it's volatile. One quarter it will be up and the next quarter it will be down. It was positive $200,000 in the fourth quarter and negative $1 million here in the first quarter. And it just has the kind of volatility, so we wanted to allow you to see the number and break it out. What we want to make sure we're clear on is that that's separate from the kind of swap income we do when we originate the swap for the customer and that's the $445,000 figure that I gave for the first quarter. That number goes right into total fee income as well. Does that help you a little bit or is that --

No, that does help a little bit. I guess if corporate spreads are more or less stable and you don't sort of have any change in your estimates of probability or loss given default, does that number sort of narrow over time or sort of how do we think about the income statement line?

Yes, that's right. That can narrow over time. So like I said, if an underlying credit defaults, and its one swap, that's when you might actually have an expense. This number is just an estimate of that. And so it just will, like I said, it one quarter down, the next quarter eventually it will converge over time.

The next question is from John Moran with Macquarie.

I just kind of circling back on the credit question, maybe a follow-up to that. I think last quarter it was something like $17 million worth of non-passed credits out of that oil and gas book. And I think they were five that you were kind of watching closely. Could you help size sort of -- I know, you said that the credits in the dugout that look potentially problematic are not really going up in terms of number, but maybe just try to size either the number of credits or the dollars that you're kind of keeping an eye on?

Yes, I can do that. We have about six or seven. One is a scrap processor in our backyard at about $8 million. Another one is the credit, last quarter that we took specific reserve for, which was $6.8 million and that's the oilfield services company. And I think we took $6.1 million, if memory serves right on that one -- $4 million. And then we have an oilfield pipeline and construction services company that one is $2.5 million. And then we have one that has been around for six or seven years that we've talked about from time-to-time. This is the shallow gas well company based here in Pennsylvania, and that's $2.4 million. And then we have a larger manufacturer of mine safety products, and that's about $10 million. So that's really the dug out that I mentioned. And then of course, one this quarter, which we took -- and this was on the watch list, and this was an $11 million credit that we took the $6.1 million, so that's the list.

The other one that I had was just on the margin, I think last quarter you guys were talking a range of 320 to 330, came in toward the higher end of that. And wondering if you could help us out with trying to the glide path here going forward? And then if we had more Fed action kind of the back part of this year, would you be expect kind of similar behavior in the margin in response?

Yes, sure, I can address that. So last quarter we gave guidance that our margin being at 320 to 330 range, we would stick with that guidance. The bank did get the benefit of their rising rates, just because about 46% of the total banks portfolio is variable or adjustable rate, and about two-thirds of that, which means about a third of the total portfolio actually did adjust up in December. We had really good results with the positive inflows to fund loan growth. So we really have not been compelled by market forces to raise rates. We have started to [ph] rate often specials on the local markets, it really didn't effect numbers in the first quarter. They might affect numbers in the second quarter. But we restarted rating some rates in the partnership to test the waters and test the elasticity of the local deposit market to rising rates and that's actually been quite effective. So there might be some of that that impacts the margin in the second quarter and that's why I would stick with that 320 to 330 guidance. So the second part of your question, rising rates would definitely help us. We have been saying for sometime we're asset sensitive. For the most part, we're fairly neutral, when we publish our parallel yield curve shifts in the first year. Then the real asset sensitivity kicks in, in the second year. Some of that near-term asset sensitivity was growing a bit, as we have had such a robust loan origination activity or variable rate loans here earlier on this year, if that continues that will just increase our assets sensitivity throughout 2016.

I would just add to Jim's comments, as we tested the elasticity, we had a figure in mind that deposits we want to raise, we thought that it would take us several months and it took us about 3.5 weeks. So we feel like our deposit book is well-positioned, should we get to the point, where rates begin to rise, but our customers will move some money to us and they're pretty loyal to us. So that was a pleasant surprise to us well.

The only other one that I had was just on OpEx. I mean you guys coming better than me every quarter for like the last year, and I know it sounds like you've had some help from lower operating cost with a more mild winter or whatever, but do you think that this run rate is sustainable here or should we look for it to tick up a little bit or is there more that you can do even?

I think we've given the guidance around sub-40%, and I think that's still holds true. We really accelerated some retail transformation from really the latter part of the second quarter into December in the first quarter. So we're getting some benefit from that. We might see $0.5 million tick up in more personnel expenses that we've -- we're in a pretty good shape with expenses and we've really not only kept them flat to down, but we took savings and really build out our mortgage platform and Ohio platform without increasing expenses. And as Jim has shared, the mix of our composition of our expenses have changed markedly from really more staff to more line in customer facing. So we feel good about all of that and we'll continue to make progress there. The catalyst was really operation excellence or conversion several years ago. It really allows us also to get to market quicker with digital solutions. I think that's benefitting some of the deposits and some things that you're seeing in more on the ground game with our loaded deposit growth in terms of just having better offerings for our clients.

The next question is from Collyn Gilbert with KBW.

Just to circle back a little bit on the loan growth discussion, Mike that was a lot of good color that you gave. But if you could talk a little bit more about what the construction growth you're seeing? And then what the pipeline was this quarter and then how that compared from fourth quarter?

I mean, the loan growth we're seeing for last year and in the first quarter of 2016 is predominantly on the commercial real estate and the construction side. We've had a little growth in the C&I side, but certainly not as much. And we're just looking at kind of quality of regional projects with good developers, nice anchors. Some of them were doing direct loans, some of them, I would say, are more club deals with two or three banks, $20 million to $30 million nice construction project, really in a community bank circle. And they're just nice projects. I think we have a good brand in Western Pennsylvania and Ohio, and it's really been a nice tailwind for us. If you really look back, since 2012 we've had almost $450 million of growth. And these construction projects are not -- they're no speculative, they really are good anchors and really some quality projects.

And most of it's on the commercial side. This isn't in residential construction?

That's correct.

And do you happen to have the pipeline numbers for where the pipeline was at the end of this quarter? And then how that compares to the end of fourth quarter?

The pipeline is pretty strong. And I think that what I had shared in the past, maybe in the third or fourth quarter was, we probably had a $100 million of takedown in construction that would propel our portfolio forward if we did nothing, and we still feel that way. We've probably used a little bit of that, but not all of it. So we'll have some loan growth there just on the takedowns on approved construction, quality construction loans. So that's remained relatively robust on the commercial real estate and the construction side.

And then just, Jim, and if you said this, I missed it, I apologize. But can you just give a little more color as to your thoughts on the trajectory on fees. I know that it fell a little bit light this quarter, but just are you anticipating kind of year-over-year growth or how are you thinking about the fee businesses in the fee lines?

Yes, we are. So I think that consistent with what we're talking about last quarter, a lot of the growth in fee income you see this year is going to come as the mortgage business we have continues to grow. Because that's generally designed as originated sell model. And originated sell ratio, we generally project over the long-term was about 70% sold versus 30% retained portfolio. Now if we have opportunities to do a construction loan on the residential side or jumbo loans, those will generally stay in portfolio. So that will change the mix on a quarter-by-quarter basis. But really generally it's going to be an originated sell model. So as that model ramps up and we continue to hire more and more mortgage loan originators and build that, so that's really the thing that's going to drive the fee income up. It's actually related to the question came earlier on the non-interest expense and why we're sticking to the $40 million guidance, because as loan originations go up, you're going to be also paying origination fees and commissions on that. And so that's going to go into the non-interest expense base as well, but it should drive fee income for the company. Growth in mortgage gain on sale, I can show you the primary driver. We have seen some a little bit of seasonal slowdown in some of the brokerage and other businesses, but some of those are actually looking a little better in the second quarter. So those will contribute as well, as well our insurance business, which is benefiting from the acquisition of the Insurance Agency that we did last year. So those are meaningful contributors as well, but the growth is really going to come from mortgage gain on sale.

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Price for any closing remarks. End of Q&A

Just appreciate your sincere interest in our company. And thank you for your thoughtful questions. And if you have any follow-up questions, don't hesitate to call either myself or Jim. And have a good afternoon.

Thank you, sir. The conference has now concluded. Thank you for attending. You may now disconnect.