Good afternoon, and welcome to the First Commonwealth Third Quarter 2016 Earnings Release Conference Call. 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 Ryan Thomas of Finance & Investor Relations. Please go ahead.

Thank you, William. 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 call 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 third quarter earnings conference call. We appreciate your interest and investment of time in our company. Joining me this afternoon is Jim Reske our Chief Financial Officer. Our third quarter net income of $17.2 million enabled earnings per share of $0.19. An ROA of 1.02% and an efficiency ratio of 57.3% on an unadjusted basis. All our improved figures by historical standards of First Commonwealth. Net income and EPS represent the best quarterly results in a decade. The third quarter benefited from a buoyant net interest income stemming from solid loan and deposit growth during the year and a stable margin. Importantly, third quarter expenses of $38.7 million remain well-controlled and provision expense of $3.4 million for the third quarter was down over the prior quarters. Although, Jim Reske will explore important particulars in a minute, let me just share some brief thoughts on credit, growth and our recent acquisitions. Lingering on credit, as I mentioned, our provision expense this quarter was $3.4 million. As we reflect on our quarterly provision expense, over the last 13 quarters, 9 of them have come in at this level of $3.4 million or less. However, we recognize that our recent credit costs have been lumpy as I shared the last quarter we have identified the problem energy loans in our portfolio, and have appropriately greeted the risk. The larger problem energy credits have been reserved for and the average balance of the remaining energy credits is significantly smaller. Our loan growth of roughly 6% year-over-year stems primarily from the commercial lending function, which has grown almost 13% during that period and has really offset some planned run off in other loan categories. We've seen nice growth in commercial real estate lending, but remain well below regulatory…

Thanks, Mike. As Mike already shared, we had a strong quarter. On the one hand, $0.19 of EPS and 1.02% ROA, along with a core efficiency ratio of 56.7% represent breakout results for First Commonwealth. On the other hand, these results neither represent the continuation of the strong underlying results of the first two quarters, which had been masked by credit costs in each of the first two quarters. Compared to the second quarter, $0.05 improvement in EPS is driven almost entirely by a $7 million decrease in provision expense. As you may recall, last quarter we set aside $7.5 million in reserves against a single loan. We charged off $6.5 million of that loan in the third quarter, and released the excess reserve, leaving us with provision expense of $3.4 million in the third quarter. Comparing the linked quarter, net interest income was up by $0.5 million and a margin that improved by 2 basis points to 3.29%. The margin benefited from positive replacement yields and our LIBOR based commercial loans got a small lift from the increase in one month LIBOR rates in the third quarter. As for the rest of the income statement, a $1.5 million increase in non-interest income compared to last quarter was almost critically offset by a $1.3 million increase in non-interest expense. To clarify, non-interest income benefited from a $470,000 positive swap evaluation adjustment in the third quarter. You may recall that the swap adjustment with a negative $531,000 last quarter, so the change represented a $1 million positive swing in non-interest income accounting for most of the $1.5 million improvement. However non-interest income did benefit from continued progress in mortgage gain on sale income. On the other hand, the $1.3 million increase in non-interest expense was driven by a $1 million negative…

Questions, operator.

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

Good afternoon.

Hi, Bob.

Hi, Bob.

First question I had for you was about the derivative mark to market swing, which I know you mentioned in your prepared remarks. Can you just remind me what it is that sort of makes that swing quarter to quarter and if there is a move in short term rates if there would be any impact on that line?

Actually, I’ve answered this a couple times. We have with us our Chief Treasury Officer, Mark Lopushansky and I’m going to turn the mike over to him just for one moment to answer this as well.

One of the primary drivers is the actual market value of the interest rate swaps. Because the credit exposure is a function of the market value. So when we see interest rates move up, we actually see a positive change in the market value of the underlying swaps and that's what actually happened this quarter. Just as a proxy, I think the 10-year swap rate moved up by about 9 basis points. So the credit exposure of that market value actually returned a positive adjustment. Does that make sense?

Yeah. And so is it fair to think then sort of the 10-year swaps that your most sensitive to hear?

We haven’t picked the 10-year. That's probably a proxy for our entire portfolio. Our swaps basically started back in 2008, and on average we had 10-year swaps and probably 7-year swaps, so the 10-year is probably a good proxy for that overall adjustment.

Great. Okay. Thank you. The other question I have for you have sort of have to do with profitability. I know you guys noted that your ROA is north of 1%, best level it’s been in several years, which is great. Just kind of curious with the acquisitions coming on board, if you guys have got targets either in terms of ROA or return on tangible equity for the business once you've been able to sort of fully assimilate the deals?

We certainly expect our ROA to be above 1% and to have some nice revenue synergies as well as the ones that we've stated on the calls for both deals. We are working through our budgets and forecast quite frankly for 2017 and 2018 through November and December, but I will certainly expect it to have a positive impact.

Yeah, Bob, our target has been 1% ROA for a long time and we're of course obviously very excited to achieve that this quarter. Integrating two deals sequentially, as we're trying to be clear about we do expect that there will be some noise in up, but ultimately our long term goal still remains to keep the ROA above 1%.

Okay, great. Thank you.

Our next questioner today is John Moran from Macquarie. Please go ahead.

Hi, guys, how is it going?

Hi, John.

Hi, John.

Hi. Just on the OpEx outlook and Mike, I think you sort of alluded to cost control as one of the key objectives as you look out into 2017, you guys have done a great job I think on a core basis of keeping it down. Even though that there will be some noise kind of coming in with the branches here in December and then 2Q with the deal closing. But on a core sort of First Commonwealth basis, do you feel good about the ability to kind of keep that well under $40 million kind of throughout 2017 or is some of the digital investments and stuff going to start to kind of take that up a bit?

I think without the acquisitions we would feel very good about that but the operating expenses will be adding for the 13 branches will be about a $6.8 million on an annualized basis, and with Delaware County Bank, it looks like about $9.8 million and then moving, Ohio, then add up $30 million or so. So that's going to add to our expense base, but our revenue will need to out run that.

And since you mentioned it, John, it's a great question. Just the – we have targeted that 160 figure and we talked about it for some time obviously as we do more acquisitions and we grow, we will need to continue to invest in our businesses. So we're probably going to migrate to really talking about the net efficiency ratio, the core efficiency ratio and the stated efficiency ratio as opposed to just a dollar figure target. In the near-term, we do think that yes the acquisitions are going to add to the dollars in terms of where we have to spend, but the core rest of the bank should be operating at about – right about that 160 level at least for the near time – probably next year.

Got you. Okay. That's helpful. And then the other one that I had was just on the growth and maybe you could just give it a little bit of context, I know a lot of banks have seen sort of slower growth in 3Q maybe even more than what would be expected just given regular seasonality. But maybe if you could just give a quick comment in terms of what you guys are seeing in the footprint and then how pipelines are looking for 4Q?

The pipelines look good. We have been fairly disciplined with a rather large portfolio of our indirect auto business and purposely rammed that off just given the spreads. The downdraft there year-over-year is over $70 million. I think that will continue. We like the prospects of the business long term, particularly if short term rates start to move up a little bit. So we're kind of hanging with it. So that's obviously impacting a little bit of our growth. There is really an ebb and flow to the C&I in the commercial real estate business. We have pretty good pipelines as we head into the fourth quarter. We've also really look closely at our risk appetite. We've had a little energy exposure and despairing some things from time to time, and so just readjusting that. We think with a full team in Ohio that will more than offset that and get us back up to – our guidance has been mid single digits and hopefully we can get to where we are consistently a little bit on the high end of that.

Okay. Thanks very much.

Thank you.

[Operator Instructions] Our next questioner today is Collyn Gilbert from KBW. Please go ahead.

Thanks. Good afternoon, guys.

Hi, Collyn.

Hi there. Jim would you mind just going through – and if you covered it, I apologize, but your thoughts on NIM, I mean I think you’d suggested maybe the range was going to be in kind of the 3.20 to 3.30, so obviously came in at the high end of that range and just maybe what you see as dynamics going forward from here.

Yeah, thanks, Collyn, I appreciate the question. It is [indiscernible] obviously it coming behind the range. There are couple of things that happened in the middle of this year that are going to change as we go into fourth quarter. We had – before we had perused the branch acquisition, we were pursuing deposit growth and keep up our loan growth and had offered some kind of a certain market specialists for certain types of deposits. Some of those will start rolling off in the fourth quarter. So that should help the margin a little bit. And then obviously the bigger effect is going to be the impact of branch acquisition, which should close towards the end of the fourth quarter. So there won’t be a tremendous effect on the branch acquisition in the fourth quarter because it’s going to close towards the end, but some effect, that’s it is going to start replacing the short-term borrowings with the longer term deposits at a cheaper rate. Effectively, particularly pronounced if the Fed raises rates in December then if we hadn’t bought the branches, our short term borrowings would've raised up almost immediately obviously with the branches replacing the short-term borrowing. The rates on those borrowings would not be going up. So those will come to the effect. All that being said, we had, I think, when we announced the branch acquisition, we had said that we expected from that probably about a 5 basis point improvement in the margin that wasn’t baking in a rate increase in December that I just mentioned, so I don’t need to confuse that issue. So that would -- just the result of that branch acquisition, probably take the margin -- our expected range in the margin from 3.20 to 3.30, up to more likely 3.25 to 3.35.

Hey, Collyn. This is Mike. I would just add somewhat encouragingly on as we look at our corporate banking, small business and our mortgage loan portfolios and what we're adding volume on here in the last quarter, those spread seem to be above our 12-month rolling average. And as Jim shared in his comments, our replacement yields for our newer loans seem to be now eclipsing the run off. And then the other thing I would share is just anecdotally as I talked to our lenders, they do feel like credit structures have stabilized a bit and they are not and I quote they feel like they are not feeling the pricing pressure that they’ve had over the last few years for what it’s worth.

Okay. That's very encouraging. Okay. And then just in terms of outlook for credit and provision, I know you had indicated obviously there's going to be some lumpiness here as we go forward. But is it just thinking about kind of the strategy around the reserve and how you see that evolving as we look out?

Lower. Collyn, I know talked about this a lot. Lower. We’ve stopped [indiscernible] little bit with energy otherwise the core performance over the last four quarters would have been clear and sooner. I think we're a little bit more reticent of energy going forward and we have to be very thoughtful and discerning regarding some certain segments. So I will keep you posted as the story unfolds here.

Okay. All right. That's helpful. All right, I will leave it there. Thanks guys.

Thanks, Collyn.

[Operator Instructions] It looks like we have no further questioner, so this will conclude our question-and-answer session. I would now like to turn the conference back over to Mike Price, President and CEO for any closing remarks.

Appreciate your interest in our company and look forward to seeing a number of you in the next quarter or two either on the road or at your conferences. Thank you very much.

The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.