Rich Stimel - Vice President, Corporate Communications Mike Price - President and CEO Jim Reske - Executive Vice President and CFO Mark Lopushansky - Chief Treasury Officer.

Bob Ramsey - FBR Capital Markets Matt Schultheis - Boenning & Scattergood Collyn Gilbert - KBW John Moran - Macquarie Matthew Breese - Sterne Agee.

Good day, ladies and gentlemen. And welcome to the First Commonwealth Financial’s Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will be given at that time.

(Operator Instructions) I’d now like to turn the conference over to your host for today, Mr. Rich Stimel, Vice President, Corporate Communications. Sir, you may begin..

Thank you. 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 call to your questions. For that portion of the call we’ll be joined by 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 two of the slide presentation for a description of the 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, Rich, and good afternoon, everyone. It is great to have you on the call with us today.

The third quarter was an especially busy quarter for us and we feel good about the way it played out, including our $0.13 per share of earnings for the third quarter in a row, a stable net interest margin, our continued progress with efficiency through the loan growth and low credit costs.

Over the course of the last three months, we’ve launched our Mortgage Banking operations, we have acquired an insurance agency, we’ve continued to grow our Cleveland business space and we executed a single largest technology initiative in our company's history.

So I’ll start with the conversion of our IT systems, given the scope of the effort and its significance for the future of the company. The conversion of our core processing system and numerous complementary platforms represents a fundamental step towards generating meaningful operating efficiencies and enterprise-wide process improvements.

This was an enormous investment for us, but the opportunity it presents impacts every aspect of our business. Our earnings performance for the quarter includes $2.2 million of non-routine conversion costs.

Year-to-date conversion-related expenses totaled $7.3 million, but what isn’t fully reflected in our earnings numbers are the additional savings that we only started to realize in the third quarter and that will begin to be fully realized in the fourth quarter. But the conversion not only provides us with significant opportunities for cost savings.

It also creates the framework for expanding our bank deliver strategy and bringing new products to market more quickly. It will be the foundation from which we grow for many years to come.

From the line of business perspective, our Mortgage Banking division launched in mid-July, providing purchase and refinance solutions across our Western Pennsylvania footprint. Through the third quarter, our loans funded are on target with our initial projections. We are also seeing good traction in the referral activity across our branch network.

A few weeks ago we announced the acquisition of Thompson/McLay, an Indiana, PA based insurance agency. This transaction closed on October 1st and is expected to be minimally accretive to earnings in the near-term.

However, we gained a team of talented producers and professionals with good relationships and access to approximately a dozen new insurance brick carriers, which will provide greater scale and product offering to an important fee-based product line.

And looking back on the quarter, the conversion alone, that have easily monopolized all of our resources and there's no doubt about it that it consumed a tremendous amount time and energy. But the focus and the determination of our 1,300 plus team members allowed us to accomplish a great deal in a very narrow timeframe.

The conversion, the launch of mortgage and the insurance acquisition. With the same time, we delivered solid loan growth and continue to effectively manage loan expenses. Loan growth has accelerated over the last two quarters to include growth of more than $78 million in the third quarter or more than 7% on an annualized basis.

We continue to see solid performance from our Cleveland business center with more than $100 million in accruals and a robust pipeline. We’re encouraged by the stabilization of our net interest margin and our noninterest expenses shows strong trending versus prior years.

Nonperforming loan in OREO balances declined modestly and drove nonperforming assets to 1.22%. Suffice to say that we feel we are fundamentally moving in the right direction. And I view the third quarter as one of the more pivotal quarters in the recent history of our organization.

We now have the foundation on which to build our franchise and grow our bank. So with that, I'll turn it over to Jim Reske.

Jim?.

Thanks Mike. As I did last quarter, let me begin with a few broad statements about the company's third quarter performance and then provide some details that I hope would be helpful.

As Mike mentioned, we were pleased with the company's financial performance in the third quarter especially in light of these significant expenditures, both in financial and human terms that we will require to complete our IT conversion. Earnings per share once again came in at $0.13 and the net interest margin was unchanged from the prior quarter.

Other performance metrics showed modest improvement. Net income for the quarter was $12.5 million, up from $11.9 million in the prior quarter. ROA and ROE, both were up slightly. The efficiency ratio improved, end-of-period loan balances grew by $78.6 million and net charge-offs were down to 18 basis points of average loans on an annualized basis.

Now let me briefly cover each element of the income statement in turn. First of all, net interest income improved by $1.2 million compared to the prior quarter, largely due to 7.3% increase in end-of-period loan balances.

As I mentioned earlier, the net interest margin held steady at 3.26% in contrast to the trend of margin compression that we had been experiencing in prior quarters. Keep in mind the prepayment penalties contributed four basis points to the margin in second quarter.

Without the effect of such prepayment penalties, the margin actually would have expanded slightly in the third quarter. Our loans continue to reprice lower in the current rate environment but the differential between rates on new loan production compared with the rates on the loans that ran off was much lower than the recent quarters.

And while our yield on interest-earning assets fell by 3 basis points, our cost of interest-bearing liabilities fell by 4 basis points. Our total cost of deposits also fell by four basis points to 0.26% in part due to the continued growth in average non-interest-bearing deposits, which were up by $26.8 billion in the third quarter.

The intentional run-off of $118.1 million in brokered certificates of deposits in favor of lower-cost short-term borrowings also helped lower our cost of funds. Beyond both trends, the bank also engaged in two acting treasury management strategies in the third quarter to help protect the margin.

The first was a simple transaction in which we sold approximately $133 million in securities from the securities portfolio and repurchased a like amount of securities with slightly longer durations.

The overall effect was to increase the yield on the portfolio by seven basis points by only extending the overall duration of the entire portfolio by 2.4 months. The second transaction was a swap in which we effectively extended the duration of $100 million of our $1.3 billion in LIBOR-based loans.

The short-term rates remain low and in fact, even if they rise slightly, the effect of these two strategies will be to add approximately $1.8 million of pretax income on an annualized basis in the first year.

This translates to approximately 2 to 3 basis points of protection to the net interest margin as a hedge against a prolonged low rate environment. We’re assuming taking the overall asset sensitive position of the bank to take advantage of rising rates when they eventually do come.

Noninterest income came in at $15.1 million in the second quarter, which is approximately $2 million down from the prior quarter due to $2 million gain on the sale of a single OREO property that we realized in the second quarter. We were pleased to see modest increases in trust and brokerage income compared to last quarter.

As Mike mentioned, the third quarter also was the first quarter for our newly relaunched mortgage business. Our investment in that business of approximately $700,000 in the third quarter so far exceeded third quarter mortgage revenue.

However, we continue to expect that this business will pass the breakeven point and will be profitable in the fourth quarter of 2014.

We have previously provided guidance that we thought that the business could provide $6 million of revenue on an annual basis and after roughly $4 million of expense produce approximately $2 million in annual net income. These estimates were of course prepared to fully launch the business.

As our experience builds, we will be able to fine tune those estimates and we have further guidance for you at a later date. Turning to non-interest expense, the third quarter marked the culmination of our year-long IT conversion project.

The total expense of the conversion came in at $11.8 million over the life of the project, which was within the range we had previously announced. Direct conversion expense totaled $2.2 million in the third quarter, with an additional $300,000 of salary and travel expenses in the third quarter related to the conversion.

But we’ve already started to realize some of the expense reductions promised by the conversion. Expense reduction from the previous quarter as a result of the IT conversion totaled $800,000 in the third quarter, which in turn drove total non-interest expense down by approximately the same amount.

Adjusted for the noise of conversion expense, non-interest expense would have been up by approximately $300,000 in the prior quarter. But this can be explained by an increase of approximately $450,000 in the cost of our investment in the mortgage business.

We continue to expect that our IT conversion will result in expense reductions of at least $1.5 million to $1.7 million per quarter from pre-conversion levels.

With approximately $800,000 of those expense reductions realized in the third quarter, we would expect an additional $700,000 to $900,000 of further expense reductions from third quarter levels. In other news, our effective tax rate was 29.1% in the third quarter compared to 28.4% last quarter.

And in terms of capital management, we completed the execution of the remaining portion of our $25 million stock buyback authorization in the third quarter ahead of schedule due to the repurchase of a large profit shares that became available. And with that, we’ll take any questions you may have..

Operator, any questions?.

(Operator Instructions) Our first question comes from the line of Bob Ramsey of FBR Capital Markets. Your line is open. Please go ahead..

Hey. Good morning or good afternoon, guys. I guess, first of all, congratulations on completing the system conversion. I know that has been an important project for some time. And so I think about the expense run rate on a go-forward basis, I know you all said there is about another $800,000 of run rate expenses that you expect to achieve.

Is it fair to sort of take where you're this quarter without the $2.2 million of conversion-related expenses and then tack on that additional sort of final benefits in terms of getting at where we are in the fourth quarter of this year, or do you think you see a little bit of growth from that level?.

I think it is.

Anything you want to add, Jim?.

No, Bobby. Just to confirm that’s exactly where we look at. The total NIE for the third quarter was $41.5 million. OpEx will be $2.2 million. If you net those you get to operating NIE of $39.3 million, back out $800,000 which is the midpoint of our range that could see the $35 million as a run rate going forward..

And, Bob, that’s consistent I believe with some of the guidance we've given in terms of getting to $40 million run rate and then having $1.5 million come off with operational excellence from the bank..

Great. I know that’s great. Loan growth, as you highlighted in our introductory comments looked really good this quarter. Again, I know you all talked about how much of the originations came out of Cleveland and I guess year-to-date.

How much of it was actually in this quarter?.

It’s probably about less than -- probably $20 million, $25 million..

Okay.

And then, what are you sort of seeing on the loan growth front? Do you have confidence with the pace you’ve seen this quarter? Are losses sustainable on a go-forward basis? How's the pipeline at the end of the quarter and what are you kind of hearing from customers?.

I think we had -- we probably had two large turnkey payoffs in the last two quarters. And I don’t suspect those payoffs will continue to be there. But I think we’ve had robust activity with what I will call club real estate and club C&I deals to a little larger regional company and developer. So I think that’s driven the activity.

And we feel good about our corporate banking and commercial offering and how it competes in the marketplace. Two quarters are the beginning of the trend, but let’s we need to make it a trend..

Okay.

Anything, I guess sort of unusually lumpy or large in the loan growth this quarter, is it pretty granular, or was it little bit turnkey?.

I would say it’s more granular than it’s been in the past. And the percentage of our credits over $15 million continues to fall modestly from quarter-to-quarter..

Okay, great. And I guess I will step back after one last question. But maybe just touching on net interest margin, could you -- I know you all set the differential between where loans are rolling off and where you’re putting on new loans has narrowed.

What is the difference between those yields today? And what is your sort of outlook for the net interest margin? I know you said without the prepayments last quarter you would have been up this quarter, but I am guessing in this rate environment, you still feel a modest amount of pressure on a go-forward basis..

Jim?.

Yeah, that’s a fair statement. We do feel that pressure. The loans too continue to price downward. We would like to think that this is a start of an upward trend and we have reached the bottom, but it’s really too early to say that. Two quarters is not trend make.

To answer your question specifically, the differential between the rates on the loans, the new production versus the rates running off, was a 5 basis points differential in the third quarter to give basis of comparison and the second quarter was a 75 basis point differential. So that has narrowed considerably.

I think it’s very analogous to what we said early in the cycle was CD rates, where you have CD roll off at higher rates that were replaced on much lower rates and the spread difference between those two on the deposit side was quite large during the cycle and now has allowed the CD to be price at near or down.

I think that you are seeing the same thing on the loan side..

It is a big change in a differential.

Is more of the movement and what’s rolling off? I mean, I guess, what I am asking is, have you seen the higher yielding loans that basically have run their course and they run off and that’s not as much of a pressure or did you see better rates on the originations in the market?.

We actually see a little of both. It is a little higher on the loans that have run off and that’s the part of it, that’s difficult to predict. And then we can put together schedules that show the amortization, scheduled amortization of credits, but the large payoffs were just hard to predict.

And we saw more of those a few quarters ago and we’ve seen recently, but the rate of -- actually raw rate on new production was up slightly in the third quarter..

Okay, great. Thanks guys..

Thank you. Our next question comes from the line of Matt Schultheis of Boenning & Scattergood. Your line is open, please go ahead..

Hey, good afternoon..

Hi, Matt..

Couple of quick questions.

With regard to the mortgage operations, recently I think your guidance was two mortgages per branch per month, what is the lead time do you feel to get up to that volume of originations?.

We are looking to get to that level in the first or second quarter of next year and we also -- the two observations after the quarter in the business are simply that we have less activity but higher loan amounts..

Okay. Understood.

With regard to your insurance purchase, can we get any color as to sort of revenue or bump up that we might see in fee income from that?.

Yes. The something up in fee income that might be just over seven figures, but it’s going to be largely offset by expense. So we really have said so far publicly that the affect in the bottomline is going to be de minimis..

And seven figures is annualized, correct?.

Absolutely..

Okay.

And one last question, where do you see your targeted efficiency ratio at say the end of 2015?.

I think the guidance that we had talked about an initiative called 50s by 15 starting about two years ago. And I think as we prepare our budgets that number is landing a little north of 59 and I am getting behind my controller. And we're just going to the last [consensus] (ph) of our '15 budget and we will be back with that.

That’s way we want to get the longer-term, I guess specific question was '15..

Okay. All right. Thank you very much..

Thanks Matt..

Thank you. Our next question comes from the line of Collyn Gilbert of KBW. .

Hi, Collyn. .

Hi, Collyn. .

Just wanted to follow up Jim on your comments about the loan spread now narrowing in terms of new origination versus what’s throwing off.

Give us sense at all either just through talking with your vendors or your customers as to wait -- the volatility that’s gone here in the last few weeks, what that might do to just forward pricing on your credits and maybe do we see a resurgences there of that of lower pricing coming in?.

I don’t have a sense of that Collyn and I probably talk to a couple customers a week..

Okay..

I will try to give you some more guidance there..

Okay. No problem. And then just curious Jim the comment that you’ve made about allowing brokered deposits to run off and replacing with borrowings, what’s facilitating your strategy? It seems like we’re hearing so many more banks go the opposite way.

So I just was curious about that?.

Make sure, it’s not just the price differential. I mean the brokered deposits are largely through the Cedar’s program and the cost of short-term borrowings is a couple basis points lower than the brokered..

Okay, that's great.

And then, can you just remind us what percent of your portfolio again reprices either with prime or LIBOR or just lesser the year maturity?.

Sure. It’s 43.9%. So it’s 28.9% reprices with LIBOR and 15% is related to prime..

Okay. And so the dynamic, can we just think about this in totality, Jim, of the balance sheet balance sheet. Let’s say, we stay in this rate environment for a while.

And is it -- does that NIM sort of range bound in here, do you see I mean not a lot of movement really driving at one way to other over the next 12 months or 18 months?.

Yeah, that’s probably true. I mean I want the hedge this probably by saying I do think some of that compression could still take place on the repricing the loan portfolio or even though we’re happy to see how much nearer that is here in the third quarter. But yeah, likely to be somewhat range bound is to use your words..

Okay, that was all I had. Great. Thanks, guys..

Thank you..

Thank you. Our next question comes from the line of John Moran of Macquarie. Your line is open, please go ahead..

Hey, John. .

Hey, how is it going?.

Good..

Good.

Hey a quick follow-up on the insurance acquisition, I think you said in the prepared remarks that it adds 12 new carriers, how many does that take you to in total?.

Probably it doubles our carriers. It really gets us (indiscernible) we just kind of feel..

Okay. So it’s 2x in terms of who you’re currently doing business with. So, I mean, maybe not in your one but overtime as you kind of integrate this thing.

Could this start to move the needle a little bit more in terms of contribution?.

It could some. It’s not a terribly efficient business, but it adds non-interest income and it’s -- we’ve a readymade customer base that’s pretty heavy on the commercial side that really property, casualty and other solutions should be ideal if we just deliver and I think we can..

Got it. Thanks. I just wanted to kind of go back and revisit the swap and make sure that I get the numbers right actually.

You said $1.3 billion on LIBOR-based loans were swapped out, how far out did you guys go and how much of that had to….?.

Yeah. Thank you very much for asking the question to give us an opportunity to clarify. We have on our balance sheet $1.3 billion of LIBOR based loans. We only swapped $100 million of that total now. That’s all..

We took a little money off the table but quite frankly, we are -- we still would love to see interest rates go up and be underwater on that swap because that would be the -- we would come out way ahead financially..

Right. The other $1.2 billion would still be priced upward in a rising environment. I’m sorry, you had a question..

Yeah. That was the first big piece of the question, so appreciate that. And then the other part was how far out did you go and how much the pre-tax to that? I know you said between the moves that you made in the securities book and the swap, it was $1.8 million pre-tax on an annual basis I think.

Is that correct?.

Yeah. And so I’m happy to provide this little sort of detail. The bond exchange that we did -- the $133 million in the securities portfolio that will add about $800,000 to pre-tax and the rest is from the swap. The duration of the swap was $50 million out three years and other $50million out four years.

And the total impact of that actually if rates don't change at all, that should be an additional $1.2 million. But we look at the most likely accurate forecast and if rates rise very slightly in our most accurate forecast, 10 to 12 basis points, even then that swap at $100 million swap will add about $1 million.

So, $1 million from the swap and our most likely rate forecast, $800,000 from the securities gives you $1.8 million..

Thanks for the additional color there. And then just in terms of how that move impacts -- I know that you said it doesn't really change the asset or liability sensitivity program..

Right..

You guys were running fairly neutral. I think, if I’m remembering correctly on a….

Well..

… basis points?.

It depends on the scenarios. Instantaneous rise, we are neutral in the first year. We will be very asset sensitive in the second year, when you look at the impact on the interest income. Other big impact here is the fact that we did a study of our core deposits. We talked about that really last quarter.

And as a result of that study, we realized -- were actually a more accurate view of the duration of our liabilities out of our balance sheet which extend the duration on liability side.

After we did that study, will just be published in the Q, is the actual, not just the net interest income impact in a rising environment, but also the impact on the enterprise value. We will show that we are asset sensitive in both measures. So to sum it up and even after this swap, we still are going to be quite asset sensitive.

Fairly neutral in the first year as we have been and then very asset sensitive in the second year in the way we modeled out..

Got it. All right. Thank you very much for that detail. I appreciate it..

Thank you..

Thank you. (Operator Instructions) Our next question comes from the line Matthew Breese of Sterne Agee. Your line is open. Please go ahead..

Good afternoon, guys. .

Hey, Matt..

Hey, Matt..

Just going back to the insurance ABC acquisition, do you have any preliminary estimates as to how much goodwill and intangibles will create from the deal?.

I think it is de minimis..

So no impact to tangible book value as a result?.

Oh I’m sorry. It can be up to $2 million. I mean, its $2 million..

Okay.

And then in regards to the broker deposits that we let roll off into shorter-term borrowings, is there a longer-term funding strategy there? Will those borrowings end up rolling into something more longer term when permanent?.

No. Not necessary. In fact, you saw a slight reduction of our long-term borrowings in the third quarter. This is some term FHLB borrowings matured and we just replaced those to short-term borrowings. I mean, yeah, so there is no strategy there in terms of picking this and turning them out.

We look at that in a broad sense as fairly match funded in terms of the short-term borrowings with our short-term LIBOR based loans..

Okay..

So those two go hand in hand..

Okay. That’s all I had. Thank you..

Thanks, Matt..

Thank you. And our next question is a follow-up from the line of Bob Ramsey of FBR Capital Markets. Your line is open. Please go ahead..

Hey, thanks for taking the follow-ups. Just couple of questions, on the repurchase front, obviously you’ll completed your authorization. Should we assume that you guys have done for the year at this point? And then I’m thinking about appetite for repurchases next year.

Is it likely to be something in the same sort of ballpark as 2013 and 2014 repurchases?.

Yeah. Bob, this is Mike. I don’t think our strategic priorities for capital change from organic one, sustainable increases in the dividend for our retail shareholders, which comprise about 40% of our base. And then third, stock buybacks probably similar kinds of dollar amount in chunks.

And then fourth, M&A, strategic M&A in contiguous markets where we can build upon a pretty strong commercial franchise, a thought process. So Jim, you want to add..

So many of those strategic things have changed at all. I would tell you that is a very practical aspect of this in terms of why we’re not coming right back and staying conservative about in going back in the market where we have further buyback authorization in that.

Part of this involves a regulatory approval process that is tied up with our year-end financial, I'm sorry, year-end capital planning.

So you want to get all that together figure out where we are end of the year, thinking about exactly what kind of buyback authorization you want to look at, go through our approval process both to our board and regulators and come out that next year when we have nothing to announce on that now..

Okay. That’s helpful. And in terms of tax rate, you guys came and touch higher than I was expecting this quarter.

What is the good tax rate for 2015 or on a go-forward basis in general?.

It’s probably about 29.5%, not ultimately two different funnel we had here in the third quarter..

Okay. Great. And then last question. I know, you all had mentioned in the release that there was a drop in commercial loan swap revenues this quarter.

Just curious if there's anything notable behind that or whether that’s something that comes back in future quarters or is it just for the normal volatility or what other color can you add around that?.

I think, its two things that just the ebb and flow of the types of deals that ease the swap and the primary release..

Okay. Great. Thank you very much..

Thanks, Bob..

Thank you. And I’m showing no further questions in queue. I would like to turn the conference back over to Mr. Mike Price for any closing remark..

I always appreciate your genuine interest in our company and the time you invest to get to know us, really appreciate it and thank you for your thoughtful questions. And look forward to seeing a number of you over the next couple quarters..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day..