Ryan Thomas - VP of Finance and IR Mike Price - President and CEO Jim Reske - EVP and CFO.

Matt Schultheis - Boenning.

Good morning and welcome to the First Commonwealth First Quarter 2018 Earnings Conference Call. All participants will be in a 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, Vice President of Finance and Investor Relations. Please go ahead Mr. Thomas..

Thank you, Vanilla. 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 may be referenced throughout today's call.

With me in the room today are Mike Price, President and CEO of First Commonwealth Financial Corporation; Jim Reske, our Chief Financial Officer; and Mark Lopushansky, our Chief Treasury Officer. After brief comments from Mike and Jim, we will open the phone call to your questions.

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.

Before we -- 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..

Hey, thank you, Ryan. And welcome, everyone. First quarter 2018 core net income was $23.3 million, our highest quarterly net income figure in the history of our company. First quarter net income produced earnings per share of $0.24, core return on assets of 1.31%, a core return on tangible common equity of 15.73%, a core efficiency ratio of 58.3%.

We also raised our dividend 12.5% to $0.09 per quarter or $0.36 per year. Three tail work winds for the quarter included; first, the interest margin improved 8 basis points on a linked quarter basis to 3.69% and a couple of things were at work here.

The December increase in the Fed fund rates was absorbed positively into the loan book, additionally deposit pricing remained disciplined and balances grew nicely, also allowing the payoff of increasingly expensive borrowings. I think also our newly booked yields on commercial loans were greater than those that were running off.

The margin helped enable net interest income of $60.2 million despite a decrease in ending loan balances of $31.2 million on a linked quarter basis. For the quarter, unanticipated payoffs in commercial loans increased significantly. Conversely average deposits increased $77.1 million in large part due to traction in consumer checking balances.

The second tailwind beside margin was core non-interest expense and this is excluding merger related expenses of $300,000, was $46.5 million which showed good progression on a linked quarter basis. And then the third tailwind was a security gain of $2.8 million coming from the liquidation of the previously written-down trust preferred security pool.

Some headwinds included elevated provision expense of $6.9 million, due to $7.3 million of specific reserves relating to two credits, the first of which was a local company $5.5 million specific reserve and a – and an additional $1.8 million specific reserve for a commercial real estate credit.

This comes on the heels of six consecutive quarters of really manageable provision expense. In short, and with the help of the security gain, the income statement resiliently absorbed the quarter's credit headwinds.

Other notable items, we continue to see nice developments in our market expansions via our acquisitions in Northern Ohio and Central Ohio. For example, in Northern Ohio in the first quarter our retail loans grew $7 million or about 21% annualized and our consumer deposits grew $10 million or 8% annualized.

In Central Ohio, our business deposits grew $66 million on a $631 million base. We really assembled some capable teams to include commercial lending and mortgage professionals and we have recently recruited Presidents for growth via Northern Ohio or Cleveland MSA as well as the Columbus MSA in Central Ohio.

We expect to repeat the same pattern with Foundation Bank in Cincinnati which will close legally on May 1st, and the actual bank conversion is slated for later in the month. Several items here, we really like the current CEO and the team he has assembled. Foundation is a profitable five branch bank with strong credit [indiscernible] enterprise risk.

The bank is just clean and its very well run. The commercial lender and the CEO there have already introduced us to opportunities in the market where our balance sheet and commercial capabilities can really make a difference.

One other item, before I hand it off to Jim, our CFO -- the Pittsburgh Business Times recognized First Commonwealth as the second largest SBA lender by dollars in the Pittsburgh MSA in a story that ran two weeks ago.

We are very pleased with our progress with our SBA initiative which was reenergized about one year ago with the acquisition of Delaware County Bank in Central Ohio.

Jim?.

Thanks, Mike. Mike has already provided you with an overview of our results, but let me provide some color on two other things that impacted first quarter earnings, just so that you can get an accurate picture of the underlying earnings power of our company.

First, in the first quarter we experienced $2.8 million of securities gain as compared with $4.3 million of securities gains in the fourth quarter. I want to point out that these were not discretionary sales of securities from our investment portfolio.

Rather they were the results of successful option calls of two pools of trust preferred securities holdings in our portfolio, which had been marked down ever since the financial crisis.

We have no say in the timing of the auction and the success of the auction, we just [know] the value of the individual trust preferred securities that were in the pool. But very successful, we were fortunate enough to get a check for the full amount on the holding at par, and that's what happened in the first quarter.

Second, the income tax provision line on our income statement reflects approximately $600,000 of non-recurring tax adjustments related to the write-down of our DTA last quarter. So if you are trying to calculate our effective tax rate by dividing our tax provision, by our pretax income, you will get the wrong number.

Our real effective tax rate was approximately 18.91%. With those two items out of the way, I'd like to provide some further detail on the net interest margin. As Mike mentioned the margin expanded nicely to 3.69%, at the top of our previous guidance of 3.60% to 3.70%.

One effect of the margin that I would like to highlight, was that we grew total average deposits by about 5.6% on an annualized basis in the first quarter and not just due to growth in time deposits and public funds, but also driven by healthy growth of consumer checking in saving deposits.

[Even if] you have noticed that our deposit data in the first quarter was at 25% up sequentially from prior quarters, this was mostly driven by the increased costs to public funds, as we made a unilateral decision in the first quarter to bring rates on this portfolio up across the board as a sort of "catch-up" given the rise in rates over the past year.

These public funds represented about 10% of our deposits. The recycling data on the other 90% of the deposit book was about 10%. As a result, our deposit data may not be as high in ensuing quarters but even if it is we would think that our gain will hover between 3.65% and 3.75%.

We only incorporated one more rate hike this year is our forecasts, so we may be surprised to the upside on the NIM, if rates rise more aggressively given our asset size disposition. And with that, we'll take any questions, you may have..

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Mark Schultheis with Boenning. Please go ahead. .

Quick question for you on the two credits that you highlighted in your discussion.

Do you share with us any industry or any sort of exposure that -- what they were in?.

I am reticent to do that only because -- let me say well it's not -- it's not heavy industry or oil and gas on the larger credit, it's a local company in Western PA that's four years old. They have got about six years of history with us. It's a direct C&I credit. .

Okay. .

And the other credit is commercial real estate and the owner failed to maintain the property and with deteriorating conditions tenants left, the specific reserve was $1.8 million and we expect to receive some indicative bids that will prove that specific reserve..

So that on the commercial real estate that seems like it was property specific it didn't feel like it was driven by sort of macroeconomic factors?.

No..

Okay.

And I am sorry Jim if you could go over the -- you added some color on your tax rate for what happened in the first quarter, could you just repeat that please?.

Yes, sure. I just want to be careful about that, so that you don't have a wrong impression of on an overly low effective tax rate.

I think we calculate our effective tax rate of 18.91%, so we just had some what you might call true up adjustments in the first quarter really related to the DTA adjustment in the fourth quarter, and that showed up in our tax rate this quarter.

So we actually called it out in the body of the text of the earnings release and I want to highlight at the call to show it was clearly a [indiscernible] going forward..

Okay, thank you..

You bet..

Thanks Matt..

[Operator Instructions] There appears to be no further questions, I would like to turn the conference back over to Mike Price for any closing remarks..

As always we appreciate your sincere interest in our company, we have the great privilege of being on road shows and conferences with all of you and look forward to that in the ensuing year. Thank you very much..

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect..