Good day ladies and gentlemen, and welcome to the First Commonwealth Financial Corporation Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the call over to Rich Stimel.

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’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 Bob Rout, Executive Vice President and Chief Financial Officer. After brief comments from management, we’ll open the call to your questions. For that portion, the call will be joined by Bob Emmerich, our Chief Credit Officer; Mark Lopushansky, our Chief Treasury Officer and Norman Montgomery, Executive Vice President of Business Integration. Before we begin, I would 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. And now, I’d like to turn the call over to Mike Price.

Thank you, Rich, and good afternoon, everyone. Thank you for joining us on today’s call. Overall, we feel good about the quarter and its implication for 2014, although undoubtedly there is still ways to go become top performing. We reported net income of $9.3 million, or $0.10 diluted earnings per share, compared to net income of $8.7 million or $0.09 per share in the fourth quarter of 2012. If you factor out the unusual expenses associated with our core technology conversion and the liquidation of two of our trust preferred securities, our operating earnings per share comes in at $0.14 for the quarter. While, we are seeing progress across several areas of strategic focus, namely credit, organic growth, our technology conversion and organizational efficiency. First, building a culture of operating excellence starts with credit discipline. We feel we laid the groundwork over the last few years that will make us very competitive along this critical dimension for years to come. Non-performing loans are trending down nicely, having fallen 45% from 2012 levels. Our criticized loans continue to decline as well, down from $289 million in 2012 to $162 million in 2013. We did see an increase in net charge-offs year-over-year from $15 million to $32 million. That increase was concentrated in two large legacy credits in the first and second quarters and we expect that number to moderate in 2014. Second, fourth quarter loan growth of $43.8 million was encouraging and exceeds 4% on annualized. And looking at the past year, our retail bank performed well in loan originations, while our corporate bank contended with some challenges. Over the year, we selectively pruned well over $80 million in corporate credits. That slowed in the later part of the year and at the time we also saw a nice pickup in…

Thank you Mike and good afternoon everyone. As Mike mentioned, we are really pleased with the ongoing improvement in our financial performance in this quarter, solid loan growth, stabilizing margin, [indiscernible] improvements in credit quality and the kickoff of the 9C [ph] conversion initiative that we believe will be transformative with respect to both customer experience and operational efficiencies. We still have a long way to go to achieve our higher performance financial status but the direction and the momentum are very encouraging. We had two unusual issues that occurred this quarter that blurs that poor performance slightly. We reported a $4.5 million or $0.03 earnings per share charge related to our IT conversion. It is currently scheduled for third quarter. Mostly this change was related to accelerated depreciation for hardware and software and we will abandon that conversion. Also included our charges for early termination of existing maintenance contracts on that hardware and software, professional fees and it rolls for severance cost in reducing balances that may be displaced by more efficient operations. We have previously disclosed that expected total charges related to this conversion will range between $11 million and $12 million. Therefore we can expect the remainder of those charges will triple in over the next three quarters in the $2 million to $3 million range per quarter. Again, most of these charges will be relating to accelerating depreciation on hardware and software of 39 different systems that are being replaced. The second unusual issue is a $1.3 million realized loss on securities. Two of our trust preferred investments that some unique default language in their documents and it appeared with a smart hedge fund [indiscernible] with our controlling senior position but with a collateral [indiscernible] the mezzanine holders that is First Commonwealth. None of other holdings…

Thank you. Questions operator

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Quick question. I know you highlighted the medical expense piece, but how much was the differential or the unusual piece of expenses this quarter?

On a linked quarter Bob, I believe we had to adjust our costs about $700,000.

And then this also was nice quarter in terms of loan growth was a little better, your margin on a core basis was pretty stable. How are you guys thinking about the opportunity for net interest income growth as we go to 2014?

I think Bob, this is Mike. We have shared in the past probably a mid-single digit loan growth and our margin is stabilizing. So we are hopeful that equation is beginning to change from last several years. And we have done nice this past quarter, four- credits -- $15 million to $25 million, nice companies, local companies. And so the C&I and the commercial real estate picked up nicely.

And when you talk about margin stabilizing, do you think we have actually hit the bottom and are onward and upward or do you think that there could be a modest amount of compression early that you sort of earn back later. I'm curious how you think about the trajectory?

Bob, this is Bob Rout. I think there will be continued pressure on the net interest margin. It so highly depends upon what’s happening with the fed and the industry environment. And today we are just seeing a whole bunch of volatility in all the markets. It’s because of what’s happening in some of the emerging markets and their interest rates. So as a spread bank holder we highly depend. I can’t tell you that we remain asset sensitive. Upward movement in the rates have a more beneficial effect for us than downward rates. So we are hopeful that there will be a reduction of interest rates going forward.

Okay, great. And then last question and I will hop out but in terms of credit, great to see the level of net charge-offs this quarter. You could see well below where you guys have talked about, kind of a normalized level of losses. I’m curious, as you think about 2014, do you think that credit trends are more or less normal or do you think it is a year where, where losses run below average or above average?

We feel that will continue to improve and objectively we just look at the run rate of criticized and classified assets which we have disclosed indexed [ph] before and I’m just looking at the sheet right now; just a few years ago our criticized assets were $598 million. End of ‘11 they were $302 million and then $288 million last year and down to $162 million. So really the pipeline of things that will create problems have certainly decreased although credit is credit. And in any given quarter something can happen but we feel good, really good about the strength and we think they are pretty solid and pertain well for the future.

The next question comes from John Moran from Macquarie Capital.

So maybe just a quick one on OpEx. Mike, if I heard properly or correctly in the prepared remarks, it sounds like some portion of the $6 million to $8 million in cost saves that you expect from the conversion are already starting to show up in the run rate. Is it possible to tease out how much of that is already there and what we might expect going forward or is that $6 million to $8 million kind of incremental, once everything is converted?

Yes, it’s a little bit of both. I think it is -- about 10% of that is -- we’re beginning to see on a linked quarter basis and I think we have the majority of it, 75% plus identified. So as the team works, over this next critical phase of the project, done a lot of the data mapping and field selection and product design and those types of things, that’s where we really get out at the core processes and really flush out how operating procedures will be different before and after. And I think there’s a lot of proof there and we’re pretty enthused about that; and not just from an efficiency standpoint, but just from the ease of doing business, both internally and with our customers, we’re also pretty excited about perhaps some good uptick in capability that customers will see.

That’s helpful. If I’m thinking about it correctly, the $40 million run rate that you guys have kind of had out there as a target might end up being a little bit conservative actually once we kind of get into the back part of '14 and into '15. Is that sort of fair to say?

Yes it is. And in fairness, John, we have said that that we really expect to get below that, upwards of a $1.5 million per quarter.

The other one, just kind of circling back on credit following upon Bob’s question; when I look at reserve to loans, they are sitting at still I guess 131.25 whatever, somewhere in between there, and the recent charge-off history anyway, second quarter’s experience of last year notwithstanding, it seems that there’s probably room to continue to work that a bit lower and maybe have provision not quite cover charge-offs for the next little bit here. Is that fair to kind of say and how are you guys thinking about where you want to be reserved?

Mike, Bob Rout here. I think [indiscernible] we’re comfortable where it’s at today. And secondly given our history with credit issues, we had the tendency to maybe skew a little bit more on the conservative side. And that’s where we are going to be keep doing until we're absolutely sure of these credit cycles. So the issue is gone behind us.

The next question comes from Collyn Gilbert from KBW

Just to go back to your commentary on the expenses and I apologize for beating a dead horse. I just wanted make sure I understand this. So Mike when you said the $160 million annual run rate, which obviously implies that $40 million a quarter, when did you think that that would start to getting kick in?

After the conversion is complete and perhaps a quarter or so after.

So that would be the end of the year.

End of the year or first quarter of 2015.

Okay just trying to make sure. Okay so we’re going to still be above that and then it will drop off below that by the end of the year?

Let me just to clarify Collyn. If you take our expenses here for the fourth quarter and back off the IT conversion cost, and maybe adjust for close to a million dollars of the medical cost and elevated costs, we’re pretty close to that 1.60 rate.

That’ why I was kind of --

Yes, the $6 million to $8 million then will become further reductions to that 1.60.

That’s right.

Okay, I know -- I apologize for being confused on that. Okay, and then Bob just to your commentary around the NIM. If we assume; obviously it’s unknown, it’s volatile, but let’s just assume interest rates don’t move, the short end and the long end don’t move this year; what -- just given the normal churn of the balance sheet, where do you see that NIM going?

Downward.

Okay. And that’s a function still that of loan origination yields being lower than what’s rolling off or?

Yes, but certainly not to the extent that we experienced in the prior quarters.

Collyn, this is Mike. I am just looking at the trend of the new volume rates. It appears to have stabilized and does not certainly have the downward pressure it had in past quarters and also in 2012 and early 2013.

The other factor in that Collyn, there is the mix of the loans that we’d be putting on next year. The LIBOR priced product is still pretty skinny, especially in the CNI end. But they're still [indiscernible] yields in the commercial real estate and construction and some of the other product lines. Some of that we'll be determined by the mix of the loan growth that we put on next year. But all the things given equal, if we have the consistent interest rate environment that we have today and it doesn’t change over the next 12 months, I think you'd see a slight deterioration in that kind of niche market.

Okay, that’s helpful and then just one last question. What should we be using for a tax rate going forward?

Slightly 26.7%.

[Operator Instructions] The next question comes from Matthew Kelley from Sterne Agee.

This is actually Matt Breese. I just wanted to touch on the mortgage banking operation build out. And when do you think we can start to see some of that actually hit the income statement?

We’ve shared that we are -- the third quarter of 2000 and of this year.

And do you have any idea to what extent we can expect the impact?

[Indiscernible] guidance on that, on the volume.

[Indiscernible]

Yes. We believe it will be a substantial business. We tend in a lot of these small wonderful towns in Western PA and the first, second or third and share and customers are very loyal and they ask us for that product and the offering. So you do the math on one to two mortgages per month, per branch across the 110 branches, it’s pretty sizable business at an average run rate. And one time we had a mortgage portfolio, that eclipsed that $600 million and that’s with selling a lot and that’s been run down to $180 million - $140 million. So it will move the needle for us, even in a tough economy.

And your intention is to sell 100% of the production?

We’ll probably portfolio some. So you’ll see it mostly in our non-interest income and we’ll keep a portion; 5% or 10% of non-conforming. There is a lot of great credit out here, particularly half of our markets are really community markets where a nice house will have excess acreage and that’s really kind of non-conforming on the FHA or set the Freddie, Fannie or Ginny or federal home loan bank standpoint and those will be very good credit risk for us.

Okay. And let me try the question this way. Right now operating scene comes about 24% of overall revenues. Do you expect the mortgage banking income to meaningfully shift that number?

Not in ’14 but certainly in ’15. We also have some other opportunities there with some improvement in our wealth business and also it’s better across selling. We’ve made some progress but not nearly enough. We track our cross sales and products per household. Contraction the last year and half or two years but certainly a lot more runway there as well.

And the expense guidance you’ve given, which is $40 million a quarter or below, that includes the added staff from the mortgage banking operation?

Yes, it’s already a burden, trust me. We’ve really invested in some good people and already a system there.

Okay. And then maybe give us an update on some of the progress you’ve made on Marcellus Shale and the build-out?

Yes. We -- actually we’re pretty comfortable with that the last few years. We’ve hired a lender maybe three years ago. The other thing we’re a little different in that we’ve always done shallow gas. So kind of reversing from shallow gas and the history there of 50 years of oil and gas, so Marcellus perhaps wasn’t as hard for us. We do stay away from lending to drillers and we tend to do more of the supply side. The drillers that we have for customers tend to be net depositors by a long shot and they don’t borrow a lot of money. So we’ve been in that business for a long time. And just as I look at the -- I'm looking at the top five or six loans that were proven [indiscernible], this past quarter it looks like maybe 10% of them would be oil and gas related.

So how much exposure do you have overall, right now to the shale?

Not a lot. Bob Emmerich, our Chief Credit Officer is very disciplined about portfolio concentration and we have a pretty modest concentration there. I think and I’m looking at Bob right now, it’s about $150 million to $200 million. And we haven’t even used up half of that, have we?

In terms of commitment that we’re at about [indiscernible]

Okay, so really pretty well contained. It’s really the ripple effect of that that we see -- trader real estate market and really the blessing and the benefit of that shows up also in other ways.

I am showing no further questions. I would now like to turn the call back over to Mike Price.

Thank you. And Mike from Macquarie beat me to the punch, but I just wanted to thank Bob Rout. I wanted to take a moment to express my appreciation Bob for your leadership and commitment to this organization. He cares and anyone who’s had the opportunity to work with him appreciates the knowledge and credibility that he brings to the role. I believe everyone is aware that in November of last year Bob announced his intention to retire. In the first half of this year he gave us plenty of time to navigate the transition and he has been very helpful in helping us to begin to identify a new CFO. He may very well be with us for this quarter’s call in which case I’ll do this again Bob. But I didn’t want to miss this opportunity. He has brought with him 40 years of financial experience, that has been valuable during the last few years and tougher times for Commonwealth and I have thoroughly enjoyed the opportunity to work with Bob over the last few years. Thank you very much. Operator, thank you.

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation, you may all disconnect. Have a good day.