Good day and welcome to the First Commonwealth Financial Corporation Fourth Quarter and Full-Year 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.

Thank you, Ted. 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; 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 Brian Karrip, 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.

Hey. Thanks, Ryan. And welcome, everyone. And thanks for joining us. On today’s call, I’ll take a few minutes to reflect on where we’ve been in 2017 and where we’re going in the year ahead. Fourth quarter results were affected by the recent passage of Tax Reform Legislation. First, as previously disclosed, the new tax law required us to take a $16.7 million write-down of deferred asset. Adjusting for the DTA and for merger-related expense, core fourth quarter net income of $20.6 million produced core earnings per share of $0.21, a core ROA of 1.11% and a core efficiency ratio of 62.2%. Second, in response to the tax law change, we decided to provide a one-time bonus payment of $1,500 to all of our employees. This comes on the heels of keeping our employees’ healthcare premium costs and benefit flat to down for yet another year or adding roughly $500 in each respective HSA account. We have not disclosed the $1,500 bonus publicly until now, that resulted in a $2.5 million one-time expense for the Company which is financial material to our fourth quarter results. This bonus is not adjusted for in any of our published core numbers. Jim will provide more detail in a momentum, but other key fourth quarter performance elements included the following. A $4.3 million gain from the redemption of our trust preferred securities holdings which had been marked down ever since the financial crisis. Modest provision expense of $2.3 million reflective of strong underlying credit metrics, and loan growth of 2.2% and commercial loan growth of 3.3% as traction in mortgage and commercial real estate was partially offset by muted growth in branch based consumer lending. Looking back on the full year of 2017, and again adjusting for merger expense and the one-time DTA charge,…

Thanks Mike. I’ll try to provide some additional color on our results, all while providing some limited guidance as to where we think our financial performance is headed in the near term. As you all know, we don’t provide explicit EPS guidance but hopefully we can describe our earnings trajectory in a way that is helpful to you as you try to better understand where our company is going. The net interest margin was essentially flat for last quarter. The margin benefited from annualized growth of approximately 5% in average non-interest balances in the quarter driven by the commercial nature of our balance sheet. However, our cost to deposits increased in the fourth quarter mostly due to the competition for time deposits in the form of CD specials and competition for public funds, which is a trend that we think, will continue in 2018. Fortunately, asset yields also went up towards the end of the fourth quarter in response to the fed rates hike and due to deposit of replacement yields throughout the quarter, leaving the margins unchanged from the last quarter at 3.61%. Looking forward, we expect that our NIM will continue in the range of 360 to 370 until the next rate hike. We believe that steady progression within that range is possible even without a rate increase, as positive replacement loan yields slightly outpace increases in our cost to funds. In addition, we continue to reiterate our guidance of mid single-digit loan growth. Fourth quarter non-interest income exclusive of securities gains is primarily driven by the surge of swap fee income as commercial customers saw to lock in fixed rates. Beyond swap income, we expect fee income to show a nice steady trajectory in 2018 impart because of the steadily growing contribution from our wealth, mortgage, SBA…

Thank you. We will now begin now our question-and-answer session. [Operator Instructions] The first question will come from Daniel Cardenas with Raymond James. Please go ahead.

A quick question. If you could remind us, what’s the size of your muni portfolio and your securities portfolio? And what impact do you think the lower tax rate would have on yields and net interest margins?

We actually have Mark Lopushansky, our Chief Treasury Officer here. Comment on that.

Okay, right now, the municipal portfolio basically, we have it in two different pieces, about 67 million would be the total positions for the municipals. As far as the impact, obviously, it’s going to have a negative impact in terms of the overall taxable business yield. We actually sold a larger portion of the portfolio a few years ago. So again, its 67 million is what our current position is.

And that’s kind of total securities portfolio of about 1.2 billion.

That’s correct.

So minimal and not going to really have negative impact on your margins on a go forward basis, okay. And then sticking with the margins, maybe a little bit of color on deposit betas. What percentage of the December rate hike do you anticipate passing onto to your customer base on a go forward or I guess going forward and then how many rate hikes have you baked into 2018?

Yes, A couple of things there, but happy to comment on that. In a general sense looking back over the last year or two years, we had consistently been projecting deposit betas that were more than what was the actual deposit betas were. In other words, we are projecting the deposit betas based on an internal model just like every other bank. And then in reality, the deposit betas were far less than that. We think that we’re coming to a point in the market cycle with the interest rate changes where that dynamic is going to change, that have following several rate hikes by the federal reserve and now perhaps the several more next year. The consumers and people and other holder of deposits will start to be more rate sensitive. And so, we think that our deposits betas are going to increase and probably converge forwards with the models are telling us. To be really specific in response to your question, we are assuming in our plan -- for our planning purposes two rate hikes next year, one in March and then the one later in September.

And then last question just for clarification purposes for maybe the $500,000 HSA contribution. Is that a lump sum contribution in Q1? Or is that going to be spread out evenly throughout the course of the year?

That will be spread out evenly for each employee over the course of the year.

The next question will be from Steve Moss with B. Riley. Please go ahead.

Just thinking about you kind of answered my question a little bit on expenses, but with the change in the tax rate. Are there any new investments you’re contemplating? And perhaps you may see that in CapEx or expenditures over the course of this year and next year?

Yes, I mean we've made quite a few investments two banks, a call center in Columbus, two mortgage loan offices in Ohio, two LPOs in Ohio. We’ve built out an SBA group. We’re investing in digital. Obviously, there’ll be more to come there in the ensuing years. We’ve also invested in a regional market president model in our markets in Ohio and now with Cincinnati as well in Foundation Bank. I think it’s important that we realize the investment in those markets. We have a terrific foundation and we really use some operating leverage here in ensuing year.

Okay. And then you had pretty good growth this quarter in C&I and commercial real estate here. Just wondering, how the pipelines are looking at the start of the year here and your thoughts spread to that?

Yes, just a couple of things on pipelines. The SBA pipeline is built nicely. In direct, there is a little soft and that’s really weather related. Mortgage pipeline is really consistent with the prior year and we really had nice year-over-year growth in that business the last few years. And then in commercial real estate, we really have a good construction pipeline. And C&I quite frankly, our pipeline is stronger than it’s been in several years. So, a lot of that is the new markets and the build out there, but the pipeline looks very good across the board.

Okay. And just lastly with regard to the margin, you mentioned, basically, a joint drift up in loan yields exceeding the funding costs. Wondering where are your new money yields at this point that you're putting on the books?

It depends on which category you're looking at. Give me one second I can probably give you an aggregate number on overall loan yields in a moment.

I also think, yes, on Page 6 of the supplemental deck, it shows the average loan yields going from 3.99 last year to about 4.29 in the fourth quarter of 2017. And just recall we have a commercially oriented book of about 63%, 64% of our loans were commercial, most of which are variable. So we do nicely as rates are going up.

[Operator Instructions] The next question comes from Collyn Gilbert with KBW. Please go ahead.

Jim, if you could add a little bit more color on expenses. The 700,000 that you’ve indicated of investments that you’ve made tied to sort of the tax bill relief. Is that -- I assuming that’s going to be in the run rate going forward or just trying to get a sense of what we should -- how we should be thinking about backing out? I mean I know obviously the 2.5 million bonus but just thinking about expenses from here?

Yes, I'll try to just give you some limited color. Nothing in that number is sort of material. And to be honest, we were hesitant to even disclose the figure. We suspect that many companies looking at kind of almost generational or once the generation shift in tax rates, they're going to be implying strategy too as soon as they can to take advantage of the tax rate change. And actually, GAAP gives you very little discretion in terms of moving expenses and revenue from period-to-period. But there are few minor things we can do, for example, accelerating decisions that we're thinking about making early next year for purchasing equipments or office equipment, that kind of thing and purchasing those in the fourth quarter. So it’s a combination of those types of things. Again, none of which material but I'll -- that’s the number. The fact that we spent that money now, we will then in turn slightly reduce non-interest expense going forward spread across several periods next year. But the aggregate effect to be honest is not going to be that material.

Okay. So because I guess it just -- it looks -- expenses that are run rate now about 49 million, almost 50 million, which is quite little higher than I think what I was projecting for next year. So I just want to make sure I am understanding that?

Yes. Thinking about -- if you think about the adjustments, taking that 700,000 into account, the one-time bonus into account, the 2.5 million one-time bonus into account, unfunded credit expense, the number we disclosed. But again, we’ll always have that bouncing around a little bit. You're probably going to adjust the figure between $47 million and $48 million.

And then on the loan growth side, Mike, you just did mention commercial pipeline -- I am sorry, construction pipeline is good. Where do you sort of anticipate growth to be there, maybe growth more broadly as it relates to construction and opportunities that you are seeing there?

In the portfolio in general, the guidance we’ve given is mid single-digits. I think we have more engines lined up against that than we have in the past and I think we have a mortgage portfolio that is not running off, it now give us a little tailwind. I think we’ll have a tailwind this year and C&I, which we haven’t had for a few years. And commercial real estate and construction, I suspect that will be that’s been the most robust segment. It will probably be muted a bit, but I expect across the other categories, it will more than pick that up. The other thing we saw was just leaking oil in small business and consumer over the last couple of years, and in the fourth quarter we really --- and throughout second half of last year, we just had more momentum with production as the new markets came online.

Okay. And what types of construction are you seeing the demand?

Just regional office and projects in some metropolitan areas and mostly in the metropolitan areas everything from one to four families housing to office to multifamily.

Okay. And I think you've sort of alluded to this Jim I believe in your comments about provisioning going forward. I mean you used the term normalizing, right, because '17 the loss rates in 2017 were 7 million and that compared to like 17 million or 16 million and 19 million. So, are you suggesting us the right number of net charge offs because maybe somewhere in between that and that we should be providing accordingly. Or do you think that while we’re in this benign cycle that $7 million in net charge off is maybe more normal?

I think I am trying to say that the provision expense is going to be approximate -- going to converge with the more normalized view of our charge-off expense going forward. And I think part of it is not as it was a couple of years ago to reflect out credit cost, but just consistent with overall balance sheet growth. And as you know because you’ve been following us for sometime the provision number just has been volatile and it bounce around some quarter-to-quarter. We’re just trying to be as subtle as you can, thinking about what long-term run rate would be.

Yes.

So and in some quarters in 2017, we had large recoveries that brought the number down and obviously we can't count on those quarter-to-quarter even.

The only thing I would add Collyn is, your charge-offs to non-performers this past year were really strong year-end figures by historical standards. The migration in our criticized loan categories was really positive for the year as well. Our commercial loan portfolio became more granular in the last year. I think we also probably like a lot of organizations looking around the quarter at the next credit cycle and trying to think about how prepared we are for that, whether that’s a year away or hopefully three or four more years away. So, I think the guidance might be somewhere between where we were maybe several years ago and where we are this past year.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mike Price for any closing remarks.

Just as always we appreciate your sincere interest in our company and we are look forward to being with many of you in the next quarter or two. Thank you very much.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.