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Executives

Rich Stimel - VP, Corporate Communications

Mike Price - President & CEO

Bob Rout - EVP & CFO

Bob Emmerich - EVP & Chief Credit Officer

Analysts

Bob Ramsey - FBR

Damon DelMonte - KBW

Collyn Gilbert - Stifel Nicolaus

Mac Hodgson - SunTrust Robinson Humphrey

Matthew Breese - Sterne Agee

First Commonwealth Financial (FCF) Q4 2012 Earnings Call January 30, 2013 2:00 PM ET

Operator

Good afternoon and welcome to the First Commonwealth Financial Corporation Fourth Quarter Earnings 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 Rich Stimel. Please go ahead.

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 and then selecting News on the left side of the page under News and Market Data. We’ve also included slide presentation on our Investor Relations page with supplemental financial information that we’ll reference throughout today’s call.

With me in the room today are Mike Price, President and CEO of First Commonwealth Financial Corporation; Bob Rout, Executive Vice President and Chief Financial Officer and Bob Emmerich, Executive Vice President and Chief Credit Officer. After brief comments from management, we’ll 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 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 would like to turn the call over to Mike Price.

Mike Price

Hey thanks Rich and good afternoon everyone. Thank you for joining us. Fiscal year-end 2012 produced $42 million of net income or $0.40 per share versus $15.3 million in 2011. The increase was a function of market drop in provision expense for the year although loan and non-interest bearing deposit growth was solid. These fundamentals did not outrun our net interest margin compression of 19 basis points.

On a quarterly basis, we posted $0.11 per share and $0.12 per share respectively in the first two quarters of 2012 and $0.09 per share in the third quarter and fourth quarters. The September fraud coupled with OREO writedowns and related costs created almost all of the second half strain and interrupted our momentum. In holding my feet to the fire, I am going to briefly give an update of the five strategic themes that I outlined on my first earnings call as an interim CEO just one year ago. I'll leave capital management to Bob and we will forgo talent given the audience although we feel that we've made significant progress there.

But the first theme I shared a year ago was clearly putting our lingering credit issues behind us and building a strong credit infrastructure that creates competitive advantage overtime. Our clear credit progression stalled in the second half of the year with third and fourth quarter noise and backup with the non-performing loans. However, we are a much better credit organization than we were just three years ago. We appropriately modified our risk appetite and adopted policies and concentration limits to ensure our credit risk profile is markedly better in years to come.

Just one example is our large credit exposures. We have significantly reduced the number of credits over $15 million to get the aggregate exposure to less than 50% of capital. Lastly, on credit we have two large credits that are creating a logjam in our NPLs that Bob will speak to. Our inflows are probably not that unusual, but we need to continue to make progress with the few remaining legacy development credits from the ‘04 to ‘08 vintage that still tend to creep up and haunt us; Bob will speak to these particulars in some detail in anticipation of your questions.

The third strategic theme that I outlined was delivering a consistently superior customer experience and becoming the best choice for businesses, their owners and their employees among community banks. This third theme is the crux of our business, our brand and our value proposition. With good loan growth in retail banking, with indirect auto branch lending in small business and in fact they had record years in new loan production. This translated into 7% growth in retail banking lending, but is without forced First Mortgage. In fact, as many of you know, our traditional mortgage business was really jettisoned about six years ago and our portfolio shrank 26%. We’ve obviously missed the mortgage lending tsunami that is really benefiting many of our competitors and this is both a blessing and a curse. I think it’s forced us to grow in other ways that will benefit us longer-term that we had not benefited from the unprecedented times with fee income and loan growth related to mortgage.

On the corporate banking side and lending, we ended up with 1% growth for the year. We had well over $100 million in commercial real estate payoffs which prove to be a headwind. Importantly, I think our new loan originations were the strongest in four years and I think for the first time or equally out between commercial real estate, middle market and large corporate. We grew our non-time deposits 6% and our non-interest bearing DDA over 15%. This was really on the strength of cash or cash management offering and our sustained focus on business calling. In fact our business DDAs grew almost 18%.

Also driving the DDA or checking story, is solid momentum with our bank at work program, titled WorkSmart which continues to account for roughly 20% of our new checking activity. We also need to add some new sources of revenue to the mix here. We have a team that has a good diversified back run in banking and we need to pick the right entry point for First Mortgage and some other opportunities in retail commercial banking and wealth. We need more legs on the revenue stool. Lastly, in corroborating the business trends, we objectively measure customer satisfaction and household growth each month. The trends here are very positive.

Our fourth theme, if you recall was enthusiastically migrate to a culture of operating excellence. We have four measures here. Currently, the most important to us is markedly better efficiency. We must stay focused on efficiency as a task strategic imperative; progress in 2012 we felt was significant; cutting through the credit noise, we feel our core non-interest expenses are now below $41 million per quarter. There is lot of initiatives here, I will just give you a few of the highlights; we have outsourced our statements, better product, less cost; we have changed our ECM network provider; we have removed the layer of senior management, we have optimized the branch staffing; we have made important trade-offs with the marketing mix to reduce expenses; we have negotiated contracts with some key providers of technology and other services.

Over the last couple of years our full-time equivalents have decreased 226 or 14% from a recent high of over 1600 down to 1395 as of December 31, 2012. A key here has really been developing departments’ budgets, some plans along with benchmarking and that's helped measurably.

We also have done a full review of our IT platform and we are looking to migrate to a more integrated and cost effective approach to support the bank for years to come. We’ve begun an RFP process and expect to make decisions about a specific path and timeframe in the next three months or so. We will keep you update at this initiative progresses.

We are still not satisfy with the transformation given the new reality and where the margin might take us over the next several years, so its really doubly important, we stay focused on efficiency and it remains a top priority.

With that, I will turn the time over to Bob Rout for a more thorough financial review.

Bob Rout

Thank you, Mike and good afternoon everyone. As Mike just mentioned, our earnings per share for the quarter was $0.09 giving us $0.40 earnings per share for the full year and a substantial payment over the last couple of years. I will provide a little more color on that performance starting with net interest income.

Like most banks, we too are bearing effects of this unusually low interest rate environment. Our net interest margin is contracted by 19 basis points or 5% over the past year. However, our net interest income has only contracted by 1%. Loan growth, loan pricing discipline and paying particular attention to deposit pricing and also deposit mix has been extremely helpful in mitigating this difficult environment.

On a linked quarter basis, we actually saw our net interest margin increase by 3 basis points, some of that increase was benefited by some acceleration of fees for loans that either paid off or amended, but we are also able to decrease our deposit cost by 5 basis points this past quarter through growing DDA accounts and again by watching the pricings on our maturing CDs very closely.

Going forward, we expect continued challenges within them until the Federal Reserve Bank modifies its accommodation strategies or until the economic demand accelerates. Bob Emmerich will be following my presentation with additional detail on credit activities this quarter.

The provision expense was $5.7 million and OREO charge downs were $3.2 million. Both of these areas represent substantial improvement over the last year on both the quarterly and full-year perspective. Our non-interest income trends continue to reflect a lot of credit noise from OREO gains, OREO rental incomes, security gains and credit adjustments for commercial loan slots.

This past quarter, we did have a $900,000 credit adjustment for one of our commercial loans swap arrangements that tripped into non-performing status this quarter. The customer continues to make payments but we thought it was prudent to fully reserve the market value of that swap until a clear direction on that loan is determined.

After you pull out the credit effects and one-time security gains, some areas of note in the recurring non-interest income categories would include. We continue to see strong double-digit growth in card related fees, as a result of us increasing DDA households and steady consumer preference shift for these types of payments.

That consumer shift has also had a counter effect on NSF fees. There are definitely less checks being written these days and consumers are also certainly more sensitive to NSF fees in this economy. Account analysis fees for our commercial customers has had very good growth this year as a result of our ongoing strategic brokers for gathering business deposit accounts.

[NOD] sales continue to be weak in this low interest rate environment. Non-interest expense has also been affected by all of the credit noise significant external fraud last quarter and severance payments as we continuously strive to right size the staffing levels. As I’ve mentioned previously, we believe we need to get core non-interest expense levels down to that $40 million to $41 million per quarter run rate.

After you strip out the credit and non-recurring issues, we are now in that range. But we also believe that there's much more opportunity as we refine our IT structure or operating processes in our retail distribution methodologies. Operational efficiency is a big part of our strategic plan objectives over the next three years.

Another strategic theme for us is to thoughtfully manage capital. That capital plan includes a lot of stressed assets. We want to be in a well capitalized position even in the most severe stress scenarios. While at the same time, we want to ensure sufficient capital to support long-term growth prospects and shareholder dividends.

Under this framework, we initiated a $50 million common stock buyback in June of 2012. To-date, we have repurchased approximately $39 million of that authorization. Yesterday, our board of directors approved an additional $25 million common stock repurchase plan.

We also planned to redeem $32.5 million of fixed rate trust preferred securities that are paying a rate of 9.5%. Both of these actions are modestly accretive to earnings per share and net interest margin and have the effect of reducing our regulatory capital ratios, 100 to 110 basis points. The exact amounts will of course depend upon buyback timing and prices. We always get questions about our effective tax rate and ours is currently at 26%.

So with that, I will turn the discussion over to Bob Emmerich, our Chief Credit Officer.

Bob Emmerich

Thank you, Bob. First Commonwealth had an increase in non-performing loans in the fourth quarter of $14 million. Within the credit arena, I suspect that would be the focus of your attention this afternoon and I will cover that in detail.

Before I get to that, I would like to point out some positive outcomes for the quarter. Provision expense for the quarter was favorable at $5.7 million that compares to $6.7 million for the third quarter and $21 million for the year or 49 basis points on average loan outstanding.

Net charge-offs were modest at $2.6 million for the quarter and $14.6 million for the year or 35 basis points. The two largest charge-offs the Bank took in the fourth quarter were further writedowns on two [Marshall] bank participations which totaled $1.245 million.

The consumer loan portfolio continues to perform well with what we consider to be favorable loss rates. We also believe we have built a diversified loan portfolio with a balanced mix between corporate lending and consumer and small business lending. And within corporate banking a balanced mix between C&I lending and investment in real estate and between property types within investment real estate.

We are conscious of not becoming overly reliant on syndications as a course of new loans but these indications is an important tool to diversify the portfolio by industry classification.

You will recall that in the third quarter First Commonwealth had an increase of $9 million in non-performing loans compared to the second quarter of 2012 that was driven largely by two items. At first, we reclassified as non-accrual a $4.8 million in consumer loan secured by residential property that were 150 days or more past due.

Second, the bank placed on non-accrual is $6.7 million loan to Watson, Pennsylvania non-profit entity that operated an inpatient care facility. As an update on that credit, a related entity that is not obligated on the loan had continue to make payments to keep the loan current but the borrower has stop using the facility and just recently filed bankruptcy.

As I mentioned just at start, in the fourth quarter non-performing loans increased $14 million that increase was driven primarily by five new NPLs as aggregate UPB totals $15 million. Two are non-accrual and three are TDRs. The non-accruals are a $4.6 million participation in the loan originated by Marshall bank which is secured by a hotel resort in Washington State.

This property has performed satisfactorily with adequate debt service coverage. However, the note ballooned in August; the [agent] bank had negotiated an extension of this note under terms we felt were appropriate. Three members of the bank group held out for better terms and the negotiations still is not concluded and as much as the note was over 90 days delinquent at year-end, the note was classified non-accrual.

You may remember that First Commonwealth purchased eight participants from Marshall Bank that totaled $59 million, all of them have not gone bad, three loans remain on the books with the total balance of $10.6 million and one was taken into OREO and carries a balance of $2.2 million.

The second non-accrual is a $4.9 million loan on a student housing property in Pittsburgh. This property was under a mass release with an educational institution that has had declining enrollment that institution did not extend the mass release when it matured in November.

The borrower is looking to reposition the property but cash flow is inadequate to service to the debt. The three TDRs are as follow, a $3.2 million on a retail property in downtown Pittsburgh. The property has high vacancy and does not cash flow. The guarantors have been keeping the loan current and have funded the debt service reserve.

The loan ballooned in April of last year. The bank guaranteed the borrower a six month extension while they look to reposition the property with a new construction loan from another bank. The second six month extension was granted in October.

Given the way delay in completing the refinancing and the multiple extensions of the balloon; the loan was classified as a TDR. Second, a $1.5 million balance on the $2 million line of credit to a home builder for a project in central Pennsylvania. The project has been slow but absorption picked up market late in 2012.

The borrowers classified substandard due to history of losses given the weak residential real estate market. This line of credit matured in December and the bank extended the line to allow the developer to finish out this project. Debt line extension resulted in classification as a TDR.

Third, a $757,000 tax anticipation of the municipality, tends need to be repaid within one year. This small municipality was unable to pay while refinancing of the year end, [SEB] agreed to a term payout which resulted in classification as a TDR.

The total NPL balance is of course the result of both inflows and outflows. We have not seen as much success as we would like on the outflows and that will continue to be a focus of our attention in the coming quarters. As you are aware a third of our $108 million NPL balance is in two loans; the $19 million remaining balance on a note to a Pittsburg real estate developer. That note is part of a 42 months forbearance agreement with three other banks that does not mature until the second quarter of 2014 and the $16,000 balance on a loan on an apartment project in Eastern Pennsylvania. That loan was restructured as part of an AB note structure last year. This is the A note. The loan has been kept current and has positive cash flow, but has been kept on non-accrual due to delinquent taxes.

As you know the bank has discontinued disclosing specific reserves on individual NPLs. In the fourth quarter the primary reserve assessments were to create a reserve for the student housing property that was placed on non-accrual and an increase in the reserve for the $19 million loan to the real estate developer. In the fourth quarter the bank had OREO write downs of $3.2 million primarily due to reappraisals of two properties that have been on the books for over a year. Those write downs for a student housing project in Northeastern Pennsylvania and a lot development project in Southeastern Pennsylvania. That concludes our credit discussion and I will turn the call back to Mike Price.

Mike Price

Thanks Bob and with that we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) our first question comes from Bob Ramsey at FBR.

Bob Ramsey - FBR

I was hoping you could talk a little bit about loan growth and just sort of trying to pick apart the pieces some of maybe the payoffs of loans versus, I know you talked about record origination growth but the total was still down so I was hoping if you could give a little more color on loan growth.

Mike Price

Well, there's two components of that retail I kind of went through that at about 7%. I'm assuming you are talking about corporate banking and the three components there are large corporate middle market and commercial real estate and we had both in excess of $100 million of payouts in our commercial real estate. We have some larger construction loans that one was over $30 million that matured in the year and so there were payoffs there and as well as a down draft and the syndications on the utilization.

Bob Ramsey - FBR

Okay and I guess broadly speaking is your sort of sense of customer demand and sort of how did it trend, was it stronger at the end of the quarter, I know a lot of banks have said they had seen some up tick in the year round.

Mike Price

Yeah we did. We ended up pushing a lot of loans into the first quarter of the year that we were supposed to close in the latter part of December, but I think that's there, we saw a little up tick despite the commercial real estate loan and portfolio what I mentioned earlier a little bit more activity in the fourth quarter with quality projects and less (inaudible) with really nice anchors and strip centers and so that was positive. I don't know that the middle market or the small business has really come back. I think that in small business encouragingly though we did see about a 3% to 3.5% growth there for us which was better than we have seen for a couple of years. So maybe that pertains well for that segment. Is that helpful?

Bob Ramsey - FBR

That is helpful. And then maybe if you could provide a little bit more color around margins. I know you, the prepared comments is adjusted still more stress, which I am sure all banks out there are going to see. But you guys were able to buck the trend this quarter and your loan deals held in relatively flat. I am curious how your loan yield stayed so strong this quarter and how you are thinking about the trend or maybe I think the magnitude of the trend in the fourth quarter?

Mike Price

I will let Bob handle anomaly there.

Bob Rout

Hi Bob, it's Rob. I think we're going to expect continued pressure to that [NIM]. I had stated previously that I thought maybe 5 to 7 basis points contraction per quarter. That might seem a little higher, probably back off on that somewhat based upon this fourth quarter results. And as I mentioned in my comments, we remained fairly disciplined on our pricing and hopefully with our credit underwriting too. As you know, there are a lot of banks out there scrambling for assets and especially we saw within our large corporate syndications where there is a couple deals where we walked away and decide not to participate in refinancing or the initial deals, both because of pricing and structures. I don't think we have a whole lot of room left in the deposit rates. We will continue to ratchet it down. We will continue to get a greater portion of that mix to be demand deposit rates and some of the things we're doing here with these trust preferred redemption, it's going to be helpful as well, not a lot but it will help the margin a couple basis points over a full-year basis.

Mike Price

Hey Bob this is Mike Price just one other kind of to mention to add to Bobs good comments and one of them is that just we were really surprised and encouraged by the non-interest bearing DDA growth particularly on the business side and I think that’s just the fruits of a lot of calling, staying calling over several years. The other thing I would share is the finance team does a very good job of really looking at competitors on the deposit side at least twice a month and I am just looking at a sheet right now with all the CD maturities and really all the money market rates out there and we are clearly now below if there is an average max and min just right between min and max in our pricing and I think that’s a prudent given environment we are in and we have really been there for a while as Bob mentioned I think we have rung out a lot on the deposit side.

Operator

Our next question comes from Damon DelMonte at KBW.

Damon DelMonte - KBW

My first question is to do with the margin Bob. How much of an impact was it to the margin from prepayment fees this quarter and in terms of basis points?

Bob Rout

I think we calculated that to be about two basis points and it’s probably equal with the five basis points reduction in deposit costs.

Damon DelMonte - KBW

Okay and answering Bob’s question about the margin before did you say that the expected impact from the redemption of the trust preferred will be something like one or two basis points on an annual basis?

Bob Rout

Yes.

Damon DelMonte - KBW

Okay. And then with respect to criticized loans it looks like that they are up around 23 million mostly in CRE and then quarter-over-quarter basis. Any comment on what was driving that?

Mike Price

One of the properties was, it’s a healthcare facility, a different healthcare facility, and the co-borrowers some of their properties have had some vacancy, so that one loan that we moved to OEM. We also had strike in the NHL which required us to move one of our loans, but…

Damon DelMonte - KBW

What was that, like directly related to the NHL or business that’s impacted by it?

Mike Price

I think we need to be cautious there…

Bob Rout

We are going to be cautious there Damon, because more information we get might make it specifically identifiable.

Damon DelMonte - KBW

Got it, understood. Okay, and then I guess my other question, Mike just more broadly speaking, you feel like commercial real estate pay downs and prepayments are slowing, do you think that is more of a first and second quarter event or you think it is going to take place during throughout the year of 2013?

Mike Price

I think the minimum is shifting in commercial real estate from the portfolio that we, and also we did two things, we deleveraged the larger loans and then we really put colors around commercial real estate, I think that that has really played itself out.

Damon DelMonte - KBW

Okay, I think that's all I had for now, thank you very much.

Operator

Our next question comes from John (inaudible) at Macquarie.

Unidentified Analyst

Just a real quick on OpEx, I know it sounds like you got an initiative underway here with possibly sort of revisiting how you guys are doing the IT system and the timeframe laid out on that and then some other, you sort of alluded to other initiatives that are ongoing, where can we ultimately go on OpEx if our core is kind of running today 40 to 41, do you think there's a whole lot of room to squeeze that down over ’13 and ’14?

Mike Price

I think we are going to have a clear vision there in the next two quarters. I think we have to continue to get costs out irrespective of any transformation with IT. I think that could be, that might be, its not a bottleneck, but it might be a great opportunity to really get to a more elegant and efficient system and at the same time have a ripple effect on other processes, loan operations, DDA and so forth throughout the bank and we are really sizing that up. We think it’s vital to get to really to past the median and become best in class efficiency performer.

The other place that we will look that I think I've alluded to earlier is really at our delivery network and just the adoption rate with our mobile banking has been just really terrific and it’s a highly rated product and we are really tracking transactions in branches and checks so we have to be smart about the delivery system. I think our view is that we still need the branches to open accounts and for key delivery mechanism for clients, particularly business clients, but I think that the density of your branch network and what might now be a spoke on maybe kind of consolidate the hubs over a period of time and you can do something relatively transformative there.

And so we are going to look at that. I don't think, the market is I think the interest rate environment and the macro environment coupled with the proliferation of technology is kind of a confluence there and we really have to be smart about it and think about what the distribution network needs to look like in two to three years. So I don't know; I think we need to push well past the one, the 40 to 41 over a period of time. But Bob Rout, I mean you are…

Bob Rout

I truly believe there's lots more opportunity to look at $160 million a year more; I think there's certainly a good 3% to 4% alternative or opportunity.

Unidentified Analyst

Makes sense, thanks. Just a quick second one for Bob; on the TruPS kind of coming out, there's another $70 million, but I think they are both if I'm remembering correctly they are both variable and tend to tied to LIBOR so not much left to do with other pieces kind of the capital stack to help out on the funding cost side of things, is that correct?

Bob Rout

That's correct. There is approximately $70 million of variable rate TruPS that are currently paying LIBOR plus 285. So not only is it cheap capital, but pretty cheap funding and its also something that we see rates moving we could put a hedge on pretty quickly and lock those rates in.

Unidentified Analyst

Got you and it makes sense. And then did I hear you correct Bob you said taxes is 28%?

Bob Rout

26%. Approximately 26% is the tax rate.

Unidentified Analyst

Okay, I thought I misread.

Operator

Collyn Gilbert of Stifel Nicolaus.

Collyn Gilbert - Stifel Nicolaus

Thanks good afternoon guys. I hope you have not over extended yourself to the likes of Sidney Crosby; I’ll leave at that, as the flier is such a disappointment. Anyway, just wanted to dig in a little bit, Bob, on the margin comment because it seems like, I am just trying to reconcile why you will see that much compression. Given the stability in loan yield and security yields that we're seeing and your comment about pricing discipline obviously and then top of that, the 700 plus million or so of quarterly saving on the redemption. It doesn’t seem like the margin erosion should be quite a significant as what maybe you are suggesting. So was there an anomaly. I mean you think you said it may be even in the loan yield this quarter or like if you could just give a little more color to that?

Bob Rout

No, the ones that we're really keeping an eye on Collyn is, we have this churning going on in our residential mortgage portfolio. That’s still riding off pretty quickly over refinancing into one of our home equity products and the other thing is the investment portfolio.

You know, that stuff runs off pretty quickly and the replacement yield, they are just absolutely horrible on really anything that you look at and try to stay within a reasonable risk profile. The loan yields were propped up a little bit by some good fee activity, that maybe a slight anomaly.

I would say, maybe we're starting to decelerate on this margin compression but I still think the compression is going to be there going forward into ‘13.

Operator

The next question comes from Mac Hodgson at SunTrust Robinson Humphrey.

Mac Hodgson - SunTrust Robinson Humphrey

Bob, were the 9.5% troughs for those swaps, I get a higher benefit to the margin in a five or six basis point range, just want to make sure I am not missing anything there?

Bob Rout

(Inaudible) trends with our replacement cost, if you fund it over 90 you might get a five or six. If you want to be conservative and fund that with may be some five to seven year moneys, it will take some of that blush off that yield and also the one to two basis points is based upon a short year. We think we can have this redeemed by April 1, but on a full-year basis you are right that probably thus push the margin accretion may be four basis points.

Mac Hodgson - SunTrust Robinson Humphrey

Okay, got it. So you are borrowings some funds of the holding company to repay those?

Bob Rout

Yes and we could do with maturing securities but we still think may be a 150 rate is the appropriate replacement funding rate for those.

Mac Hodgson - SunTrust Robinson Humphrey

Okay, got you. And you may have mentioned this, apologize otherwise, but on the buyback, the $50 million program, did that expire or do you still have access to the availability under that program in addition to the 25?

Bob Rout

No, we still have access to it. So our plan would be to finish out that 50 and then have the additional 25.

Operator

Our next question comes from Matthew Breese with Sterne Agee.

Matthew Breese - Sterne Agee

Just sticking with the expense commentary Bob, you had mentioned that ex some of the credit related costs were already at a $40 million run rate or there and about, so given what you have outlined…

Bob Rout

$40 million to $41 million, Matt, $40 million to $41 million, we think is, I have to strip out some of the non-recurring create noise and other issues, that's prior run rate at this point.

Matthew Breese - Sterne Agee

Okay.

Mike Price

(Inaudible) something in on your questions?

Matthew Breese - Sterne Agee

No, its okay. I guess my question was given some of the pretty extensive outlines for what’s to come over the next year or two and as far as when you want to pull out of the expenses, its 160 kind of a starting point and we can get below that after 2013?

Mike Price

Yeah, I think we are looking to get below that after 2013 and playing out probably to the second half of 2014.

Matthew Breese - Sterne Agee

Okay. And you had also mentioned that on the expense front, you do want to become of best in class performer. So I guess my question is, what would you consider best in classes for as efficiency ratios go?

Mike Price

Well, I know the number historically. I just think the playing field is changed. I think we have good peer group of 12 to 24 banks and we tend to be in bottom quartile and we need to move up and once we are in that upper quartile, I feel better, better where we are at.

Matthew Breese - Sterne Agee

Okay, so the goals to get to the upper quartile, but would you put any parameters around, what kind of the efficiency ratio that looks like?

Mike Price

Again it’s a bit of a moving targets, but its certainly 55 to 59 depending on what happens with [NIM] over the course for the next two years.

Matthew Breese - Sterne Agee

And then on the buyback front with the stocks back over 7 bucks, you bought back for quite a few shares this quarter, can we expect to be anywhere new that aggressive over the near term?

Bob Rout

Now I think it will be a function to price make, without giving away our price parameters, we won't be the one pushing the stock price, we will looking for pull back opportunities to pick up those shares, and again the regulatory guidelines are structured to not allow that to happen or to help mitigate that from happening. So yeah I think it’s all a matter of price. And if I could pick it all up in the first quarter I would be gladly doing it because it’s within our pricing guidelines but it takes us through the rest of the 2013 I'm okay with that as well.

Matthew Breese - Sterne Agee

And then my last question is around the provision. We've seen a few quarters a little bit more consistent, but with the bump up in criticized loans and non-performing loans, can we expect a higher provision in the quarters to come.

Mike Price

I was going to defer to Bob Emmerich because we (inaudible).

Bob Rout

Bob your thoughts?

Bob Emmerich

Normally if you see an increase in NPLs it would normally come with an increase in credit expense, but we haven't seen in the same level of collateral deterioration that we saw during the recession values had held up a bit, so we didn't see the same kind of, as much of a direct correlation in this past quarter and I would be hopeful that that trend would continue.

Mike Price

Hey Matt one other comment on your efficiency. I did think that a (inaudible) obviously is the top line as well as the bottom line and we are changing the business mix, I mean we wanted to be more business oriented at risk in terms of our balances, relationship value and then importantly the cross selling that comes with that cash management and wealth and wealth we have a clear opportunity which Bob alluded to, and so I expect that to be tuck in the other way.

Operator

At this time we are showing no further questions. Would you like me to repeat the Q&A instructions?

Mike Price

No, I think we are good. Hey we would just like to thank everyone for participating. Certainly you can reach us with any follow-up questions and we appreciate your interest in First Commonwealth. Thank you.

Operator

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

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