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Executives

Richard Stimel – Communications Manager

John Dolan – President and CEO

Robert Rout – EVP and CFO

Michael Price – President of First Commonwealth Bank

Robert Emmerich – EVP & Chief Credit Officer

Analysts

Matt Schultheis – Boenning & Scattergood

Damon DelMonte – KBW

Mac Hodgson – SunTrust Robinson Humphrey

First Commonwealth Financial Corporation (FCF) Q1 2010 Earnings Conference Call April 22, 2010 2:00 PM ET

Operator

Good afternoon and welcome to First Commonwealth’s First Quarter 2010 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. Please note this event is being recorded. I would now like to turn the conference over to Mr. Rich Stimel. Sir, you may go ahead.

Richard 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. We’ve also included a slide presentation on our Investor Relations page with supplemental and financial information that we’ll reference throughout today’s call. With me in the room today are John Dolan, President and CEO of First Commonwealth Financial Corporation, Mike Price, President of First Commonwealth Bank and Bob Rout, Executive Vice President Chief Financial 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 Bob Emmerich, our Chief Credit Officer and John Previte, our Senior Vice President of Investments. 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 description of 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 John Dolan.

John Dolan

Good afternoon everyone and thanks for joining us today. There is a lot to cover on the call and I’d like to start with an overview of the first quarter and an update on some key strategic initiatives. As I mentioned on last quarter’s call we’re very pleased to have Bob Rout on Board as Executive Vice President and Chief Financial Officer. Bob will be providing details on our first quarter financial performance and then finally Mike Price will discuss our operating initiatives and performance of our clients and business.

Needless to say our first quarter net loss of $13.2 million was extraordinarily disappointing. This compares to net income of $1.7 million in the first quarter of 2009. During the first quarter of 2010, we saw enormous declines in collateral values. The volatility we’re experiencing remains largely a product of a small number of out of state credits concentrated in the real estate sector. Mike will get into the details of our credit quality a little later but in general non-performing loans increased roughly 12.7% to $167.4 million from December 31, 2009.

There were two key participation loans that were placed into non-performing status in the first quarter and again Mike will go into those details a little bit later. On our first quarter provision for loan losses was $45 million which represents an increase of $36.8 million from the first quarter of 2009, and was primarily driven by the deterioration of collateral values. Obviously credit quality remains our number one focus as we continue to work to resolve the credit challenges in our out of state construction loans and construction loans.

These loans make up a relatively small portion of our portfolio and have had a disproportionately large effect on our earnings. In addition, they have obscured what is otherwise a compelling story about the performance of our branch banking and small business banking. Over the last two to three years, First Commonwealth has systematically renewed our community banking focus. Our approach has been build on the strategy of delivering locally as a responsible community bank. To that end we continued to see significant progress in first quarter.

Net interest income was up 5% from the first quarter of 2009, driven by a 15 basis point increase in net interest margin. Non-interest income is up as well largely as a result of improved performance in the deposit services, wealth and insurance products. This is the focus of the number of strategic initiatives and we believe these efforts will produce significant opportunities for growth. Our strategic focus on core deposit growth continues to reap benefits as these deposits are not only are most reasonably priced source of funds but they’re also a great source of fee revenue in a powerful means of building customer relationships.

On the OTTI front, we continued to see a reduction in deferrals and defaults for the last three quarters. In the first quarter of 2010, we recorded a $2.8 million impairment charge on six trust preferred securities as down from $9.9 million recorded in the first quarter of 2009. Additionally, we’ve seen one of our banks within our poles cure during the quarter. We also continued our cost containment efforts with non-interest expense decreasing slightly from our first quarter 2009.

We’ve taken a very surgical approach to our expense reduction initiatives because we remain intent on cutting the fact while preserving the muscle that moves our company forward. We believe more opportunities exist to reduce expenses. So while we understand that credit quality is the pressing matter of the day and that these credits were originated mostly in 2006, 2007 we also know that these credit issues are almost having another important story that loans, deposits, net interest income, net interest margins are up. While impairment charges and non-interest expenses are down. Basically we’ve executed on a community banking principals which have let to a solid fundamental performance in the first quarter. So although we feel about good the growth we’ve generated, our credit issues continued to create volatile in our earnings.

And as a result our Board of Directors concluded as appropriate to reduce our dividend to $0.01 per share. So with that overview I’d like to introduce Bob Rout and discuss our first quarter financials. Bob?

Robert Rout

Thank you, John. Good afternoon everyone. Certainly it has been another busy quarter for us as credit has established itself as the most important topic of discussion. I’ll touch on our reserve levels that will allow Mike Price to discuss specific details of those credit issues. And then I also planned to quickly through some of the other issues that are affecting our performance for this first quarter. The first and certainly the most interesting issue affecting our interest this quarter was the $45 million of provision expense we took as a result of the deterioration on two loans which were replaced in the non-referral status during the third and fourth quarters of last year and as well as two new ones out of market condominium participation ones.

And these handful of large credits continued to cause a disproportionate affect earnings something that we’re all well aware of and are currently taking every necessary steps to mitigate those affects. Net charge-offs were approximately $8 million for the quarter and as a result the reserved increased to $37 million to 71% of our non-performing loans. This is slightly better than the industry peers, was at the end of the year. I would also like to point out that in excess of $50 million that reserve is related to specific reserves dedicated to two of our largest non-performing credits.

Slight a higher level of non-accrual loans, net interest income had increased $2.5 million or 5% year-over-year. The increase has been driven by nine basis point expansion in the margin which makes it five out of the last seven quarters that we saw improvement in that net margin. Our focus on growing core deposits in the associated household relationships allowing these securities portfolio to run off and then paying down borrowings has considerably changed the profile of our balance sheet. We believe that ample liquidity and reduced balance sheet leverage is a place to be during these uncertain economic times.

It will also position us well for when the economy position us well for when the economy just tick up. We did a nice job last year of keeping the expenses in check and it seems that that trend has carried over into 2010. We certainly believe that there is lots more opportunities in this area to see a process improvement activities.

On the fee revenue side of the house we’re seeing some improvement in our wealth management business as market values our assets under management have reformed depreciably from where they were a year ago. This area is also benefited from some recent management additions and the upgrading of technology. We sold off approximately $700,000 or 20% of our equities portfolio during the first quarter and reported a $400,000 pretax gain. The mainly $2.5 million in that portfolio consists of local bank stocks and currently has unrealized gains of about $100,000.

We will continue to improve in that portfolio down to positions where we might have a future strategic interests. So in the first quarter of 2010, we recognized other temporary impairment charges at $2.8 million on the trust preferred full securities and encouraging sign here is that this is the third quarter in a row where we saw an improvements in the rates of deferrals and defaults which is having a direct correlation to our impairment charge comparatively.

Hopefully this trend will continue through 2010, our current net exposure in whole trust preferred securities is now approximately $28 million. So on that note, I’ll turn the call to Mike Price, to give some details on our core fundamentals and additional information concerning our credit quality.

Michael Price

Hi thanks Bob. I’ll keep my comments brief given the supplemental financial data that we’ve provided. Unfortunately First Commonwealth is continuing to fill the impact of the environment and its effect on our commercial loan portfolio, mainly in our construction loans. However there are areas within First Commonwealth that continued to improve and I’ll get to those but first I’d like to provide some additional details around credit.

Total net non-performing loans increased approximately $19 million or 13% for the first quarter of 2010, comparable to the increase in the fourth quarter of 2009. First quarter additions were primarily driven by two out of market credits, a $13 million participation loan secured primarily by a condominium development in Missouri that was originated in 2007 and secondly a $7 million participation loan on a recently completed condominium project in North Carolina.

This loan was also booked in 2007, neither of these loans were shared national credits. Looking at the entire non-performing loan portfolio at March 31, 2010 which you can see on page seven of the presentation that $167 million which represents 3.6% of total loans. The construction portfolio has the largest amount of non- accrual loans but represents only 9% of our total loan portfolio and 95% of the construction non-accrual loans are out of Pennsylvania. Also about 13% of our non-performing loans were $21 million were shared national credits which you can see on page 21.

And all of these non-performing loans were outside FPA. Out of state lending is a practice that we curtailed significantly in 2009. looking at the percentage of non-performing loans to outstanding loans by its type 20% of a construction loans are non-performing, 2% of commercial real estate loans are non-performing and 5% of C&I loans are non-performing. In aggregate our two largest non-performing loans first a $46.1 million line of credit to a western Pennsylvania real estate developer that was placed in the non-accrual status in the fourth quarter of 2009 and second a $39.4 million construction loan for Florida condominium project that was placed in the non-accrual status in the third quarter of 2009.

Total here is $85.5 million representing basically half of the total non-performing loan balance and we have specific allocations to the reserve of $54.2 million on these two credits. If you turn to page 20, I’d like to further clarify, I know our participations in (snicks) have drawn some scrutiny and as you know not all of our participations are (snicks). If you look at page 20 you can see in the first quarter of 2010, $505 million or that red bar are C&I credits. And I would just like to comment briefly on those. And there in the C&I portfolio that our purchase indications, we have 27 names over $15 million.

The majority of these borrowers are large western Pennsylvania headquartered companies about 70%. At the end of the year here we had one relationship over $50 million and this loan was reduced and the relationship is now below 50. It’s important to note that none of these large customers are non-accrual and the credit costs of this portfolio overall this C&I book here had been reasonable given the recession.

So indeed as you’ve heard earlier, our challenge lies in the construction loan portfolio. As John had mentioned earlier, we’re all seeing continued improvement in some fundamentals with our community banking operations at First Commonwealth as a result of our efforts growth is balanced between consumer and commercial banking and we’re getting good loan spreads and a better mix of lower cost transaction in savings deposits.

Household growth continues to be solid and our attrition rates are low. Regarding some of the fundamentals that would drive a long term success for First Commonwealth, as you can see on page four, total loans from March 31, 2009 increased to $137 million or 3% on an annual basis. Of that $93 million or two-thirds were in commercial loans and $44 million are approximately one-third were in consumer loans.

Commercial loans grew 3% and consumer loans increased 2% for the 12 month period. We exited the mortgage origination business about four years ago and this portfolio has been running off. We had run off a $112 million in the past 12 months in fact excluding this plan run off consumer loan growth would have been greater than commercial loan growth. As we indicated earlier balance growth is our goal. For the first quarter of 2010, our average FICO scores on consumer credit remained flat versus the average scores for 2009.

Our average score of 746 still indicates that we’re not sacrificing quality in our underwriting standards to generate growth. Consumer delinquencies were relatively flat at March 31, 2010 compared to the same period last year. Total deposits increased $333 million or 8% from March 31, 2009. Lower cost in transaction savings deposits increased $497 million or 20% during the same time frame. These lower cost in deposits represented 65% of our total deposits on March 31, 2010 up appreciably from 58% at March 31, 2009. So this is a nice shift year-over-year in our mix of deposits and we expect this shift to continue overtime which will help us drive the net interest margin performance.

As John mentioned earlier, we are aligning the company’s goals with our shareholder values. Specifically we’ll continue to improve our sales and service execution on the lending side balance growth between consumer and commercial lending will be important. We need to reduce our out of market real estate exposures and scale down large individual credit relationships. On the deposit side our focus will be to drive transaction savings deposit growth and our engine there will be small business.

Now I’d like to turn the call back to the operator and open it up for some questions.

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question comes from Matt Schultheis from Boenning & Scattergood. Please go ahead.

Matt Schultheis – Boenning & Scattergood

Good afternoon gentlemen.

Michael Price

Hi, Matt.

Matt Schultheis – Boenning & Scattergood

Quick questions for you, couple of quick questions actually, I think at the end of the year you had about $458 million in (snicks) outstanding commitments for over $900 million. Have you seen any draws on the existing commitments?

John Dolan

Mike you want to…

Michael Price

$458 million in (snicks) and $900 in commitments.

John Dolan

We have Bob Emmerich here as well. Bob, do you have any comments on that?

Robert Emmerich

The sure national credit by state are shown in page 21 in the slide and the total we have there at March 31, was $431 million. Overall our utilization rate on our commercial facilities have been running in the mid 40s. They’ve declined a bit from a year ago, from into 50s to the mid 40s and I don’t have the utilization rates for the (snicks) specifically but I would think that they would be representative in that.

Matt Schultheis – Boenning & Scattergood

Okay, and you may need to correct me on this but a lot of these loans that you’ve identified over the past year individual loans, have been participations and for example the one that you took the (inaudible) construction that you had to reserve for the collateral write down with this quarter. Was that something that you guys did or was that something that the lead participant in the loan did and you guys just had to follow so.

Robert Rout

The one we’re talking about in Florida that was originally $39 million and that we now have a $32 million allocation on that is a credit that we did directly.

Matt Schultheis – Boenning & Scattergood

Okay, as far as – okay, so that was as a direct, but okay, so as far as participations in general speaking the ones that you have done that have been problematic, are you the lead or you somewhere?

Robert Rout

(Inaudible).

Matt Schultheis – Boenning & Scattergood

Okay, you’re generally a participant and are you following the leads example in how you’re reserving for these, are you being more aggressive than the lead is?

Robert Emmerich

Generally speaking, this is Bob Emmerich generally speaking the Asian Bank doesn’t, would not reveal how they would set a reserves unless it was a sure national credit where you were mandated to take a chart off for generally speaking the Asian wouldn’t tell you what they’re reserving at the (inaudible).

Matt Schultheis – Boenning & Scattergood

So result means that we would be using.

Robert Emmerich

We would be using our methodology, yes.

Matt Schultheis – Boenning & Scattergood

Absolutely. Ok, I think that’s it from me. Thank you very much.

Michael Price

Thanks Matt.

Robert Rout

Thanks.

Operator

Thank you, our next question comes from Damon DelMonte from KBW. Please go ahead.

Damon DelMonte – KBW

Hi good afternoon guys, how are you?

John Dolan

Good Damon, how about yourself?

Damon DelMonte – KBW

Great thanks. Did you guys talked a little bit about the amount of (inaudible) that would be at risk with the upcoming regulation that takes effect in July?

Robert Rout

Yes we calculated about a $1.2 million.

John Dolan

Annual basis.

Robert Rout

On an annual basis.

Damon DelMonte – KBW

I’m sorry a $1.2 million.

Robert Rout

Yes.

Damon DelMonte – KBW

Okay, and then do you guys talked about programs that might mitigate that loss or is that what you think your best case scenario is?

Michael Price

Let me clarify that Damon. The regulation that kicked into last half of the year. We anticipated that would be $1.2 million for the six months and so we are continuing to look at, its hard to quantify right now by the way, because its hard to tell what the customers reactions will be and their preference. But we’re continuing to look at what are the alternatives to be able to I’ll say maintain B levels even if its not in the (inaudible). So we were continued to evolve our solution their but right now the quick is going to be $200,000 a month and the other thing affects that we’re continued to grow our DDA balances and we’re hopeful that’ll offset some of the deficiency as well.

Damon DelMonte – KBW

Okay, great. And then kind of going forward, how should we look at the provisions. Do you guys think that provision would net charge-offs going forward and this year 258 reserve level is adequate, you expressing more choppiness with some of these commercial credits.

Robert Emmerich

Well it’s hard to predict the future there. So all I can say is that we believe that the amounts that we’ve set aside right now reflect a risk that we have in the portfolio in the existing conditions. If the conditions change, that will have an impact. Mike talked about the largest credits that we have remaining in that participation portfolio and the quality of what’s going on with those credits.

That’s under current conditions as there seem to be doing okay, but in market changes that could have an impact so I’d rather not speculate on though.

Robert Rout

Damon, it’s Bob Rout, also you need to consider that again $54 million of that reserve is specifically assigned to two credits. So we won't necessarily replace back to 258, if we’re some type of charged on those credits.

Damon DelMonte – KBW

Right.

Robert Rout

So I wouldn’t read into anything along that coverage ratio right now.

Damon DelMonte – KBW

Okay, and from a lending perspective, are you guys still following customers outside of your core western (PA) markets?

Robert Rout

No.

Damon DelMonte – KBW

Sticking local? Okay, and then I guess my last question related to capital. Total capital at the holding company was 11%, I believe it was 10.4 at the bank level. I think from a bank level perspective its getting close to that well capitalized status but what’s your thought process regarding your current capital level and how do the recent self filing kind of come into that picture as well. What are your thoughts on capital?

Michael Price

Well we remain well capitalized and we intent to remain well capitalized. We’re going to manage our need per capital as well, so the self registration was a precautionary method and I think kind of a precautionary thing and I think that its pretty common for banks in this environment to have a self registration. So I can't say we have any specific plans at time.

Damon DelMonte – KBW

Okay, thank you very much.

Michael Price

Okay, Damon.

Operator

(Operator Instructions) Our next question comes from Mac Hodgson from SunTrust Robinson Humphrey. Please go ahead.

Mac Hodgson – SunTrust Robinson Humphrey

Hi good afternoon.

Michael Price

Hi Mac.

Mac Hodgson – SunTrust Robinson Humphrey

Just quick a follow-up on that lost capital conversation. Do you have any liquidity in the holding company you could downstream in to the bank, for those support ratios.

Michael Price

We do have some at the holding company and we also have an investment subsidiary that has additional liquidity?

Mac Hodgson – SunTrust Robinson Humphrey

How much liquidity would that be?

Michael Price

I don’t know if we disclose that in any of our documents but yes I’d rather not disclose all those details at this point in time.

Mac Hodgson – SunTrust Robinson Humphrey

Ok, and on the large Florida credit, $39 million or so, I know you have a specific reserve for it earlier with the early appraisal in the first quarter, maybe what drove the change there?

Robert Emmerich

This is Bob Emmerich. It was a appraisal and what we’re finding with a lot of these real estate assets is prices really don’t have much in the way of comps, in a lot of the comps they do have are just from share sales, foreclosures, and so that’s really impacting the value that they’re coming with particularly for a land acquisition of.

John Dolan

Mac, this is John. What Bob says what we’re experiencing is these appraisals coming back. They’re already reflected in our provisions as we have experienced those.

Robert Rout

And I think it’s also worthy to note that as the market has fallen out a long some of these market areas that we are having developers walk away through deals and walk away from workout plans thus forcing as it appraisals as suppose as complete appraisals and its having a very significant effect on valuations, (inaudible) connected to real estate development.

Mac Hodgson – SunTrust Robinson Humphrey

So I think you guys are moving forward with the foreclosure there?

Robert Emmerich

Yes that is one of the possibilities we are still continuing to negotiate with the equity partner there.

Mac Hodgson – SunTrust Robinson Humphrey

Ok, got you. And maybe just one last one John you mentioned expenses you all feel like more opportunities to reduce expenses, could you provide any more detail on things you might look at and potential magnitude.

John Dolan

There is nothing to really disclose at this time but we’re constantly looking at operating efficiencies, different ways to do business, and that’s one of the things that Bob is pretty good at is looking at the efficiencies. So we’re going to utilize his skills.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, thank you.

John Dolan

Sure.

Operator

(Operator Instructions) We show no further questions at this time. I’d like to turn the call back over to your Mr. Stimel for any closing remarks.

John Dolan

Well I’ll just – this is John. I just wanted to thank everybody for joining us this afternoon and looking at the first quarter it’s really about the convergence of the past and the future. On one hand we’re dealing with the past credit decisions which resulted in a small group (provided) market loans that today are having a disproportionate effect on our earnings and we continue to work through this issue. On the other hand we’re seeing ongoing signs of strong fundamentals with growth and deposits, loans, net interest income and net interest margin and we believe these results stemming from our firm commitment to responsible community banking will allow us to build more comprehensive customer relationship and lead us the long term sustainable growth. And we look forward to speaking with you again in the very near future. Thanks.

Operator

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

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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