David Dahlmann - Chairman
Mike Price - President & CEO
Bob Rout - EVP & CFO
Matt Tomb - EVP, Chief Risk Officer, General Counsel & Secretary
Norman Montgomery - EVP, Business Integration
First Commonwealth Financial Corporation (FCF) 2013 Annual Shareholders' Meeting Conference Call April 23, 2013 3:00 PM ET
It’s certainly my pleasure to welcome all of you here to the actually the 30th Annual Shareholder Meeting. It’s now, am I Rich its now three o'clock. Okay. Its three o'clock and its April 23, 2013 and according to the notice of the meeting I am calling this meeting to order.
Let me say you should have in front of you an agenda and you should have on the back of it some rules and procedure and when we get to the Q&A, I'd ask you to make sure that we observe, also you have press release, I think everybody has one, press release that was just sent today.
Before, I am just wondering could this be turned down just a little bit, there's a lot of feedback and I don't know whether that's that, thank you very much. Before I turn to the formal business part of the meeting, I would like to introduce some people here from the table. To my immediate left is Mike Price, the President and Chief Executive Officer of First Commonwealth. Next to Mike is, Bob Rout, Chief Financial Officer and to Bob’s left is Matt Tomb, the Secretary of First Commonwealth.
I'll preside this meeting and Matt is going to be acting as the Secretary. I will review the agenda that you have in front of you in just a moment, but I should note that this meeting is being recorded. In addition, it’s being broadcast live via the internet. We would ask you to turn off your cell phones and order electronic devices until we land safely at the gate. Actually that's at the end of the meeting. Hopefully that will cut down the distraction during the meeting.
Let me turn to the agenda. After I complete my opening remarks which will be fairly soon, I'm going to turn the podium over to Matt Tomb to conduct the business portion of the meeting. During the business meeting, all of you, the shareholders will be asked to vote on three items of business. First, we would be asking for your vote on the election of 13 Directors; each to serve for one year and until his or her successor is elected and qualified. That will be the first line of business. The second item of business will be the ratification, the appointment of KPMG as the company’s independent registered public accounting firm for the fiscal year ending 12/31/2013. The third and final item of business will be the approval of the non-binding advisory vote on compensation on named Executive Officers.
Following the business meeting, we will move to topic three as you can see on the agenda, during which I will provide a brief update on corporate governance. Following me will be Bob Rout who will review the financial performance of the organization and Mike Price will then conclude the discussion where he will talk about strategy and themes.
At the conclusion of the presentation, Matt Tomb will report the preliminary results from the business meeting and this is item four on your agenda. We will then almost immediately open the meeting for questions and comments by all of you. At the conclusion of the question and answer period, we will adjourn the meeting at approximately 4:15. I can tell though, we will keep this meeting open to all your questions or answer or all your comments heard.
I would ask at this point does anybody have a questions regarding the meeting agenda? I hear none. I would like at this moment to turn the podium over to Matt Tomb; Matt will lead us through the business portion of the meeting. Matt?
Thank you, David. And we will now turn to the official business of the meeting shortly, but I want to first cover just a few legal formalities. First, I have here the minutes of the 2012 Annual Meeting of Shareholders and in the interest of time we will dispense with the reading of the minutes, but they are available following the meeting if any shareholder wishes to review them.
Secondly, I have a sworn affidavit of the notice of the meeting, which was mailed by first class mail on or about March 22, of 2013 together with the proxy statement and form of proxy card and First Commonwealth’s Annual Report on Form 10-K for the year-ended December 31, 2012. This was mailed to shareholders of record as of the close of business on March 4, 2013 which was the record date for purposes of voting at this meeting. These items will be filed with the records of the company.
Next, I will confirm that the list of the shareholders of the company has been available with company’s corporate headquarters for the past 10 days and is available in the back of the room for inspection by any shareholder who wishes to do so.
I am also pleased to welcome to the meeting [Ms. Rita Swartz], capable representative from Computershare Shareowner Services which is the company’s transfer agent. Rita is here to serve as the inspector of elections for this meeting and that means it's her job to ensure that there is an impartial tabulation of the votes. Welcome Rita.
And last but not least, I can confirm that of the 99,324,120 shares of common stock that were issued in outstanding as of the record date. A total of 85,95,670 shares or 85.7% of the outstanding shares are present at this meeting in person or by proxy therefore I can report that the quorum is present to convene this meeting.
So with those items out of the way, I’ll declare that the polls are open for voting on items of business at today's meeting and we do have ballots available if anyone needs to cast the votes here at the meeting; you don't need a ballot, if you’ve previously submitted a proxy unless you want to change your vote. In addition, I would note that if you hold your shares through a broker or other nominee, you will need a legal proxy from the broker or nominee in order to cast the ballot at this meeting. So if anybody would like to request the ballot please raise your hand and we’ll get you one.
There are three items of business to be voted on today, each of which is described in detail in the company's proxy statement. The first item of business is the election of 13 individuals to the Board of Directors. In accordance with the company's bylaws each director will be elected to serve for a term of one year and until his or her successor has been qualified.
The nominees for election are present here today, and I will ask each one of them to briefly stand when I read his or her name. Now first is James G. Barone. Second, Julie A. Caponi; Ray T. Charley; Gary R. Claus; David S. Dahlmann; Johnston A. Glass; Jon L. Gorney; David W. Greenfield; Luke A. Latimer; James W. Newill; T Michael Price, Laurie Stern Singer, and Robert J. Ventura. These individuals are the only persons who have been nominated to stand for election of directors. Since there are 13 board positions available, the 13 nominees receiving the highest number of votes will be elected.
The second item of business is the ratification of the appointment of KPMG LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2013. Today we have two representatives from KPMG present at the meeting, Partner Michael Ohlweiler and Senior Manager [JP Beldarrain]. Mr. Ohlweiler has advised the company he does not have a formal statement to make. However, he is available during the question and comment period to respond to appropriate questions from shareholders.
And the third and final item of business come before this meeting is the approval of a non-binding advisory vote on the compensation of the company's named executive officers, commonly known as say-on-pay. Information concerning executive compensation can be found on pages 20 through 40 of the company's proxy statement and the text of a resolution that shareholders are being asked to prove is found on page 19.
We will be closing the polls shortly, so if anybody would like to go by ballot, please do so now. I didn't see anybody raise their hand, requesting a ballot. So with that out of the way, we declare that the polls are closed and we will be tabulating the ballots and I will be reporting the preliminary voting results at the conclusion of prepared remarks by Mr. Dahlmann, Mr. Price and Mr. Rout. And at this time I will turn the podium back over to Mr. Dahlmann. Thank you.
Thank you very much, Matt. Now I'll declare the business portion of the meeting adjourned. It’s my pleasure as I said earlier to be with you and I'll be starting the first of three discussions that we will have or conversations. I will speak about corporate governance. Bob will address the financial performance for both the 2012 as well as the first quarter of 2013. Then, we will turn to Mike and Mike will discuss the organizational strategic priorities. The role these priorities have played in 2012 and where they are taking us in 2013 and beyond. Shortly following Mike’s comments as I had noted earlier, we will open the floor for any of your questions or comments.
Now to begin the discussion on corporate governance I think the first and fundamental question you need to ask is what is the objective of governance? Well, again, let me state that unlike management, it’s charged with executing the company's strategic plan, the board’s responsibility is oversight of its execution. The intent of oversight is to achieve positive growth that is sustainable and that increases hopefully the total return to all of you, the shareholders and in the manner which at least equals or hopefully will exceed your long-term expectations.
With that understanding in mind of what the objective of governance is, then it means to a second question, how does the board think about our oversight responsibility? The board approaches its oversight responsibilities through the implementation of a balanced scorecard focused on three key themes; leadership and accountability, risk oversight, and strategic direction and execution. I will return to these themes later when we talk about corporate performance within the context of our strategic plan. However, I would emphasize that it is precisely the strategic plan that serves as a framework for our priorities and the goals for the next three years.
It's important to note that the governance process is a dynamic process requiring continual monitoring, analysis and refinement, which leads to another question, what change into refinements have been made in our governance structured practices to help us effectively carry out our oversight responsibilities? Most importantly, we must have the right people in the right places to execute our strategy and be in a position to adjust it, refine it, when our efforts need to be adjusted. The oversight of this process requires an independent and engaged Board of Directors, whose interests are aligned with all viewers as shareholders.
At First Commonwealth, we believe that the actions of the Board of Directors must be first transparent and second free of any conflicts of interest. During last several years of First Commonwealth, the board is implementing governance policies and practices to create a stronger foundation for oversight that effectively aligns with your interest to shareholders.
For example, today all directors are elected on an annual basis, why? So we would have forward accountability to all of you in a relatively short timeframe. Additionally, the Board is composed entirely of independent directors, except for Mike Price, the CEO. Also now, all directors are required to own 25,000 shares of stock by the end of the fifth year following their election. We did something else in the last couple of years and that was to have 75% of our annual retainer in the form of stock as opposed to cash.
Additionally, we have exclusive policies related to the conflict of interest and associated risk. We believe that all of these are very important governance practices. We believe they foster independence from management and align within the shareholders and as does the separation of the rule Chairman and CEO which we have had for a number of years.
The independence I spoken about must be coupled with adverse set of talents and expertise by the individuals who serve. Independence provides the foundation for effective governance. Today our Board is comprised of individuals who come from variety of industries but there is a lot of focus or emphasis on the financial new accounting issues.
The extensive knowledge and experience of our Board of Directors are also supplemented by a lot of independent education or coordinate education for the Board as a whole. This has been around the issues in enterprise risk, regulatory matters as well as the key industry trends. Our Board normally has extensive knowledge and experience but has a commitment to the First Commonwealth.
As important as the evolution of our corporate governance structure and practices have been, equally important is an another question, with additional governance enhancements are needed? Our strategic priorities that Mike Price will speak to earlier really formed the basis for the decision about how we need supplement or board in a skill sets.
As we look to a strategic planning process that I’ll note a little later on during 2012 that provide us with the framework in which to determine what skill sets experiences did the directors need to have collectively to be able to oversee the execution of the strategic plan. As we went through that process, we determined that even with the very solid basis of knowledge within the board there were areas that we needed to supplement. Those areas were technology and operations as well as banking and risk management. So an important step in enhancing our government’s practice was the appointment in January of this year of Jon Gorney to the Board of Directors.
Jon is an expert in technology and operations. He’s served for nearly 40 years in the financial services industry. Even though presently he is the management consultant, he’s served as an Executive Vice President of National City Corporation. He oversaw all its technology and operations. Following National City’s acquisition by PNC Jon served as the member of the PNC Executive Committee and was responsible for leadership and development of the single operating platform. He retired from PNC in 2010. Clearly Jon’s background in technology and operation is particularly relevant given First Commonwealth stressing to the strategic priorities of the enhancement of efficiency to the evolution of our IT and operating infrastructure.
Another step in enhancing our governance ability is the Board’s nomination of Jim Barone. Jim has significant experience in banking and management. Jim retired from S&P in 2002 as an Executive Vice President, Treasurer as well as Secretary. Jim actually has served on the Board of the bank, First Commonwealth Bank since 2012. He’s been a very, very solid contributor and helped us to navigate some very difficult times in a very, very difficult financial environment.
As I noted earlier, I would return to the question of how does the bank and how does the Board think about oversight. I would emphasize that it’s extremely important to have a precise governance framework; why, because the environment is so volatile. The decisions management makes must be aligned with the interest of the investor. And as far as the Board is concerned, this framework that I will be talking about in the Board balance scorecard provides a structure and a process and a very disciplined approach to strategic decision making around corporate governance. As we approach the effectiveness of governance we look at the oversight through a system’s approach, again looking at the three themes of leadership and accountability, risk oversight, strategic direction and execution.
Turning to the first theme, leadership and accountability; actually it’s this theme on which the success of the organization really rests. It really is fundamental to our ability to drive long term value to our shareholders. The decisions the managements make must be aligned with those of the investors. The Board’s obligation again is to ensure alignment and to hold management accountable. Ultimately, we must deliver sustainable and profitable growth that increases the total return to all of you.
If you think back one year ago we were within one month in time that Mike Price was named CEO of First Commonwealth Bank. A year later, I think we will all agree there has been substantial improvement in the organizational performance under his leadership and that of his executive team. Mike has challenged himself. He has challenged his executives to successfully navigate a very, very difficult environment and to lead us in a growing organization.
2012 was in fact a year of solid progress for us. Our earnings per share, our return our equity, our total return to shareholders, all improved. The leadership demonstrated progress from all this financial perspective. But it also positioned us well within the marketplace. After a year of transition, we continued to move forward in terms of brand perception, customer satisfaction and profitability.
The second theme, risk oversight; I would note that the results that we have experienced and will experience in the future take place within an environment of inherent risk. The Board’s responsibility here is to provide an appropriate risk appetite and to ensure corporate alignment with that appetite. In order to accomplish this, the Board does meet on a regular basis with the members of management to discuss the status and magnitude of the risks. These risks include, credit, market liquidity, operations, legal and compliance matters, reputation and strategy. Our risk profile has dramatically improved as a result of management’s upgrading of credit administration function as well as the rightsizing the portfolio. All of these efforts will mitigate future uncertainty and hopefully provide a basis for less volatility in our earnings.
The third theme is strategic direction and execution. With the proper accountabilities assigned and with risk identified and understood we now turn to the strategic direction and execution. In 2012, First Commonwealth, as I mentioned earlier, underwent a comprehensive strategic planning process that reaffirmed the direction of this organization. This evaluation resulted in a refined corporate mission and identified five strategic priorities. These priorities include, company credit infrastructure, capital position, customer experience, operating excellence and talent. Mike will speak to all of these in detail in a few minutes. The Board’s focus remains on oversight of the execution of the strategic plan and that oversight is based upon the corporate governance structure that I've discussed here today.
In conclusion, our industry in general and our company in particular has navigated numerous challenges in recent times. These challenges remain; market competition is fierce; the regulatory environment is demanding; technology and customer expectations are constantly changing. I can say without doubt, the banking industry that we find ourselves in today is more unforgiving than anytime in the last eighty years. All these challenges bring opportunity.
I believe in 2012, we see as many of those opportunities, but this trend continues in the first quarter and we believe there is clear progress on many fronts and will continue through 2013; because the progress that we have seen the Board felt it appropriate to raise the dividend from $0.05 to $0.06 per share. We remain committed to ensuring that the stakeholders benefit from strong capital position and we believe the strength of the capital position is one of the many results of our disciplined approach to corporate governance.
So in close I would like to say on behalf of the First Commonwealth Board of Directors, I thank you for your support as owners of this company and we will be willing to address questions after the next two presentations.
Now I would like to turn the discussion over to our Chief Financial Officer, Bob Rout for an overview on First Commonwealth’s financial results. Bob?
Thank you, Dave. And let me too extend my welcome to all of you joining in today. My focus here today is to provide a quick overview of our financial performance and also to help Mike’s discussion concerning the strategic direction of First Commonwealth.
Now I advise pulling together some thoughts and slides for this presentation. I referred back to my very first annual meeting presentation with this organization in April, 2010. There is no doubt; those were tough and disappointing times for First Commonwealth and the shareholders. They were times when we have just announced a $13.2 million loss for the quarter and we are looking at additional reduction in the dividend. We are about half way through charging off almost $300 million of loan and investment losses. While at the same time, we were trying to reassure a very anxious group of shareholders and regulators.
Our efforts over the past two years certainly have been a difficult work, but effective. We cleaned up those legacy problem loans and securities with just the few drivers remaining; reducing the number and total balance of inappropriately sized loans by $400 million by selling off some questionable $200 million worth of securities and by diversifying our funding sources we now have a smaller but less risky balance sheet.
A complete rebuilding of our credit area with seasoned professionals was critical. The management team and board of directors have well restructured and the bank is now more efficient; have to reduce our full time equivalent staff positions by 243 or 15%.
As interesting it’s all there is, it is still yesterday’s news. You, as shareholders of the company, are much more interested in where the organization is headed rather than where it has been, and hopefully our presentations today will give you a sense of that direction and what we believe are good market and performance organization, or performance opportunities for our newly restructured organization.
In the annual meeting we probably do need to do just a bit of a look back at our 2012 performance. This highlighted schedule compares some key performance statistics for the full year 2012 as compared to 2011, net income earnings per share, dividends per share, return on assets and return on equity. These year-over-year results are certainly indicative of the progress made; but they are not near what we need to be in order to be classified as a high performance bank.
This schedule shows our key performance statistics for the first quarter of 2013 as compared to the same period last year. Performance is relatively flat between the periods, mostly due to some one-time gains last year and because our net interest margin is feeling some squeeze from this highly unusual and extremely low interest rate environment in the world markets today.
Year-over-year balance sheet helps us to dive into this first quarter’s performance. We had decent earning asset growth over the last 12 months with $76 million of investments and $88 million of loans. We are particularly pleased with the loan growth in not only a tough economic environment but also in compliance with more disciplined underwriting criteria that we implemented following some top credit lessons learned in the past.
Deposits grew modestly, but we are very pleased within exchanges, whereby more of the funding is coming from checking and transactional accounts. Checking accounts are not only our cheapest source of funds, but they are rich in fees and customer relationship values.
Growing these types of deposits have been and will continue to be a strategic focus for us. Any banks can grow CDs by advertising rates in the newspaper. It’s quite a different thing, saying our teams are cash management professionals to obtain the operating accounts of businesses and their employees. Right now borrowings are cheaper than CDs or time deposits and that's allowing us the opportunity to mold the CD balances into more of a customer relationship portfolio rather than a conglomeration of single service rate shoppers.
[Home] loans is only a good thing if the borrowers are paying you back and as we are all painfully aware many of our larger customers were not paying this back during that Great Recession period. This chart shows some key statistics that we used to measure how well customers are paying us back and you can see the improvement.
Credit administration is an area that we've devoted an awful lot of resources over the last three to four years. We now believe that our credit administration function is a competitive strength. And this is how all of those issues fall out on to the income statement comparing the first quarter of 2013 with this first quarter 2012.
Net income is slightly under last year but our earnings per share remain the same at $0.11 due to our stock repurchase programs. Despite growing loans and investments our net interest income is down by $3 million, again this unusual interest rate period is, our environment is squeezing the spreads that we earned on loans and securities and what we pay out to depositors and other funds providers. And this is happening in most banks across the country. A little uptick in economic recovery should change that interest rate environment.
Non-interest income variance reflects some of those one-time gains that I was referring to earlier. Non-interest expense includes all of those day to day costs associated with running this bank; salaries, benefits, occupancy, data processing and advertising etcetera. First Commonwealth has not been a very efficient bank when we compare it to our peers and we currently have a number of initiatives underway to improve that position. But the biggest impact in that non-interest expense reduction is from the cleaning up of problem credits where the costs of consultants, management fees, attorneys, valuation write-downs have just been shocking. This is another example of the benefits of a strong and independent credit administration function.
Last area I want to talk about is capital. Bank capital [ROC] ratios can be extremely complex formulas. To simply put they really tell us two things about some new regulators, how much and how fast the banking grow and secondly how much economic or credit shocks can a bank withstand before some type of regulatory actions require?
This chart shows the primary ratios used by regulators; total risk base, tier-1 risk base and leverage. In the next column, we see First Commonwealth ratios currently and where the regulators define well capitalized, the highest classification. And as you can see we're well in excess of those levels, but that’s only part of the story as these ratios.
Banks are also required to stress past these ratios using the economic scenarios, sometimes even more extreme than what we actually experienced in that 2009 to 2011 timeframe. It's our philosophy that we want to remain in that well capitalized position even after the most severe stress scenario that we can devise. That stress scenario testing and the resolving capital position provided us with the comfort to implement some common stock repurchases and also to raise dividend this quarter.
There are a lot of things happening at this bank but the most important thing is the return to shareholders, total return of course being the combination of stock depreciation and dividends. This chart compares our total return to the shareholders over the last 12 months as compared to our peer group. It's our ongoing objective to continue to outperform banks like test.
So with that, I want to thank you again for being here today. Your ongoing support as well as your honest and frank feedback are recognized and appreciated. We don’t get any better by folks comments all the things that we're doing right. So, with that, I’ll turn over the podium to Mike Price, our President and Chief Executive Officer. Please enjoy the rest of the meeting. Thank you.
Good afternoon and welcome. It is good to be with you today. I would like to thank David for setting the stage and also for Bob’s comments in financial highlights. I appreciated his quote you are much more interested in where the organization is headed versus where it has been. And hopefully at the end of my presentation you will have a sense of where we headed and our strategic plan is great and we did a strategic planning and I will share our mission with you here in a minute, but execution perhaps is more important.
And I would like to introduce you to some of the people that are producing the results. And if my executive leadership team could please stand up I would like to introduce them.
Steve Cobain, who runs our Corporate Banking Group. Bob Emmerich, our Chief Credit Officer. You have met Bob Rout, our Chief Financial Officer. Len Lombardi, our Chief Audit Executive. Norm Montgomery who runs our IT and our operations functions. Cheryl Parzych, who runs our Wealth Management Division in the back there. Eric Renner, I can see him with corner of my eye, who runs retail and small business banking. Carrie Regal, who runs our HR function. And Matt Tomb, our Chief Legal Officer. Hey and I see Greg, who ran the local united weight campaign and runs our Commercial Real Estate division, hey Greg.
Welcome it's good to be with you today. This is the team that produces the results and the outcomes. Let me start and it's been a privilege to service the CEO over the last year and we began a year ago as a team and we really developed a strategic planning -- a strategic plan and we started with the basics. What is our purpose and how do we make it happen? We called that a mission statement. And our mission statement here is to help our neighbours and the businesses within our communities realize their financial goals, in fact their dreams if you will, if we do our jobs right as a trusted partner and friend. We should know our neighbors in the businesses within our communities. We care. We are engaged, in fact many our friends.
When we are plugged in and we hear about opportunities even consult with businesses, their owners and their employees before and official request is made and makes its way to the market place, I believe we can win in that way. We are a mission-driven company and we have to remain one if we want to grow and prosper with our customers.
In our vision couple key points here. We deliver best-in-class service by anticipating the needs and exceeding the expectations of our customers. We are going to talk about some adjective measures of that in a minute, but that really needs to be at the core of who we are. We recruit, develop and reward the most talented community bank team in our markets and I really believe we have the talented team who will support our communities as active leaders and as good corporate citizens and these good people are involved in several things in each of their communities and they are really in the fray making a difference in each of the communities that we are privileged to serve.
And importantly we will deliver long-term value to our shareholders by becoming the top performing bank in Pennsylvania. At the end of the day it matters the financial results that we produce and the return that we can provide all of you. And over the past years David and Bob have outlined, we have been pleased to be able to increase our dividend and indeed return more to shareholders than the peer median and certainly than we have in the past.
We have five strategic teams that I would like to chat about with you today and discuss, first is credit and credit is paramount to any bank culture in the future of the company and I want to share with you just some of the trends that the vision is to build a strong credit infrastructure and culture that really produces competitive advantage overtime and we have lower credit costs which we haven't had in the past, but they are getting down there a bit and you can see NPLs or non-performing loans. This is a bad thing. These are the good people that can't pay us back or refuse to and you can see the trend in that percentage coming down, you can see that number from going from a loss beehive of about $148 million to about $78.3 million here in the first quarter and that's a five-year low for this number in the company.
You can see net charge offs and the trend there, you can see reserves to total loans that we have a reserve category and our reserves are little over $60 million and those cover about 80% of those problem loans. You can see criticized loans to total loans, that number has dropped as well and you can see it’s gone from about $584 million in criticized. These are kind of like the scratch and dent refrigerator you get on sale at the best buy on the weekend. So you can see that those have been cut in half over the course of the last several years and that's pretty important. Also our non-performers fell from the end of the year $108 million to about $78 million here in the first quarter pretty precipitous and nice drop and hopefully that will really pertain well for the future.
The next strategic theme is really to thoughtfully manage our strong capital position to ensure stability, but also to benefit shareholders. And in terms of capital and this capital that Bob Rout talked about really our priorities are these. First and foremost to grow the bank organically. Secondly, sustainable increases in the dividend. And again, the dividend has moved from $0.03 to $0.05 to $0.06 per share and the constraint there is we can only payout a portion of the income in dividends. Third, stock buybacks. And fourth, strategic M&A or mergers and acquisitions at the right time and only at the right price.
And here's a little summary, I’ve mentioned this before; we've completed about 53% of a $50 million and a $25 million share repurchase program through March. We retired $32.5 million of 9.5% or high fixed rate trust preferred debt on April 1st and that will pertain well for the future as well.
Our third strategic theme and I'm going to pause here is to deliver a consistently superior customer experience and become the best choice for businesses and their employees among community banks. I really believe that there is a clear opportunity and the team does as well to position ourselves as the best choice for businesses across our markets; I look in the back, I look at Steve Cobain who runs our Corporate Banking Group; Eric Renner who is responsible for our Business Banking Group and I think we have teams that can compete with anybody and businesses bring in great relationship value, consumers and that's what's help driving the loan growth that Bob shared earlier.
Just one story and this is a manufacturing company who deals in plastics. A year ago we began to do business with them. We provided them with a $20 million credit facility; it quickly became a much deeper relationship, because we listened to the client and we put together a very thoughtful loan structure for them. We then earned the treasury management business and in the early summer talked to them about how we can deliver greater value and save the money with employee benefits. This ultimately saved the client around $50,000 in health insurance cost in the first year.
Around the same time, we talked to them about the 401(k) advisory services and eventually won that opportunity as well. We also opened personal accounts for the owners and their employees and this is just getting better every quarter and I have to tell you one of my favorites parts about our board meetings is we talk about big wins in both our retail and our corporate bank each month and typically there is three or four of those and we've never been more competitive in winning business in the marketplace. We're not looking to sell the products. We're looking to help our business owners grow their businesses and its back to the mission. It's very simple; to help our neighbors and the businesses within our communities, realize their financial goals as the trusted partner and friend.
This next slide, we're also pretty proud off. If you look at the topline, it's called C&I, Commercial and Industrial loans. These loans are now about 25% of the balance sheet of the company and they have grown nicely over the last few years and our balance sheet is looking like a little larger bank and that's a good thing because we're financing the small businesses in the middle market companies and the communities that we do business in.
This is everything from auto body shops, to manufacturing companies and we also have a nice business in commercial real estate and it's a good performing portfolio and that business we've about 250 mile concentric circle from Indian, Pennsylvania and that portfolio now is performing very well. And one of the reasons we’ve had traction in these business portfolios is quite simply, we're doing a lot more calling; we have really focused on energy and oil in Marcellus and we have an ever growing kind of cadre of centers of influence, accountants, attorneys and good people that are referring us business and really keying up lots of nice opportunities for us.
This loan growth has really happened without First Mortgage business. We got out of that business back in I think 2005, 2006 and that portfolio is running off so there is a headwind there, but we are able to overcome it and move the portfolio forward. I would also add that we are really staying disciplined in our underwriting and I can think of just at least three loans this past quarter where we really let them go; they were underwritten in the marketplace, but they just weren’t the right credits. We have also worked on our large credit exposures pretty significantly; at one point we had over 70 loans that were excess of $50 million that number is now in the 30s, so we have really taken some of the risk out of the balance sheet of the company.
The other thing we are all proud of is just when we talk about a superior customer experience that’s nice. But how does it really objectively translate. In our retail bank we do 10 surveys from third parties or customers every month on every branch and that’s administered by a company called (inaudible) and we are really at all time highs in terms of customer service throughout our company. Just last Thursday JD Power, we jumped from a 10th place to sixth out of 35 banks; there is only one bank ahead of us, here locally, and I won’t say who that is, so if you come up and whisper to me afterwards, I might give it to you. But we really are performing very well objectively with customer service in our branches.
One thing that’s not on here, we do another survey with a company called (inaudible) they do a lot of consulting around corporate and commercial banking and we really showed up as really the top bank in terms of customer service for middle market and corporate banking in the Pittsburgh area, I know I get going fast, so I apologize.
The next slide is just strategic theme number four, enthusiastically migrates to a culture of operating excellence and we are really focused on a couple of key things here; mainly our credit quality which we have talked about, our core loan and deposit growth, our efficiency and our net interest margin, but on the next slide you can see the progression with our deposit growth and this is a non-interest bearing checking accounts over the course of the last several years and when we started, Bob likes to share, we were probably about 9% back in ‘07, ‘08 and all of our deposits were checking accounts, that number has grown to about 19% here in the most recent quarter and you can see that number going from the $64 million up to about $88 million; really good progression with new checking account activity and we call that core deposit, it’s a wonderful thing. This is money that helps fund our balance sheet. We have to provide service through branches, but we don't pay interest on this and again that’s a good thing.
As we look at efficiency which is the next slide, lots of efficiency initiatives; I think you had 243 on your slide, I have 238, so we must add a few back, but about 15% reduction in FTEs and this really wasn't through any massive lay-offs; this is just through natural attrition at our company getting more productive and more efficient, we have reduced some management layers; we have outsourced some things like clients statements and ATM service, and we've also renegotiated some third party contracts and consolidated our bank and holding company structure, changed our marketing mix, got it out of the more expensive newspapers and really you are seeing more billboards, a lot more online and getting more bank for our marketing buck.
And also I would share that our electronic channels are really growing rapidly and you might think well why didn’t I put that on here? Our customers really have a preference to use mobile banking, electronic online, so we are investing in those channels and we are also just drawing back ever so slightly with our branch network and rethinking our delivery.
The next slide is really our challenge. You can see our net interest margin really kind of going down here over the last couple of years and last year the net interest margins has gone down about 30, that's a lot, that's about $15 million, probably normalized, that's about 20 basis points a year and basis point is worth about 500,000. So we wake up out of bed every year and about $10 million of top line to $15 million of disappearing off of the top line. So we've got to be nimble, we've got to be quick. However we are going to overcome that, focus on becoming more efficient, really trying to outgrow that with our loans and our poor assets and really capturing more business in each relationship and really providing more value to that client.
We are also for some of you good depositors we've been pretty tough on rates, we are not paying 2%, 3%, 4% for conclude, are we (inaudible). It’s more like a 0.5%. So it’s a tougher environment out there used to be when you had a couple of 100,000 hundred thousand in your pocket in retirement or 401(k) thanks for really competing for that money, but it’s really come down quite a bit the last few years. The 15 is perhaps really one of the most important and that's really to acquire, retain and develop the most talented community bank teams in the markets where we compete.
And we really have a knowledgeable skilled and dedicated team here at First Commonwealth and some of that talent has really become because of some market disruptions with some of our bigger competitors. We do have a clear sense of excellence and accountability, how people perform matter. We have clear goals and objectives, we have profit and loss statements by line of business and we need to understand that the customer is at the center of everything we do. And our talented people really deliver good customer service and we are proud of that. And we feel like the team is jelling and coming together and its good momentum with the core group of executives and senior leaders.
Just a couple of closing thoughts. We do feel good about the progress we made in 2012 and through the first quarter. Earnings are up, credit quality is improving, we are returning more to the shareholders, objectively we are delivering on our basic value propositions and our clients do like us. The feedback we get is positive. All of the complaints kind of come to my office and we track them and I can tell you the two places they come from, but I can handle most of them every week as Ken my assistant rose and it makes us better.
I really would like to thank you for your support this past year. We care about what you think. I read the comments that come into our Investor Relations area and we try to react and get at the things that are most important to you. I would like to thank you for your time and we are happy to turn it over some questions that you might have and be helpful in anyway we can.
Thank you very much, Mike. I'd like to certainly thank you for your discussion on strategic priorities and also Bob Rout in terms of, they look back as well as look ahead. At this time I would like to say that I always like Mike’s analogy. I realize he probably shops the same place I do, we both go up there scratch and dent specials, I think refrigerators. Matt, if you could come up and tell us what the preliminary results for voting please?
Thank you, Dave. Based on preliminary report from the Inspector of Elections, I am pleased to report that each of the 13 nominees has been elected to the Board of Directors. Each nominee received at least 96% of the votes cast for their election. In addition, KPMG LLP was -- the ratification of KPMG LLP as our independent registered public accounting firm was approved with rate of approximately 98% of votes cast and the advisory vote on the compensation of named executive officers was also approved and 95% of the votes cast were for this proposal. These results are preliminary. We will be filing an 8-K with the SEC within four days that we will report the final results after they are certified by the Inspector of Elections. Thank you.
Thank you very much, Matt. Well, we've been talking about the question and answer period for a while. We're almost there. I wanted to first congratulate the directors on their election. I can assure you that their commitment to the First Commonwealth is unquestioned and they will work, certainly be expected to be held accountable. I would also like to congratulate KPMG in terms of new overwhelming support as well.
As we turn to the questions, I would ask you to observe the rules or procedures which were on the back of the agenda. I would ask you to address all your questions to me, I will certainly make sure that I hand them off to probably the Mike and Mike will determine what management may need to address it.
There may also be a question or two that may go to one of our committee chairs of the board. If you would please raise your hand and Larissa and Jason are prepared to hand the microphone to you. If you would wait and get the microphone, then to identify yourself and tell us your affiliation whether you are proxy or whether you are a shareholder. I would ask you to be concise in your questions and if your questions at the time to one so that we can give everyone a chance to get their questions answered.
I would also ask if you keep your questions to two minutes. If you go beyond two minutes we classify that’s a speech, it no long would be a question. That was supposed to be humorous, apparently it wasn’t.
So at this point, the floor is open for questions, please.
This is a quite group, I don't know Mike we, Bob we, Matt we probably have been sleep. Any questions please?
Thank you. Let me ask the questions.
Absolutely, the right next to you (Dick) if you didn't, we have a real problem.
I thought it would be embarrassing if no one asks a question?
Absolutely, and it’d be more embarrassing if we don't have an answer, so you go ahead.
[Richard Larrick] from Mt. Lebanon, Pittsburg suburb, I am a shareholder and (inaudible) with the bank. One thing occurred to me Dave maybe Matt Tomb can help with this, whatever happens?
Okay, I will do that. Well dictate things seriously and I hope we have some questions here until Dick gets back.
My question to you is as your organization today equipped with state of the art technology for banking at all levels for customer, commercial, consumer?
Okay, that I think is a very valid question. Let me ask Mike to handle that. Mike, the question that was being asked is whether we have the state of the art technology to handle all types of customer transactions across all the business lines. I think that kind of ties to when I was talking about the importance of having Jon Gorney on the board and looking at the -- our IT and technology platforms so will you handle that?
You know right now we are undergoing a full look at our technology. We have used about 39 systems. It’s actually probably more than that, over 40 and in some places better than others. We need our systems to be more integrated. We really need CRM systems that really speak to both our people in the backroom, our people in the front lines. We have ways to go there. We don't think that systems in and of itself are the answer. We think the good people in front of our customer really are most important thing, but we need a little better systems we think to provide better service to our clients and I don't know Norm if you would care to expand on that at all.
Okay, not there yet honestly. We have, I have to tell you I'm pretty proud of our mobile banking, our online banking, and some things that we've rolled out in the last year. We really believe that those are state of the art and those are pretty important to really tech savvy younger consumers in particular and usage on those products is just astounding, I mean it’s growing like 60% to 70% per year.
Well, we've just approved the system called Mobile Remote Check Capture, so as a consumer with your smartphone you can take a picture of your check and deposit it into the bank and that will be coming online here pretty quick, but we really need those kind of whiz bank kind of things because certain consumers just demand them and the rest of us are learning how to use them.
Absolutely right. And as we continue to enhance our (inaudible) mobile banking, our online banking and our business online banking.
Did we address the question? I hate to say that I love the (inaudible) but I think you put you finger on it, okay. Next question. We are still waiting for Dick here. I hate the spot before Dick is back. How about one more question? And you can go beyond two minutes.
We are just checking to see if Dick wants to ask. I do apologize we are, we said 4:15 so we are a little ahead of schedule. I would again like to take a moment to just thank those who really worked hard to get this put together. I think I believe Dick has said to Stacy he is not prepared okay. We wish him well.
If there are no other questions, I would like to thank you all very much for coming. It’s really been a pleasure to be with you. We're very honored to have you as shareholders of this institution. As was said here earlier, we certainly want to hear the good as well as the not so good. We can’t get better if we're not challenged and we certainly expect to be challenged at all levels.
So again thank you for your commitment and we would hope that the 2013 and beyond will be a success for all of us. As we close, I do want to recognize a few people, I am sure I will miss a few on the way. I would like to obviously thank Mike Price and Bob Rout. Behind this team, Matt Tomb has done (inaudible) work. As you look at the proxy material, as you look at many of the things that have taken place here, Matt’s been at the center of it and he is a tremendous talent. I don't know how he got there being so young, but he is quite a talented executive officer.
I would also like to thank Wendy Reynolds. I am not sure where Wendy is. She is outside I think attending the Dick, but Wendy is really the Vice President. She is really the administrator for the board and she is taking care of all the logistical items with the help of (Karin), I think she was here in (inaudible) and so we thank Rich Stimel. Rich is back there in the back. He takes a very little profile but he is responsible for coordinating all the presentations. So he does a tremendous job in terms of strategic communication and the thing I like most about Rich is he likes pun and we get along quite well.
So with that said, I would like to again thank all of you. I look forward to see you in 2014. And again if you have issues you want to address to us in the future, don't hesitate to pick up the phone and give us a call. Thank you very much. This meeting is adjourned.
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