Standard Bank Annual Report
2012 Message To Shareholders
2012 was a year of significant progress and a return to profitability for Standard Bancshares, Inc.
Despite challenges in the form of increased industry regulation, uneven economic recovery and lingering
credit quality issues, we were able to mark a number of accomplishments during the year:
- We reported improved financial results, generating net income of $5.8 million in 2012 versus the net loss of $5.5 million posted in 2011
- We significantly enhanced asset quality,decreasing past due and non-accrual loans by 32 percent, from $86.5 million at December 31, 2011 to $59.2 million at December 31, 2012, while lowering net charge offs from $42.9 million in 2011to $11.1 million in 2012
- We upgraded our product and service offerings to better meet the needs of our consumer and
- We continued to invest in and strengthen our relationships with our clients and our communities
- After significant efforts by our senior management team and outside advisors over the past two years,
in November 2012 we announced a strategic recapitalization through which we would raise nearly $140 million in new capital
- The proceeds from the capital raise, which was completed in early 2013, materially improved the Company’s balance sheet and capital position, and facilitated the repayment of our TARP obligation and our notes payable.
We believe that the momentum we created during the year, punctuated by the strategic recapitalization completed in early 2013, will facilitate continued growth and improved earnings performance for Standard Bancshares, Inc. in the years ahead.
In November, 2012, we announced a strategic recapitalization through which we raised $138.9 million in new capital. The new capital, which we received in February 2013, significantly improved our balance sheet and capital position. Furthermore, as part of the transaction, our TARP obligation was repaid in full. We incurred additional charges associated with the strategic recapitalization, including the write off of goodwill and further building of our provision for loan losses. Thus, we anticipate these one-time, nonrecurring charges will temper the 2013 first quarter and full year reported financial results.
This improved financial position will not only enable us to better meet the needs of our retail and commercial banking customers, it will allow Standard Bancshares to take advantage of anticipated growth opportunities in the consolidating Midwestern banking market. This capital strength will also enable us to continue our longstanding commitments to the civic and charitable organizations in the neighborhoods and communities that Standard serves, as detailed below.
Improving Financial Performance
Although we are not yet satisfied with the overall level of financial performance achieved in 2012, we are pleased to report that during the year, we increased net income to $5.8 million, from the $5.5 million loss reported in 2011, an improvement of $11.3 million. Earnings growth was driven primarily by a lower provision for loan losses and higher other income.
A primary focus in 2012 was improving asset quality, and by every metric, Standard Bancshares was successful in achieving this goal. Every key asset quality metric showed material improvement during 2012; as a result, we were able to lower our loan loss provision from $38.2 million in 2011 to $16.1 million in 2012. At year-end 2012, our allowance for loan losses was $42.0 million, or 71 percent of past due and nonaccrual loans of $59.2 million, versus an allowance for loan losses of $37.0 million, or 43 percent of past due and non-accrual loans of $86.5 million at yearend 2011.
Net interest income for 2012 was down by roughly 5 percent from 2011 levels, as a $7.7 million decline in interest income more than offset a $3.9 million decline in interest expense. The materially lower loan loss provision led to net interest income after provision for credit losses increasing by $18.2 million, or 48 percent, to $56.0 million in 2012, from the $37.8 million reported in 2011.
Overall asset growth was modest, with total assets reaching $2.19 billion at year-end 2012, up from $2.14 billion at the end of 2011. Total loan growth in 2012 was a modest 1.5 percent; however, key loan portfolio composition changes occurred during the year. During the year, we increased our commercial loans outstanding by $78.4 million, or 44 percent, while we decreased our construction and land development loans by $28 million, or 18 percent, and our consumer loans by $36.8 million, or 14 percent. At December 31, 2012, the loan portfolio totaled $1.57 billion.
Deposit growth was more robust, with total deposits for 2012 increasing by $49.4 million, or 2.6 percent, reaching $1.92 billion at year-end. Again, important changes in deposit base composition occurred during the year. Demand deposits were up by $100.4 million, or 11 percent, during the year, with non-interest bearing demand deposits comprising four-fifths of that growth. Core savings deposits were up by $41.0 million, or 14 percent. Higher cost brokered deposits declined by $60.7 million, or 37 percent, during 2012.
The changes in loan and deposit base composition are reflective of our consumer and commercial business centric community banking strategy at work, and lead us to believe that as our asset quality challenges are put behind us, we will be able to facilitate enhanced organic growth in our core banking operations.
Other income increased by $2.0 million, or 12 percent, in 2012 to reach $19.3 million. The primary drivers of this increase were higher secondary mortgage income and higher cash management fees.
At the same time, tight expense controls were maintained. Total 2012 other expense of $66.7 million was a mere $1.4 million higher than 2011 expenses of $65.3 million.
Throughout the course of 2012, we added or enhanced a number of product and service offerings to better meet the needs of our consumer and commercial banking customers. We launched a branded mobile banking app for our retail online banking customers in September. This app, available on both the iPhone® and Android™ mobile platforms, allows our customers a wide range of functionality, including the ability to check balances, review transactions, locate branches/ATMs, pay bills and transfer funds, via their mobile devices. We expanded our core deposit product line, adding two new offerings – Student eChecking and SB@Work – targeted to specific market segments.
To capitalize on the mortgage refinancing boom, we added the Federal Home Loan Bank of Chicago as a primary source of funding for our 15, 20 and 30 year fixed-rate mortgage loans. As an FHLB member bank, we are able to enjoy unique pricing and servicing benefits, while increasing our loan origination profitability.
Our commercial banking team continued to expand its focus on meeting a wide variety of small- and middlemarket commercial customer lending needs. One area of renewed focus at Standard is SBA lending. While we have extensive experience in this arena, many of our customers do not realize that we are an ideal source for SBA loans for both the start-up of new small businesses and to finance the growth of existing small businesses.
Community Leadership and Commitment
We continue to increase our engagement in the community. In 2012, Standard Bank employees volunteered over 3,700 hours to 400+ different education, fraternal and social service organizations in our communities, through a variety of programs.
Our Annual Holiday Giving campaign benefitted four local charities: Park Lawn, Toys for Tots™, Lakeview Pantry, and Operation St. Nick, and was augmented by food and clothing drives. This campaign encompassed multiple specific initiatives: for instance, the employees and customers of seven Standard Bank branches made the holiday season a little brighter for Chicago southland non-profit Park Lawn and the people it serves by raising over $5,800 through the sale of ornaments.
Our fundraising efforts during the year also encompassed an employee fitness-based campaign as well. Last summer, over 400 employees walked more than 98,000 miles during our President’s Challenge. Funds raised helped to support the American Heart Association and other local charities in our footprint.
We believe it is a core part of our mission to not only support our communities, but to help our community members help themselves. As an example, our growing Financial Literacy programs throughout our six hubs allow our knowledgeable teams, in partnership with nearly three dozen organizations including churches, schools and social service groups, to educate those who are underserved and under banked about financing basics. Many branches participated in “Teach the Children to Save” week by providing financial education classes to a variety of schools.
As a locally-managed institution, our ties to the community represent more than just financial and volunteer support. Our employees generally live in the areas in which they work, and comprise essential “threads” in the fabric of the communities we serve.
During 2012, as part of the recapitalization, we announced that veteran Chicago area bankers Robert A. Rosholt and Allen Koranda would join the Company’s board once the transaction was completed. Mr. Rosholt, who will become lead independent director, formerly served as Executive Vice President and Chief Financial Officer at First Chicago, First Chicago NBD, and Bank One, and is currently Chairman of the Board of HCC Insurance Holdings, Inc. Mr. Koranda is the former Chairman and CEO of MAF Bancorp, Inc., which was the holding company for MidAmerica Bank. We welcome their guidance and counsel.
2012 was a challenging year for Standard Bancshares, but our accomplishments during the year clearly delineate the struggles of the past from the promise of the future. We set out to address our credit quality issues, improve our financial performance and strengthen our balance sheet. Importantly, we accomplished all of these objectives. The combination of the performance improvement and strategic recapitalization will position Standard Bancshares as a key player in the consolidating Midwestern banking market, while providing capital to fuel renewed organic growth in our current markets. As always, we appreciate the hard work and dedication of our employees, the valuable counsel of our Board and the continued support of our customers and our fellow shareholders.
Timothy J. Gallagher
Chairman of the Board
Lawrence P. Kelley
President, Chief Executive Officer and Vice Chaiman of the Board