2013 Message To Shareholders
2013 was a transitional year for your company, whereby we strategically recapitalized the balance sheet to support future growth and to aggressively chart a new course for Standard Bancshares.
Among the year’s key accomplishments:
· We completed our previously announced, $138.9 million capital raise at the end of February, which materially improved the Company’s balance sheet and capital position, and facilitated the repayment of our TARP obligation and our notes payable.
· We reconstituted our holding company board of directors. The holding company board now consists of nine (9) members of which, two (2) new independent directors were added along with three (3) representatives from new private equity investors. Robert Rosholt, a new independent director, was named lead director. The board formed committees for Nominating, Compensation and Audit. Charters were created and adopted for each committee, setting the stage for appropriate governance.
· Management created and the board approved a new 5 year strategic plan establishing goals and objectives for future performance of the company. The strategic plan plays on the strengths of the bank which includes a relationship banking focus and building on our very strong deposit base.
· While the focus of our strategic plan is on organic growth, we are well positioned with strong regulatory relationships to be opportunistic on acquisitions in what is a consolidating marketplace for banking. We continue to review opportunities as they present themselves with an eye toward enhancing efficiency and creating shareholder value.
· We increased our earnings performance significantly, driven primarily by a material decline in our loan loss provision from 2012. We were also able to enhance asset quality. The classified asset ratio declined by 24% from 58% at December 31, 2012 to 44% at December 31, 2013.
We anticipate that the momentum we have created over the last year will drive continued earnings growth and facilitate overall franchise growth, resulting in enhanced value for Standard Bancshares, Inc. shareholders in the years ahead.
Financial Recapitalization & 2012 Earnings Restatement
In late February 2013, we completed the previously announced strategic recapitalization. At that time we incurred additional charges, after tax, which included the write off of goodwill and an additional provision for loan losses, totaling approximately $36.5 million. These additional charges were determined to be accounting entries that should be recorded in 2012. As a result of the restatement, our 2012 earnings changed from the originally reported net income to a net loss before preferred dividends of $30.8 million. The net loss for 2012 applicable to common shareholders was $34.9 million.
2013 Financial Results
Our full year 2013 financial results represent an improvement over both the previously reported and the restated 2012 results. While accounting standards dictate that we compare the 2013 results to the restated 2012 numbers, it is important to note that our 2013 net income before preferred dividends of $8.2 million was 41.4 percent higher than our 2012 originally reported net income of $5.8 million. Net income applicable to common shareholders totaled $7.0 million for 2013 compared to a net loss applicable to common shareholders of $34.9 million in 2012, an increase of $41.9 million.
Net interest income for 2013 was down by roughly $0.4 million from 2012 levels, as a $5.8 million decline in interest income more than offset a $5.4 million decline in interest expense. Improving credit quality led to a materially lower loan loss provision of $8.8 million in 2013 versus $33.4 million in 2012. As a result, the Company’s net interest income after provision for credit losses increased by $24.3 million, or 62.6 percent, to $63.0 million in 2013, from the $38.7 million reported in 2012. Non-interest income increased modestly, with 2013 non-interest income of $20.5 million up $1.3 million, or 6.6 percent over 2012.
Increases in a variety of fee income categories offset declines in loan fees and commissions and secondary mortgage income.
Due primarily to the goodwill impairment of $24.0 million that increased 2012 non-interest expense, total non-interest expense declined significantly in 2013. Excluding this factor, 2013 non-interest expenses of $69.5 million were slightly below 2012 levels, as decreases in FDIC assessments, benefits expense, occupancy expense and OREO expenses more than offset an increase in compensation expenses. Importantly, in 2013 we were able to reward many key employees with performance bonuses which we had not been in a position to award since 2008.
Overall asset growth was modest, with total assets reaching $2.18 billion at year-end 2013, up from $2.16 billion at the end of 2012. Loan growth, while tempered in the first half of the year by our activities related to holding company reorganization and strategic planning was up an encouraging 6.1 percent, with total loans increasing from $1.57 billion at year-end 2012 to $1.66 billion at year-end 2013. Most of the growth was related to commercial lending with C&I loans increasing by $68.3 million, or 26.6 percent, partially offset by an intentional decline in non-owner occupied commercial real estate loans of 5.4%.
Following 2012’s strong overall deposit growth, 2013 saw total deposits remain unchanged at $1.92 billion. However, we again saw important changes in deposit base composition, with strong increases in core deposit categories offsetting declines in higher priced time deposits. Following a 20 percent increase in 2012, 2013 non-interest bearing demand deposits increased by $45.2 million, or 9.2 percent in 2013. Savings deposits increased by $34.7 million, or 10.5 percent. At the same time, we were able to lower our non-core brokered time deposits by $36.7 million, or 35.6 percent, during 2013.
With the challenging economy, and the difficult interest rate environment, we remain focused on enhancing the strengths of our organization, namely relationship based banking and enhancing our low cost deposit base. Specific operating initiatives aimed at driving improved financial results, include:
· Continued rebalancing and expansion of the loan portfolio with an emphasis on C&I lending and less emphasis on commercial real estate lending
· Continued focus on replacing higher rate certificates of deposit with lower cost money market deposits and core savings and demand deposits
· Enhance select product offerings
· Identifying additional areas that offer potential greater efficiency
We are reinforcing our efforts to grow our relationships with municipalities and school districts by creating a new Government and Institutional Lending Division led by respected banking veteran, Laura Shallow. Laura rejoined Standard Bank after several years of working with regional banks, successfully growing their government and institutional portfolios. While we have historically operated in this sector, we now have the ability to offer these clients a far greater breath of needed products and services.
Our product offerings continue to evolve with marketplace needs, especially in the digital arena. We significantly upgraded our mobile banking functionality making it convenient for our customers to, among other things, deposit checks, view their deposit history as well as deposited images via their smartphones and iPads, all in a secure operational environment.
In light of the anticipated declines in future mortgage refinancing attributable to the rising mortgage interest rate environment, we have made significant progress in broadening our mortgage product offerings and marketing to appeal to a wider range of potential customers. Over the past few years, for instance, we have worked diligently to enhance our product offerings to first-time homebuyers, and as a result, in 2013 we originated nearly $14.5 million in mortgage loans under programs targeted to this audience.
In 2013 Standard Bank and Trust elected to close two underperforming branches: one in Dolton, Illinois and one in the Southport neighborhood of Chicago. Both of these markets will continue to be served by a nearby Standard Bank and Trust branch. Although the branches have closed, we anticipate that the resultant savings will commence in 2014.
Committed to the Communities we Serve
Standard’s position as a strong, stable community bank continues to differentiate us from our competition. Two award-winning community achievements are worthy of mention as we wrap up the year: our innovative micro-loan program and our significant employee volunteer commitment to the neighborhoods we serve.
The micro-loan program, designed to assist small businesses with flexible financing was designed with the needs of small micro-businesses, women-owned and minority-owned small businesses. This innovative program and some of the early successes it enjoyed were recognized nationally by the American Bankers Association, who awarded Standard Bank with its Community Commitment Award, only one of six banks in the nation so recognized in 2013.
Our position as a strong, stable, community-centric bank was again reinforced by the commitment of our employees to achieve our “pay-it-forward” mission day-in and day-out. During the year, some 400 Standard bankers volunteered over 2,900 hours to 150 civic, educational, fraternal and social service organizations in the neighborhoods we serve. This kind of dedication to our communities resulted in recognition of Standard by the prestigious Illinois Bank Community Service Award which was bestowed upon Standard by the Illinois Bankers Association, making us one of only three Illinois banks to earn this designation in 2013.
As we have mentioned repeatedly, our success is based on talent and execution. We are very proud of the accomplishments of our employees and, most importantly, to their roles in bettering the lives of the people and the communities we serve.
As we enter 2014, with the strength of our capital base and our position as the “go-to” independent neighborhood community bank for individuals, families and businesses, we look to not only continue our organic growth but to take advantage of the consolidation taking place in the Midwest banking market. We believe we are well situated to achieve additional competitive and acquisitive market share gains as we move forward.
As always, thank you for your continued confidence in and support of Standard Bancshares.
Lawrence P. Kelley
President, Chief Executive Officer and Vice Chairman
Robert A. Rosholt
Lead Independent Director