<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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TAYLOR CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
671-6712
(Primary Standard Industrial
Classification Code Number)
36-4108550
(I.R.S. Employer
Identification No.)
350 East Dundee Road
Wheeling, Illinois 60090
(847) 459-1111
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------
Jeffrey W. Taylor
Chairman of the Board and Chief Executive Officer
Taylor Capital Group, Inc.
350 East Dundee Road
Wheeling, Illinois 60090
(847) 459-1111
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
Copies to:
Mark L. Yeager, Esq.
Stephen A. Tsoris, Esq.
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606-5096
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Common Stock (par value
$.01 per share)....... 4,500,000 shares $31.00 $139,500,000 $42,273
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f).
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ACTING PURSUANT
TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 24, 1996
PROSPECTUS
dated , 1996
TAYLOR CAPITAL GROUP, INC.
SUBSCRIPTION OFFERING
COMMON STOCK, $.01 PAR VALUE
MINIMUM: 4,000,000 SHARES
MAXIMUM: 4,500,000 SHARES
---------------
Taylor Capital Group, Inc., a Delaware corporation (the "Company") and the
Taylor Family (as defined), upon the terms and conditions set forth in this
Prospectus (this "Prospectus") and the accompanying Subscription Letter (the
"Subscription Letter"), offers to certain Selected Offerees (as defined) to
subscribe for the purchase (the "Offer") of shares of the Company's Common
Stock, par value $.01 (the "TCG Common"). The amount of TCG Common purchasable
by any Selected Offeree shall be determined by the Taylor Family in its
discretion. The purchase price for each share of TCG Common purchased shall be
one share of Common Stock, $.01 par value ("CTFG Common"), of Cole Taylor
Financial Group, Inc. ("CTFG"). No cash shall be accepted. The minimum number of
shares of CTFG Common which may be accepted if the Offer is to proceed
(including shares of CTFG Common held by members of the Taylor Family) is 4.0
million and the maximum is 4.5 million shares. CTFG Common delivered in the
Offer will be delivered to CTFG in connection with the Split-Off Transactions
(as defined) pursuant to an Amended and Restated Share Exchange Agreement dated
June 12, 1996 (the "Agreement") among CTFG, Jeffrey W. Taylor, Bruce W. Taylor
and certain other members of the Taylor family (the "Taylor Family"), under
which the Company will acquire Cole Taylor Bank ("Bank"), CT Mortgage Company,
Inc. (the "Mortgage Company") and a minority interest in Alpha Capital Fund II,
L.P. ("Alpha Capital Fund"). At the closing (the "Closing") of the Split-Off
Transactions, the Selected Offerees who subscribe will receive from CTFG (or in
CTFG's discretion, directly from the Company), the TCG Common.
The Offer is being made exclusively to the following (the "Selected
Offerees"): (i) the participants in the Cole Taylor Bank 401(k)/Profit Sharing
Employee Stock Ownership Plan (the "Profit Sharing/ESOP") who hold shares of
CTFG Common in the CTFG stock fund thereunder (the "Eligible Participants"),
(ii) the Profit Sharing/ESOP with respect to the shares of CTFG Common held in
the ESOP stock accounts thereunder, (iii) members of the Taylor Family, (iv)
certain CTFG stockholders who are officers, directors and employees of the Bank
and CTFG, and (v) selected other CTFG stockholders. The Taylor Family, in its
discretion, will determine the identities of and offered amounts to the Selected
Offerees, and the Taylor Family and the Company have no obligation to (i) make
the Offer to any person, (ii) accept any Subscription Letter, or (iii) allow any
person to deliver all of the CTFG Common they desire to deliver. As of the date
of this Prospectus, the Taylor Family beneficially owns 3,996,241 shares of CTFG
Common which in the aggregate could be used to purchase 88.8% of the TCG Common
offered hereby (assuming the maximum number of shares subscribed for). Under the
terms of the Share Exchange Agreement, no more than 49.9% of the TCG Common
issued in the Offer may be issued to persons who are not members of the Taylor
Family.
TCG Common constitutes a new issue of securities with no established trading
market. Any CTFG Common not delivered and accepted in the Offer will remain
outstanding. There is not likely to be any trading market for the TCG Common.
See "Risk Factors--No Public Market."
Any subscription validly delivered and not withdrawn prior to 12:00 a.m.,
Chicago time, on , 1996, unless extended by the Taylor Family in its
sole discretion (such date as it may be so extended, the "Expiration Date"), is
eligible for acceptance. Subscriptions may be withdrawn at any time prior to the
Expiration Date. The Offer is subject to certain conditions, including the
closing of the Split-Off Transactions. See "The Offer."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DESCRIPTION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, ANY OTHER GOVERNMENTAL
AGENCY OR OTHERWISE.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TCG COMMON IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
<PAGE> 3
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The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements certified by its
independent auditors and quarterly reports containing unaudited consolidated
financial information for the first three quarters of each fiscal year.
------------------
CERTAIN STATEMENTS CONTAINED UNDER "UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS," UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND UNDER "BUSINESS," SUCH AS
STATEMENTS CONCERNING OPERATIONS OF THE COMPANY AFTER THE SPLIT-OFF TRANSACTIONS
(AS DEFINED), AND OTHER STATEMENTS CONTAINED IN THIS PROSPECTUS REGARDING
MATTERS THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS (AS SUCH
TERM IS DEFINED IN THE RULES PROMULGATED PURSUANT TO THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT")). BECAUSE SUCH FORWARD-LOOKING STATEMENTS
INCLUDE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED IN OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED HEREIN UNDER "RISK FACTORS." THE COMPANY UNDERTAKES NO OBLIGATION TO
RELEASE PUBLICLY THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS
THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information, including "Risk Factors" and the
consolidated financial statements and notes thereto, appearing elsewhere in this
Prospectus. Unless the context otherwise indicates, as used herein, the defined
terms "Company" or "Taylor Capital" shall mean Taylor Capital Group, Inc.
together with Cole Taylor Bank (the "Bank") and CT Mortgage Company, Inc. (the
"Mortgage Company") which will become wholly-owned subsidiaries of the Company
as a result of the Split-Off Transactions (as defined below). Unless the context
otherwise indicates, this Prospectus assumes the Company has acquired the Bank
and the Mortgage Company, which acquisitions will become effective upon the
consummation of the Split-Off Transactions (as defined).
THE COMPANY
Taylor Capital Group, Inc. (the "Company"), a newly incorporated bank
holding company, is acquiring Cole Taylor Bank, an Illinois state chartered bank
(the "Bank"), which commenced operations over 60 years ago as Main State Bank.
The Bank provides a full range of commercial and consumer banking services both
to small and mid-size businesses and to individuals through its ten branch
offices in Chicago neighborhoods and suburban Cook and DuPage Counties. The
Bank's historical market niche has been providing commercial loans to small and
mid-size companies located in the Chicago metropolitan area. Following the
consummation of the Split-Off Transactions (as defined below), the Company will
wholly own CT Mortgage Company, Inc. (the "Mortgage Company"), which began
operations in the first quarter of 1996 and competes in the subprime mortgage
market for residential loans on a brokered basis. The Mortgage Company is
located in Altamonte Springs, Florida and, through its subsidiaries, operates
primarily in the southeastern United States.
As a result of a series of transactions (the "Split-Off Transactions")
described in an Amended and Restated Share Exchange Agreement dated as of June
12, 1996 (the "Share Exchange Agreement") among Cole Taylor Financial Group,
Inc. ("CTFG") Jeffrey W. Taylor, Bruce W. Taylor and certain other members of
the Taylor family (collectively, the "Taylor Family"), CTFG is transferring all
of the capital stock of the Company ("TCG Common") to the Taylor Family and
certain other stockholders of CTFG (the "Taylor Group") in exchange for their
shares of Common Stock of CTFG ("CTFG Common"). The Taylor Family may include
other CTFG stockholders in the Taylor Group purchasing CTFG Common with TCG
Common, and therefore, CTFG shares delivered pursuant to the Offer hereby
constitute the Stock Amount (as defined) under the Share Exchange Agreement. As
of the date of this Prospectus, the Taylor Family beneficially owns 3,996,241
shares of CTFG Common, which, if delivered in their entirety, would represent
88.8% of the TCG Common offered hereby (assuming the maximum number of shares
issued).
Pursuant to a tax ruling issued on September 3, 1996 (the "Tax Ruling"),
for U.S. federal income tax purposes, no gain or loss will be recognized by (and
no amount will be included in the income of) the Taylor Group upon their receipt
of the TCG Common.
At June 30, 1996, adjusting for the Split-Off Transactions and assuming the
exchange of 4.5 million shares, the Company had pro forma consolidated total
assets of $1.9 billion and pro forma total equity of $147.4 million. For the
first half of 1996, applying similar adjustments, the Bank and the Mortgage
Company had pro forma consolidated net income of $5.1 million. See "Unaudited
Pro Forma Condensed Consolidated Financial Statements".
The Company's strategy for the future is to (i) improve the Bank's results
of operations by continuing to grow and improve its core commercial bank
business, (ii) increase the Bank's fee income by more intensively marketing its
fee producing financial services products, (iii) expand the Bank's deposit
gathering capabilities and (iv) selectively expand the subprime mortgage
financing activities of the Mortgage Company.
The Company's principal executive offices are located at 350 E. Dundee
Road, Wheeling, Illinois 60090, and its telephone number is (847) 459-1111. The
Company was incorporated in Delaware on October 9, 1996.
3
<PAGE> 5
THE OFFERING
The Offer..................... The purchase price for each share of TCG Common
shall be one share of CTFG Common. The Company
will issue the TCG Common in connection with
the Split-Off Transactions, currently estimated
to be consummated in December, 1996. There is
no assurance, however, that the closing of the
Split-Off Transactions (the "Closing") will
occur in December, 1996, if at all. See "Risk
Factors -- Conditions to Closing."
Amount offered................ A minimum of 4.0 million shares and a maximum
of 4.5 million shares of TCG Common.
Shares outstanding after the
Offering...................... 4.0 million to 4.5 million shares, depending
upon the number of shares of TCG Common
purchased by the Selected Offerees.
Expiration Date............... 12:00 a.m., Chicago time, on December , 1996,
unless the Offer is extended by the Company in
its sole discretion, in which case the term
"Expiration Date" means the latest date and
time to which the Offer is extended.
Conditions to the Offer....... The Offer is conditioned upon a minimum of 4.0
million shares of TCG Common being purchased
and the occurrence of the Closing. In addition,
the Offer is subject to certain other customary
conditions, which may be waived by the Company.
See "The Offer -- Conditions of the Offer" and
"Risk Factors -- Conditions to Closing." The
Taylor Family and the Company reserve the right
to terminate the Offer if any of such
conditions have not been satisfied and to amend
the terms of the Offer at any time prior to the
Expiration Date.
Offerees...................... The Offer is being made exclusively to the
following (the "Selected Offerees"): (i) the
participants in the Cole Taylor Bank
401(k)/Profit Sharing Employee Stock Ownership
Plan (the "Profit Sharing/ESOP") who hold
shares of CTFG Common in the CTFG stock fund
thereunder (the "Eligible Participants"), (ii)
the Profit Sharing/ESOP with respect to the
shares of CTFG Common held in the ESOP stock
accounts thereunder, (iii) the members of the
Taylor Family, (iv) certain CTFG stockholders
officers, directors and employees of the Bank
and CTFG, and (v) selected other CTFG
stockholders. The Taylor Family, in its
discretion, will determine the identities of,
and number of shares of TCG Common offered to,
the Selected Offerees, and the Taylor Family
and the Company have no obligation to (i) make
the Offer to any person, (ii) accept any
Subscription Letter, or (iii) allow any person
to purchase all of the TCG Common they desire
to purchase.
Procedures for subscribing for
TCG Common Generally.......... See "The Offer -- Procedures to Subscribe" and
"-- Guaranteed Delivery Procedures."
Special Election for Eligible
Participants and Profit
Sharing/ESOP.................. See "Special Election Under the Profit
Sharing/ESOP" and "Trustee's Election for ESOP
Stock Accounts."
4
<PAGE> 6
Withdrawal Rights............. Subscriptions may be withdrawn at any time
prior to the Expiration Date. See "The Offer --
Withdrawal of Deliveries."
Procedures for subscribing for
TCG Common under the Profit
Sharing/ ESOP Special
Election...................... See "Special Election under the Profit
Sharing/ESOP -- Procedure for Making the
Special Election."
Certain Tax Considerations.... For a discussion of certain federal income tax
consequences of the Offer, see "Certain U.S.
Federal Income Tax Considerations."
Escrow Agent.................. Cole Taylor Bank is serving as the escrow agent
(the "Escrow Agent") in connection with the
Offer. Cole Taylor Bank is currently a
subsidiary of CTFG and will be wholly owned by
the Company after the Closing.
Use of proceeds............... There will be no cash proceeds to the Company
from the Offer.
Risk Factors.................. Potential purchasers of TCG Common should take
into account the specific considerations set
forth under "Risk Factors" as well as the other
information set forth in this Prospectus.
5
<PAGE> 7
SUMMARY SELECTED FINANCIAL DATA
COLE TAYLOR BANK -- HISTORICAL
The summary selected financial data presented below as of and for the years
ended December 31, 1995 and 1994 are derived from the audited historical
financial statements of the Bank on a stand alone basis. This data includes the
Bank's automobile receivables business, which will be discontinued in connection
with the Split-Off Transactions. The financial statements of the Bank for 1995
and 1994 were audited by KPMG Peat Marwick LLP, independent accountants. The
financial data as of and for the periods ended June 30, 1996 and 1995 and
December 31, 1993, 1992 and 1991 are derived from unaudited financial
statements. This data should be read in conjunction with the financial
statements, the notes thereto and other financial information included elsewhere
in this Prospectus. The financial data for the six months ended June 30, 1996
are not necessarily indicative of the Bank's expected results for the full year.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED DECEMBER 31,
ENDED JUNE 30, ------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
------------------------ --------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income............ $ 35,593 $ 34,363 $ 69,318 $ 72,149 $ 66,681 $ 58,040 $ 52,055
Provision for loan losses...... 2,052 2,332 4,056 7,374 10,521 8,922 8,816
Noninterest income............. 7,664 6,846 14,227 12,887 15,425 14,502 12,870
Noninterest expense............ 27,225 26,780 53,549 55,248 53,926 49,107 44,690
Provision for income taxes..... 4,665 3,566 7,774 6,512 4,937 4,551 3,515
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................. $ 9,315 $ 8,531 $ 18,166 $ 15,902 $ 12,722 $ 9,962 $ 7,904
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (at end of
period):
Total assets................... $1,847,608 $1,736,919 $1,774,032 $1,719,653 $1,544,095 $1,395,234 $1,247,628
Investments and federal funds
sold......................... 432,959 480,076 443,348 488,019 459,349... 394,050 301,702
Loans.......................... 1,280,383 1,169,238 1,211,622 1,130,177 986,384 904,788 822,443
Allowance for loan losses...... 24,475 23,759 23,869 22,833 19,740 14,661 12,646
Total deposits................. 1,486,332 1,274,339 1,364,075 1,293,411 1,180,845 1,130,850 1,017,571
Short-term borrowings.......... 146,373 251,261 202,033 243,997 209,227 152,259 124,511
Long-term borrowings........... 70,836 60,753 61,003 47,864 37,690 5,490 623
Stockholders' equity........... 129,080 127,632 132,741 118,997 101,763 94,979 93,440
EARNINGS PERFORMANCE DATA:
Net interest margin (tax
equivalent).................. 4.39% 4.43% 4.38% 4.88% 5.11% 4.83% 4.71%
Return on average total
assets....................... 1.05 1.00 1.05 0.98 0.87 0.74 0.64
Return on average stockholders'
equity....................... 14.18 13.88 14.29 14.50 13.00 10.52 8.69
BALANCE SHEET AND OTHER KEY
RATIOS:
Nonperforming assets to total
assets....................... 0.98% 0.86% 1.08% 1.03% 1.14% 1.72% 2.68%
Nonperforming assets to total
loans plus repossessed
property..................... 1.41 1.28 1.57 1.56 1.78 2.64 4.01
Net loan charge-offs to average
loans........................ 0.23 0.25 0.26 0.41 0.57 0.79 0.82
Allowance for loan losses to
loans........................ 1.91 2.03 1.97 2.02 2.00 1.62 1.54
Allowance for loan losses to
nonperforming loans.......... 155.57 177.11 174.76 157.61 156.67 84.61 66.32
</TABLE>
6
<PAGE> 8
PRO FORMA (UNAUDITED)
The following summary selected financial data of the Bank and consolidated
Company gives pro forma effect to the Split-Off Transactions including the
acquisition of the Bank and the Mortgage Company by the Company, the sale or
transfer of the Bank's Automobile Finance Business as well as the consummation
by the Company of the Credit Facilities, the Offer described in this Prospectus
and the Preferred Stock Offering. For a description of the pro forma effects of
the Split-Off Transactions see "Unaudited Pro Forma Condensed Consolidated
Financial Statements" and "Management's Discussion and Analysis of Pro Forma
Financial Condition and Results of Operations."
ASSUMING PURCHASE OF 4.5 MILLION SHARES
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY BANK ONLY
-------------------------------- --------------------------------
FOR THE FOR THE FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1996 1995 1996 1995
---------------- ------------ ---------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income.............. $ 33,321 $ 64,578 $ 34,233 $ 66,698
Provision for loan losses........ 1,692 3,586 1,692 3,586
Noninterest income............... 7,762 14,227 7,664 14,227
Noninterest expense.............. 30,854 59,707 28,935 56,869
Provision for income taxes....... 3,456 5,841 4,411 7,328
---------- ---------- ---------- ----------
Net income.................. $ 5,081 $ 9,671 $ 6,859 $ 13,142
========== ========== ========== ==========
Net income applicable to common
stockholders..................... $ 3,216 $ 5,942
BALANCE SHEET DATA (at end of
period):
Total assets..................... $1,899,018 $1,820,190 $1,892,775 $1,817,395
Investments and federal funds
sold.......................... 521,859 533,448 521,859 533,448
Loans............................ 1,172,722 1,100,622 1,169,383 1,100,622
Allowance for loan losses........ 23,475 22,869 23,475 22,869
Total deposits................... 1,486,332 1,364,075 1,486,332 1,364,075
Short-term borrowings............ 146,373 202,033 146,373 202,033
Long-term borrowings............. 99,966 86,715 70,836 61,003
Stockholders' equity............. 147,409 148,866 170,409 171,866
EARNINGS PERFORMANCE DATA:
Net interest margin
(tax-equivalent).............. 4.15% 4.14% 4.27% 4.27%
Return on average total assets... 0.56 0.54 0.75 0.74
Return on average stockholders'
equity........................ 6.79 6.75 7.95 7.91
BALANCE SHEET AND OTHER KEY RATIOS:
Nonperforming assets to total
assets........................ 0.95 1.05 0.96 1.05
Nonperforming assets to total
loans plus repossessed
property...................... 1.54 1.73 1.55 1.73
Net loan charge-offs to average
loans......................... 0.25 0.29 0.26 0.29
Allowance for loan losses to
loans......................... 2.00 2.08 2.01 2.08
Allowance for loan losses to
nonperforming loans........... 149.22 167.44 149.22 167.44
PER SHARE DATA:
Average common shares assumed
outstanding................... 4,500,000 4,500,000
Earnings per common share........ $ 0.71 $ 1.32
Book value per common share...... $24.26 $24.58
</TABLE>
7
<PAGE> 9
PRO FORMA (UNAUDITED) (CONTINUED)
ASSUMING PURCHASE OF 4.0 MILLION SHARES
<TABLE>
<CAPTION>
CONSOLIDATED COMPANY BANK ONLY
-------------------------------- --------------------------------
FOR THE FOR THE FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
1996 1995 1996 1995
---------------- ------------ ---------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income.............. $ 32,781 $ 63,503 $ 33,693 $ 65,623
Provision for loan losses........ 1,692 3,586 1,692 3,586
Noninterest income............... 7,762 14,227 7,664 14,227
Noninterest expense.............. 30,894 59,782 28,975 56,944
Provision for income taxes....... 3,267 5,519 4,222 7,006
---------- ---------- ---------- ----------
Net income.................. $ 4,690 $ 8,843 $ 6,468 $ 12,314
========== ========== ========== ==========
Net income applicable to common
stockholders..................... $ 2,825 $ 5,114
BALANCE SHEET DATA (at end of
period):
Total assets..................... $1,883,682 $1,804,807 $1,877,439 $1,802,012
Investments and federal funds
sold.......................... 505,359 516,948 505,359 516,948
Loans............................ 1,172,722 1,100,622 1,169,383 1,100,622
Allowance for loan losses........ 23,475 22,869 23,475 22,869
Total deposits................... 1,486,332 1,364,075 1,486,332 1,364,075
Short-term borrowings............ 146,373 202,033 146,373 202,033
Long-term borrowings............. 99,966 86,715 70,836 61,003
Stockholders' equity............. 132,073 133,483 155,073 156,483
EARNINGS PERFORMANCE DATA:
Net interest margin
(tax-equivalent).............. 4.13% 4.12% 4.25% 4.25%
Return on average total assets... 0.52 0.50 0.72 0.70
Return on average stockholders'
equity........................ 6.98 6.92 8.23 8.16
BALANCE SHEET AND OTHER KEY RATIOS:
Nonperforming assets to total
assets........................ 0.96 1.06 0.97 1.06
Nonperforming assets to total
loans plus repossessed
property...................... 1.54 1.73 1.55 1.73
Net loan charge-offs to average
loans......................... 0.25 0.29 0.26 0.29
Allowance for loan losses to
loans......................... 2.00 2.08 2.01 2.08
Allowance for loan losses to
nonperforming loans........... 149.22 167.44 149.22 167.44
PER SHARE DATA:
Average common shares assumed
outstanding................... 4,000,000 4,000,000
Earnings per common share........ $ 0.71 $ 1.28
Book value per common share...... $23.46 $23.81
</TABLE>
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<PAGE> 10
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before subscribing for any shares of TCG Common.
ABILITY TO PAY DIVIDENDS
The Company is a holding company without significant assets other than, as
of the Closing, its equity interest in the Bank. Accordingly, dividends on the
TCG Common, if any, would be paid solely from (i) dividends, loan repayments, if
any, and other payments to the Company by the Bank and (ii) proceeds of any
subsequent securities offering or bank financing. Management does not anticipate
the Mortgage Company will make dividend payments to the Company for the near
term. Dividend payments from the Bank are subject to regulatory limitations,
generally based on current and retained earnings, imposed by the various
regulatory agencies with authority over the Bank. Payment of dividends is also
subject to regulatory restrictions if such dividends would impair the capital of
the Bank.
Dividends on the TCG Common are payable when, as and if declared by the
Board of Directors of the Company. The final determination of the timing, amount
and payment of dividends on the TCG Common will depend on conditions then
existing, including dividends received from the Bank, the Company's
profitability, financial condition and capital requirements and other
restrictions described below. Under Delaware corporate law, the Company may
declare and pay dividends out of surplus, or if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared and/or the
preceding year. In addition, the Company has filed a Registration Statement on
form S-1 relating to $38.25 million of % Noncumulative Perpetual Preferred
Stock, Series A (par value $.01 per share) (the "Preferred Stock"). The
Preferred Stock is expected to be sold in an underwritten public offering,
substantially concurrently with the Offer (the "Preferred Stock Offering").
Under the proposed terms of the Preferred Stock, no dividends on the TCG Common
may be paid unless full dividends for the then-current dividend period for the
Preferred Stock are declared and paid or set apart for payment.
The Federal Reserve Board ("FRB") has issued a policy statement on the
payment of cash dividends by bank holding companies. In the policy statement,
the FRB expressed its view that a bank holding company experiencing earnings
weaknesses should not pay cash dividends which exceed its net income or which
could only be funded in ways that would weaken its financial health, such as by
borrowing. The FRB also may impose limitations on the payment of dividends as a
condition to its approval of certain applications, including applications for
approval of mergers and acquisitions. There can be no assurance that the FRB
will not impose such limitations on the payment of dividends to Company
stockholders. See "Supervision and Regulation." As a result of the Split-Off
Transactions, the Company expects a substantial decline in tangible book value
of the Bank and the Company from historical levels at the Bank, which capital
levels may inhibit the Company's dividend paying ability. See "-- Risks Arising
from Split-Off Transactions -- Decrease in Tangible Capital," "Unaudited Pro
Forma Condensed Consolidated Financial Statements" and "Supervision and
Regulation."
Substantially all of the consolidated assets of the Company are held by the
Bank, and, in the event of liquidation of both the Company and the Bank,
creditors of the Bank, including depositors, would have first claim to such
assets before holders of Preferred Stock. Holders of Preferred Stock would have
first claim on any remaining assets before holders of TCG Common. At June 30,
1996, the Bank had outstanding indebtedness and other liabilities, including
deposits, of $1.7 billion. See "Description of Capital Stock -- Preferred Stock
- -- Liquidation Rights."
In addition to the foregoing restrictions, the Company expects to obtain a
$25 million, unsecured five year term loan and a $5 million, unsecured one year
line of credit, which may contain certain restrictive covenants, including
covenants which may affect the Company's ability to pay dividends. The terms of
any future financing arrangements could also limit the Company's ability to pay
dividends. See "The Split-Off Transactions -- Related Financing" and
"Description of Capital Stock -- Common Stock."
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<PAGE> 11
RISKS ARISING FROM THE SPLIT-OFF TRANSACTIONS
DISCONTINUANCE OF AUTOMOBILE FINANCE CONTRACT BUSINESS
All of the automobile finance contract business of the Bank (the
"Automobile Finance Business") is being sold or transferred by the Bank. The
used automobile finance contract business, which consists of the Bank's rights
and obligations pursuant to automobile loans or notes which are collateralized
primarily with used automobiles (the "Used Automobile Receivables") and related
assets, is being transferred from the Bank to a wholly-owned subsidiary of CTFG.
The new automobile finance contract business is being sold by the Bank to an
unaffiliated third party, with the majority of the proceeds of such sale to be
transferred to CTFG as a part of the Split-Off Transactions and the remainder,
if any, to be retained by the Bank to be used for general corporate purposes. As
of August 31, 1996, the Bank held approximately $115 million in aggregate face
amount of automobile receivables, of which approximately 31% was collateralized
by used automobiles. There can be no assurance the Bank will be able to replace
the income contribution of the assets being transferred or sold or that any
retained proceeds will be reinvested in assets that will provide the same
historical rate of return as the Automobile Finance Business. See "Unaudited Pro
Forma Condensed Consolidated Financial Statements."
INCREASED LEVERAGE
The Company will incur substantial indebtedness in connection with the
Split-Off Transactions. The Company will obtain a $25 million, unsecured five
year term bank loan and a $5 million, unsecured one year line of credit from
LaSalle National Bank (collectively, the "Credit Facilities"). This indebtedness
will require the dedication of an increased portion of the Company's cash flow
to the payment of principal and interest, thereby reducing funds available for
dividends on the TCG Common, capital expenditures and future business
opportunities. The Company expects that the Credit Facilities will contain
customary covenants, representations, warranties, conditions and default
provisions. The covenants may affect the operating flexibility of the Company,
including the Company's ability to pay dividends on the TCG Common. See "The
Split-Off Transactions -- Related Financing."
The proposed terms of the Preferred Stock provide that it will carry a
liquidation preference of $25.00 per share, plus declared and unpaid dividends
for the then current dividend period up to the date fixed for liquidation. The
Preferred Stock is expected to be perpetual, and holders of the Preferred Stock
will be entitled to elect one director (and in certain circumstances, two
directors). It is expected that dividends on the Preferred Stock will take up a
substantial portion of the Company's cash flow. See "Description of Capital
Stock -- Preferred Stock."
DECREASE IN TANGIBLE CAPITAL
The transfer of the Used Automobile Receivables and payment of the First
Cash Component (as defined) in connection with the Split-Off Transactions will
have the effect of lowering tangible capital levels at the Bank from historical
levels. Nevertheless, the Bank's regulatory capital levels are anticipated to
be, immediately following the Split-Off Transactions, above the "well
capitalized" level established by banking regulators. Under applicable federal
banking regulations, the Bank could become subject to increasingly restrictive
regulatory oversight and limitations on operations and capital if regulatory
capital levels fall below "well capitalized." For example, should the Bank's
capital ratios fall below such levels, it may be restricted from issuing certain
instruments such as brokered certificates of deposit, which the Bank relies upon
as an element of its overall asset/liability management. Inability of the Bank
to issue such instruments could jeopardize its liquidity and result in the
Bank's inability to maintain sufficient funds to respond to the needs of
borrowers or take advantage of earnings enhancement opportunities.
The Company anticipates that its leverage capital and Tier 1 risk based
capital ratios will exceed regulatory capital guideline minimums for a "well
capitalized" institution at the time of the Closing of the Split-Off
Transactions. However, the Company's total risk based capital ratio at such time
is expected to only exceed the regulatory capital guideline minimum for an
"adequately capitalized" institution. As a result, the company will be deemed
"adequately capitalized" for purposes of various banking regulations. Should the
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<PAGE> 12
Company be deemed less than "adequately capitalized," under applicable federal
guidelines, the Company may become subject to certain limitations affecting the
payment of dividends, limitations on the consummation of certain acquisitions or
other operating or financial restrictions.
Following the offering, it is not expected that an active public market
will develop for the Preferred Stock or that a public market will exist for the
TCG Common. The absence of an active public market for the Company's capital
stock could adversely affect the Company's ability to raise additional capital
to meet desired regulatory capital minimums of the Company or the Bank should
the need arise in the future. There can be no assurance that either the Bank or
the Company will be able to maintain its capital at levels which will not result
in adverse operating or financial restrictions or that access to adequate
capital or capital on terms satisfactory to the Company or the Bank will exist
in the event capital restoration is necessary or desirable. See "Pro Forma
Capitalization," "Unaudited Pro Forma Condensed Consolidated Financial
Statements," "Management's Discussion and Analysis of Pro Forma Condition and
Results of Operations" and "Supervision and Regulation."
Liabilities Under Share Exchange Agreement
The Company and the Bank will assume a number of obligations to CTFG
related to the Share Exchange Agreement, including (i) obligations to comply
with certain agreements which affect the tax free status of the Split-Off
Transactions and (ii) obligations to indemnify and hold harmless CTFG for Losses
(as defined) relating to the operations of the Bank and the Mortgage Company or
CTFG's ownership of securities thereof. In addition, it is expected that the
Company will enter into an indemnification agreement which will obligate the
Company to indemnify the Taylor Family against these obligations as well as
various other obligations of the Taylor Family contained in the Share Exchange
Agreement, including the Taylor Family's agreement to indemnify CTFG against 25%
of any Losses relating to the transactions contemplated by the Share Exchange
Agreement. See "The Split-Off Transactions--Liabilities Under the Share Exchange
Agreement." Many of these obligations or liabilities are contingent in nature
and the existence, probability and magnitude thereof are impossible to predict,
are not within the control of the Company, its subsidiaries or the Taylor
Family, may bear no relationship to the business and operations of the Company
and its subsidiaries, and are not subject to any contractual upper limit on
liability. Some of these liabilities, such as liability resulting from an action
causing the Split-Off Transactions to be taxable, could have a material adverse
impact on the Company or the Bank, could prevent the Company and the Bank from
paying dividends, and may affect the continuing viability of the Company or the
Bank.
Interest of Taylor Family; Possible Conflicts of Interest
The Company was formed solely for the purpose of facilitating the Split-Off
Transactions and has no prior operating history. Accordingly, the Share Exchange
Agreement and related agreements and arrangements affecting the Company were
negotiated with CTFG and executed by representatives of the Taylor Family. The
Share Exchange Agreement includes no representations and warranties relating to
the business and operations of the Bank and the Mortgage Company due, in part,
to the Taylor Family's knowledge of these businesses. The Share Exchange
Agreement includes representations, warranties, covenants and indemnification
obligations of the Taylor Family. The Taylor Family has placed in escrow shares
of CTFG to secure its obligation to pay $15 million to CTFG if the Share
Exchange Agreement is terminated in certain events, including a termination by
CTFG if by June 30, 1997 adequate financing to complete the Split-Off
Transactions has not been obtained by the Taylor Family.
In many cases, obligations of the Taylor Family will be assumed by the
Company and/or the Bank and/or indemnification will be extended by the Company
to the Taylor Family with the effect that the Taylor Family will be relieved of
responsibility for such obligations and, correspondingly, the Company or the
Bank will be bound by such obligations. Among other things, the Company and the
Bank may be liable for indemnity or damages to CTFG in connection with the
operations of the Bank and the Mortgage Company or CTFG's ownership of
securities thereof prior to Closing or for indemnity to the Taylor Family in
connection with the portion of the Losses suffered by CTFG arising out of the
Split-Off Transactions for which the Taylor Family has agreed to indemnify CTFG.
See "Risk Factors--Risks Arising From the Split-Off
11
<PAGE> 13
Transaction--Liabilities under Share Exchange Agreement" and "The Split-Off
Transactions--Liabilities Under Share Exchange Agreement." Additionally, counsel
to the Taylor Family in connection with the Split-Off Transactions is also
counsel to the Company. Neither the Company nor any of its non-Taylor Family
shareholders have been separately represented. The Taylor Family's financial
advisor in connection with the Split-Off Transactions is one of the underwriters
of the Preferred Stock Offering. The Taylor Family and its various
representatives may experience conflicts of interest in connection with the
formation of the Company, the negotiation and execution of the various
assumption and indemnification agreements and implementation of the Split-Off
Transactions. There can be no assurance that these conflicts will be resolved in
a manner favorable to the non-Taylor Family stockholders of the Company or that
the terms of such agreements are comparable to those that would be available
were these agreements negotiated at arms length between unaffiliated parties.
Failure to Achieve Minimum Offering Amount
The Taylor Family agreed in the Share Exchange Agreement to deliver or
cause to be delivered at least the greater of (i) 4.0 million shares of CTFG
Common or (ii) all of the shares of CTFG Common owned beneficially or of record
by the Taylor Family (including any shares of CTFG Common owned after the
exercise of any options to purchase CTFG Common). No more than 49.9% of the TCG
Common may be issued in the Offer to persons who are not members of the Taylor
Family. While no individual Taylor Family member is required to purchase in the
Offer, the Taylor Family, as a group, would be subject to substantial damages if
the minimum amount of 4.0 million shares of TCG Common is not purchased. See
"The Split-Off Transactions -- The Share Exchange Agreement" and
"-- Termination."
INTEREST RATE RISK EXPOSURE
The Bank's cash flows depend to a great extent upon the level of net
interest income, which is the difference between total interest income earned on
earning assets, such as loans and investments, and total interest expense paid
on interest-bearing liabilities, such as deposits and borrowings. The amount of
net interest income is affected by changes in the volume and mix of earning
assets, the level of rates earned on those assets, the volume of
interest-bearing liabilities and the level of rates paid on those
interest-bearing liabilities. Balancing the maturities of the Bank's assets in
relation to maturities of liabilities involves estimates as to how changes in
the general level of interest rates will impact the yields earned on assets and
the rates paid on liabilities. Currently, the Bank's liabilities reprice or
mature more quickly than its assets, a condition referred to as a "negative gap"
position. Accordingly, when interest rates rise, the Bank's net interest income
tends to be adversely impacted. At June 30, 1996 the Bank's interest rate risk
model showed a decline of approximately 3.07% of the Bank's twelve month net
interest income, assuming a gradual 200 basis point increase in market interest
rates. Conversely, in a declining rate environment the Bank's net interest
income is generally positively impacted. Changes in the level of interest rates
also affect the amount of loans originated by the Bank and, thus, the amount of
loan and commitment fees, as well as the market value of the Bank's
interest-earning assets. Moreover, increases in interest rates also can result
in disintermediation, which is the flow of funds away from banks into direct
investments, such as corporate securities and other investment vehicles, which
generally pay higher rates of return than financial institutions. In addition, a
flattening of the "yield curve" (i.e., a decline in the difference between long
and short term interest rates), could adversely impact net interest income to
the extent that the Bank's assets have a longer average term than its
liabilities. Finally, the Bank's portfolio of loans held for sale, which is
composed predominantly of residential mortgage loans and the Bank's outstanding
commitment to finance residential properties, incurs interest rate risk because
loan rates are committed to borrowers before the loan is either sold or
committed to a secondary mortgage market investor. The Bank will continue to be
vulnerable to changes in interest rates and to decreases in the difference
between long and short term interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset/Liability
Management."
LIQUIDITY MANAGEMENT
The Bank's success depends in part on its ability to maintain sufficient
funds to respond to the needs of depositors and borrowers, as well as to take
advantage of earnings enhancement opportunities. As a part of its
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<PAGE> 14
asset/liability management, the Bank uses a number of funding sources in
addition to the normal influx of liquidity from core deposit growth and
repayments and maturities of loans and investments. These alternatives include
Federal Home Loan Bank advances, repurchase agreements, municipal deposits,
brokered deposits, and federal funds purchased. Generally, the Company has paid
a premium for brokered and other out of market area deposits which is included
in interest expense. Adverse operating results at the Bank or changes in
industry conditions could lead to an inability to replace such brokered deposits
at maturity, which could result in higher costs to or reduced asset levels of
the Bank. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity" and "--Deposits."
DEPENDENCE ON CHICAGO MARKET AREA
The success of the Bank is dependent upon the general economic conditions
in the Chicago metropolitan area, where virtually all of its loans are
generated. Adverse changes in the economy of the Chicago metropolitan area would
likely impair the Bank's ability to gather deposits and could otherwise have a
negative effect on its business, including the demand for new loans, the ability
of customers to repay loans and the value of the collateral pledged to the Bank.
A substantial portion of the Bank's loan portfolio involves loans which are to
some degree secured by real estate properties located primarily within the
Chicago metropolitan area. In the event that real estate values in such area
decline, the value of such collateral would be impaired.
MANAGEMENT OF CREDIT RISK
The Bank's allowance for loan losses is maintained at a level considered
adequate by management to absorb anticipated losses. The amount of future losses
is susceptible to changes in economic, operating and other conditions, including
changes in interest rates, that may be beyond the Company's control, and such
losses may exceed current estimates. In addition, the Bank's historical strategy
of providing commercial loans to small and mid-sized businesses has resulted in
a loan portfolio which has relatively larger loans concentrated with fewer
customers than a similarly sized bank focused on consumer lending. There can be
no assurance that the allowance for loan losses will prove sufficient to cover
actual loan losses in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Allowance for Loan Losses."
GOVERNMENT REGULATION AND RECENT LEGISLATION
The Company, the Bank and the Mortgage Company are subject to extensive
federal and state legislation, regulation and supervision. Recently enacted,
proposed and future legislation and regulations have had and will continue to
have a significant impact on the banking industry. Some of the legislative and
regulatory changes, such as the recently enacted assessment on federally insured
depository institutions to contribute towards the cost of interest due on bonds
issued between 1987 and 1989 and to resolve failed savings and loan
associations, may increase the costs of doing business and assist competitors of
the Company and its subsidiaries. The effects of any such changes or potential
changes cannot be accurately predicted but could adversely affect the operating
results of the Company and the Bank. See "Supervision and Regulation."
COMPETITION
The banking business is highly competitive. The Bank encounters competition
primarily in seeking deposits and in obtaining loan customers. The Bank's
principal competitors include other commercial banks, savings and loan
associations, mutual funds, money market funds, finance companies, credit
unions, mortgage companies, the United States Government, private issuers of
debt obligations and suppliers of other investment alternatives, such as
securities firms. In recent years, several major multi-bank holding companies
have entered the Chicago metropolitan market. Generally, these financial
institutions are significantly larger than the Bank and have access to greater
capital and other resources. As a result of these and other factors, future
growth opportunity for the Bank may be limited. In addition, many of the Bank's
non-bank competitors are not subject to the same extensive federal regulations
that govern bank holding companies and federally insured banks and state
regulations governing state chartered banks. As a result, such non-bank
competitors may have advantages over the Bank in providing certain services.
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<PAGE> 15
CONTROL BY TAYLOR FAMILY
If the Taylor Family, their families and family trusts in the aggregate
deliver the CTFG Common held by them as of the date of this Prospectus, they
will beneficially own or control in excess of 88.8% of the outstanding TCG
Common (assuming the maximum amount subscribed for). As a result, these
stockholders, acting together, will be able effectively to control virtually all
matters requiring approval by the stockholders of the Company, including
amendment of the Company's Certificate of Incorporation and Bylaws, the approval
of mergers or similar transactions, and, with the exception of the right of
Preferred Stockholders to vote for the election of one director (and, in the
event the Company fails to declare and pay dividends for any six consecutive or
nonconsecutive quarters, the election of an additional director) the election of
all directors. See "Security Ownership of Management and Certain Beneficial
Owners." Conversely, the death of a substantial stockholder in the Company or
the decision by the Taylor Family to sell or liquidate its position in the
Company for whatever reason would have the effect of altering the balance of
effective stockholder control of the Company and, among other things, could have
the effect of altering the composition of the Board of Directors of the Company.
In addition, as of the Closing, members of the Taylor Family will constitute
three of the seven members of the Board of Directors of each of the Company and
the Bank and will serve as the Company's and the Bank's highest ranking
officers. These persons may experience conflicts of interest in the execution of
their duties on behalf of the Company and the Bank. There can be no assurance
any such conflicts would be resolved in a manner favorable to the Company or the
Bank. See "Management".
MORTGAGE COMPANY RISKS
Through its subsidiaries, the Mortgage Company originates, warehouses and
resells residential first and second mortgages primarily of subprime borrowers
who generally do not qualify for conventional loans or whose borrowing needs are
not met by traditional residential mortgage lenders. These borrowers generally
do not satisfy the more rigid underwriting standards of the traditional mortgage
lending market for a number of reasons, such as blemished credit histories (from
past loan delinquencies or bankruptcy), inability to provide income verification
data or lack of established credit history. Generally, these borrowers pose an
increased risk of default than do borrowers under conventional loans.
Since the subsidiaries of the Mortgage Company typically hold loans for
sixty to ninety days or longer prior to sale, and do not receive a commitment to
purchase the loan from an investor at the time of origination, the Mortgage
Company faces the risks that fluctuations in market interest rates will render
the loans held by its subsidiaries less valuable than the Mortgage Company's
basis in such loans. In addition, the Mortgage Company could experience a loss
on any loan that went into default while held by a subsidiary of the Mortgage
Company.
The Mortgage Company commenced business in the first quarter of 1996. It is
a start-up business with a limited history of operations. It has been
substantially dependent upon CTFG, which has advanced funds to the Mortgage
Company and guaranteed the performance of the obligations of the Mortgage
Company under certain agreements for the sale of loans to various purchasers.
The Company will assume the existing arrangements between CTFG and the
purchasers of Mortgage Company loans and will provide financing to the Mortgage
Company. The Mortgage Company will continue to be dependent upon guarantees and
financing from the Company for the foreseeable future. The Mortgage Company,
therefore, is not currently able to operate without assistance from its parent
company. In addition, as a result of these guarantees, the Company is subject to
the same risks that may impact the Mortgage Company and such risks could result
in losses which may exceed the Company's investment in the Mortgage Company. See
"Business -- The Mortgage Company."
NO PUBLIC MARKET
The Company does not intend to list the shares of TCG Common on any
securities exchange or include the TCG Common on any quotation system, and no
active trading market for the TCG Common is expected to develop.
14
<PAGE> 16
Although there is no public market for the TCG Common (and none is expected
to develop), Eligible Participants who elect to exchange their shares of CTFG
Common for shares of TCG Common and other participants with ESOP stock account
balances under the Profit Sharing/ESOP will have the right to exercise certain
limited "put" rights requiring the Company to purchase their shares of TCG
Common following their termination of employment with the Company and the Bank.
These former Profit Sharing/ESOP participants will receive in-kind distributions
of shares of TCG Common, subject to the terms of the Profit Sharing/ESOP. Upon
receipt of their shares of TCG Common, former participants will have a "put"
right entitling them to sell the shares to the Company. The Company has a legal
obligation to honor the holder's "put" rights by purchasing the shares at a
purchase price that is equal to the current fair market value, as determined by
the trustee of the Profit Sharing/ESOP, based on a valuation report by an
independent appraiser. See "Special Election Under the Profit
Sharing/ESOP--Appraisal." The Company may pay for the distributed shares of TCG
Common in cash or by issuing a five-year, interest-bearing promissory note. See
"Special Election Under the Profit Sharing/ESOP--ESOP Provisions."
The Company could experience potentially significant repurchase obligations
when employees with substantial holdings of TCG Common terminate employment. The
Company believes it will have sufficient cash flow to satisfy its repurchase
obligations. However, there can be no assurance that the Company's repurchase
obligations will not be significantly greater than presently anticipated.
CERTAIN TAX CONSIDERATIONS
Although the Tax Ruling to the effect that the purchase of TCG Common by
delivery of CTFG Common will be treated as a tax-free transaction under Section
355 of the Internal Revenue Code of 1986, as amended (the "Code") will generally
be binding upon the Internal Revenue Service (the "IRS"), the Tax Ruling was
based upon certain factual representations and assumptions. If any such factual
representations or assumptions are incorrect or untrue in any material respect,
the Tax Ruling may be invalidated. If the purchase of TCG Common by delivery of
CTFG Common were not to qualify under Section 355 of the Code, then TCG Common
stockholders would be required to recognize substantial gain for U.S. federal
income tax purposes. See "Certain U.S. Federal Income Tax Considerations."
CONDITIONS TO CLOSING
There are a number of conditions to the Closing of the Split-Off
Transactions. In addition, the approval of the Federal Reserve Bank of Chicago
of the acquisition of the Bank is conditioned upon certain minimum capital
levels being met. If the Split-Off Transactions are not consummated, all CTFG
Common delivered with subscriptions will be returned, and subscribers will have
foregone any opportunity to have sold their CTFG Common during the period their
shares are held by the Escrow Agent. Subscribers, therefore, are accepting the
market risk for the period their shares are held by the Escrow Agent, and this
period may extend to the fortieth business day after the date of this
Prospectus.
POSSIBLE LACK OF AVAILABLE INFORMATION
The Company anticipates that it will not be required to register the TCG
Common pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and does not presently intend voluntarily to effect such a
registration. Following the Offering, the Company will be subject to the
periodic and other reporting requirements of the Exchange Act for 1997 pursuant
to Section 15(d) thereof. Thereafter, provided the TCG Common is then held by
less than 300 holders of record at the beginning of any subsequent fiscal year
the Company could cease to be subject to the obligation to file such reports
with respect to such fiscal year. The Company anticipates that the TCG Common
will be held by less than 300 holders of record at the end of 1997, and
therefore that it will then cease to be subject to the reporting requirements of
the Exchange Act at that time. The Company intends to provide quarterly and
annual financial information to its stockholders even if not required to do so
pursuant to the Exchange Act.
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<PAGE> 17
PRICING OF THE TCG COMMON
Prior to the Offer, there has been no public market for the TCG Common. See
"--No Public Market." The terms of the Offer for the TCG Common were determined
by reference to the total common equity capital required by the Company to
consummate the Split-Off Transactions, which in turn was determined as a result
of negotiations between the Taylor Family and CTFG as to the terms of the Share
Exchange Agreement. The effective price for the TCG Common does not necessarily
bear any relation to the income, earnings and certain other financial and
operating information of the Bank in recent periods, the future prospects of the
Company and its industry in general, or market prices of securities or financial
and operating information of companies engaged in activities similar to those of
the Company.
As a condition to purchasing TCG Common on behalf of electing Eligible
Participants and on behalf of the Profit Sharing/ESOP, the Trustee must have
received an opinion from its financial advisor, Houlihan Lokey Howard & Zukin
("HLHZ") to the effect that the effective purchase price of the TCG Common does
not exceed its fair market value effective as of the date of the purchase and
that the overall transaction is fair to the Profit Sharing/ESOP from a financial
point of view. The valuation is subject to certain conditions, exceptions and
qualifications and accordingly should not be construed by the holders of CTFG
Common as a recommendation as to whether they should purchase shares pursuant to
the Offer described hereby.
FOR ELIGIBLE PARTICIPANTS: SUBSTITUTION OF DIVERSIFIED INVESTMENT FOR TCG COMMON
An election by an Eligible Participant to direct the trustee to substitute
his or her shares of CTFG Common held in the CTFG stock fund for shares of TCG
Common is, in effect, a decision to substitute an investment that may be
liquidated and invested in one or more of the various investment funds under the
Profit Sharing/ESOP for an investment in TCG Common. For various reasons stated
herein, an investment in TCG Common is subject to greater risk of loss than an
investment in the other investment funds. Management of the Company makes no
recommendation as to the suitability of an investment in TCG Common by any
Eligible Participants.
CERTAIN PROVISIONS THAT MAY BE DEEMED TO HAVE AN ANTI-TAKEOVER EFFECT
The Certificate of Incorporation and Bylaws of the Company contain several
provisions that may be deemed to have an "anti-takeover" effect in that they
could impede or prevent an acquisition of the Company unless the potential
acquiror has obtained the approval of the Company's Board of Directors. Such
provisions include the authorization pursuant to the Certificate of
Incorporation of 10.0 million shares of Common Stock, and 7.0 million shares of
Preferred Stock, of which a maximum of only 4.5 million shares of Common Stock
and 1,530,000 shares of Series A Preferred Stock will be issued in connection
with the Split-Off Transactions, leaving substantial amounts of Common Stock and
Preferred Stock authorized and available for future issuance at the discretion
of the Company's Board of Directors.
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THE SPLIT-OFF TRANSACTIONS
BACKGROUND
As a result of the Split-Off Transactions described below, the Company will
acquire the Bank and the Mortgage Company from Cole Taylor Financial Group, Inc.
("CTFG"). Until the consummation of the Split-Off Transactions (the "Closing"),
the Company will have no operations.
CTFG was formed in 1981 and in 1984 became the holding company for what was
then the Main State Bank (which had been acquired by CTFG's founders, Irwin H.
Cole and Sidney J Taylor, in 1969) and Drovers National Bank (which had been
acquired by Messrs. Cole and Taylor in 1978). CTFG has a third wholly-owned
subsidiary, Reliance Acceptance Corporation (f/k/a Cole Taylor Finance Co.) (the
"Finance Company"). CTFG was a private company until 1994, when CTFG made an
initial public offering of its Common Stock. As of September 30, 1996, the
family of Irwin H. Cole (the "Cole Family") and the family of Sidney J Taylor
(the "Taylor Family") each owned approximately 25% of the CTFG Common.
THE SHARE EXCHANGE AGREEMENT
To maximize stockholder value and to resolve differences among the Cole
Family, the Taylor Family and certain other directors of CTFG regarding the
strategic direction of CTFG, and after careful consideration of alternatives,
CTFG and Jeffrey W. Taylor, Sidney J Taylor, Bruce W. Taylor and certain other
members of the Taylor Family entered into the Share Exchange Agreement. The
Share Exchange Agreement is included as an exhibit to the Registration Statement
on Form S-4, of which this Prospectus forms a part, and the following summary
does not purport to be a complete description of the Share Exchange Agreement or
the Split-Off Transactions described therein but is qualified in its entirety by
reference to the Share Exchange Agreement as filed.
THE SPLIT-OFF TRANSACTIONS
At the Closing, CTFG will transfer all of the shares of TCG Common to the
Taylor Group and the Taylor Group will assign and deliver or cause to be
assigned and delivered to CTFG a certain number of shares of CTFG Common to be
determined at the discretion of the Taylor Family (the "Stock Amount"); provided
that, in no event will the Stock Amount consist of more than 4.5 million shares
of CTFG Common or less than the greater of (i) 4.0 million shares of CTFG Common
or (ii) all of the shares of CTFG Common which are owned beneficially or owned
of record by the Taylor Family (including any shares of CTFG Common owned after
the exercise of any options to purchase shares of CTFG Common (the "Options")
and any shares of CTFG Common in the CTFG ESOP and the CTFG Profit Sharing (as
defined) allocated to members of the Taylor Family). All outstanding Options
will become vested and exercisable prior to the Closing and each Taylor Family
member holding any Options will exercise such Options at or prior to the
Closing. The Taylor Family may include other CTFG stockholders in the group
exchanging the Stock Amount (the "Taylor Group") and therefore, the CTFG Common
accepted for delivery in the Offer will constitute the Stock Amount under the
Share Exchange Agreement. No more than 49.9% of the TCG Common issued in the
Offer may be issued to persons who are not members of the Taylor Family. As of
the date of this Prospectus, the Taylor Family beneficially owns 3,996,241
shares of CTFG Common which in the aggregate could be used to purchase 88.8% of
the TCG Common offered hereby (assuming the maximum number of shares purchased).
PRE-CLOSING TRANSACTIONS
Formation of New Reliance. The Bank has formed New Reliance, a new wholly
owned subsidiary, to which the Bank will transfer (i) its used automobile
receivables business, primarily consisting of (A) substantially all of the
assets used in the Bank's automobile receivables business, including agreements
with automobile dealers to purchase sales finance contracts (the "Dealer
Agreements") and (B) the Automobile Receivables having a fair market value of
between $30 million and $31 million; (ii) the First Cash Component (as defined
below); and (iii) the Second Cash Component (as defined below). The term
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"First Cash Component" means: (1) if the Stock Amount is less than 4.25 million,
cash in an amount equal to (A) $60 million minus (B) the amount, if any, by
which the fair market value of the Used Automobile Receivables exceeds $30
million plus (C) the product of $33.00 and the difference between 4.25 million
and the Stock Amount; (2) if the Stock Amount is equal to 4.25 million, cash in
an amount equal to (A) $60 million minus (B) the amount, if any, by which the
fair market value of the Used Automobile Receivables exceeds $30 million; or (3)
if the Stock Amount is greater than 4.25 million, cash in an amount equal to (A)
$60 million minus (B) the amount, if any, by which the fair market value of the
Used Automobile Receivables exceeds $30 million minus (C) the product of $33.00
and the difference between the Stock Amount and 4.25 million. The term "Second
Cash Component" means cash in an amount equal to (i) the amount of CTFG's cash
investment in Alpha Capital Fund, net of all partner distributions, return of
capital and like payments, made from time to time prior to June 12, 1996, plus
any additional cash investment made by CTFG in Alpha Capital Fund thereafter if
made with the Taylor Family's consent (which investment totalled $155,921 as of
September 30, 1996), plus interest on the total amount invested beginning, as to
each portion of such amount invested at different times, on the date of such
investment, at the rate of 9% per annum, compounded annually (which interest was
$10,683 as of September 30, 1996); plus (ii) the amount of CTFG's aggregate cash
investments in the Mortgage Company, net of all distributions to stockholders,
return of capital and like payments, made from time to time prior to June 12,
1996 plus any additional cash investment made by CTFG in the Mortgage Company
thereafter if made with the Taylor Family's consent (which investments totalled
$1,007,000 as of September 30, 1996), plus interest on the total amount invested
at different times, on the date of such investment, at the rate of 9% per annum,
compounded annually (which interest was $68,687 as of September 30, 1996). The
First Cash Component and the Second Cash Component are together referred to as
the "Cash Component."
Transfer of New Reliance to CTFG and the Merger of the Finance Company into
New Reliance. Immediately prior to the Closing, CTFG will cause the Bank to
distribute all of the capital stock of New Reliance to CTFG, and, thereafter,
CTFG will cause the Finance Company to be merged with and into New Reliance.
Transfer of the Capital Stock of the Bank, the Mortgage Company and CTFG's
Interest in Alpha Capital Fund. At the Closing, CTFG will transfer to the
Company all of the capital stock of the Bank, all of the capital stock of the
Mortgage Company and all of CTFG's rights, obligations and interest in Alpha
Capital Fund.
REPRESENTATIONS AND COVENANTS
Under the Share Exchange Agreement, each member of the Taylor Family,
jointly and severally, made certain representations and warranties, including
the following: (a) that the Share Exchange Agreement and the consummation of the
Split-Off Transactions have been duly authorized and that the Share Exchange
Agreement constitutes a legal, valid and binding obligation of each member of
the Taylor Family; (b) representations and warranties regarding the number of
shares of CTFG Common and options to purchase CTFG Common owned and that such
shares and options will be free and clear of any security interests, liens or
other encumbrances ("Liens"); (c) that they will cooperate with CTFG in taking
all necessary action to form the Company and cause the Company to enter into,
ratify and approve the Share Exchange Agreement; (d) that the assets of the
Bank's used automobile receivables business to be transferred to New Reliance
are substantially all of the assets used exclusively in or necessary for the
conduct of such business; and (e) that the transfer of the Stock Amount will
transfer to CTFG good and valid title to the shares of CTFG Common constituting
the Stock Amount, free and clear of any Liens, except for Liens CTFG has
permitted to attach.
CTFG made certain representations and warranties, including the following:
(a) that the consummation of the Split-Off Transactions has been duly authorized
and that the Share Exchange Agreement constitutes the legal, valid and binding
obligation of CTFG; (b) representations regarding the capital structure of the
Bank and the Mortgage Company; (c) representations regarding the amounts and
dates of its investments in the Mortgage Company and Alpha Capital Fund; (d)
that CTFG will, at the Closing, have good and valid title to all of the Bank
Stock, the capital stock of the Mortgage Company and the interest in the Alpha
Capital Fund, free and clear of any Liens; (e) that the transfer of the capital
stock of the Bank (the "Bank Stock"), the capital stock of the Mortgage Company
and the interest in the Alpha Capital Fund to the Company, will
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<PAGE> 20
transfer good and valid title to the Bank Stock, the capital stock of the
Mortgage Company and the interest in the Alpha Capital Fund, free and clear of
any Liens, except for Liens the Taylor Family has permitted to attach; and (f)
that CTFG has not received since September 1, 1995 any acquisition proposal,
except as previously disclosed.
The covenants of the parties include, without limitation, the following:
(a) the members of the Taylor Family who are directors of CTFG (the "Taylor
Directors") will submit, no later than August 31, 1996, any necessary
applications to the applicable governmental authorities for approval of the
Split-Off Transactions (including but not limited to the Federal Reserve Board)
and the Bank and CTFG will assist in such filings; (b) at the Annual Meeting,
the members of the Taylor Family will vote all shares of CTFG Common owned or
controlled by them in favor of the Share Exchange Agreement and the Split-Off
Transactions; (c) CTFG and the Taylor Family will comply with any covenants made
in connection with the Tax Ruling or with any applicable governmental authority
to ensure the tax-free nature of the Split-Off Transactions; and (d) for the
two-year period following the actual date of the Closing (the "Closing Date"),
the parties agreed to take, or refrain from taking, certain actions which may
affect the qualification of the Split-Off under Section 355 of the Code or the
validity of the Tax Ruling (unless the party wishing to take such action
provides the other party with a written opinion from nationally recognized tax
counsel that the desired transaction will not affect the qualification of the
Split-Off under Section 355 of the Code or the validity of the Tax Ruling).
CONDUCT OF BUSINESS PRIOR TO THE CONSUMMATION OF THE SPLIT-OFF TRANSACTIONS
The Bank and Mortgage Company. Under the Share Exchange Agreement, except
as otherwise agreed to in writing by the CTFG Board and the Taylor Directors and
except to the extent necessary to consummate the Pre-Closing Transactions, CTFG
and the Taylor Directors have agreed, prior to the earlier of the Closing Date
and the termination of the Share Exchange Agreement, not to terminate or change
the terms of the employment of Jeffrey W. Taylor or Bruce W. Taylor at CTFG. In
addition, CTFG and the Taylor Directors have agreed that, prior to the later of
the Closing Date and the termination of the Taylor Sale Period, they will not
terminate or change the terms or conditions of employment of any employees of
CTFG having an annual salary of $100,000 or more (other than Jeffrey W. Taylor
or Bruce W. Taylor), the Bank (including Jeffrey W. Taylor and Bruce W. Taylor)
or the Mortgage Company. The "Taylor Sale Period," which is defined under
"--Termination," is generally the period of time beginning with the termination
of the Share Exchange Agreement for specified reasons and ending on the earliest
of (a) nine months, (b) the date CTFG decides not to pursue or terminate the
sale of the Bank or (c) the date the Taylor Directors present to the CTFG Board
a bona fide offer by a third party to purchase the Bank. The foregoing does not
apply to employees of the Finance Company or its subsidiaries in their
capacities as such.
CTFG and the Taylor Directors also agreed that, during the period from the
date of the Share Exchange Agreement and continuing until the later of the
Closing Date and the termination of the Taylor Sale Period, except to the extent
necessary to consummate the pre-closing transactions set forth in "--Pre-Closing
Transactions" (the "Pre-Closing Transactions"), to use their reasonable best
efforts to cause each of the Bank and the Mortgage Company: (a) to carry on its
business in the ordinary course in substantially the same manner as previously
conducted; (b) to keep in full force and effect any material contracts; (c) to
keep in full force and effect the insurance coverage in effect on the date of
the Share Exchange Agreement; (d) to use its best efforts to keep in full force
and effect and preserve its business organization and material rights and
franchises and to retain its present employee force; (e) to continue all usual
intercompany relationships and practices to support the ongoing business
activities of the Bank and the Mortgage Company in accordance with existing
practices; and (f) to take such action as may be necessary to maintain,
preserve, renew and keep in full force and effect its corporate existence and
material rights and franchises.
The Finance Company. Except as otherwise agreed to by the CTFG Board (with
the participation of the Taylor Directors) and except to the extent required to
consummate the Pre-Closing Transactions, CTFG has agreed to use its reasonable
best efforts to cause each of the Finance Company and the Finance Company's
subsidiaries, from and after the date of the Share Exchange Agreement and until
the earlier of the Closing Date or the termination of the Share Exchange
Agreement, to: (a) carry on its business only in the ordinary course and
consistent with past practices; (b) keep in full force and effect any material
contracts except as
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they may terminate in accordance with their terms or in accordance with the
terms of the Share Exchange Agreement; (c) keep in full force and effect the
insurance coverage in effect on the date of the Share Exchange Agreement; (d)
use its best efforts to maintain and preserve its business organization and
material rights and franchises and to retain its present employee force and
general customer relationships; (e) continue all usual intercompany
relationships and practices to support the ongoing business activities of the
Finance Company in accordance with existing practices; and (f) take such action
as may be necessary to maintain and keep in full force and effect its corporate
existence and material rights and franchises.
Prohibited Transactions Without Approval. From and after the date of the
Share Exchange Agreement and until the earlier of the Closing or the termination
of the Share Exchange Agreement, CTFG and the Taylor Directors have agreed to
use their reasonable best efforts to cause the Bank and the Mortgage Company not
to take certain actions, including the following (unless agreed to by the CTFG
Board with the participation of the Taylor Directors): (a) except in the
ordinary course of business and consistent with prior practice, (1) incur any
obligation or liability, (2) assume, guaranty or endorse the obligations of any
other person, (3) mortgage or pledge any of its assets or create or suffer to
exist any Lien thereupon, or (4) obligate the Bank or the Mortgage Company to an
intercompany charge; (b) amend or terminate any material contract which would
materially adversely affect its rights thereunder; (c) acquire any corporation,
partnership or other business or substantial part thereof; (d) sell or otherwise
dispose of any substantial part of its assets; (e) enter into, dispose or divest
itself of any joint venture or partnership or cause any business entity to
become a subsidiary or affiliate; (f) sell or otherwise dispose of any real
property owned or operated by it except for the sale of real estate held for
sale in the ordinary course of business; (g) enhance, expand, modify, replace or
alter any computer or data processing system owned, leased or licensed by it
(including any software associated with any such computer or system); (h)
authorize any expenditures in excess of $50,000, individually or in the
aggregate; (i) make, originate or otherwise acquire any loans or loan
commitments for any loans or lines of credit; (j) authorize for issuance, issue,
sell, redeem or acquire any debt securities, shares of capital stock or other
equity securities, or declare, issue or pay any dividend or other distribution
of assets other than as set forth in the Share Exchange Agreement; (k) split,
combine or reclassify any shares of its capital stock; (l) sell, pledge or
otherwise encumber any stock owned by it in any subsidiary; (m) amend or permit
the amendment of the certificate of incorporation, charter, bylaws or similar
document of any subsidiary; (n) split, combine or reclassify any shares of
capital stock; (o) enter into, adopt or (except as may be required by law) amend
or terminate any bonus, compensation or any other benefit plan for the benefit
or welfare of any director, officer or employee, increase in any manner the
compensation or benefits of any director, officer or employee or pay any benefit
not required by any plan or arrangement in effect as of June 12, 1996 or hire
any employee with a salary in excess of $150,000 per year or hire, terminate or
change the terms of employment of any employee who would be entitled to any
payment upon change of control of the Bank or the Mortgage Company; (p) acquire
or dispose of any securities or interests for investment purposes or sell or
purchase mortgage servicing rights; (q) open any new office or close any current
office of the Bank, any of the Bank's subsidiaries or the Mortgage Company; or
(r) enter into any transactions other than in the ordinary course of business.
From and after the date of the Share Exchange Agreement and until the
earlier of the Closing or the termination of the Share Exchange Agreement, CTFG
has agreed to use its reasonable best efforts to cause the Finance Company not
to take certain actions, including the following (unless agreed to by the CTFG
Board with the participation of the Taylor Directors): (a) except in the
ordinary course of business and consistent with prior practice, (1) assume,
guarantee or endorse the obligations of any other person, (2) mortgage or pledge
any of its assets or create or suffer to exist any Lien thereupon, or (3)
obligate the Finance Company to an intercompany charge; (b) amend or terminate
any material contract which would materially adversely affect its rights
thereunder; (c) acquire any corporation, partnership or other business or
substantial part thereof; (d) sell or otherwise dispose of any substantial part
of its assets; (e) enter into, dispose or divest itself of any joint venture or
partnership or cause any business entity to become a subsidiary or affiliate;
(f) sell or otherwise dispose of any real property owned or operated by it,
except for the sale of real estate held for sale in the ordinary course of
business; (g) enhance, expand, modify, replace or alter any computer or data
processing system owned, leased or licensed by it (including any software
associated with any such computer or system); (h) authorize any expenditures in
excess of $50,000, individually or in the
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aggregate; (i) make, originate or otherwise acquire any loans or loan
commitments for any loans or lines of credit; (j) authorize for issuance, issue,
sell, redeem or acquire any debt securities or equity securities, or declare,
issue or pay any dividend or other distribution of assets other than as set
forth in the Share Exchange Agreement; (k) split, combine or reclassify any
shares of its capital stock; (l) sell, pledge or otherwise encumber any stock
owned by it in any subsidiary; (m) amend or permit the amendment of the
certificate of incorporation, charter, bylaws or similar document of any
subsidiary; (n) split, combine or reclassify any shares of capital stock of any
of its subsidiaries; (o) enter into, adopt or (except as may be required by law)
amend or terminate any bonus, compensation or any other benefit plan for the
benefit or welfare of any director, officer or employee, increase in any manner
the compensation or benefits of any director, officer or employee or pay any
benefit not required by any plan or arrangement in effect as of June 12, 1996 or
hire any employee with a salary in excess of $150,000 per year or hire,
terminate or change the terms of employment of any employee who would be
entitled to any payment upon change of control of the Bank or the Mortgage
Company; (p) acquire or dispose of any securities or interests for investment
purposes or sell or purchase mortgage servicing rights; or (q) enter into any
transactions other than in the ordinary course of business.
The parties also agreed that between the date of the Share Exchange
Agreement and the Closing Date, the Bank will pay monthly dividends to CTFG in
such amounts that the cumulative dividends for calendar year 1996 are equal to
$10.1 million. If the Closing Date occurs prior to January 1, 1997, such amount
shall be reduced by $27,671.23 for each day after the Closing Date and prior to
January 1, 1997. If the Closing Date has not occurred prior to December 31,
1996, such dividends will be $880,000 per month of calendar year 1997.
In addition, after the date of the Share Exchange Agreement and prior to
the Closing Date, CTFG and the Taylor Directors agreed to use their reasonable
best efforts to cause CTFG, the Bank and the Finance Company to obtain any
waivers, consents, amendments or approvals required to prevent any default,
acceleration or other adverse effect upon CTFG, the Bank or the Finance Company
under any indenture, credit agreement, note or other indebtedness.
NO SOLICITATION
CTFG has agreed to immediately cease any existing discussion or
negotiations with any third parties with respect to any offer or proposal for
the acquisition of the capital stock or assets of, or merger or combination
with, CTFG, the Bank or the Finance Company or similar transactions, (each an
"Acquisition Proposal"). Subject to certain exceptions described below, CTFG
also agreed that it will not (i) solicit or encourage any inquiries, proposals
or offers, (ii) solicit or engage in negotiations or discussions concerning, or
provide any non-public information or data to, any person or entity relating to
any Acquisition Proposal, or (iii) agree to approve or recommend any Acquisition
Proposal. However, CTFG is not prevented from furnishing non-public information
to, or entering into discussions or negotiations with, any person in connection
with an unsolicited Acquisition Proposal or recommending such Acquisition
Proposal to the stockholders if the directors determine in good faith that such
action is required to discharge their fiduciary duties and CTFG advises the
Taylor Family of all non-public information delivered to such third-party.
ADDITIONAL AGREEMENTS
The Taylor Family and CTFG made certain additional agreements under the
Share Exchange Agreement, including the following:
Notification of Change. The parties agreed to notify each other of certain
events, including: (a) any material change in the ordinary course of business or
operation of the Bank, its subsidiaries, or the Mortgage Company; and (b) any
governmental complaints, investigations or hearings or the institution or threat
of litigation involving the Bank, its subsidiaries or the Mortgage Company which
is material or might have a material adverse effect.
Regulatory Filings. CTFG agreed to furnish the Taylor Directors, and the
Taylor Directors agreed to furnish the CTFG Board, with any information relating
to CTFG, the Bank, its subsidiaries or the Mortgage
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Company required to be included in any filing that CTFG, on the one hand, or the
Taylor Family, on the other, is required to file in order to consummate the
Split-Off Transactions.
Compliance with Tax and Regulatory Representations. Each party agreed to
comply with any covenants it made in connection with the Tax Ruling or with any
applicable governmental authority to ensure the tax-free nature of the Split-Off
Transactions. CTFG agreed that, for the two-year period following the Closing
Date, it will cause New Reliance to continue the operation of the used
automobile receivables business previously operated by the Bank by taking
certain actions including: (a) purchasing the same type of automobile
receivables previously purchased by the Bank (except that such receivables may
be collateralized by used automobiles only), (b) maintaining a portfolio of at
least $30 million in face amount value of such receivables (net of unearned
finance charge), and (c) to the extent practicable, purchasing receivables from
the same dealerships from which the Bank previously purchased such receivables.
For two years following the Closing Date, unless the Taylor Family has
obtained a tax opinion (a "Tax Opinion") satisfactory to CTFG that the desired
transaction will affect neither the tax-free qualification of the Split-Off nor
the validity of the Tax Ruling: (a) no Taylor Family member will sell or enter
into any transaction reducing economic risk with respect to the Bank Stock
received in the Split-Off Transactions; (b) the Taylor Family will cause the
Bank to continue the active conduct of its banking business; and (c) the Taylor
Family will not permit either the Bank or the Company to merge with any other
corporation, liquidate in whole or in part, sell or transfer any significant
part of its assets, redeem or otherwise purchase any of its capital stock or,
except as specifically provided by the Tax Ruling, issue additional shares of
its capital stock. Regardless of whether the Taylor Family has obtained a Tax
Opinion, the Taylor Family will not enter into any agreement for transfer of
control of the Bank or the Company for one year following the Closing Date.
For two years following the Closing Date, unless CTFG obtains a tax opinion
satisfactory to the Taylor Family that the desired transaction will affect
neither the tax-free qualification of the Split-Off nor the validity of the Tax
Ruling, CTFG will not: (a) sell or otherwise transfer the capital stock of New
Reliance; or (b) permit New Reliance to merge with any other corporation,
liquidate in whole or in part, sell or transfer any significant part of its
assets, or redeem or otherwise purchase any of its capital stock (except in
accordance with the Share Exchange Agreement or the Tax Ruling).
CTFG and the Bank have agreed to amend their tax allocation agreement so
that the allocation through the Closing between CTFG and its subsidiaries, on
the one hand, and the Bank, on the other, will continue in a matter consistent
with past practice. From the date of the Share Exchange Agreement, all tax
benefits associated with the exercise or buyout of all compensatory options of
CTFG Common will inure solely to CTFG and any audit claims or liabilities shall
be borne by the party to whom the adjustment is attributable.
Lease Arrangements. If requested by CTFG, the Bank will sublease to CTFG
for 90 days after the Closing Date, the space currently utilized by CTFG on
terms reasonably acceptable to the parties. On the Closing Date, CTFG will
assign to the Bank any leases, licenses, and property used by, or adjacent to,
the Bank properties but owned by CTFG or the Finance Company, for no additional
consideration. All property owned by the Bank as of June 12, 1996 will remain
the property of the Bank on and after the Closing Date.
Employees. CTFG will assume all liability (and will indemnify the Bank and
the Taylor Family for such liability) for any payments owed as a result of the
Closing to persons specified in the Share Exchange Agreement or full-time
employees of the Finance Company or its subsidiaries. The Taylor Family will
cause the Bank to assume all liability (and the Bank will indemnify CTFG and its
subsidiaries) for any severance or change in control payments owed as a result
of the Closing to employees of CTFG, the Bank or its affiliates, other than
persons specified in the Share Exchange Agreement or full-time employees of the
Finance Company or its subsidiaries.
Employee Benefit Plans. The Taylor Family agreed to cause the Company to
establish a new employee stock ownership plan and a new 401(k) plan, and CTFG
agreed to transfer to the new plans from the Cole Taylor Financial Group, Inc.
Employee Stock Ownership Plan (the "CTFG ESOP") and the Cole Taylor Financial
Group, Inc. 401(k)/Profit Sharing Plan (the "CTFG Profit Sharing") the account
balances of employees who are or will become employees of the Bank at Closing
and former employees of the Bank.
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CTFG has caused contributions to be made to the CTFG ESOP sufficient to prepay
the outstanding CTFG ESOP loan and, before the Closing Date, will cause the
allocation to the accounts of participants of the shares of CTFG Common that are
released from the suspense account by reason of such loan prepayment. Pursuant
to the Share Exchange Agreement, the Company will establish the Profit
Sharing/ESOP.
Insurance Policies. The Bank may purchase from CTFG, and CTFG may purchase
from the Bank, any insurance policies owned by the other party and providing
coverage with respect to the purchasing party or any of its officers at the
greater of the book value or the cash value of such policies.
CONDITIONS TO CLOSING
Under the Share Exchange Agreement, the obligations of the Taylor Family to
effect the Split-Off Transactions are subject to the fulfillment or waiver of
certain conditions, including the following: (i) the representations and
warranties of CTFG set forth in the Share Exchange Agreement are true in all
material respects and CTFG has performed and satisfied in all material respects
all covenants and agreements required by the Share Exchange Agreement; (ii) all
action required to be taken by or on the part of CTFG or the Bank to authorize
the execution, delivery and performance of the Share Exchange Agreement and the
consummation of the Split-Off Transactions has been duly and validly taken by
the Boards of Directors of CTFG and the Bank; (iii) the expiration or
termination of any applicable waiting periods and the approval of the
transactions by all applicable governmental authorities; (iv) the absence of any
order, injunction or decree by any court, governmental agency, department or
regulatory body prohibiting the consummation of the transactions; (v) the
absence of any material new litigation which could reasonably be expected to
have a material adverse effect on the business and financial condition of the
Bank and its subsidiaries; (vi) the absence of any statute, rule, regulation or
policy which prevents or restricts the consummation of the Split-Off
Transactions; (vii) the consummation of the pre-closing transactions set forth
above in "--Pre-Closing Transactions"; (viii) the approval of the Split-Off
Transactions by the holders of at least a majority of the outstanding shares of
CTFG Common, and (ix) the receipt of all required approvals, consents and
authorizations of any third parties in connection with the transactions, except
for such approvals, consents and authorizations which if not obtained would not
have a material adverse effect on the Bank and its subsidiaries.
The obligations of CTFG to effect the Split-Off Transactions are subject to
the fulfillment or waiver of certain conditions, including the following: (i)
the representations and warranties of the Taylor Family set forth in the Share
Exchange Agreement are true in all material respects and the Taylor Family shall
have performed and satisfied all covenants and agreements required by the Share
Exchange Agreement; (ii) all action required to be taken by or on the part of
the Taylor Family to authorize the execution, delivery and performance of the
Share Exchange Agreement and the consummation of the Split-Off Transactions has
been duly and validly taken by the Taylor Family; (iii) the expiration or
termination of any applicable waiting periods and the approval of the
transactions by all applicable governmental authorities; (iv) the absence of any
order, injunction or decree by any court, governmental agency, department or
regulatory body prohibiting the consummation of the transactions; (v) the
absence of any material new litigation which could reasonably be expected to
have a material adverse effect on CTFG and its subsidiaries (other than the
Bank); (vi) the absence of any statute, rule, regulation or policy which
prevents or restricts the consummation of the transactions; (vii) the
consummation of the Pre-Closing Transactions; (viii) the approval of the
Split-Off Transactions by the holders of at least a majority of the outstanding
shares of CTFG Common, and (ix) the receipt of all required approvals, consents
and authorizations of any third parties in connection with the transactions,
except for such approvals, consents and authorizations which if not obtained
would not have a material adverse effect on CTFG and its subsidiaries (other
than the Bank), taken as a whole.
CLOSING
The Closing and the delivery of the certificates and acknowledgements
required under the Share Exchange Agreement will take place on the Closing Date,
which date will be fixed by mutual agreement of the Taylor Family and CTFG as
promptly as practicable following the satisfaction or waiver of the conditions
to Closing set forth in the Agreement. See "--Conditions to Closing."
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TERMINATION
The Share Exchange Agreement may be terminated at any time prior to the
Closing: (i) by mutual written consent of the Taylor Family and CTFG; (ii) by
the Taylor Family or CTFG if any court of competent jurisdiction within the
United States issues any order, decree or ruling or action restraining,
enjoining or prohibiting the consummation of the Split-Off Transactions; (iii)
by the Taylor Family or CTFG in the event any approval of any applicable
governmental authority has been denied or contains or is subject to terms or
conditions which either party reasonably deems to be materially burdensome; (iv)
provided the party seeking termination has satisfied in all material respects
all covenants and agreements to be performed and satisfied by it on or prior to
the date of termination under the Share Exchange Agreement, by the Taylor Family
or CTFG upon material breach by the other party of any of its covenants or
agreements, subject to a 30-day right to cure following the receipt of written
notice of such breach; (v) provided the terminating party has not caused the
Closing not to occur in breach of the Share Exchange Agreement, by the Taylor
Family or CTFG if the Closing has not occurred prior to June 30, 1997; (vi) by
CTFG, prior to the Annual Meeting, after CTFG's receipt of an acquisition
proposal if the CTFG Board determines, based on the advice of independent
counsel, that such action is required for the discharge of the CTFG Board's
fiduciary duties; (vii) by the Taylor Family if the CTFG Board withdraws or
modifies, in a manner adverse to the Taylor Family, its approval of the Share
Exchange Agreement, the Split-Off Transactions or its recommendation to CTFG's
stockholders, if CTFG enters into an agreement providing for an acquisition
proposal or the CTFG Board resolves to do any of the foregoing; (viii) by the
Taylor Family if the Annual Meeting has not occurred prior to November 28, 1996
(unless the Taylor Family has caused the Annual Meeting not to occur prior to
such date), or (ix) by either CTFG or the Taylor Family if the stockholders of
CTFG do not approve the Split-Off Transactions at the Annual Meeting.
If the Share Exchange Agreement is terminated due to a Triggering
Termination (as defined below), CTFG will be entitled to receive as an exclusive
remedy, liquidated damages equal to $15 million from the Taylor Family, which
amount is subject to reduction depending on the result of the Bank Sale Process
(as defined below). A "Triggering Termination" means termination of the Share
Exchange Agreement due to the following reasons: (i) failure to obtain the
approval of any applicable governmental authority (other than because of a
failure to comply with the Community Reinvestment Act or fair lending statutes);
or (ii) if the Closing has not occurred prior to June 30, 1997 due to (A) the
failure to obtain New Bank Financing, or (B) the failure to obtain the approval
of any applicable governmental authority (other than because of a failure to
comply with the Community Reinvestment Act or fair lending statutes).
If the Share Exchange Agreement is terminated as a result of a Triggering
Termination, CTFG will use its reasonable best efforts to solicit bids from
third parties for the sale of all of the equity interest in the Bank (the "Bank
Sale Process"). The Taylor Family has agreed to use its best efforts to support
the Bank Sale Process, and the Taylor Directors will direct such process. If,
during the nine-month period after a Triggering Termination, CTFG receives a
Sufficient Bona Fide Offer (as defined below) to acquire all of the equity
interest in the Bank that the Taylor Family wishes the CTFG Board to consider,
the obligation of the Taylor Family to pay CTFG $15 million will be reduced
(provided the obligation will never be less than zero) by the amount by which
the Sufficient Bona Fide Offer would provide CTFG with gross proceeds with a
fair market value in excess of $235 million. A "Sufficient Bona Fide Offer"
means an offer for all of the equity interest in the Bank from a financially
reliable third party (or parties) that, if accepted, would be likely to be
consummated and that, if consummated, would provide CTFG with gross proceeds
with a fair market value in excess of $235 million. The CTFG Board is under no
obligation to accept a Sufficient Bona Fide Offer that the Taylor Family wishes
the CTFG Board to consider, provided, however, that in the event the CTFG Board
rejects a Sufficient Bona Fide Offer, the obligation of the Taylor Family to pay
CTFG $15 million will be reduced in the same manner as is set forth in the
preceding sentence. If no Sufficient Bona Fide Offer is received during the nine
months after a Triggering Termination, the Taylor Family will pay the full $15
million to CTFG. CTFG may, without the participation of any member of the Taylor
Family, resolve not to pursue the Bank Sale Process or to enter into an
agreement providing for the merger or disposition of the stock or assets of CTFG
prior to the expiration of the nine-month period following a Triggering
Termination, in which case the obligation of the Taylor Family to pay the $15
million to CTFG will be extinguished. The
24
<PAGE> 26
Taylor Family deposited 750,000 shares of CTFG Common into escrow to ensure
payment of any liquidated damages required to be paid by the Taylor Family under
the Agreement. See "--The Escrow Agreement."
If the Share Exchange Agreement is terminated (i) by CTFG after the receipt
of an acquisition proposal if such action was necessary to discharge the CTFG
Board's fiduciary duties or (ii) by the Taylor Family, if the CTFG Board
withdraws or modifies its approval of the Share Exchange Agreement or the
Split-Off Transactions, if CTFG has entered into an agreement providing for an
acquisition proposal or the CTFG Board resolves to do any of the foregoing, CTFG
is obligated to pay the Taylor Family as an exclusive remedy, liquidated damages
in an amount equal to (a) the Taylor Family's out of pocket expenses paid to
lawyers, accountants, investment bankers or other experts plus (b) three percent
of the fair market value as of the date of the Share Exchange Agreement of the
acquisition proposal that gave rise to such termination. If the Share Exchange
Agreement is terminated by the Taylor Family upon material breach of any of
CTFG's covenants or agreements contained in the Share Exchange Agreement, which
has not been cured within 30 days of written notice thereof by CTFG, CTFG is
obligated to pay the Taylor Family, as an exclusive remedy, liquidated damages
equal to $15 million.
INDEMNIFICATION
The Share Exchange Agreement provides that the Taylor Family will indemnify
and hold harmless CTFG and its affiliates from and against any and all losses,
damages, claims, liabilities or obligations (including attorneys' fees and
interest) ("Losses") with respect to (i) any breach of any representation,
warranty or agreement of the Taylor Family contained in the Share Exchange
Agreement and (ii) any brokerage fees, commissions or finders' fees payable on
the basis of any action taken or caused to be taken by the Taylor Family. After
the Closing, the Taylor Family is obligated to cause the Bank to indemnify and
hold harmless CTFG and its affiliates from and against any and all Losses (i)
whenever incurred, arising or accrued, relating to the Bank, the Mortgage
Company or CTFG's ownership of securities in the Bank, the Mortgage Company or
Alpha Capital Fund or (ii) incurred, arising or accrued prior to the Closing and
relating to New Reliance. In addition, after the Closing, the Taylor Family is
obligated to indemnify and hold harmless CTFG from and against 25% of any
Losses, including, without limitation, any costs or expenses of defense or
settlement of any suits, actions or proceedings initiated by third parties and
any judgments in such suits, actions or proceedings relating to the Split-Off
Transactions and any Losses relating to disputes regarding terminations or
limitations of the Options.
CTFG is obligated to indemnify and hold harmless the Taylor Family, its
affiliates and the Bank from and against any and all Losses with respect to (i)
any breach of any representation, warranty or agreement of CTFG contained in the
Share Exchange Agreement and (ii) any brokerage fees, commissions or finders'
fees payable on the basis of any action taken or caused to be taken by CTFG. In
addition, after the Closing, CTFG is obligated to indemnify and hold harmless
the Taylor Family from and against any and all Losses (x) whenever incurred,
arising or accrued, relating to CTFG (except for matters for which the Taylor
Family is indemnifying CTFG pursuant to the Share Exchange Agreement) or the
Finance Company or (y) incurred, arising or accrued after the Closing and
relating to New Reliance.
Unless the Share Exchange Agreement has been terminated by the Taylor
Family due to a material breach by CTFG of any of its covenants or agreements
contained in the Share Exchange Agreement which has not been cured within 30
days of notice of such breach, the Taylor Family will indemnify and hold
harmless CTFG against all costs and liabilities related to the sale of the Bank
Stock, including, without limitation, all underwriting, accounting, legal,
printing, filing fees and other expenses of a public or private offering and any
liabilities relating to misstatements or omissions in the registration statement
or other offering documents or any part thereof. The Bank will assume such
indemnity and hold harmless agreement after the Split-Off.
AMENDMENT
The Share Exchange Agreement may be amended or modified, and the terms
thereof waived, at any time before or after the receipt of any approvals, by a
writing executed by CTFG and representatives of the Taylor
25
<PAGE> 27
Family. However, after stockholder approval of the Share Exchange Agreement and
the Split-Off Transactions, no amendment may be made which by applicable law
requires the further approval of CTFG's stockholders unless such approval is
obtained. If CTFG determines that an amendment made after approval by its
stockholders requires the further approval of its stockholders, it will call a
special meeting of its stockholders for voting on such amendment and will
resolicit proxies for use at such special meeting. Any such resolicitation will
be made in substantially the same manner as the solicitation of proxies made
pursuant to CTFG's Proxy Statement dated October 15, 1996. From and after the
date of the Share Exchange Agreement, any amendment of the Share Exchange
Agreement, any action or inaction of CTFG or any or its subsidiaries relating to
the Share Exchange Agreement (other than as specifically set forth in the Share
Exchange Agreement), including any termination of the Share Exchange Agreement
by CTFG, will require the concurrence of the CTFG Board or a duly authorized
committee thereof by a majority of those voting, without the vote of any member
of the Taylor Family.
EXPENSES
Except as otherwise specifically set forth in the Share Exchange Agreement
(see "--Termination"), each party will pay its own fees and expenses incident to
preparing for, entering into, and carrying out the Share Exchange Agreement and
the Split-Off Transactions. The fees and expenses of CTFG and the Finance
Company, including any brokers', finders', investment bankers', attorneys',
filing, accountants' or tax advisors' fees (collectively, "Fees") are to be
borne by CTFG, and the Fees of the Bank and the Taylor Family are to be borne by
the Taylor Family. CTFG expects that it will pay an aggregate of approximately
$6 million for Fees and special payments to certain employees as a result of the
Split-Off Transactions. It is expected that the Company will reimburse the
Taylor Family for the expenses incurred in connection with the organization of
the Company and the transactions contemplated by the Split-Off Transactions.
THE ESCROW AGREEMENT
Pursuant to an escrow agreement between the Taylor Family, CTFG and The
Northern Trust Company dated June 19, 1996 (the "Escrow Agreement"), the Taylor
Family deposited 750,000 shares of CTFG Common (the "Escrow Amount") into escrow
to ensure payment of any liquidated damages required to be paid by the Taylor
Family under the Share Exchange Agreement. The Northern Trust Company, as escrow
agent, will hold the Escrow Amount in escrow until it receives (i) a final order
or judgment of a court of competent jurisdiction directing the disposition of
the Escrow Amount or any part thereof, together with an opinion of counsel to
CTFG or the Taylor Family that such order or judgment is final, or (ii) joint
written notice from CTFG and the Taylor Family, in which case the Escrow Amount
will be distributed in accordance with such order or judgment or the joint
written notice, as the case may be. A copy of the Escrow Agreement has been
filed as an exhibit to the Registration Statement on Form S-4, of which this
Prospectus forms a part. THE FOREGOING SUMMARY DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ESCROW AGREEMENT.
THE STOCK REPURCHASE
Although no decision has been made, after consummation of the Split-Off
Transactions, CTFG may repurchase from its then existing stockholders
outstanding shares of its CTFG Common (the "Stock Repurchase"). CTFG would fund
the Stock Repurchase with some or all of the Cash Component that it receives
from the Bank in the Split-Off Transactions, provided that CTFG does not expect
to expend more than $60 million for the Stock Repurchase, if the Stock
Repurchase is effected. If commenced, it is possible that the Stock Repurchase
may be effected through one or more tender offers, open market purchases,
private purchases or otherwise. Alternatively, CTFG may utilize some of the cash
it receives from the Bank in the Split-Off Transactions to reduce existing debt,
buy out compensatory stock options or pay dividends.
The Stock Repurchase would only be effected, if at all, after consummation
of the Split-Off Transactions. After consummation of the Split-Off Transactions,
CTFG may determine not to effect the Stock Repurchase or any of the other
transactions described in the preceding paragraph. Consequently, regardless of
whether the Split-Off Transactions are consummated, there can be no assurance as
to when, if ever, the Stock Repurchase
26
<PAGE> 28
or any of such other transactions will be consummated or, if effected, the size,
manner or duration of such Stock Repurchase or other transactions.
TAX TREATMENT
The Tax Ruling to the effect that the Split-Off Transactions will be
treated as a tax-free transaction under Section 355 of the Code was issued on
September 3, 1996 (the "Tax Ruling"). Pursuant to the Tax Ruling, for U.S.
federal income tax purposes: (i) no gain or loss will be recognized by the
Company upon the purchase of TCG Common by delivery of CTFG Common held by the
Taylor Group, and (ii) no gain or loss will be recognized by (and no amount will
be included in the income of) the Taylor Group upon their receipt of the capital
stock of the Company in exchange for the CTFG Common owned by them. Although the
Tax Ruling will generally be binding upon the IRS, the Tax Ruling was issued
based upon certain factual representations and assumptions. If any such factual
representations or assumptions are incorrect or untrue in any material respect,
the Tax Ruling may be invalidated. See "Certain U.S. Federal Income Tax
Consequences."
REGULATORY REQUIREMENTS
The Split-Off Transactions are subject to approval by the Federal Reserve
Board under the Bank Holding Company Act ("BHCA"). On August 30, 1996, the
Taylor Directors submitted an application to the Federal Reserve Board for
approval of the transaction and, on September 13, 1996, the Federal Reserve
Board requested additional information. The Taylor Directors filed the
additional information in response to this request and on September 26, 1996
were informed by letter that the application had been accepted as
informationally complete and was being processed by the Federal Reserve Bank of
Chicago under delegated authority. On October 21, 1996, the Company was notified
that the Federal Reserve Bank of Chicago (the "Reserve Bank"), acting under
delegated authority, approved the Company's application to become a bank holding
company through the acquisition of the Bank, (the "Approval Letter"). The
Approval Letter also indicated that the Reserve Bank does not intend to object
to the notification by applicant to engage in nonbanking activities through the
acquisition of the Mortgage Company. The approval was specifically conditioned
on the Company's compliance with the commitments and representations made in
connection with the application and notification. These commitments include, but
are not limited to, the Company and the Bank being at certain minimum regulatory
capital at Closing so that, as of the Closing, the Bank will be considered "well
capitalized" and the Company will be considered "adequately capitalized" for the
purposes of the regulations. The Approval Letter indicates that the Split-Off
Transactions may not be consummated before the 15th calendar day or after three
months from the date of the Approval Letter.
The Taylor Family is not aware of any other governmental approvals or
actions that are required for the consummation of the Split-Off Transactions.
Should any such approvals or actions be required, it is currently contemplated
that such approvals or actions would be sought, but there can be no assurance
that such other approvals, if any, would be received. Moreover, if other
required approvals, if any, are received, there can be no assurance as to the
date of such approvals or that such approvals will not be conditioned in a
manner that would cause either of the parties to abandon the Split-Off
Transactions. See "Risk Factors--Risks Arising From the Split-Off
Transactions-Increased Leverage."
VESTING OF CTFG OPTIONS
Pursuant to the Share Exchange Agreement, all outstanding options to
purchase CTFG Common held by members of the Taylor Family will become vested and
exercisable in full prior to the Closing. Each Taylor Family member holding any
such options is obligated to exercise them at or prior to the Closing.
Additionally, as a result of the Split-Off Transactions, all outstanding options
("Employee Stock Options") to purchase Common Stock under CTFG's 1991 Stock
Option Plan (the "1991 Plan") have become vested as of October 18, 1996, subject
to the restrictions of applicable securities law. Employee Stock Options held by
persons who will no longer be employees of CTFG as a result of the Split-Off
Transactions (i.e., employees of the Bank) will expire unless exercised at the
Closing or within 60 days after the consummation of the Split-Off Transactions.
27
<PAGE> 29
In that the options exercised are attributable to Bank employees, the Bank
is entitled to receive a tax benefit equivalent to the excess of the fair value
of the CTFG stock over the exercise price at the date of exercise. Pursuant to
the Share Exchange Agreement, CTFG and the Bank have amended their existing tax
allocation agreement so that (A) the allocation of federal, state and local tax
liabilities through the closing between CTFG and its subsidiaries on the one
hand and Bank on the other will continue in a manner consistent with past
practice, except that beginning June 12, 1996, all tax benefits associated with
the exercise or buyout of all compensatory options on CTFG Common, whether held
by employees or former employees of Bank or otherwise, will inure solely to the
benefit of CTFG; and (B) any claims or liabilities arising from audits
(including audits commenced or completed after the Closing) of pre-closing
periods will be borne by the party to whom the adjustment is attributable.
RELATED FINANCING
In order to provide the capital infusion necessary to obtain requisite
regulatory approval to consummate the Split-Off Transactions, the Company will
obtain a $25 million, unsecured five year term bank loan (the "Term Loan") and a
$5 million, unsecured one year line of credit (the "Line of Credit"; the Bank
Loan and Line of Credit are referred to collectively as the "Credit Facilities")
from LaSalle National Bank ("LaSalle"). A commitment letter regarding such
Credit Facilities was executed by the Company and LaSalle on September 17, 1996
(the "Commitment Letter") and the parties intend to execute definitive documents
prior to the Closing. Based on the terms set forth in the Commitment Letter, the
Company expects the Credit Facilities will contain customary covenants,
representations, warranties, conditions and default provisions. While the Credit
Facilities are unsecured, the Company will be prohibited from using the capital
stock of the Bank as security for other or alternative credit facilities. Such
covenants may affect the operating flexibility of the Company, including the
Company's ability to pay dividends on the TCG Common.
Interest on the Term Loan will be due quarterly, with annual principal
reductions of $1.0 million beginning in 1998 and a balloon payment of $21
million at maturity. The funds from the Term Loan will be used to make capital
contributions to the Bank and the Company of $23 million and $2.0 million,
respectively. Proceeds of the Line of Credit will be used to support the
Company's ongoing working capital needs.
The Company has filed a Registration Statement on Form S-1 relating to
$38.25 million of Noncumulative Perpetual Preferred Stock, Series A (the
"Preferred Stock"). The Preferred Stock is expected to be sold in the Preferred
Stock Offering. The proposed terms of the Preferred Stock will carry a
liquidation preference of $25.00 per share, plus declared and unpaid dividends
for the then current dividend period up to the date fixed for liquidation. The
Preferred Stock is expected to have a dividend rate per annum in an amount no
greater than % per annum. The Preferred Stock will also have certain other
rights. See "Description of Capital Stock--Preferred Stock."
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Offer. The purchase
price for each share of TCG Common purchased shall be the delivery of one share
of CTFG Common.
28
<PAGE> 30
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated long-term debt and
stockholders' equity of the Company at June 30, 1996, after giving effect to the
Split Off Transactions, the related bank debt financing and the net proceeds of
the Common and Preferred Stock offerings. The Company will issue between 4.0
million and 4.5 million shares of TCG Common.
<TABLE>
<CAPTION>
ASSUMING 4.0 ASSUMING 4.5
MILLION MILLION
COMMON SHARES COMMON SHARES
ISSUED ISSUED
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Pro Forma Capitalization as of June 30, 1996
LONG-TERM DEBT:
Federal Home Loan Bank advances(1)............................. $ 70,000 $ 70,000
Term loan...................................................... 25,000 25,000
Line of Credit................................................. 4,130 4,130
Other debt..................................................... 836 836
-------- --------
Total long-term debt................................... 99,966 99,966
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par, 3,000,000 shares authorized,
Series A, 1,530,000 shares issued and outstanding, $25
stated value(2)............................................. 36,250 36,250
Common stock, $.01 par, 7,000,000 shares authorized, 4,000,000
or 4,500,000 shares (as indicated) issued and outstanding... 40 45
Surplus........................................................ 95,783 111,114
Retained earnings.............................................. 0 0
-------- --------
Total stockholders' equity............................. 132,073 147,409
-------- --------
Total Capitalization................................... $ 232,039 $ 247,375
======== ========
REGULATORY CAPITAL RATIOS:
Consolidated Company
Tier 1 risk-based capital................................... 5.51% 6.45%
Total risk-based capital.................................... 6.76 7.70
Leverage.................................................... 4.14 4.85
Pro forma Bank only
Tier 1 risk-based capital................................... 7.02% 8.27%
Total risk-based capital(3)................................. 8.28 9.52
Leverage.................................................... 5.25 6.19
</TABLE>
- ---------------
(1) See Note 11 of the Notes to Financial Statements of the Bank.
(2) Reflects the issuance of the preferred stock, net of $2.0 million in
estimated issuance costs.
(3) The regulatory minimum total risk-based capital ratio as established by the
Board of Governors of the Federal Reserve System for an adequately
capitalized bank is set at 8% and for a "well-capitalized" bank is set at
10% or above. Management intends to maintain the Bank's capitalization so
that these regulatory ratios are above the "well-capitalized"
classification. The pro forma capitalization of the Bank as shown above, is
currently below the "well-capitalized" level, however, due to the Bank's
anticipated earnings growth subsequent to June 30, 1996 the Bank's ratios
are expected to be in excess of the "well-capitalized" guidelines by the
Closing.
29
<PAGE> 31
SELECTED BANK FINANCIAL DATA
The selected data presented below under the caption "Income Statement Data"
and "Balance Sheet Data" for and as of the years ended December 31, 1995 and
1994 are derived from the historical audited financial statements of the Bank on
a stand alone basis. The financial statements of the Bank for 1995 and 1994 were
audited by KPMG Peat Marwick LLP, independent accountants. The financial data
for and as of the periods ended June 30, 1996 and 1995 and December 31, 1993,
1992 and 1991 are derived from unaudited financial statements. This data should
be read in conjunction with the financial statements, the notes thereto and
other financial information included elsewhere in this Prospectus. The financial
data for the six month period ended June 30, 1996 are not necessarily indicative
of the Bank's results to be expected for the full year.
The selected financial data presented below is based on the historical
results of the Bank, including the Bank's automobile receivables business, which
will be discontinued in connection with the Split-Off Transactions. For a
description of the pro forma effects of the Split-Off Transactions, which will
be accounted for using the purchase method of accounting, on the Bank and the
Company, see "Unaudited Pro Forma Condensed Consolidated Financial Statements"
and "Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations" of the Bank and the Company.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------- FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
----------------------- ------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross interest income............ $ 68,085 $ 65,581 $ 133,684 $ 116,267 $ 101,828 $ 98,967 $ 105,881
Gross interest expense........... 32,492 31,218 64,366 44,118 35,147 40,927 53,826
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.............. 35,593 34,363 69,318 72,149 66,681 58,040 52,055
Provision for loan losses........ 2,052 2,332 4,056 7,374 10,521 8,922 8,816
Noninterest income............... 7,664 6,846 14,227 12,887 15,425 14,502 12,870
Noninterest expense.............. 27,225 26,780 53,549 55,248 53,926 49,107 44,690
Provision for income taxes....... 4,665 3,566 7,774 6,512 4,937 4,551 3,515
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income....................... $ 9,315 $ 8,531 $ 18,166 $ 15,902 $ 12,722 $ 9,962 $ 7,904
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets..................... $1,847,608 $1,736,919 $1,774,032 $1,719,653 $1,544,095 $1,395,234 $1,247,628
Investments and federal funds
sold........................... 432,959 480,076 443,348 488,019 459,349 394,050 301,702
Loans............................ 1,280,383 1,169,238 1,211,622 1,130,177 986,384 904,788 822,443
Allowance for loan losses........ 24,475 23,759 23,869 22,833 19,740 14,661 12,646
Total deposits................... 1,486,332 1,274,339 1,364,075 1,293,411 1,180,845 1,130,850 1,017,571
Short-term borrowings............ 146,373 251,261 202,033 243,997 209,227 152,259 124,511
Long-term borrowings............. 70,836 60,753 61,003 47,864 37,690 5,490 623
Stockholders' equity............. 129,080 127,632 132,741 118,997 101,763 94,979 93,440
EARNINGS PERFORMANCE DATA:(1)
Return on average total assets... 1.05% 1.00% 1.05% 0.98% 0.87% 0.74% 0.64%
Return on average equity......... 14.18 13.88 14.29 14.50 13.00 10.52 8.69
Net interest margin
(tax-equivalent)............... 4.39 4.43 4.38 4.88 5.11 4.83 4.71
Ratio of earnings to fixed
charges:
Including interest on
deposits..................... 1.42x 1.38x 1.40x 1.50x 1.49x 1.32x 1.20x
Excluding interest on
deposits..................... 3.05 2.30 2.42 2.84 3.04 2.73 2.09
BALANCE SHEET AND OTHER KEY RATIOS:
Nonperforming assets to total
assets......................... 0.98% 0.86% 1.08% 1.03% 1.14% 1.72% 2.68%
Nonperforming assets to total
loans plus repossessed
property....................... 1.41 1.28 1.57 1.56 1.78 2.64 4.01
Net loan charge-offs to average
loans.......................... 0.23 0.25 0.26 0.41 0.57 0.79 0.82
Allowance for loan losses to
loans.......................... 1.91 2.03 1.97 2.02 2.00 1.62 1.54
Allowance for loan losses to
nonperforming loans............ 155.57 177.11 174.76 157.61 156.67 84.61 66.32
Average stockholders' equity to
average total assets........... 7.40 7.38 7.34 6.75 6.73 7.02 7.36
</TABLE>
- ---------------
(1) The Bank was wholly owned by Cole Taylor Financial Group, Inc., therefore
the per share disclosure for earnings and dividends has been omitted.
30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following presents management's discussion and analysis of the
financial condition and results of operations of the Bank on a stand alone basis
for 1995, 1994 and 1993. This discussion covers the historical performance of
the Bank without giving effect to the Split-Off Transactions and should be read
in conjunction with the Bank's historical financial statements and the notes
thereto appearing elsewhere in this Prospectus. This discussion does not include
the results of operations and financial position of the Company, which was only
recently formed for purposes of the Split-Off Transactions.
The Split-Off Transactions are expected to impact the financial condition
and results of operations of the Bank on a stand alone basis. The estimated
impact of the transaction is reflected in the Pro Forma financial statements
included in this Prospectus and discussed in the notes and management's
discussion accompanying those Pro Forma financial statements. As a result of the
Split-Off Transactions, the Bank's financial position and results of operations
will be impacted by: (1) the sale and transfer of approximately $111 million of
automobile receivables, (2) the reinvestment of a portion of the proceeds from
the automobile receivables sale as well as the proceeds from the capital
contribution received from the Company, and (3) the recording and amortization
of the fair value adjustments recorded on the Bank's balance sheet, including
substantial goodwill, as a result of the excess of the cost of the acquisition
of the Bank over the fair value of the Bank's net assets.
OVERVIEW
For the first six months of 1996, net income was $9.3 million, compared
with $8.5 million for the same period last year. Annualized return on average
assets increased to 1.05% from 1.00% in the first half of 1995, while annualized
return on average equity also increased to 14.18% in the first half of 1996 from
13.88% in the first half of 1995.
Total assets grew $73.6 million, or 4.1% to $1.85 billion as of June 30,
1996 compared to December 31, 1995. During the first six months of 1996, loans
grew $68.8 million, up 5.7% from December 31, 1995. Deposits increased $122.3
million during the first six months of 1996, up 9.0% from December 31, 1995.
Stockholder's equity decreased $3.7 million, down 2.8% from December 31, 1995.
The decline in stockholder's equity is due to a $5.1 million increase in the
unrealized holding loss, net of tax, on securities designated available-for-sale
as a result of changes in market interest rates.
The Bank's net income of $18.2 million in 1995 represented a 14.2% increase
over net income of $15.9 million in 1994. Net income in 1994 surpassed 1993's
net income of $12.7 million by 25.0%. Total assets of the Bank were $1.77
billion, $1.72 billion and $1.54 billion at December 31, 1995, 1994, and 1993,
respectively. Loans grew to $1.21 billion in 1995, compared to $1.13 billion in
1994 and $986.4 million in 1993. Total deposits were $1.36 billion, $1.29
billion and $1.18 billion at December 31, 1995, 1994 and 1993, respectively.
Stockholders' equity increased to $132.7 million at December 31, 1995 compared
to $119.0 million and $101.8 million at December 31, 1994 and 1993,
respectively. The significant increase in stockholder's equity during 1994
included $10.0 million of capital contributions as a result of Cole Taylor
Financial Group, Inc.'s successful completion of its initial public offering.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the difference between total interest income earned on
earning assets and total interest expense paid on interest-bearing liabilities,
is the Bank's principal source of earnings. The amount of net interest income is
affected by changes in the volume and mix of earning assets, the level of rates
earned on those assets, the volume and mix of interest-bearing liabilities, and
the level of rates paid on those interest-bearing liabilities.
31
<PAGE> 33
Net interest income (with an adjustment for tax-exempt income) for the
first six months of 1996 was $36.8 million, an increase of 3.4% from the same
period in 1995. Growth in net interest income during the first six months of
1996 over the comparable period last year was due to a 4.4% increase in average
earning assets partially offset by a 5 basis point decline in net interest
margin. Net interest margin, which is determined by dividing taxable-equivalent
net interest income by average interest-earning assets, decreased during the
first half of 1996 to 4.38%, as compared to 4.43% in the first half of 1995. The
net interest margin was affected by a decline in the commercial loan yield of
approximately 40 basis points, partially offset by a shift of assets from the
lower yielding investment securities into the higher yielding loan portfolio.
The 13 basis point increase of the average rate paid on time deposits was mostly
offset by the 45 basis point decline in short-term borrowing rates.
Net interest income for 1995 (with an adjustment for tax-exempt income) was
$71.8 million, a decrease of 3.7% from 1994. Net interest income for 1994 (with
an adjustment for tax-exempt income) was $74.6 million, an increase of 8.1% from
$69.0 million in 1993. The decrease in net interest income during 1995 is
comprised of a 50 basis point decrease in net interest margin partially offset
by an increase of 7.4% in average earning assets. Net interest margin decreased
during 1995 to 4.38% as compared to 4.88% in 1994. During 1995 the cost of
interest bearing liabilities increased by 130 basis points as a result of
increased cost of deposits and short-term and long-term borrowings and a shift
from lower cost interest-bearing demand and savings accounts to higher cost time
deposits and increased use of brokered and out of market certificates of
deposit. The yield on earning assets increased by 53 basis points. Increased
volume and yield on commercial and installment loans was partially offset by an
increase in real estate mortgages in which narrower margins are earned. In 1994,
net interest income increased as a result of a 13.0% increase in average earning
assets partially offset by a 23 basis point decline in the net interest margin.
Net interest margin decreased during 1994 to 4.88% as compared to 5.11% in 1993.
The cost of interest-bearing liabilities increased by 37 basis points while the
yield on earning assets increased by 7 basis points. The Bank's net interest
margin decrease during 1994 reflects the increased cost of interest-bearing
demand deposits, time deposits and short-term borrowings, an increase in
investment securities and real estate mortgages in which narrower margins are
earned, partially offset by increased yields on commercial loans as a result of
the increases in the prime lending rate which occurred throughout the year and a
decline in the cost of savings deposits reflective of a decrease in interest
rates which had occurred in the second half of 1993.
32
<PAGE> 34
The following tables set forth certain information relating to the Bank's
average balance sheets and reflects the yield on average earning assets and cost
of average liabilities for the years indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities. Interest income is measured on a tax-equivalent basis using a 35%
rate.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND YIELD/RATES
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE (%) BALANCE INTEREST RATE(%)
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities(1):
Taxable................................ $ 357,845 $ 11,269 6.33% $ 404,360 $ 12,742 6.35%
Non-taxable (tax equivalent)........... 65,422 2,988 9.19 66,612 3,046 9.22
---------- ------- ---------- -------
Total investment securities....... 423,267 14,257 6.77 470,972 15,788 6.76
---------- ------- ---------- -------
Cash Equivalents......................... 18,872 497 5.30 10,174 300 5.95
---------- ------- ---------- -------
Loans(2):
Commercial and industrial.............. 790,770 35,778 9.10 700,121 33,024 9.51
Real estate mortgages.................. 227,700 8,392 7.41 213,812 7,930 7.48
Consumer and other..................... 230,218 9,525 8.32 224,858 9,099 8.16
Fees on loans.......................... 852 692
Less: Allowance for loan losses........ (24,574) (23,198)
---------- ------- ---------- -------
Net loans (tax equivalent)........... 1,224,114 54,547 8.96 1,115,593 50,745 9.17
---------- ------- ---------- -------
Total earning assets.............. 1,666,253 69,301 8.36 1,596,739 66,833 8.44
---------- ------- ---------- -------
NONEARNING ASSETS:
Cash and due from banks................ 67,331 65,647
Premises and equipment, net............ 17,093 14,502
Accrued interest and other assets...... 33,384 32,470
---------- ----------
Total nonearning assets........... 117,808 112,619
---------- ----------
TOTAL ASSETS............................. $1,784,061 69,301 7.81 $1,709,358 66,833 7.88
========== ------- ========== -------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits..... $ 338,143 5,990 3.56 $ 343,571 6,193 3.63
Savings deposits..................... 123,029 1,564 2.56 130,407 1,684 2.60
Time deposits........................ 669,716 18,675 5.61 532,668 14,486 5.48
---------- ------- ---------- -------
Total deposits.................... 1,130,888 26,229 4.66 1,006,646 22,363 4.48
---------- ------- ---------- -------
Short-term borrowings.................... 164,161 4,468 5.47 239,034 7,014 5.92
Long-term borrowings..................... 61,019 1,795 5.92 57,130 1,841 6.50
---------- ------- ---------- -------
Total interest bearing
liabilities..................... 1,356,068 32,492 4.82 1,302,810 31,218 4.83
---------- ------- ---------- -------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits........... 280,982 268,034
Accrued interest and other
liabilities.......................... 14,912 14,909
---------- ----------
Total noninterest-bearing
liabilities..................... 295,894 282,943
---------- ----------
STOCKHOLDERS' EQUITY..................... 132,099 123,605
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................. $1,784,061 $1,709,358
========== ==========
Net interest income (tax equivalent)..... $ 36,809 $ 35,615
======= =======
Net interest spread...................... 3.66% 3.68%
Net interest margin...................... 4.38% 4.43%
</TABLE>
- ---------------
(1) Investment securities average balances are based on amortized cost.
(2) Nonaccrual loans are included in the above stated average balances.
(3) Yields/rates are annualized.
33
<PAGE> 35
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND YIELD/RATES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ ------------------------------ ------------------------------
YIELD/ YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%) BALANCE INTEREST (%) BALANCE INTEREST (%)
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities(1):
Taxable...................... $ 400,868 $ 25,382 6.33% $ 402,447 $ 25,045 6.22% $ 340,177 $ 21,928 6.45%
Non-taxable (tax
equivalent)................ 66,904 6,117 9.14 65,028 5,986 9.21 59,180 5,597 9.46
----------- --------- ----------- --------- ----------- ---------
Total investment
securities............. 467,772 31,499 6.73 467,475 31,031 6.64 399,357 27,525 6.89
----------- --------- ----------- --------- ----------- ---------
Cash Equivalents............... 11,519 672 5.83 6,294 274 4.35 3,488 102 2.92
----------- --------- ----------- --------- ----------- ---------
Loans(2):
Commercial and industrial.... 719,113 68,003 9.46 681,033 57,546 8.45 630,882 49,589 7.86
Real estate mortgages........ 215,601 16,007 7.42 168,855 12,518 7.41 123,422 9,879 8.00
Consumer and other........... 226,799 18,721 8.25 204,040 15,702 7.70 194,035 15,619 8.05
Fees on loans................ 1,294 1,664 1,434
Less: Allowance for loan
losses..................... (23,506) (21,878) (18,711)
----------- --------- ----------- --------- ----------- ---------
Net loans (tax equivalent)... 1,138,007 104,025 9.14 1,032,050 87,430 8.47 929,628 76,521 8.23
----------- --------- ----------- --------- ----------- ---------
Total earning assets..... 1,617,298 136,196 8.42 1,505,819 118,735 7.89 1,332,473 104,148 7.82
----------- --------- ----------- --------- ----------- ---------
NONEARNING ASSETS:
Cash and due from banks...... 65,453 72,697 77,572
Premises and equipment,
net........................ 15,133 11,991 11,856
Accrued interest and
other assets............... 33,391 35,319 33,100
----------- ----------- -----------
Total nonearning
assets................. 113,977 120,007 122,528
----------- ----------- -----------
TOTAL ASSETS................... $1,731,275 136,196 7.87 $1,625,826 118,735 7.30 $1,455,001 104,148 7.16
=========== --------- =========== --------- =========== ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand
deposits................. $ 344,466 12,494 3.63 $ 385,028 10,641 2.76 $ 332,948 8,267 2.48
Savings deposits........... 127,987 3,311 2.59 141,848 3,683 2.60 140,614 3,976 2.83
Time deposits.............. 552,956 31,229 5.65 436,947 18,674 4.27 380,021 15,229 4.01
----------- --------- ----------- --------- ----------- ---------
Total deposits........... 1,025,409 47,034 4.59 963,823 32,998 3.42 853,583 27,472 3.22
----------- --------- ----------- --------- ----------- ---------
Short-term borrowings.......... 233,003 13,584 5.83 227,304 9,483 4.17 210,487 6,639 3.15
Long-term borrowings........... 57,176 3,748 6.56 36,364 1,637 4.50 26,382 1,036 3.93
----------- --------- ----------- --------- ----------- ---------
Total interest bearing
liabilities............ 1,315,588 64,366 4.89 1,227,491 44,118 3.59 1,090,452 35,147 3.22
----------- --------- ----------- --------- ----------- ---------
NONINTEREST-BEARING
LIABILITIES:
Noninterest-bearing
deposits................... 273,667 273,065 254,424
Accrued interest and other
liabilities................ 14,903 15,602 12,247
----------- ----------- -----------
Total noninterest-bearing
liabilities.................. 288,570 288,667 266,671
----------- ----------- -----------
STOCKHOLDERS' EQUITY 127,117 109,668 97,878
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY......... $1,731,275 $1,625,826 $1,455,001
=========== =========== ===========
Net interest income (tax
equivalent).................. $ 71,830 $ 74,617 $ 69,001
========= ========= =========
Net interest spread............ 3.72% 2.71% 2.42%
Net interest margin............ 4.38% 4.88% 5.11%
</TABLE>
- ---------------
(1) Investment securities average balances are based on amortized cost.
(2) Nonaccrual loans are included in the above stated average balances.
34
<PAGE> 36
The following table allocates the changes in net interest income to changes
in either average balances or average rates for earning assets and
interest-bearing liabilities. The change in net interest income due to both
volume and rates has been allocated proportionately. Interest income is measured
on a tax-equivalent basis using a 35% rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
----------------------------- --------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994 1994 COMPARED TO 1993
----------------------------- ----------------------------- -----------------------------
CHANGE DUE TO CHANGE DUE TO CHANGE DUE TO
------------------ ------------------ ------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Investment securities:
Taxable............... $(1,464) $ (9) $(1,473) $ (99) $ 436 $ 337 $ 3,897 $ (780) $ 3,117
Tax-exempt............ (55) (3) (58) 172 (41) 131 541 (152) 389
Cash equivalents........ 232 (35) 197 282 116 398 107 65 172
------- ------- ------- ------- -------- -------- -------- ------- --------
Loans................... 4,817 (1,015) (3,802) 9,324 7,271 16,595 8,711 2,198 10,909
------- ------- ------- ------- -------- -------- -------- ------- --------
Total interest earned..... 3,530 (1,062) 2,468 9,679 7,782 17,461 13,256 1,331 14,587
------- ------- ------- ------- -------- -------- -------- ------- --------
INTEREST PAID ON:
Interest-bearing demand
deposits.............. (97) (106) (203) (1,209) 3,062 1,853 1,378 996 2,374
Savings deposits........ (94) (26) (120) (359) (13) (372) 35 (328) (293)
Time deposits........... 3,813 376 4,189 5,679 6,876 12,555 2,386 1,059 3,445
Short-term borrowings... (2,068) (478) (2,546) 243 3,858 4,101 564 2,280 2,844
Long-term borrowings.... 121 (167) (46) 1,175 936 2,111 433 168 601
------- ------- ------- ------- -------- -------- -------- ------- --------
Total interest paid....... 1,675 (401) 1,274 5,529 14,719 20,248 4,796 4,175 8,971
------- ------- ------- ------- -------- -------- -------- ------- --------
Net interest income....... $ 1,855 $ (661) $ 1,194 $ 4,150 $(6,937) $(2,787) $ 8,460 $(2,844) $ 5,616
======= ======= ======= ======= ======== ======== ======== ======= ========
</TABLE>
PROVISION FOR LOAN LOSSES
Management determines a provision for loan losses which it considers
sufficient to maintain an adequate level of allowance for loan losses. In
evaluating the adequacy of the allowance for loan losses, consideration is given
to historical charge-off experience, growth of the loan portfolio, changes in
the composition of the loan portfolio, general economic conditions, information
about specific borrower situations including their financial position and
collateral values, and other factors and estimates which are subject to change
over time. Estimating the risk of loss and amount of loss on any loan is
subjective. Ultimate losses may vary from current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, the adjustments are
reported in income through the provision for loan losses in the appropriate
period. The provision for loan losses for the first six months of 1996 was $2.1
million compared to $2.3 million for the first six months of 1995. The provision
for loan losses was $4.1 million in 1995, a decrease of $3.3 million, or 45.0%,
below 1994's provision for loan losses of $7.4 million. The provision for loan
losses for 1994 decreased $3.1 million or 29.9%, compared to $10.5 million for
1993. Net charge-offs, through the allowance for loan losses were $1.4 million
for both of the six month periods ended June 30, 1996 and 1995. Net charge-offs,
through the allowance for loan losses, during 1995, 1994 and 1993 were $3.0
million, $4.3 million and $5.4 million respectively. See "Financial
Condition--Allowance for Loan Losses."
35
<PAGE> 37
NONINTEREST INCOME
The following table shows the Bank's noninterest income for the periods
indicated:
NONINTEREST INCOME
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS FOR THE YEARS ENDED DECEMBER
ENDED JUNE 30, 31,
----------------- -----------------------------
1996 1995 1995 1994 1993
------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges................... $4,269 $3,458 $ 7,452 $ 7,199 $ 6,947
Trust fees........................ 1,774 1,644 3,539 3,095 2,944
Financial services income......... 89 180 307 560 882
Mortgage banking income........... 896 910 1,688 694 325
Other noninterest income.......... 636 654 1,241 1,331 1,324
Nonrecurring items................ -- -- -- -- 2,438
Net investment securities gains... -- -- -- 8 565
------ ------ ------- ------- -------
Total noninterest income........ $7,664 $6,846 $14,227 $12,887 $15,425
====== ====== ======= ======= =======
</TABLE>
Total noninterest income increased $818,000, or 11.9% to $7.7 million, for
the first six months of 1996, as compared to the first six months of 1995. Total
noninterest income for the full year 1995 was $14.2 million, an increase of $1.3
million, or 10.4%, over 1994's noninterest income of $12.9 million. Total
noninterest income for 1994 decreased $2.5 million, or 16.5%, compared to $15.4
million for 1993. Total noninterest income, excluding the impact of net
investment securities gains and nonrecurring items, increased $1.3 million, or
10.5%, from 1994 to 1995, and $457,000, or 3.7%, from 1993 to 1994.
Service charges totaled $4.3 million for the first half of 1996, an
$811,000, or 23.5% increase over the first six months of 1995 service charges of
$3.5 million. The increase is the result of increases in the business deposit
account and credit card service charges. Service charges for the full year 1995,
increased $253,000, or 3.5%, to $7.5 million from 1994 and $252,000, or 3.6%, to
$7.2 million in 1994 from 1993. The 1995 increase relates primarily to increases
in retail and merchant credit card service charges. The 1994 increase is the
result of increases in overdraft charges, partially offset by the reduction of
transaction oriented deposit account services charges on business accounts.
Trust fees increased $130,000, or 7.9%, to $1.8 million during the first
six months of 1996, from $1.6 million during the first six months of 1995. This
increase is related to increases in the personal and employee benefit trusts
business. Trust fees grew to $3.5 million in 1995, an increase of $444,000, or
14.3%, over 1994's trust fees of $3.1 million. The 1995 increase is attributable
to increased employee benefit, land and exchange trust revenues. In February
1995, the Bank completed an acquisition of approximately 1,000 land trust
accounts from a financial institution located in a suburb of Chicago. The 1994
increase is generally the result of increased land and exchange trust revenues.
Total fees received from financial services (i.e., the sale of certain
insurance and financial services products through third party vendors) decreased
$91,000 to $89,000 for the first half of 1996, from $180,000 for the first half
of 1995. This decrease is primarily attributable to a revision of the Bank's
agreement with the third party vendor in mid-1995 of retail branch sales which
reduced commission income earned on retail sales. This also accounts for the
1995 decrease of $253,000, or 45.2%. In 1994, total fees decreased 36.5% to
$560,000 in 1994 from $882,000 in 1993. The 1994 decrease is a result of
personnel losses.
Mortgage banking income is generally comprised of gains and losses on loans
originated for sale, which includes lower of cost or market adjustments on such
loans and commitments and loan servicing income. Servicing of loans sold is
retained or released based on the best economic outcome. Since 1995 the Bank has
retained the servicing rights on approximately 75% of the loans sold into the
secondary market. The Bank has not purchased any mortgage servicing rights.
Mortgage banking income declined $14,000, or 1.5% for the first six months of
1996 as compared to the same period in 1995. The 1996 decline is due to smaller
profit margins
36
<PAGE> 38
on loans sold, partially offset by the $87 million increase in loans sold. In
addition, loan servicing income has also declined during 1996 because of
increased amortization of mortgage servicing rights and declining loan servicing
rates, partially offset by the $52 million increase in the average loan
servicing portfolio. Both 1996 and 1995 periods have gains from bulk sales of
mortgage servicing rights, $451,000 in 1996 and $487,000 in 1995. During the
first half of 1995, the mortgage income was partially offset by a $130,000 loss
on the sale of approximately $30 million in mortgage loans previously held in
the loan portfolio which were not originated for sale. For the full year 1995,
mortgage banking income grew to $1.7 million, an increase of $994,000 over
1994's income of $694,000, which increased $369,000, or 113.5% over 1993's
mortgage banking income of $325,000. The increase in 1995's income reflected the
adoption of SFAS No. 122 "Accounting for Mortgage Servicing Rights" which
resulted in $895,000 of additional income and an increased volume of loans sold
with servicing retained. The 1994 and 1993 reported income amounts are primarily
comprised of loan servicing income. As of June 30, 1996, and December 31, 1995,
1994 and 1993, the Bank's portfolio of mortgage loans serviced for others was
approximately $246 million, $195 million, $166 million and $135 million,
respectively.
Other noninterest income, which principally includes standby letters of
credit, ATM and vault rental fees, remained fairly flat during the six month
periods ended June 30, 1996 and 1995, and decreased $90,000, or 6.8%, to $1.2
million in 1995 from 1994 and was flat during 1994 compared to 1993.
Nonrecurring income in 1993 totaled $2.4 million and is attributable to a
legal settlement related to certain equipment leases purchased in December 1986.
The settlement arose as a result of a lawsuit filed against the seller claiming
breach of contract and fraud.
There were no net investment securities gains recorded during the first six
months of 1996 or in 1995. Net investment securities gains were $8,000 and
$565,000 during 1994 and 1993, respectively. In 1994, the proceeds from
securities sales were $525,000 with a resultant gross gain of $8,000. In 1993,
the proceeds from securities sales were $42 million with resultant gross gains
and losses recorded of $717,000 and $152,000, respectively.
Noninterest Expense
The following table shows the Bank's noninterest expense for the years
indicated:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED DECEMBER
ENDED JUNE 30, 31,
------------------ -----------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits................ $14,781 $14,073 $28,973 $28,691 $28,069
Occupancy of premises, net.................... 2,349 2,421 4,880 4,885 5,114
Furniture and equipment....................... 1,519 1,321 2,651 2,385 2,458
Computer processing........................... 999 788 1,676 1,444 1,403
Legal fees.................................... 744 742 1,655 1,106 1,116
Advertising and public relations.............. 917 783 1,582 2,298 2,183
FDIC deposit insurance........................ 2 1,408 1,451 2,646 2,400
Other real estate and repossessed asset
expense..................................... 675 6 1,169 999 1,292
Other noninterest expense..................... 5,239 5,238 9,512 10,794 9,891
------- ------- ------- ------- -------
Total noninterest expense................ $27,225 $26,780 $53,549 $55,248 $53,926
======= ======= ======= ======= =======
Efficiency ratio(1)........................... 62.94% 64.99% 64.38% 64.98% 68.17%
</TABLE>
- ---------------
(1) Noninterest expense divided by an amount equal to net interest income plus
noninterest income, less security gains and significant nonrecurring items.
Total noninterest expense for the first six months of 1996, increased
$445,000, or 1.7% over the same 1995 period. For the full year 1995, noninterest
expense decreased $1.7 million, or 3.1% as compared to 1994.
37
<PAGE> 39
The decrease in 1995 is primarily attributable to CTFG assuming approximately
$2.8 million in salary and overhead expenses that had been paid by the Bank in
1994. For 1994, noninterest expense increased $1.3 million, or 2.5%, over the
1993 levels.
Salaries and employee benefits represent the largest category of
noninterest expense, accounting for 54.3% of the total expenses during the first
six months of 1996, and 52.5% for the same period in 1995. For the first six
months of 1996, salaries and benefits increased $708,000, or 5% over the same
1995 period. The 1996 increase includes $461,000 increase in expenses relating
to the Bank's incentive, employee stock ownership, and profit sharing plans. For
the full year 1995, salaries and benefits totaled 54.1% of the total expenses
versus 51.9% in 1994 and 52.1% in 1993. Salaries and employee benefits increased
$282,000, or 1.0%, to $29.0 million in 1995 from $28.7 million in 1994. In 1995,
certain Bank employees were transferred to CTFG. Giving effect to the transfer
of employees to CTFG, 1995 salaries and benefits increased $1.2 million or 4.4%
over 1994. During 1994, salaries and employee benefits increased $622,000, or
2.2%. Salary and employee benefits expense includes contributions to the Bank's
management incentive, employee stock ownership, and profit sharing plans of $2.2
million in 1995 and $2.9 million in both 1994 and 1993, respectively. The Bank's
group health insurance costs decreased in 1995 and 1994 to $1.7 million and $2.0
million, respectively, compared with $2.5 million in 1993. In 1995, 1994 and
1993, the average number of full-time equivalent employees at the Bank was 676,
686 and 679, respectively.
Occupancy expenses for the first six months of 1996, decreased $72,000 from
the same 1995 period because of reduced real estate tax and maintenance
expenses, partially offset by additional expenses relating to the Bank's new
Broadview, IL branch. Occupancy expenses remained relatively flat during 1995.
Occupancy expense decreases during 1994 relate to real estate tax and repairs
and maintenance expenses.
Furniture and equipment expenses increased $198,000 for the first six
months of 1996 over the same 1995 period due to additional expenses relating to
technology enhancement and the Bank's new Broadview, IL branch. For the full
year 1995, furniture and equipment expenses increased $266,000, or 11.2%, after
remaining relatively flat during 1994. The 1995 increase relates to increased
depreciation charges.
Computer processing expenses for the first six months of 1996 increased
$211,000 over the same 1995 period. This 1996 increase is due to increased
charges from the Bank's data processor and volume increases on credit card
processing charges. Computer processing expenses increased $232,000, or 16.1%,
in 1995 after remaining relatively flat during 1994. The increase is
attributable to phone line charges associated with the Bank's wide area computer
network, credit card processing charges related to the credit card program
introduced in 1995, and enhancements in certain data processing systems made in
1995.
Legal fees for the first six months of 1996 were flat when compared to the
same 1995 period. Legal fees for the full year 1995, increased $549,000, or
49.6%, after decreasing $10,000 in 1994. The increase in 1995 is generally
attributable to increased litigation costs associated with various legal actions
concluded in 1995.
Advertising and public relations expenses for the first six months of 1996
increased $134,000 over the same 1995 period because of an increased emphasis on
direct marketing. Advertising and public relations expense decreased $716,000,
or 31.2%, in 1995 after increasing $115,000 in 1994. The decrease in 1995 is
primarily attributable to reduced television and radio advertisements compared
to the previous two years when the Bank was attempting to raise customer
awareness levels.
For the first six months of 1996 compared to the first six months of 1995,
FDIC deposit insurance decreased $1.4 million. For 1995 compared to 1994, FDIC
deposit insurance decreased $1.2 million. The decreases were a result of the
reductions in the premium rate assessed. FDIC deposit insurance was up $246,000,
or 10.3%, during 1994 as a result of the increased level of deposits. For all of
the periods presented, the Bank was categorized as "well-capitalized" and,
therefore, was being assessed at the lowest premium rate.
Other real estate and repossessed asset expense for the first six months of
1996 increased $669,000 over the same 1995 period, primarily due to costs
associated with the operation and disposition of a repossessed business
property. Provision for losses on other real estate included in these amounts
were $39,000 and $88,000 for the six month periods ending June 30, 1996 and
1995, respectively. Other real estate and repossessed asset expense was $1.2
million, $999,000 and $1.3 million in 1995, 1994 and 1993, respectively.
38
<PAGE> 40
Provision for losses on other real estate included in these amounts were
$243,000, $587,000 and $266,000 during the years ended December 31, 1995, 1994
and 1993, respectively. The principal balance of other real estate and
repossessed assets outstanding as of December 31, 1995, 1994 and 1993 was $5.4
million, $3.2 million and $5.1 million, respectively. See "Financial
Condition--Nonperforming Loans and Assets."
Other noninterest expense (which principally includes certain professional
fees, consulting, outside services and other operating expenses such as
telephone, postage, stationary and printing, etc.) was flat the first six months
of 1996 compared to the same 1995 period. For the full year 1995, these expenses
decreased $1.3 million, or 11.9%, from 1994. The decrease in 1995 is
attributable to CTFG assuming approximately $1.6 million in certain overhead
expenses that had been paid by the Bank in 1994. During 1994, other noninterest
expense increased $1.1 million, or 11.6%, from $9.7 million in 1993.
INCOME TAXES
The effective income tax rate for the first six months of 1996 was 33.4%,
as compared to 29.5% for the first six months of 1995. The income tax provision
for the full years of 1995, 1994 and 1993 was $7.8 million, $6.5 million and
$4.9 million, respectively. As a percentage of pretax income, income tax expense
for 1995 was 30.0%, as compared to 29.1% in 1994, and 28.0% in 1993.
The Bank filed a consolidated federal income tax return with CTFG for each
period presented. The Internal Revenue Service (the IRS) is currently conducting
a routine audit of the consolidated 1993 federal income tax return. While the
IRS audit findings are not yet known, management does not expect the results to
have a material impact on the Bank's financial position.
FINANCIAL CONDITION
LOAN PORTFOLIO
The Banks primary source of income is interest on loans. The following
table presents the composition of the Bank's loan portfolio at the end of the
periods indicated:
LOAN PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- ------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial... $ 661,039 $ 638,497 $ 611,670 $580,587 $556,578 $535,807
Real estate--residential
construction.............. 159,035 121,547 94,223 71,030 55,031 44,965
Real estate--mortgage....... 180,929 207,377 202,455 135,322 106,105 84,044
Mortgage loans
held-for-sale............. 41,856 15,748 1,554 -- -- --
Consumer.................... 238,778 231,717 224,927 202,102 190,588 163,020
Other loans................. 3,017 2,061 1,136 1,559 1,570 1,015
---------- ---------- ---------- -------- -------- --------
Gross loans.......... 1,284,654 1,216,947 1,135,965 990,600 909,872 828,851
Less: Unearned discount..... (4,271) (5,325) (5,788) (4,216) (5,084) (7,551)
---------- ---------- ---------- -------- -------- --------
Total loans.......... 1,280,383 1,211,622 1,130,177 986,384 904,788 821,300
Less: Allowance for loan
losses.................... (24,475) (23,869) (22,833) (19,740) (14,661) (12,646)
---------- ---------- ---------- -------- -------- --------
Loans, net........... $ 1,255,908 $1,187,753 $1,107,344 $966,644 $890,127 $808,654
========== ========== ========== ======== ======== ========
</TABLE>
The loan portfolio has grown consistently each of the past five years. This
is consistent with the Bank's asset/liability strategy of increasing loans
outstanding to increase net interest income. At June 30, 1996, gross loans
increased $67.7 million, or 5.6%, over the previous year end. Gross loans
increased $81.0 million, or 7.1% at December 31, 1995, as compared to December
31, 1994. In 1994, gross loans increased $145.4 million, or 14.7%, as compared
to December 31, 1993.
39
<PAGE> 41
Commercial and industrial loans, the largest component of the Company's
loan portfolio, increased to $661.0 million at June 30, 1996, an increase of
$22.5 million, or 3.5% from December 31, 1995. Commercial and industrial loans
represented 51.4% of the loan portfolio at June 30, 1996 and 52.5%, 53.8% and
58.6% at December 31, 1995, 1994 and 1993, respectively.
Real estate--residential construction loans increased $37.5 million, or
30.8%, to $159.0 million at June 30, 1996 as compared to December 31, 1995. Real
estate--residential construction loans represented 12.4% of the loan portfolio
at June 30, 1996 and 10.0%, 8.3% and 7.2% at December 31, 1995, 1994 and 1993,
respectively.
Real estate--mortgage loans decreased $26.4 million, or 12.8%, to $180.9
million at June 30, 1996, as compared to December 31, 1995. This decline in
mortgage loans is due to normal loan amortization and prepayments and
management's asset/liability strategy to limit the growth of long-term maturity
mortgage loans. During 1993 the Bank retained all of the mortgages it
originated. The conforming originations were securitized and transferred to the
Bank's investment securities portfolio to be held to maturity. Securitization
provided the Bank with additional liquidity and risk-based capital adequacy and
therefore was a more desirable means for meeting the Bank's capacity for
long-term investments. By mid-1994, the Bank had reached its asset/liability
strategy limit for long-term fixed rate lending and began selling all conforming
loan originations with maturities over 5 years. The Bank continued to hold in
its portfolio adjustable rate mortgages and 3 to 5 year balloon loans. Beginning
in 1995, and throughout 1996, the Bank began selling all conforming mortgages
into the secondary market. Real estate--mortgage loans represented 14.1% of
gross loans as of June 30, 1996 and 17.0%, 17.8% and 13.7% at December 31, 1995,
1994 and 1993, respectively.
Mortgage loans held-for-sale increased $26.1 million, or 165.8%, to $41.8
million as of June 30, 1996, as compared to December 31, 1995. This significant
increase is due to the Bank's growing emphasis on mortgage banking activities.
Consumer loans increased $7.1 million, or 3.0%, to $238.8 million at June
30, 1996, as compared to December 31, 1995. Consumer loans represented 18.6% of
gross loans as of June 30, 1996 and 19.0%, 19.8% and 20.4% at December 31, 1995,
1994 and 1993, respectively.
The following table sets forth the remaining maturities, net of unearned
discounts for certain consumer loans, at June 30, 1996:
MATURITIES AND RATE SENSITIVITY OF LOANS (1)
<TABLE>
<CAPTION>
OVER 1 YEAR
THROUGH 5 YEARS OVER 5 YEARS
---------------------- ----------------------
ONE YEAR FLOATING FLOATING
OR LESS FIXED RATE RATE FIXED RATE RATE TOTAL
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial....... $331,946 $175,753 $ 90,255 $ 51,162 $ 11,923 $ 661,039
Real estate--residential
construction.................. 58,810 31,387 56,617 12,221 -- 159,035
Real estate--mortgage........... 9,728 63,683 3,226 44,097 60,195 180,929
Mortgage loans held-for-sale.... 41,856 -- -- -- -- 41,856
Consumer........................ 56,263 95,163 19,882 5,437 57,762 234,507
Other loans..................... 3,017 -- -- -- -- 3,017
-------- -------- -------- -------- ------- ----------
Total...................... $501,620 $270,823 $150,098 $107,480 $ 72,118 $1,280,383
======== ======== ======== ======== ======= ==========
</TABLE>
- ---------------
(1) Maturities based upon contractual dates. Demand loans are included in the
one year or less category and totaled $16.3 million as of June 30, 1996.
The ratio of average loans outstanding to total average interest-bearing
liabilities was 92.1% as of June 30, 1996 and 88.3%, 85.9%, 87.0%, 87.5% and
84.5% at December 31, 1995, 1994, 1993, 1992 and 1991, respectively.
40
<PAGE> 42
NONPERFORMING LOANS AND ASSETS
Management reviews the loan portfolio for problem loans through a loan
review function and various credit committees. During the ordinary course of
business, management becomes aware of borrowers that may not be able to meet the
contractual requirements of loan agreements. Such loans are placed under close
supervision with consideration given to placing the loan on a nonaccrual status,
the need for an additional allowance for loan loss, and (if appropriate) a
partial or full charge-off. Those loans on which management does not expect to
collect interest in the normal course of business are placed on a nonaccrual
status. After a loan is placed on nonaccrual status, any current year interest
previously accrued but not yet collected is reversed against current income.
Interest is included in income subsequent to the date the loan is placed on
nonaccrual status only as interest is received and so long as management is
satisfied that there is no impairment of collateral values. The loan is returned
to accrual status only when the borrower has demonstrated the ability to make
future payments of principal and interest as scheduled.
The following table sets forth the amounts of nonperforming loans and other
assets at the ends of the periods indicated:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans contractually past due 90 days
or more but still accruing.......... $ 3,794 $ 3,737 $ 4,012 $ 2,151 $ 5,584 $ 8,543
Nonaccrual loans...................... 11,938 9,921 10,475 10,449 11,744 10,524
------- ------- ------- ------- ------- -------
Total nonperforming loans........ 15,732 13,658 14,487 12,600 17,328 19,067
Other real estate..................... 2,103 2,928 2,843 4,628 5,373 13,588
Other repossessed assets.............. 284 2,488 356 456 1,351 853
------- ------- ------- ------- ------- -------
Total nonperforming assets....... $ 18,119 $19,074 $17,686 $17,684 $24,052 $33,508
======= ======= ======= ======= ======= =======
Nonperforming loans to total loans.... 1.23% 1.13% 1.28% 1.28% 1.92% 2.32%
Nonperforming assets to total loans
plus repossessed property........... 1.41 1.57 1.56 1.78 2.64 4.01
Nonperforming assets to total
assets.............................. 0.98.... 1.08 1.03 1.14 1.72 2.68
</TABLE>
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses has been established to provide for those
loans which may not be repaid in their entirety. Loan losses are primarily
created from the loan portfolio, but may also be generated from other sources,
such as commitments to extend credit, guarantees, and standby letters of credit.
The allowance for loan losses is increased by provisions charged to expense and
decreased by charge-offs, net of recoveries. Although a loan is charged-off by
management when deemed uncollectible, collection efforts continue and future
recoveries may occur.
The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
including their financial position, collateral values, and other factors and
estimates which are subject to change over time. Estimating the risk of loss and
amount of loss on any loan is necessarily subjective and ultimate losses may
vary from current estimates. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in income through the provision
for loan losses in the periods in which they become known. The adequacy of the
allowance for loan losses is monitored by the internal loan review staff and
reported to management and the Board of Directors. Although management believes
that the allowance for loan losses is adequate to absorb any losses on existing
loans that may become uncollectible, there can be no assurance that the
allowance will prove sufficient to cover actual loan losses in the future. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the adequacy of the Bank's allowance for loan
losses. Such agencies may require the Bank
41
<PAGE> 43
to make additional provisions to the allowance based upon their judgments about
information available to them at the time of their examinations. See "Results of
Operations--Provision for Loan Losses".
The following table summarizes, for the periods indicated, activity in the
allowance for loan losses, including amounts of loans charged-off, amounts of
recoveries, additions to the allowance charged to operating expense, the ratio
of net charge-offs to average total loans, the ratio of the allowance to total
loans at end of period, and the ratio of the allowance to nonperforming loans:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average total loans.......... $1,248,688 $1,161,513 $1,053,928 $948,339 $876,957 $779,442
========== ========== ========== ======== ======== ========
Total loans at end of
period..................... $1,280,383 $1,211,622 $1,130,177 $986,384 $904,788 $821,300
========== ========== ========== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES:
Allowance at beginning of
period..................... $ 23,869 $ 22,833 $ 19,740 $ 14,661 $ 12,646 $ 10,256
---------- ---------- ---------- -------- -------- --------
Charge-offs:
Commercial and
industrial.............. (819) (3,728) (4,280) (6,968) (7,477) (6,066)
Real estate--residential
construction............ -- -- -- -- -- --
Real estate--mortgage...... (142) (242) (290) (420) (55) (2)
Consumer and other......... (853) (931) (588) (583) (523) (794)
---------- ---------- ---------- -------- -------- --------
Total charge-offs....... (1,814) (4,901) (5,158) (7,971) (8,055) (6,862)
---------- ---------- ---------- -------- -------- --------
Recoveries:
Commercial and
industrial.............. 203 1,581 666 2,344 969 364
Real estate--residential
construction............ -- -- -- -- -- --
Real estate--mortgage...... 9 40 -- -- -- --
Consumer and other......... 156 260 211 185 179 72
---------- ---------- ---------- -------- -------- --------
Total recoveries........ 368 1,881 877 2,529 1,148 436
---------- ---------- ---------- -------- -------- --------
Net charge-offs.............. (1,446) (3,020) (4,281) (5,442) (6,907) (6,426)
---------- ---------- ---------- -------- -------- --------
Provision for loan losses.... 2,052 4,056 7,374 10,521 8,922 8,816
---------- ---------- ---------- -------- -------- --------
Allowance at end of period... $ 24,475 $ 23,869 $ 22,833 $ 19,740 $ 14,661 $ 12,646
========== ========== ========== ======== ======== ========
Net charge-offs to average
total loans(1)............. 0.23% 0.26% 0.41% 0.57% 0.79% 0.82%
Allowance to total loans at
end of period.............. 1.91 1.97 2.02 2.00 1.62 1.54
Allowance to nonperforming
loans...................... 155.57 174.76 157.61 156.67 84.61 66.32
</TABLE>
- ---------------
(1) June 30, 1996 ratio is annualized.
The Bank regards the allowance for loan losses as a general reserve which
is available to absorb losses from all loans. However, for purposes of complying
with disclosure requirements of the Securities and Exchange Commission, the
table below presents an allocation of the allowance for loan losses among the
various loan categories and sets forth the percentage of loans in each category
to gross loans. The allocation of the allowance for loan losses as shown in the
table should neither be interpreted as an indication of future charge-offs, nor
as an indication that charge-offs in future periods will necessarily occur in
these amounts or in the indicated proportions.
42
<PAGE> 44
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------- ---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
LOAN LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALLOCATED:
Commercial and
industrial.... $11,568 51.5% $11,163 52.5% $10,693 53.8% $2,658 58.6% $3,169 61.2% $7,070 64.6%
Real estate--
residential
construction... 2,783 12.4 2,127 10.0 1,648 8.3 -- 7.2 -- 6.0 -- 5.4
Real estate--
mortgage...... 2,228 17.3 2,231 18.3 2,040 18.0 37 13.7 12 11.7 92 10.2
Consumer and
other......... 3,064 18.8 2,972 19.2 2,891 19.9 614 20.5 715 21.1 265 19.8
UNALLOCATED..... 4,832 -- 5,376 -- 5,561 -- 16,431 -- 10,765 -- 5,219 --
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total allowance
for loan
losses........ $24,475 100.0% $23,869 100.0% $22,833 100.0% $19,740 100.0% $14,661 100.0% $12,646 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
During 1994, the Bank revised the manner in which the allowance for loan
losses is allocated to specific loan types for the purpose of complying with
disclosure requirements of the Securities and Exchange Commission. Prior periods
have not been restated.
INVESTMENT SECURITIES
The purpose of the investment portfolio is to primarily provide a source of
earnings and secondarily for liquidity management purposes. In managing the
portfolio and the composition of the entire balance sheet, the Bank seeks a
balance among earnings, credit and liquidity considerations, with a goal of
maximizing the longer-term overall profitability.
On November 15, 1995, the Financial Accounting Standards Board issued its
Special Report on the implementation of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Guidance in the Special Report
allows entities to reclassify securities, including held-to-maturity debt
securities, without calling into question the intent of the entity to hold debt
securities to maturity in the future. The Special Report indicates that the
one-time reclassification permitted should occur as of a single date between
November 15, 1995 and December 31, 1995. In compliance with the provisions
contained in the Special Report, the Bank reclassified approximately $299.8
million of held-to-maturity securities, at amortized cost, into the
available-for-sale classification. Unrealized gains of approximately $400,000
were recorded in stockholder's equity as a result of this reclassification.
43
<PAGE> 45
The following tables present the composition and maturities of the
investment portfolio by major category as of the periods indicated:
INVESTMENT PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
---------------------- ---------------------- ----------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1996:
U.S. Treasury securities......... $ 107,702 $ 107,432 -- -- $ 107,702 $ 107,432
U.S. government agencies
securities..................... 38,877 38,727 -- -- 38,877 38,727
U.S. government agency mortgage-
backed securities.............. 179,083 170,901 -- -- 179,083 170,901
States and political
subdivisions................... -- -- 64,878 66,888 64,878 66,888
Collateralized mortgage
obligations.................... 305 305 -- -- 305 305
Commercial paper................. 24,904 24,904 -- -- 24,904 24,904
Other securities................. -- -- 10,412 10,417 10,412 10,417
-------- -------- ------- ------- -------- --------
Total..................... $ 350,871 $ 342,269 $ 75,290 $ 77,305 $ 426,161 $ 419,574
======== ======== ======= ======= ======== ========
DECEMBER 31, 1995:
U.S. Treasury securities......... $ 110,897 $ 111,688 -- -- $ 110,897 $ 111,688
U.S. government agencies
securities..................... 55,131 55,738 -- -- 55,131 55,738
U.S. government agency mortgage-
backed securities.............. 195,463 193,953 -- -- 195,463 193,953
States and political
subdivisions................... -- -- 67,110 70,733 67,110 70,733
Collateralized mortgage
obligations.................... 364 356 -- -- 364 356
Other securities................. -- -- 9,503 9,506 9,503 9,506
-------- -------- ------- ------- -------- --------
Total..................... $ 361,855 $ 361,735 $ 76,613 $ 80,239 $ 438,468 $ 441,974
======== ======== ======= ======= ======== ========
DECEMBER 31, 1994:
U.S. Treasury securities......... $ 11,051 $ 11,087 $ 110,207 $ 106,265 $ 121,258 $ 117,352
U.S. government agencies
securities..................... -- -- 51,240 48,165 51,240 48,165
U.S. government agency mortgage-
backed securities.............. 51,854 46,277 170,266 157,761 222,120 204,038
States and political
subdivisions................... -- -- 66,639 66,643 66,639 66,643
Collateralized mortgage
obligations.................... 1,073 1,067 -- -- 1,073 1,067
Other securities................. -- -- 7,636 7,640 7,636 7,640
-------- -------- ------- ------- -------- --------
Total....................... $ 63,978 $ 58,431 $ 405,988 $ 386,474 $ 469,966 $ 444,905
======== ======== ======= ======= ======== ========
DECEMBER 31, 1993:
U.S. Treasury securities......... $ 30,716 $ 31,823 $ 70,981 $ 74,319 $ 101,697 $ 106,142
U.S. government agencies
securities..................... -- -- 32,497 32,938 32,497 32,938
U.S. government agency mortgage-
backed securities.............. 60,067 59,719 158,231 160,189 218,298 219,908
States and political
subdivisions................... -- -- 64,324 69,013 64,324 69,013
Collateralized mortgage
obligations.................... 3,327 3,279 -- -- 3,327 3,279
Other securities................. -- -- 6,945 6,948 6,945 6,948
-------- -------- ------- ------- -------- --------
Total....................... $ 94,110 $ 94,821 $ 332,978 $ 343,407 $ 427,088 $ 438,228
======== ======== ======= ======= ======== ========
</TABLE>
44
<PAGE> 46
INVESTMENT PORTFOLIO--MATURITY AND YIELDS
(AS OF JUNE 30, 1996)
<TABLE>
<CAPTION>
MATURING
--------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
---------------- ---------------- --------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ----- -------- ----- ------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
SECURITIES(1):
U.S. Treasury securities.... $ 79,373 6.39 % $ 28,059 5.38 % $ -- -- % $ -- -- % $107,432 6.13 %
U.S. government agencies
securities................ 12,979 6.54 25,748 6.52 -- -- -- -- 38,727 6.53
U.S. government agency
mortgage-backed
securities(3)............. 30,252 6.40 75,026 6.37 45,103 6.49 20,520 6.68 170,901 6.44
Collateralized mortgage
obligations(3)............ 240 6.15 65 6.15 -- -- -- -- 305 6.15
Commercial paper............ 24,904 5.40 -- -- -- -- -- -- 24,904 5.40
-------- -------- ------- ------- --------
Total
available-for-sale.... 147,748 128,897 45,103 20,520 342,269
-------- -------- ------- ------- --------
HELD-TO-MATURITY
SECURITIES(2):
States and political
subdivisions(4)........... 3,292 8.46 18,508 9.00 36,710 9.26 6,368 8.75 64,878 9.10
Other securities............ -- -- -- -- 575 8.22 9,837 6.15 10,412 6.26
-------- -------- ------- ------- --------
Total
held-to-maturity...... 3,292 18,508 37,285 16,206 75,290
-------- -------- ------- ------- --------
Total securities... $151,040 $147,405 $82,388 $36,726 $417,559
======== ======== ======= ======= ========
</TABLE>
- ---------------
(1) Based on estimated fair value.
(2) Based on amortized cost.
(3) Maturities of mortgage-backed securities and collateralized mortgage
obligations are based on anticipated lives of the underlying mortgages, not
contractual maturities.
(4) Rates on obligations of states and political subdivisions have been adjusted
to tax equivalent yields using a 35% income tax rate.
Investments in U.S. Treasury securities are generally considered to have
very low credit risk and high liquidity. U.S. government agencies securities
principally consist of Federal Home Loan Bank ("FHLB"), Federal Farm Credit Bank
and Federal National Mortgage Association ("FNMA") notes. These securities are
considered to possess a relatively low credit risk and moderate interest rate
risk. U.S. government agency mortgage-backed securities consist principally of
FNMA and Federal Home Loan Mortgage Corporation ("FHLMC") certificates. These
securities possess a higher risk level than U.S. Treasuries and agencies due, in
part, to certain prepayment risks. The Bank generally only invests in state and
municipal investment securities which are rated investment grade by nationally
recognized rating organizations. Certain municipal issues, which are restricted
to the Bank's local market area, are not rated. The Bank also invests in
commercial paper all of which is short term and investment grade. Other
securities are primarily composed of equity securities. These include Federal
Reserve Bank stock and FHLB stock that are required to be maintained for various
purposes. At June 30, 1996, the Bank held no securities of any single issuer,
other than the U.S. Treasury and U.S. government agencies securities, including
FNMA, that exceeded 10% of stockholder's equity. Although the Bank holds
securities issued by municipalities within the state of Illinois which in the
aggregate exceed 10% of stockholder's equity, none of the holdings from
individual municipal issues exceed this threshold.
45
<PAGE> 47
A significant portion of the Bank's investment securities portfolio
(approximately 76% at June 30, 1996) is used as collateral for public funds time
deposits, securities sold under agreement to repurchase and other Bank
borrowings.
DEPOSITS AND BORROWED FUNDS
The Bank's core deposits consist of noninterest- and interest-bearing
demand deposits, savings deposits, certificates of deposit under $100,000,
certain certificates of deposit over $100,000 and public funds. These deposits,
along with other borrowed funds are used by the Bank to support its asset base.
The following tables sets forth the distribution of the Bank's average
deposit account balances and average cost of funds rates on each category of
deposits for the periods indicated:
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------
1996
------------------------------
PERCENT
AVERAGE OF
BALANCE DEPOSITS RATE
---------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Noninterest-bearing demand deposits................................ $ 280,982 19.90% --%
Interest-bearing demand deposits................................... 338,143 23.95 3.56
Savings deposits................................................... 123,029 8.71 2.56
Time deposits:
Customer certificates of deposit................................. 391,329 27.72 5.59
Brokered certificates of deposit................................. 113,023 8.01 5.71
Public funds..................................................... 165,364 11.71 5.58
---------- ------
Total time deposits........................................... 669,716 47.44 5.61
---------- ------
Total deposits.............................................. $1,411,870 100.00%
========== ======
</TABLE>
Average deposits increased $113.7 million or 8.8% to $1.4 billion through
June 30, 1996 from the average of $1.3 billion in 1995. Average public funds
time deposits increased $50.9 million, or 44.4%. This was a result of the Bank
encouraging its municipal customers to move from repurchase agreements to time
deposits, since the reduction in the FDIC insurance premiums made repurchase
agreements less attractive to the Bank. Customer certificates of deposit
increased $43.4 million, or 12.5%. Brokered certificates of deposit increased
$22.5 million to average $113.0 million as the Bank's asset growth continued to
exceed customer deposit growth.
46
<PAGE> 48
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
AVERAGE OF AVERAGE OF AVERAGE OF
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits....... $ 272,732 21.01% -- % $ 272,546 22.05% -- % $ 254,285 22.95% -- %
Interest-bearing demand
deposits.............. 344,466 26.54 3.63 385,028 31.14 2.76 332,948 30.06 2.48
Savings deposits........ 127,987 9.86 2.59 141,848 11.47 2.60 140,614 12.69 2.83
Time deposits:
Certificates of
deposit, under
$100,000............ 288,736 22.24 5.60 198,504 16.06 4.01 223,288 20.15 4.15
Certificates of
deposit, over
$100,000............ 59,210 4.56 5.73 30,024 2.43 4.02 30,632 2.76 3.45
Brokered certificates
of deposit.......... 90,528 6.97 5.30 95,976 7.76 4.81 49,438 4.47 4.65
Public funds.......... 114,482 8.82 5.99 112,443 9.09 4.35 76,663 6.92 3.39
---------- ------ ---------- ------ ---------- ------
Total time
deposits.......... 552,956 42.59 5.65 436,947 35.34 4.27 380,021 34.30 4.01
---------- ------ ---------- ------ ---------- ------
Total deposits...... $1,298,141 100.00% $1,236,369 100.00% $1,107,868 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
Average deposits increased 5.0% in 1995 as compared to an increase of 11.6%
in 1994. During 1995, average noninterest-bearing deposits were flat, average
interest-bearing demand deposits decreased 10.5%, average savings deposits
decreased 9.8% and average time deposits increased 26.5%. In 1994, average
noninterest-bearing demand deposits increased 7.2%, average interest-bearing
demand deposits increased 15.6%, average savings deposits increased .9% and
average time deposits increased 15.0%.
Since 1992, earning asset growth has exceeded core deposit growth, which
has resulted in the use of brokered and out of market certificates of deposit
and other borrowed funds. In 1995, the Bank began offering certificates of
deposit over the National CD Network. The National CD Network is a private
database that collects certificate of deposit rates from participating
institutions across the country and provides such information to its
subscribers. The balance of certificates of deposit obtained through the
National CD Network was $57 million at June 30, 1996. In 1992, the Bank began
issuing brokered certificates of deposit. The balance of brokered certificates
of deposit balances was $128 million at June 30, 1996. The brokered and out of
market certificates of deposit generally have original terms of one to two
years. Under FDIC regulations, only "well-capitalized" institutions may fund
themselves with brokered certificates of deposit without the prior approval of
regulators. The Bank is categorized as "well-capitalized" at June 30, 1996. See
"Risks Arising from the Split-Off Transactions." In addition, municipal
deposits, consisting of public funds time deposits and repurchase agreements
with municipalities have become an important funding source for the Bank. Total
municipal time deposits and repurchase agreements approximated $243 million at
June 30, 1996. Most of these deposits and short-term borrowings are
collateralized by securities which are part of the Bank's investment portfolio.
Time deposits in denominations of $100,000 or more totaled $307.0 million
at June 30, 1996, up $90.8 million, or 34.5% from 1995. The following table sets
forth the amount and maturities of time deposits of $100,000 or more at June 30,
1996:
TIME DEPOSITS $100,000 AND OVER
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
3 months or less......................................................... $ 158,052
Over 3 months through 6 months........................................... 70,508
Over 6 months through 12 months.......................................... 70,342
Over 12 months........................................................... 8,079
--------
Total.................................................................. $ 306,981
========
</TABLE>
47
<PAGE> 49
The Bank also uses short-term borrowings to support its asset base. These
borrowings include federal funds purchased, securities sold under agreements to
repurchase and U.S. Treasury tax and loan note option accounts. At June 30,
1996, short-term borrowings were $146.4 million or 8.5% of total liabilities
compared with $202.0 or 12.3% of total liabilities at December 31, 1995 and
$244.0 million or 15.2% of total liabilities at December 31, 1994. In 1996,
short-term borrowings averaged $164.2 million compared with $233.0 million,
$227.3 million and $210.5 million during 1995, 1994 and 1993 respectively. The
decrease in short-term borrowings was a result of the Bank encouraging its
municipal deposit customers to move from repurchase agreements to time deposits.
The following table reflects categories of short-term borrowings having
average balances during the period greater than 30% of stockholder's equity at
the end of each year. During each reported year, federal funds purchased and
securities sold under repurchase agreements are the only categories meeting this
criteria.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
---------- ------------------------------------
1996 1995 1994 1993
---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FEDERAL FUNDS PURCHASED:
Balance at end of period............................. $ 26,562 $ 43,500 $ 48,450 $ 24,720
Weighted average interest rate at end of period...... 5.37% 5.94% 6.26% 3.24%
Maximum amount outstanding(1)........................ $ 30,185 $ 54,900 $ 53,750 $ 53,175
Average amount outstanding........................... $ 28,339 $ 28,227 $ 36,343 $ 46,942
Weighted average interest rate during period......... 5.31% 5.82% 4.48% 3.12%
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Balance at end of period............................. $109,896 $148,546 $181,624 $154,007
Weighted average interest rate at end of period...... 5.17% 5.43% 5.29% 3.19%
Maximum amount outstanding(1)........................ $144,825 $224,907 $190,142 $166,523
Average amount outstanding........................... $130,440 $196,728 $179,027 $143,057
Weighted average interest rate during period......... 5.41% 5.81% 4.13% 3.22%
</TABLE>
- ---------------
(1) Based on amount outstanding at month end during each year.
The Bank's long-term borrowings consists principally of FHLB advances. The
Bank, as of June 30, 1996 had $70 million of borrowings outstanding from the
Federal Home Loan Bank of Chicago. FHLB advances totaled $60 million and $47.0
million at December 31, 1995 and 1994, respectively. During 1995, $50 million of
new advances were offset by $37 million of maturities. The Bank also had
$836,000 of non-interest bearing notes outstanding as of June 30, 1996 related
to certain community reinvestment activities.
CAPITAL RESOURCES
The Bank actively monitors compliance with bank regulatory capital
requirements, focusing primarily on the risk-based capital guidelines. Under the
risk-based capital method of capital measurement, the ratio computed is
dependent on the amount and composition of assets recorded on the balance sheet,
and the amount and composition of off-balance sheet items, in addition to the
level of capital.
48
<PAGE> 50
The Bank's capital ratios were as follows for the dates indicated:
RISK-BASED CAPITAL RATIOS(1)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
JUNE 30,
1996 1995 1994 1993
------------------- ------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital............. $ 132,067 9.47% $ 130,642 10.19% $ 120,587 10.18% $ 98,826 9.29%
Tier 1 capital "well
capitalized"
requirement.............. 83,706 6.00 76,948 6.00 71,069 6.00 63,823 6.00
---------- ----- ---------- ----- ---------- ----- ---------- -----
Excess..................... $ 48,361 3.47% $ 53,694 4.19% $ 49,518 4.18% $ 35,003 3.29%
========== ===== ========== ===== ========== ===== ========== =====
Total capital.............. $ 149,593 10.72% $ 146,770 11.44% $ 135,492 11.44% $ 112,122 10.54%
Total capital "well
capitalized"
requirement.............. 139,510 10.00 128,246 10.00 118,448 10.00 106,371 10.00
---------- ----- ---------- ----- ---------- ----- ---------- -----
Excess..................... $ 10,083 0.72% $ 18,524 1.44% $ 17,044 1.44% $ 5,751 0.54%
========== ===== ========== ===== ========== ===== ========== =====
Total risk adjusted
assets................... $1,395,104 $1,282,460 $1,184,476 $1,063,714
========== ========== ========== ==========
</TABLE>
- ---------------
(1) Based on fully phased in risk-based capital guidelines of the Federal
Reserve Bank, a bank is required to maintain a Tier 1 capital to
risk-adjusted asset ratio of 6% and total capital to risk-adjusted assets
ratio of 10% to be considered well capitalized.
LEVERAGE RATIO(1)(2)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
JUNE 30,
1996 1995 1994 1993
------------------- ------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital.............. $ 132,067 7.31 % $ 130,642 7.41 % $ 120,587 7.15 % $ 98,826 6.51 %
Minimum requirement......... 108,398 6.00 105,800 6.00 101,135 6.00 91,065 6.00
---------- ----- ---------- ---- - ---------- ---- - ---------- ---- -
Excess...................... $ 23,669 1.31 % $ 24,842 1.41 % $ 19,452 1.15 % $ 7,761 0.51 %
========== ===== ========== ===== ========== ===== ========== =====
Quarterly average tangible
assets.................... $1,806,628 $1,763,327 $1,685,587 $1,517,755
========== ========== ========== ==========
</TABLE>
- ---------------
(1) The leverage ratio is defined as the ratio of Tier 1 capital to quarterly
average tangible assets.
(2) Based on Federal Reserve Bank guidelines, a bank generally is required to
maintain a leverage ratio of 4% plus an additional cushion of at least 100
to 200 basis points.
LIQUIDITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the Bank's
ability to meet withdrawals either on demand or at contractual maturity, to
repay borrowings as they mature and to make new loans and investments as
opportunities arise. The Bank actively manages its liquidity position to
maintain sufficient funds to respond to the needs of depositors and borrowers,
as well as to take advantage of earnings enhancement opportunities. In addition
to the normal influx of liquidity from core deposit growth, together with
repayments and maturities of loans and investments, the Bank utilizes the
brokered and national certificate of deposit markets, sells securities under
agreement to repurchase, and borrows overnight federal funds. The Bank is a
member of the FHLB, which affords the Bank the opportunity to borrow funds (from
overnight to 10 years and beyond) collateralized by the Bank's first mortgage
residential loans and FHLB stock.
The Bank's management uses two primary measures of liquidity to monitor its
position. The first measure is a static analysis of basic surplus, which
represents the relationship between liquid assets and short-term liabilities
which are vulnerable to non-replacement under abnormally stringent conditions.
The second measure is a 90-day cash flow forecast of the relationship between
identified funding sources and uses and the total funds required to support that
asset position. Management has targeted ranges specified for each of the
measures and maintains a liquidity plan with specific action steps to provide
required liquidity under stringent conditions.
49
<PAGE> 51
For the first six months of 1996, cash outflows from operating activities
exceeded operating inflows by $11.7 million, as compared to positive cash
inflows of $11.7 million in the year earlier period. The 1996 outflows reflect
the increase in mortgage banking loans held for sale. In the 1995 period,
interest received net of interest paid was the principal source of operating
cash inflows. Net cash outflows from investing activities were $31.9 million in
the first six months of 1996 as compared to $43.7 million in 1995. The primary
usage of investing cashflow in each of these periods, was net loan growth;
however, in 1996, this outflow was offset by excess maturities over new
purchases of investment securities. Net cash inflows from financing activities
were $68.5 million in the first half of 1996 as compared to $7.9 million in
1995. In 1996, net cash inflows were attributable to deposit inflow of $122.2
million offset by repayments of short-term borrowings. For the comparable 1995
period, the cash inflows were attributable to net increases in the long-term and
short-term borrowings, offset by deposit outflows.
Cash inflows from operating activities exceeded operating outflows by $10.2
million in 1995, $20.9 million in 1994 and $25.8 million in 1993. Interest
received net of interest paid is the principal source of operating cash inflows
in each of the above periods. Management of investing and financing activities,
and market conditions, determine the level and the stability of net interest
cash flows. The decrease in net cash provided by operating activities is a
result of increases in loans originated and held for sale due to the Bank's
increased emphasis on mortgage banking activities.
Net cash outflows from investing activities were $44.9 million in 1995 as
compared to $192.6 million in 1994 and $132.7 million in 1993. In each of the
aforementioned years, the majority of the net cash outflows from investing
activities were the result of loan growth.
Net cash inflows from financing activities were $33.9 million in 1995 as
compared to $162.9 million in 1994 and $132.8 million in 1993. In 1995, net cash
inflows were attributable to deposits of $70.7 million and long-term borrowings
of $50.3 million. During 1994, the major contributors to net cash inflows from
financing activities were deposits of $112.6 million, short-term borrowings of
$34.8 million, long-term borrowings of $25.3 million and proceeds from a capital
contribution of $10.0 million. In 1993, net cash inflows were attributable to
deposits of $50.0 million, short-term borrowings of $57.0 million and long-term
borrowings of $32.3 million.
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability management objectives are to manage, to the
degree prudently possible, its exposure to interest rate risk over both a one
year planning horizon and a longer-term strategic horizon and, at the same time,
provide a stable and steadily increasing flow of net interest income. The Bank's
primary measurement of interest rate risk is earnings at risk, which is
determined through computerized simulation modeling. The modeling estimates
changes in net interest income in response to increases or decreases in market
interest rates. The model uses the rates and maturities of the Bank's existing
interest-earning assets and interest-bearing liabilities and revises each based
on how the market interest rates move and how the specific Bank products would
respond to changes in rates. The structuring of the Bank's balance sheet is
determined by ensuring that the earnings at risk do not exceed predetermined
maximum limits. The Bank's policy requires that earnings at risk, under a 200
basis point increase or decrease in interest rates, does not exceed 10%. At June
30, 1996, the Bank's computer simulation modeling indicated that the Bank was
within policy limits. Given the Bank's current interest rate risk profile,
management's response to increases in interest rates is to extend funding to
lengthen liabilities and to modify product offerings to shorten asset
maturities. For example, in expectation of rising rates the Bank's marketing and
sales force would emphasize floating rate loans, such as home equity lines and
adjustable rate mortgages, and longer term certificates of deposit and demand
deposit accounts. In addition, wholesale funding through FHLB advances or
brokered certificates of deposit would be extended in term. The Bank also uses
static gap analysis to monitor interest rate risk. A static gap matrix is
prepared reflecting the difference between interest-earning assets and
interest-bearing liabilities within specific time periods. The Bank's gap
position is defined as liability sensitive, which means its net interest margin
is impacted negatively during periods of rising interest rates. The negative
impact of the rising rates must then be minimized through growth and
restructuring of the balance sheet.
Interest rate swaps have been entered into by the Bank to reduce then
existing balance sheet interest rate risk. The present notional amount of all of
the interest rate swaps as of June 30, 1996 is $75 million. Under the
50
<PAGE> 52
swap contract designated to hedge certain floating-rate commercial loans, the
Bank pays a variable rate (LIBOR based) in exchange for receiving a fixed rate.
In periods of rising interest rates, the value of the swap contract decreases
and the Bank either receives less or pays more under the terms of the contract.
Conversely, the related loans against which the hedge is designated, would earn
at the now higher rate, thereby substantially offsetting the negative impact of
the swap contract. The effect of the contract is to fix the interest received on
the hedged loans. Under the swap contract designated to hedge certain short-term
borrowings, the Bank pays a fixed rate in exchange for receiving a variable rate
(fed funds). In periods of rising interest rates, the value of the swap contract
increases and the Bank either receives more or pays less under the terms of the
contract. Conversely, the Bank would then pay the higher rate for the short-term
borrowings, substantially offsetting the positive impact of the swap contract.
The effect of the contract is to fix the rate paid on the hedged short-term
borrowings. In each case if economic conditions reduce the value of a specific
swap, that reduction in value is offset by the improved profitability of the
hedged financial instruments.
The financial impact of these swaps was to decrease net interest income by
approximately $290,000 for the six month period ended June 30, 1996. As of June
30, 1996, the estimated fair value of these swaps was approximately $(683,000).
The financial impact of these swaps is dependent upon market interest rates,
which cannot be predicted with any certainty.
The following table sets forth information concerning interest rate
sensitivity of the Bank's consolidated assets and liabilities as of June 30,
1996. Assets and liabilities are classified by the earliest possible repricing
date or maturity, whichever comes first.
INTEREST SENSITIVITY GAP ANALYSIS
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------------------------------
NON-RATE
0-3 4-12 1-5 SENSITIVE AND
MONTHS MONTHS YEARS OVER 5 YEARS TOTAL
--------- --------- -------- -------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash equivalents............................ $ 31,489 $ -- $ -- $ -- $ 31,489
Investment securities(1).................... 51,816 99,288 147,341 119,114 417,559
Total loans(1).............................. 661,445 113,051 436,392 69,495 1,280,383
--------- --------- -------- -------- --------
TOTAL EARNING ASSETS........................ $ 744,750 $ 212,339 $583,733 $188,609 $1,729,431
========= ========= ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest-bearing demand deposits.......... $ 337,131 $ -- $ -- $ -- $ 337,131
Savings deposits.......................... 122,598 -- -- -- 122,598
Time deposits............................. 290,616 326,658 109,070 -- 726,344
--------- --------- -------- -------- --------
Total interest-bearing deposits....... 750,345 326,658 109,070 -- 1,186,073
--------- --------- -------- -------- --------
Short-term borrowings....................... 144,323 2,050 -- -- 146,373
Long-term debt.............................. 10,000 35,160 25,640 36 70,836
--------- --------- -------- -------- --------
Total borrowings...................... 154,323 37,210 25,640 36 217,209
--------- --------- -------- -------- --------
TOTAL INTEREST-BEARING LIABILITIES.......... $ 904,668 $ 363,868 $134,710 $ 36 $1,403,282
========= ========= ======== ======== ========
Interest sensitivity gap.................... $(159,918) $(151,529) $449,023 $188,573 $ 326,149
Derivatives affecting interest rate
sensitivity:
Pay floating interest rate swaps.......... (25,000)
Receive fixed interest rate swaps......... 25,000
Pay fixed interest rate swaps............. (50,000)
Receive floating interest rate swaps...... 50,000
Interest sensitivity gap.................... $(134,918) $(201,529) $474,023 $188,573 $ 326,149
Cumulative gap.............................. (134,918) (336,447) 137,576 326,149 326,149
Interest sensitivity gap to total assets.... (7.30)% (10.91)% 25.66% 10.21% 17.65%
Cumulative sensitivity gap to total
assets.................................... (7.30) (18.21) 7.45 17.65 17.65
</TABLE>
- ---------------
(1) Callable investment securities are generally reported at the earlier of
maturity or call date. Loans are placed in the earliest time frame in which
maturity or repricing may occur, except for mortgage-backed securities and
real estate loan maturities which are based on published industry prepayment
estimates.
51
<PAGE> 53
Those estimates are for loans and mortgage-backed securities with comparable
weighted average interest rates and contractual maturities. Loans are stated
gross of the allowance for loan losses.
The table assumes that all savings deposits reprice in the earliest period
presented; however, the Bank believes a significant portion of these accounts
constitute a core component and are generally not rate sensitive. The Bank
believes that its aggressive lowering of interest rates paid on savings accounts
has significantly reduced the volatility of the balances in these accounts.
The table does not necessarily indicate the future impact of general
interest rate movements on the Bank's net interest income because the repricing
of certain assets and liabilities is discretionary and is subject to competitive
and other pressures. As a result, assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rate levels.
EFFECTS OF INFLATION
A banking organization's assets and liabilities are primarily monetary.
Therefore, a banking organization does not necessarily gain or lose due to the
effects of inflation. Moreover, changes in interest rates, which are a major
determinant of a financial service organization's profitability, do not
necessarily correspond to changes in the prices of goods and services. An
analysis of a banking organization's asset and liability structure provides the
best indication of how a banking organization is positioned to respond to
changing interest rates and maintain profitability.
The financial statements and supplementary financial data have been
prepared, primarily, on an historical basis which is mandated by generally
accepted accounting principles. Fluctuations in the relative value of money due
to inflation or recession generally are not considered.
ADDITIONAL ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
("SFAS No. 121"), is effective for fiscal years beginning after December 31,
1995. SFAS No. 121 requires entities to review assets to be held and used in the
business for impairment and an impairment loss, if any, to be recognized if the
carrying amount of the asset exceeds the fair value of the asset as defined in
the standard. The Bank has determined that SFAS No. 121 will not have a material
impact on its financial condition or results of operations.
Statement of Financial Accounting Standards No. 123, Accounting and
Disclosure of Stock-Based Compensation ("SFAS No. 123"), is effective for fiscal
years beginning after December 15, 1995. SFAS No. 123 encourages, but does not
require, entities to recognize expense for stock-based awards based on their
fair value on the date of grant. Under SFAS No. 123, entities may continue
following the existing accounting rules (the intrinsic value method which often
results in no compensation expense), provided that pro forma disclosures are
made of what net income and earnings per share would have been had the new fair
value method been used. To do so, the fair value of options and similar awards
will have to be calculated using complex valuation techniques. Additionally,
this new standard requires entities to make significantly more disclosures
regarding employee stock options than are now required. The Bank has determined
that SFAS No. 123 will not have a material impact on its financial condition or
results of operations.
Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS 125") was issued in June 1996, and is effective for fiscal years
beginning after December 31, 1996. SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on a consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Under the financial-components
approach, after a transfer of financial assets, an entity recognizes all
financial and servicing assets it controls and liabilities it has incurred and
derecognizes financial assets it no longer controls and liabilities that have
been extinguished. If a transfer does not meet the criteria for a sale, then the
transfer is accounted for as a secured borrowing with pledge of
52
<PAGE> 54
collateral. The Bank has determined that SFAS No. 125 will not have an impact on
its financial condition or results of operations.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited financial data regarding the
Bank's operations for the first two quarters of 1996 and each of the four
quarters of 1995 and 1994. This information, in the opinion of management,
includes all adjustments necessary to present fairly the Bank's results of
operations for such periods, consisting only of normal recurring adjustments for
the periods indicated. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------------------
JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1996 1996 1995 1995 1995 1995 1994 1994 1994 1994
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income..... $ 34,362 $33,723 $ 34,171 $ 33,932 $ 33,343 $32,238 $ 31,436 $ 29,764 $ 28,702 $26,365
Interest expense.... 16,396 16,096 16,650 16,498 16,276 14,942 12,992 11,343 10,590 9,193
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest
income............ 17,966 17,627 17,521 17,434 17,067 17,296 18,444 18,421 18,112 17,172
Provision for loan
losses............ 1,053 999 759 965 1,055 1,277 1,817 1,740 1,901 1,916
Noninterest
income............ 3,963 3,701 3,980 3,401 3,596 3,250 3,296 3,161 3,199 3,223
Securities gains,
net............... -- -- -- -- -- -- -- -- -- 8
Noninterest
expense........... 13,288 13,937 14,050 12,719 13,280 13,500 13,919 13,902 13,752 13,675
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes............. 7,588 6,392 6,692 7,151 6,328 5,769 6,004 5,940 5,658 4,812
Income taxes........ 2,603 2,062 2,042 2,166 1,888 1,678 1,712 1,742 1,716 1,342
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.......... $ 4,985 $ 4,330 $ 4,650 $ 4,985 $ 4,440 $ 4,091 $ 4,292 $ 4,198 $ 3,942 $ 3,470
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
53
<PAGE> 55
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Consolidated Financial Statements include
the Company and its subsidiaries, the Bank and the Mortgage Company. The pro
forma financial statements begin with the historical financial statements of the
Bank as of June 30, 1996 (unaudited) and December 31, 1995 (audited) and for the
periods then ended. The pro forma financial statements reflect the results of
the Split-Off Transactions including the acquisition of the Bank and the
Mortgage Company by the Company, sale or transfer of the Bank's Automobile
Finance Business as well as the consummation of the Credit Facilities, the Offer
described in this Prospectus and the Preferred Stock Offering.
There are two sets of unaudited pro forma condensed consolidated financial
statements for each period presented. One assumes the exchange of 4.0 million
shares (the minimum offering) and the second set assumes the exchange of 4.5
million shares (the maximum offering). Notes describing the pro forma
adjustments and assumptions accompany each set of pro forma financial
statements.
The pro forma balance sheets assume that the Split-Off Transactions, the
Offer and the Preferred Stock Offering occurred on the balance sheet date and
include an estimated accrual for nonrecurring expenses attributable to the
transaction. The pro forma income statements assume that the transactions
occurred on the first date of the reporting period and include only those
adjustments expected to have a continuing impact on the Company. The pro forma
financial statements are based on the assumptions set forth in the accompanying
notes and are not necessarily indicative of the Bank's or Company's future
results of operations or financial position.
Following the pro forma financial statements is management's discussion and
analysis of pro forma financial condition and results of operations of the Bank
and the Company, highlighting the effects of the Split-Off Transactions on the
Bank and the Company. See "The Split-Off Transactions."
54
<PAGE> 56
TAYLOR CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
ASSUMES THE PURCHASE OF 4.5 MILLION SHARES
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
HISTORICAL SPLIT-OFF PRO FORMA MORTGAGE PRO FORMA
BANK ADJUSTMENTS BANK COMPANY COMPANY(D) ELIMINATIONS(E) CONSOLIDATED
---------- ----------- ---------- -------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks................. $ 102,071 $ $ 102,071 $ 218 $ $ $ 102,289
Federal funds sold...... 15,400 15,400 15,400
Investment securities... 417,559 59,250(c) 506,459 506,459
28,250(a)
1,400(b)
Investment in
subsidiaries.......... 171,462 (171,462)
Loans held for sale..... 41,856 41,856 8,893 50,749
Loans, less allowance
for loan losses....... 1,214,052 (110,000)(a) 1,104,052 2,950 (5,554) 1,098,498
(2,950)
Premises, leasehold
improvements and
equipment, net........ 16,945 6,500(b) 23,445 64 23,509
Goodwill and other
intangibles........... 4,251 59,767(b) 64,018 351 64,369
Other assets............ 35,474 35,474 144 2,127 37,745
---------- --------- ---------- -------- ------ --------- ----------
Total assets...... $1,847,608 $ 45,167 $1,892,775 $9,319 $176,539 $(179,615) $1,899,018
========== ========= ========== ======== ====== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits.......... $1,486,332 $ $1,486,332 $ $ $ $1,486,332
Short-term borrowings... 146,373 146,373 146,373
Accrued interest, taxes
and other
liabilities........... 14,987 638(a) 18,825 113 18,938
3,200(b)
Long-term borrowings.... 70,836 70,836 8,504 29,130 (8,504) 99,966
---------- --------- ---------- -------- ------ --------- ----------
Total
liabilities..... 1,718,528 3,838 1,722,366 8,617 29,130 (8,504) 1,751,609
---------- --------- ---------- -------- ------ --------- ----------
Stockholders' equity:
Preferred stock....... -- 36,250 36,250
Common stock.......... 15,000 15,000 45 (15,000) 45
Surplus............... 50,826 (13,980)(a) 155,409 702 111,114 (155,409) 111,114
59,313(b) (702)
59,250(c)
Retained earnings..... 68,408 (68,408)(a)
Unrealized loss on
securities available
for sale, net of
tax................. (5,154) 5,154(b)
---------- --------- ---------- -------- ------ --------- ----------
Total
stockholders'
equity.......... 129,080 41,329 170,409 702 147,409 (171,111) 147,409
---------- --------- ---------- -------- ------ --------- ----------
Total liabilities
and
stockholders'
equity.......... $1,847,608 $ 45,167 $1,892,775 $9,319 $176,539 $(179,615) $1,899,018
========== ========= ========== ======== ====== ========= ==========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
55
<PAGE> 57
TAYLOR CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
ASSUMES THE PURCHASE OF 4.5 MILLION SHARES
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO HISTORICAL PRO
HISTORICAL SPLIT-OFF FORMA MORTGAGE FORMA
BANK ADJUSTMENTS BANK COMPANY COMPANY(J) ELIMINATIONS(K) CONSOLIDATED
---------- ----------- ------- ---------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest & fees on loans... $ 54,376 $(4,700)(f) $49,676 $ 259 $ $ (118) $ 49,817
Interest on investment
securities............... 13,212 920(f) 16,552 7 (7) 16,552
495(g)
1,925(h)
Interest on cash
equivalents.............. 497 497 497
------ ------- ------ ------- ----- ----- -------
Total interest
income.......... 68,085 (1,360) 66,725 266 (125) 66,866
Interest expense:
Deposits............... 26,229 26,229 (7) 26,222
Short-term
borrowings........... 4,468 4,468 4,468
Long-term borrowings... 1,795 1,795 118 1,060 (118) 2,855
------ ------- ------ ------- ----- ----- -------
Total interest
expense......... 32,492 32,492 118 1,060 (125) 33,545
Net interest income........ 35,593 (1,360) 34,233 148 (1,060) 33,321
Provision for loan
losses................... 2,052 (360)(f) 1,692 1,692
------ ------- ------ ------- ----- ----- -------
Net interest
income after
provision....... 33,541 (1,000) 32,541 148 (1,060) 31,629
Noninterest income:
Service charges........ 4,269 4,269 4,269
Trust fees............. 1,774 1,774 1,774
Other noninterest
income............... 1,621 1,621 98 1,719
------ ------- ------ ------- ----- ----- -------
Total noninterest
income.......... 7,664 7,664 98 7,762
Noninterest expense:
Salaries & benefits.... 14,781 (285)(f) 14,496 305 850 15,651
Occupancy expenses..... 2,349 145(g) 2,494 53 2,547
Furniture &
equipment............ 1,519 1,519 1,519
Computer processing.... 999 999 999
Legal fees............. 744 744 744
Other real estate &
repos................ 675 675 675
Other noninterest
expense.............. 6,059 (140)(f) 5,919 211 500 6,630
Goodwill
amortization......... 99 1,990(g) 2,089 2,089
------ ------- ------ ------- ----- ----- -------
Total noninterest
expense......... 27,225 1,710 28,935 569 1,350 30,854
Income before taxes........ 13,980 (2,710) 11,270 (323) (2,410) 8,537
Income taxes............... 4,665 (254)(i) 4,411 (110) (845) 3,456
------ ------- ------ ------- ----- ----- -------
Net income
(loss).......... $ 9,315 $(2,456) $ 6,859 $ (213) $ (1,565) $ $ 5,081
====== ======= ====== ======= ===== ===== =======
Net income
applicable to
common
stockholders
(l)............. $ 3,216
=======
Earnings per
common share.... $ 0.71
=======
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
56
<PAGE> 58
TAYLOR CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
ASSUMES THE PURCHASE OF 4.5 MILLION SHARES
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
HISTORICAL SPLIT-OFF PRO FORMA MORTGAGE PRO FORMA
BANK ADJUSTMENTS BANK COMPANY COMPANY(D) ELIMINATIONS(E) CONSOLIDATED
---------- ---------- ---------- --------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks................. $ 87,547 $ $ 87,547 $ 565 $ $ $ 88,112
Federal funds sold...... 5,000 5,000 5,000
Investment securities... 438,348 59,250(c) 528,448 528,448
28,250(a)
2,600(b)
Investment in
subsidiaries.......... 172,506 (172,506)
Loans held for sale..... 15,748 15,748 15,748
Loans, less allowance
for loan losses....... 1,172,005 (110,000)(a) 1,062,005 1,062,005
Premises, leasehold
improvements and
equipment, net........ 16,844 6,500(b) 23,344 62 23,406
Goodwill and other
intangibles........... 3,640 56,763(b) 60,403 96 60,499
Other assets............ 34,900 34,900 2,072 36,972
----------- -------- ----------- ---- -------- ---------- ----------
Total assets.... $1,774,032 $ 43,363 $1,817,395 $ 627 $174,578 $(172,410) $1,820,190
=========== ======== =========== ==== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits.......... $1,364,075 $ $1,364,075 $ $ $ $1,364,075
Short-term borrowings... 202,033 202,033 202,033
Accrued interest, taxes
and other
liabilities........... 14,180 638(a) 18,418 83 18,501
3,600(b)
Long-term borrowings.... 61,003 61,003 25,712 86,715
----------- -------- ----------- ---- -------- ---------- ----------
Total
liabilities... 1,641,291 4,238 1,645,529 83 25,712 1,671,324
----------- -------- ----------- ---- -------- ---------- ----------
Stockholders' equity:
Preferred stock....... 36,250 36,250
Common stock.......... 15,000 15,000 45 (15,000) 45
Surplus............... 50,826 (15,395)(a) 156,866 544 112,571 (156,866) 112,571
62,185(b) (544)
59,250(c)
Retained earnings..... 66,993 (66,993)(a)
Unrealized loss on
securities available
for sale, net of
tax................. (78) 78(b)
----------- -------- ----------- ---- -------- ---------- ----------
Total
stockholders'
equity........ 132,741 39,125 171,866 544 148,866 (172,410) 148,866
----------- -------- ----------- ---- -------- ---------- ----------
Total
liabilities
and
stockholders'
equity........ $1,774,032 $ 43,363 $1,817,395 $ 627 $174,578 $(172,410) $1,820,190
=========== ======== =========== ==== ======== ========== ==========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
57
<PAGE> 59
TAYLOR CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
ASSUMES THE PURCHASE OF 4.5 MILLION SHARES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
HISTORICAL SPLIT-OFF PRO FORMA MORTGAGE PRO FORMA
BANK ADJUSTMENTS BANK COMPANY COMPANY(J) ELIMINATIONS(K) CONSOLIDATED
---------- ----------- --------- ---------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest & fees on
loans................... $103,654 $(9,300)(f) $94,354 $ $ $ 94,354
Interest on investment
securities.............. 29,358 1,840(f) 36,038 36,038
990(g)
3,850(h)
Interest on cash
equivalents............. 672 672 672
--
-------- ------- -------- ----- ------- --------
Total interest
income........... 133,684 (2,620) 131,064 131,064
Interest expense:
Deposits................ 47,034 47,034 47,034
Short-term borrowings... 13,584 13,584 13,584
Long-term borrowings.... 3,748 3,748 2,120 5,868
--
-------- ------- -------- ----- ------- --------
Total interest
expense.......... 64,366 64,366 2,120 66,486
Net interest income....... 69,318 (2,620) 66,698 (2,120) 64,578
Provision for loan
losses.................. 4,056 (470)(f) 3,586 3,586
--
-------- ------- -------- ----- ------- --------
Net interest income
after
provision........ 65,262 (2,150) 63,112 (2,120) 60,992
Noninterest income:
Service charges......... 7,452 7,452 7,452
Trust fees.............. 3,539 3,539 3,539
Other noninterest
income................ 3,236 3,236 3,236
--
-------- ------- -------- ----- ------- --------
Total noninterest
income........... 14,227 14,227 14,227
Noninterest expense:
Salaries & benefits..... 28,973 (730)(f) 28,243 92 1,700 30,035
Occupancy expenses...... 4,880 285(g) 5,165 7 5,172
Furniture & equipment... 2,651 2,651 2,651
Computer processing..... 1,676 1,676 1,676
Legal fees.............. 1,655 1,655 6 1,661
Other real estate &
repos................. 1,169 1,169 1,169
Other noninterest
expense............... 12,349 (220)(f) 12,129 33 1,000 13,162
Goodwill amortization... 196 3,985(g) 4,181 4,181
--
-------- ------- -------- ----- ------- --------
Total noninterest
expense.......... 53,549 3,320 56,869 138 2,700 59,707
Income before taxes....... 25,940 (5,470) 20,470 (138) (4,820) 15,512
Income taxes.............. 7,774 (446)(i) 7,328 (47) (1,440) 5,841
--
-------- ------- -------- ----- ------- --------
Net income (loss)... $ 18,166 $(5,024) $13,142 $ (91) $ (3,380) $ 9,671
======== ======= ======== ===== ======= == ========
Net income
applicable to
common
stockholders
(1).............. $ 5,942
========
Earnings per common
share............ $ 1.32
========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
58
<PAGE> 60
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ASSUMING THE PURCHASE OF 4.5 MILLION SHARES
(a) Reflects transfer and sale of $110 million net automobile receivables
(net of $1 million in allowance for loan losses). This includes the transfer of
the estimated $30 million fair market value of used Automobile Receivables from
the Bank to New Reliance. Loans sold totaling $80 million provide cash for
payment of the First Cash Component of $52 million required to be contributed to
New Reliance as part of the Split-Off Transactions. The proceeds from the sale
of the loans in excess of the required First Cash Component, estimated to
approximate $28 million, are assumed to be reinvested in investment securities.
It is assumed that the loans can be sold and transferred at their book value and
therefore the sale and transfer will not result in either a gain or a loss. The
estimated $52 million First Cash Component assumes the tender of 4.5 million
shares by the Taylor Group in exchange for the Company. Accrued interest, taxes,
and other liabilities have also been increased by $638,000 reflecting the
$397,000 deferred tax liability resulting from the $1 million reduction in the
allowance for loan losses and $241,000 representing certain severance payments,
net of taxes.
(b) Reflects the application of purchase accounting to the assets and
liabilities of the Bank (net of deferred income taxes) and the resulting
recognition of goodwill for the excess of the cost (the "Total Purchase Price")
over the fair value of the net assets acquired. The Company's cost of the
acquired Bank is comprised of three components: (1) the Taylor Group's
proportionate interest in the Bank's book value at the balance sheet date (the
"Historical Ownership Interest") plus (2) the proportionate fair value of the
4.5 million shares exchanged at the balance sheet date (the "Purchased Ownership
Interest") and (3) estimated direct acquisition costs of $2 million.
The proportionate interest of the Taylor Group in the Bank is represented
by their percentage ownership in CTFG, which, assuming the exercise of all
options held by the Taylor Group and all Bank employees, approximates 28.35% of
the then outstanding shares of CTFG. This represents the Taylor Group's
Historical Ownership Interest in the Bank. Therefore, the first component of the
Total Purchase Price of the Bank represents 28.35% of the Bank's book value at
the balance sheet date (after the distribution of the $52 million First Cash
Component and $30 million used Automobile Receivables). The Purchased Ownership
Interest is the proportionate fair value of the 4.5 million shares exchanged for
the remaining 71.65% of the book value of the Bank. It is calculated using the
market value of the shares at the balance sheet date.
The excess of the cost, or total purchase price, over the fair value of the
net assets acquired is recorded as goodwill. The calculation of the goodwill is
as follows:
<TABLE>
<CAPTION>
CALCULATION OF GOODWILL
JUNE 30, 1996 DECEMBER 31, 1995
---------------------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Number of shares exchanged......................... 4.5 million 4.5 million
Market price of CTFG stock @ balance sheet date.... $ 29.75 $ 29.88
Implied percentage of Bank stock deemed
purchased........................................ 71.65% 71.65%
----------- -----------
Purchased Ownership Interest....................... $ 95,922 $ 96,341
Historical Ownership Interest -- book value of Bank
@ 28.35%......................................... 13,237 14,275
Direct acquisition costs........................... 2,000 2,000
-------- --------
Total Purchase Price of the Bank................... $111,159 $112,616
Total book value of the Bank....................... $ 129,080 $ 132,741
Transfer of cash and automobile receivables........ (82,388) (82,388)
Fair value adjustments to balance sheet, net of
deferred income taxes............................ 4,700 5,500
----------- -----------
Less: Adjusted book value of the Bank.............. 51,392 55,853
-------- --------
Goodwill........................................... $ 59,767 $ 56,763
======== ========
</TABLE>
As illustrated by the calculation presented above, the actual goodwill
recorded at the Closing depends on the market price of CTFG common stock, the
Taylor Group's Historical Ownership Interest percentage, the
59
<PAGE> 61
fair market value of the Bank's assets and liabilities and the Bank's total
equity at the date of Closing. These factors are volatile and are expected to
change by the Closing date.
The estimated fair value adjustments to the Bank's balance sheet relate
primarily to investment securities and premises and equipment. The adjustments
to estimated fair value are proportionate to the share of the Bank deemed to
have been purchased. Therefore, the purchase accounting adjustments reflect
71.65% of the total fair market value increases and decreases identified and no
fair value adjustments are applied to the Taylor Group's Historical Ownership
Interest in the Bank.
(c) Reflects the capital contribution from the Company's preferred stock
and long term debt proceeds into the Bank. The proceeds are assumed to be
invested in investment securities. The capital contribution is funded through
the issuance by the Company of $38 million (expected to net $36 million after
issuance costs) of noncumulative perpetual preferred stock and approximately $23
million of long term debt.
(d) Reflects the pro forma Company. Other assets include capitalized
estimated organization costs of $100,000, the cash surrender value of officers
life insurance relating to the Company officers of almost $2.0 million and the
investment in Alpha Capital Fund. Loans reflect the intercompany loan to the
Mortgage Company of $3 million assumed as part of the Split-Off Transactions.
Long term debt at June 30, 1996 totals $29 million and is composed of the $23
million drawn to contribute to the Bank, the approximate $1 million in cash paid
to acquire the Mortgage Company and Alpha Capital Fund and the $5 million used
to assume the cash surrender value of the officers life insurance and the
intercompany loan to Mortgage Company formerly provided by CTFG. Equity includes
the estimated net proceeds from the Preferred Stock Offering and 4.5 million
shares of the TCG Common.
(e) Reflects the eliminations necessary to report consolidated financial
statements. The Company's investment in the Bank and Mortgage Company are
eliminated. In addition, the intercompany loans from the Bank and the Company to
the Mortgage Company are eliminated. These consolidation entries cause the
excess of the purchase price over the fair value of the net assets of the
Mortgage Company totaling $351,000 at June 30, 1996 to be reclassified from
investment in subsidiaries to goodwill and other intangibles
(f) Reflects the estimated impact to the Bank's income statement of the
sale and transfer of the estimated $111 million in automobile receivables.
Interest and fees on loans is reduced as well as the direct costs to originate
and service these automobile receivables and the related estimated provisions
for loan losses for the period. This adjustment also reflects the interest
income earned on the reinvestment of the excess proceeds from the loan sale of
approximately $28 million at a 6.5% yield.
(g) Reflects the amortization of the purchase accounting adjustments.
Premises and equipment is amortized over 20 years, investment securities over
approximately 7 years and goodwill over 15 years. The amortization is based on
the fair market value adjustments and goodwill computed as of June 30, 1996.
(h) Reflects the interest income on the investment of the estimated $59
million capital contribution at the Bank in investment securities at a 6.5%
yield.
(i) Reflects the tax effect of the pro forma adjustments, excluding
goodwill amortization, at a 35% tax rate in 1996 and 30% in 1995.
(j) Reflects the pro forma Company income statement including the estimated
interest expense on the cost of the long term debt and the estimated salary and
other operating expenses of the Company. Both periods assume a cost on the debt
of 8.25%. The interest expense for the six months ended June 30, 1995 is based
on debt outstanding at January 1, 1996 of $25.7 million. The 1995 interest
expense is based on debt outstanding of $25.0 million.
(k) Reflects the eliminations necessary to report condensed consolidated
financial statements. Interest income and expenses on intercompany loans is
eliminated as well as interest earned on deposits maintained by the Mortgage
Company at the Bank.
(l) Assumes the issuance of $38.25 million of Preferred Stock at an annual
dividend rate of 9.75%.
60
<PAGE> 62
TAYLOR CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
ASSUMES THE PURCHASE OF 4.0 MILLION SHARES
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
HISTORICAL SPLIT-OFF PRO FORMA MORTGAGE PRO FORMA
BANK ADJUSTMENTS BANK COMPANY COMPANY(D) ELIMINATIONS(E) CONSOLIDATED
---------- ----------- ---------- ---------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks... $ 102,071 $ $ 102,071 $ 218 $ $ $ 102,289
Federal funds sold........ 15,400 15,400 15,400
Investment securities..... 417,559 59,250(c) 489,959 489,959
11,750(a)
1,400(b)
Investment in
subsidiaries............ 156,126 (156,126)
Loans held for sale....... 41,856 41,856 8,893 50,749
Loans, less allowance for
loan losses............. 1,214,052 (110,000)(a) 1,104,052 2,950 (5,554) 1,098,498
(2,950)
Premises, leasehold
improvements and
equipment, net.......... 16,945 6,500(b) 23,445 64 23,509
Goodwill and other
intangibles............. 4,251 60,931(b) 65,182 351 65,533
Other assets.............. 35,474 35,474 144 2,127 37,745
---------- --------- ---------- ------ -------- --------- ----------
Total assets..... $1,847,608 $ 29,831 $1,877,439 $9,319 $161,203 $(164,279) $1,883,682
========== ========= ========== ====== ======== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Total deposits............ $1,486,332 $ $1,486,332 $ $ $ $1,486,332
Short-term borrowings..... 146,373 146,373 146,373
Accrued interest, taxes
and other liabilities... 14,987 638(a) 18,825 113 18,938
3,200(b)
Long-term borrowings...... 70,836 70,836 8,504 29,130 (8,504) 99,966
---------- --------- ---------- ------ -------- --------- ----------
Total
liabilities.... 1,718,528 3,838 1,722,366 8,617 29,130 (8,504) 1,751,609
---------- --------- ---------- ------ -------- --------- ----------
Stockholders' equity:
Preferred stock......... -- 36,250 36,250
Common stock............ 15,000 15,000 40 (15,000) 40
Surplus................. 50,826 (30,480)(a) 140,073 702 95,783 (140,073) 95,783
60,477(b) (702)
59,250(c)
Retained earnings....... 68,408 (68,408)(a)
Unrealized loss on
securities available
for sale, net of
tax................... (5,154) 5,154(b)
---------- --------- ---------- ------ -------- --------- ----------
Total
stockholders'
equity......... 129,080 25,993 155,073 702 132,073 (155,775) 132,073
---------- --------- ---------- ------ -------- --------- ----------
Total liabilities
and
stockholders'
equity......... $1,847,608 $ 29,831 $1,877,439 $9,319 $161,203 $(164,279) $1,883,682
========== ========= ========== ====== ======== ========= ==========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
61
<PAGE> 63
TAYLOR CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
ASSUMES THE PURCHASE OF 4.0 MILLION SHARES
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO HISTORICAL PRO
HISTORICAL SPLIT-OFF FORMA MORTGAGE FORMA
BANK ADJUSTMENTS BANK COMPANY COMPANY(J) ELIMINATIONS(K) CONSOLIDATED
---------- ----------- ------- ---------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest & fees on loans... $ 54,376 $(4,700)(f) $49,676 $ 259 $ $(118) $ 49,817
Interest on investment
securities............... 13,212 380(f) 16,012 7 (7) 16,012
495(g)
1,925(h)
Interest on cash
equivalents.............. 497 497 497
------- ------- ------- ----- ------- ----- -------
Total interest
income.......... 68,085 (1,900) 66,185 266 (125) 66,326
Interest expense:
Deposits................. 26,229 26,229 (7) 26,222
Short-term borrowings.... 4,468 4,468 4,468
Long-term borrowings..... 1,795 1,795 118 1,060 (118) 2,855
------- ------- ------- ----- ------- ----- -------
Total interest
expense......... 32,492 0 32,492 118 1,060 (125) 33,545
Net interest income........ 35,593 (1,900) 33,693 148 (1,060) 32,781
Provision for loan
losses................... 2,052 (360)(f) 1,692 1,692
------- ------- ------- ----- ------- ----- -------
Net interest
income after
provision....... 33,541 (1,540) 32,001 148 (1,060) 31,089
Noninterest income:
Service charges.......... 4,269 4,269 4,269
Trust fees............... 1,774 1,774 1,774
Other noninterest
income................. 1,621 1,621 98 1,719
------- ------- ------- ----- ------- ----- -------
7,664 7,664 98 7,762
Noninterest expense:
Salaries & benefits...... 14,781 (285)(f) 14,496 305 850 15,651
Occupancy expenses....... 2,349 145(g) 2,494 53 2,547
Furniture & equipment.... 1,519 1,519 1,519
Computer processing...... 999 999 999
Legal fees............... 744 744 744
Other real estate &
repos.................. 675 675 675
Other noninterest
expense................ 6,059 (140)(f) 5,919 211 500 6,630
Goodwill amortization.... 99 2,030(g) 2,129 2,129
------- ------- ------- ----- ------- ----- -------
Total noninterest
expense......... 27,225 1,750 28,975 569 1,350 30,894
Income before taxes........ 13,980 (3,290) 10,690 (323) (2,410) 7,957
Income taxes............... 4,665 (443)(i) 4,222 (110) (845) 3,267
------- ------- ------- ----- ------- ----- -------
Net
income(loss).... $ 9,315 $(2,847) $ 6,468 $ (213) $ (1,565) $ $ 4,690
======= ======= ======= ===== ======= ===== =======
Net income
applicable to
common
stockholders
(l)............. $ 2,825
=======
Earnings per
common share.... $ .71
=======
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
62
<PAGE> 64
TAYLOR CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
ASSUMES THE PURCHASE OF 4.0 MILLION SHARES
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL PRO FORMA PRO FORMA MORTGAGE PRO FORMA
BANK ADJUSTMENTS BANK COMPANY COMPANY(D) ELIMINATIONS(E) CONSOLIDATED
---------- ---------- ---------- --------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks................. $ 87,547 $ $ 87,547 $ 565 $ $ $ 88,112
Federal funds sold...... 5,000 5,000 5,000
Investment securities... 438,348 59,250 (c) 511,948 511,948
11,750 (a)
2,600 (b)
Investment in
subsidiaries.......... 157,123 (157,123)
Loans held for sale..... 15,748 15,748 15,748
Loans, less allowance
for loan losses....... 1,172,005 (110,000 )(a) 1,062,005 1,062,005
Premises, leasehold
improvements and
equipment, net........ 16,844 6,500 (b) 23,344 62 23,406
Goodwill and other
intangibles........... 3,640 57,880 (b) 61,520 96 61,616
Other assets............ 34,900 34,900 2,072 36,972
---------- -------- ---------- ---- -------- --------- ----------
Total assets.... $1,774,032 $ 27,980 $1,802,012 $ 627 $159,195 $(157,027) $1,804,807
========== ======== ========== ==== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits.......... $1,364,075 $ $1,364,075 $ $ $ $1,364,075
Short-term borrowings... 202,033 202,033 202,033
Accrued interest, taxes
and other
liabilities........... 14,180 638 (a) 18,418 83 18,501
3,600 (b)
Long-term borrowings.... 61,003 61,003 25,712 86,715
---------- -------- ---------- ---- -------- --------- ----------
Total
liabilities... 1,641,291 4,238 1,645,529 83 25,712 1,671,324
---------- -------- ---------- ---- -------- --------- ----------
Stockholders' equity:
Preferred stock....... 36,250 36,250
Common stock.......... 15,000 15,000 40 (15,000) 40
Surplus............... 50,826 (31,895 )(a) 141,483 544 97,193 (141,483) 97,193
63,302 (b) (544)
59,250 (c)
Retained earnings..... 66,993 (66,993 )(a)
Unrealized loss on
securities available
for sale, net of
tax................. (78) 78 (b)
---------- -------- ---------- ---- -------- --------- ----------
Total
stockholders'
equity........ 132,741 23,742 156,483 544 133,483 (157,027) 133,483
---------- -------- ---------- ---- -------- --------- ----------
Total
liabilities
and
stockholders'
equity........ $1,774,032 $ 27,980 $1,802,012 $ 627 $159,195 $(157,027) $1,804,807
========== ======== ========== ==== ======== ========= ==========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
63
<PAGE> 65
TAYLOR CAPITAL GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
ASSUMES THE PURCHASE OF 4.0 MILLION SHARES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO HISTORICAL PRO
HISTORICAL SPLIT-OFF FORMA MORTGAGE FORMA
BANK ADJUSTMENTS BANK COMPANY COMPANY(J) ELIMINATIONS CONSOLIDATED
---------- ----------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest & fees on loans..... $ 103,654 $(9,300)(f) $ 94,354 $ $ $ $ 94,354
Interest on investment
securities................. 29,358 765(f) 34,963 34,963
990(g)
3,850(h)
Interest on cash
equivalents................ 672 672 672
------ ------- ------ ------- ----- ----- -------
Total interest
income............ 133,684 (3,695) 129,989 129,989
Interest expense:
Deposits................. 47,034 47,034 47,034
Short-term borrowings.... 13,584 13,584 13,584
Long-term borrowings..... 3,748 3,748 2,120 5,868
------ ------- ------ ------- ----- ----- -------
Total interest
expense........... 64,366 64,366 2,120 66,486
Net interest income.......... 69,318 (3,695) 65,623 (2,120) 63,503
Provision for loan losses.... 4,056 (470)(f) 3,586 3,586
------ ------- ------ ------- ----- ----- -------
Net interest income
after provision... 65,262 (3,225) 62,037 (2,120) 59,917
Noninterest income:
Service charges.......... 7,452 7,452 7,452
Trust fees............... 3,539 3,539 3,539
Other noninterest
income................. 3,236 3,236 3,236
------ ------- ------ ------- ----- ----- -------
Total noninterest
income............ 14,227 14,227 14,227
Noninterest expense:
Salaries & benefits...... 28,973 (730)(f) 28,243 92 1,700 30,035
Occupancy expenses....... 4,880 285(g) 5,165 7 5,172
Furniture & equipment.... 2,651 2,651 2,651
Computer processing...... 1,676 1,676 1,676
Legal fees............... 1,655 1,655 6 1,661
Other real estate &
repos.................. 1,169 1,169 1,169
Other noninterest
expense................ 12,349 (220)(f) 12,129 33 1,000 13,162
Goodwill amortization.... 196 4,060(g) 4,256 4,256
------ ------- ------ ------- ----- ----- -------
Total noninterest
expense........... 53,549 3,395 56,944 138 2,700 59,782
Income before taxes.......... 25,940 (6,620) 19,320 (138) (4,820) 14,362
Income taxes................. 7,774 (768)(i) 7,006 (47) (1,440) 5,519
------ ------- ------ ------- ----- ----- -------
Net income (loss)... $ 18,166 $(5,852) $ 12,314 $ (91) $ (3,380) $ $ 8,843
====== ======= ====== ======= ===== ===== =======
Net income
applicable to
common
stockholders(1)... $ 5,114
=======
Earnings per common
share............. $ 1.28
=======
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
financial statements.
64
<PAGE> 66
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
ASSUMING THE PURCHASE OF 4.0 MILLION SHARES
(a) Reflects the transfer and sale of $110 million net of automobile receivables
(net of $1 million in allowance for loan losses). This includes the transfer
of the estimated $30 million fair market value of used Automobile
Receivables from the Bank to New Reliance. Loans sold totaling $80 million
provide cash for payment of the First Cash Component of $68 million required
to be contributed to New Reliance as part of the Split-Off Transactions. The
proceeds from the sale of the loans in excess of the required First Cash
Component, estimated to approximate $12 million, are assumed to be
reinvested in investment securities. It is assumed that the loans can be
sold and transferred at their book value and therefore the sale and transfer
will not result in either a gain or a loss. The estimated $68 million First
Cash Component assumes the tender of 4.0 million shares by the Taylor Group
in exchange for the Company. Accrued interest, taxes and other liabilities
have also been increased by $638,000 reflecting the $397,000 deferred tax
liability resulting from the $1 million reduction in the allowance for loan
losses and $241,000 representing certain severance payments, net of taxes.
(b) Reflects the application of purchase accounting to the assets and
liabilities of the Bank (net of deferred income taxes) and the resulting
recognition of goodwill for the excess of the cost (the "Total Purchase
Price") over the fair value of the net assets acquired. The Company's cost
of the acquired Bank is comprised of three components: (1) the Taylor
Group's proportionate interest in the Bank's book value at the balance sheet
date (the "Historical Ownership Interest") plus (2) the proportionate fair
value of the 4.0 million shares exchanged at the balance sheet date (the
"Purchased Ownership Interest") and (3) estimated direct acquisition costs
of $2 million.
The proportionate interest of the Taylor Group in the Bank is represented
by their percentage ownership in CTFG, which, assuming the exercise of all
options held by the Taylor Group and all Bank employees, approximates
28.35% of the then outstanding shares of CTFG. This represents the Taylor
Group's Historical Ownership Interest in the Bank. Therefore, the first
component of the Total Purchase Price of the Bank represents 28.35% of the
Bank's book value at the balance sheet date (after the distribution of the
$68 million First Cash Component and $30 million used Automobile
Receivables). The Purchased Ownership Interest is the proportionate fair
value of the 4.0 million shares exchanged for the remaining 71.65% of the
book value of the Bank. It is calculated using the market value of the
shares at the balance sheet date.
The excess of the cost, or total purchase price, over the fair value of the
net assets acquired is recorded as goodwill. The calculation of the
goodwill is as follows:
<TABLE>
<CAPTION>
CALCULATION OF GOODWILL
JUNE 30, 1996 DECEMBER 31, 1995
---------------------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Number of shares exchanged..................... 4.0 million 4.0 million
Market price of CTFG stock @ balance sheet
date......................................... $ 29.75 $ 29.88
Implied percentage of Bank stock deemed
purchased.................................... 71.65% 71.65%
-------- --------
Purchased Ownership Interest................... $85,264 $85,636
Historical Ownership Interest -- book value of
Bank @ 28.35%................................ 8,559 9,597
Direct acquisition costs....................... 2,000 2,000
------- -------
Total Purchase Price of the Bank............... $95,823 $97,233
Total book value of the Bank................... $ 129,080 $ 132,741
Transfer of cash and automobile receivables.... (98,888) (98,888)
Fair value adjustments to balance sheet, net of
deferred income taxes........................ 4,700 5,500
-------- --------
Less: Adjusted book value of the Bank.......... 34,892 39,353
------- -------
Goodwill....................................... $60,931 $57,880
======= =======
</TABLE>
65
<PAGE> 67
As illustrated by the calculation presented above, the actual goodwill
recorded at the Closing depends on the market price of CTFG Common, the
Taylor Group's Historical Ownership Interest percentage, the fair market
value of the Bank's assets and liabilities and the Bank's total equity at
the date of Closing. These Factors are volatile and are expected to change
by the Closing date.
The estimated fair value adjustments to the Bank's balance sheet relate
primarily to investment securities and premises and equipment. The
adjustments to estimated fair value are proportionate to the share of the
Bank deemed to have been purchased. Therefore, the purchase accounting
adjustments reflect 71.65% of the total fair market value increases and
decreases identified and no fair value adjustments are applied to the
Taylor Group's Historical Ownership Interest in the Bank.
(c) Reflects the capital contribution from the Company's preferred stock and
long term debt proceeds into the Bank. The proceeds are assumed to be
invested in investment securities. The capital contribution is funded
through the issuance by the Company of $38 million (expected to net $36
million after issuance costs) of noncumulative perpetual preferred stock and
approximately $23 million of long term debt.
(d) Reflects the pro forma Company. Other assets include capitalized estimated
organization costs of $100,000, the cash surrender value of officers life
insurance relating to the Company officers of almost $2.0 million and the
investment in Alpha Capital Fund. Loans reflect the intercompany loan to the
Mortgage Company of $3 million assumed as part of the Split-Off
Transactions. Long term debt at June 30, 1996 totals $29 million and is
composed of the $23 million drawn to contribute to the Bank, the approximate
$1 million in cash paid to acquire the Mortgage Company and Alpha Capital
Fund and the $5 million used to assume the cash surrender value of the
officers life insurance and the intercompany loan to Mortgage Company
formerly provided by CTFG. Equity includes the estimated net proceeds from
the preferred stock offering and 4.0 million shares of Company Common Stock
for the CTFG stock exchanged.
(e) Reflects the eliminations necessary to report consolidated financial
statements. The Company's investment in the Bank and Mortgage Company are
eliminated. In addition, the intercompany loans from the Bank and the
Company to the Mortgage Company are eliminated. These consolidation entries
cause the excess of the purchase price over the fair value of the net assets
of the Mortgage Company totaling $351,000 at June 30, 1996 to be
reclassified from investment in subsidiaries to goodwill and other
intangibles.
(f) Reflects the estimated impact to the Bank's income statement of the sale and
transfer of the estimated $111 million in automobile receivables. Interest
and fees on loans is reduced as well as the direct costs to originate and
service these automobile receivables and the related estimated provisions
for loan losses for the period. This adjustment also reflects the interest
income earned on the reinvestment of the excess proceeds from the loan sale
of approximately $12 million at a 6.5% yield.
(g) Reflects the amortization of the purchase accounting adjustments. Premises
and equipment is amortized over 20 years, investment securities over
approximately 7 years and goodwill over 15 years. The amortization is based
on the fair market value adjustments and goodwill computed as of June 30,
1996.
(h) Reflects the interest income on the investment of the estimated $59 million
capital contribution at the Bank in investment securities at a 6.5% yield.
(i) Reflects the tax effect of the pro forma adjustments, excluding goodwill
amortization, at a 35% tax rate in 1996 and 30% in 1995.
(j) Reflects the pro forma Company income statement including the estimated
interest expense on the cost of the long term debt and the estimated salary
and other operating expenses of the Company. Both periods assume a cost on
the debt of 8.25%. The interest expense for the six months ended June 30,
1995 is based on debt outstanding at January 1, 1996 of $25.7 million. The
1995 interest expense is based on debt outstanding of $25.0 million.
(k) Reflects the eliminations necessary to report condensed consolidated
financial statements. Interest income and expenses on intercompany loans is
eliminated as well as interest earned on deposits maintained by the Mortgage
Company at the Bank.
(l) Assumes the issuance of $38.25 million of Preferred Stock at an annual
dividend rate of 9.75%.
66
<PAGE> 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following presents management's discussion and analysis of the
financial condition and results of operations of the Bank and the consolidated
Company on an unaudited pro forma basis as of June 30, 1996 and December 31,
1995 and for the six months and year then ended. The discussion compares the
effects of the Split-Off Transactions and formation of the Company on the Bank
and the consolidated Company, with the Bank on a historical basis. This
discussion should be read in conjunction with the unaudited pro forma condensed
consolidated financial statements and the accompanying notes which describe the
assumptions used in the preparation of the unaudited pro forma condensed
consolidated financial statements. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements" "The Split-Off Transactions".
RESULTS OF OPERATIONS
OVERVIEW
Assuming the Purchase of 4.5 Million Shares
For the first six months of 1996, pro forma Bank only net income was $6.9
million as compared to $9.3 million on an historical basis. Annualized return on
average assets was .75% on a pro forma basis as compared to 1.05% on an
historical basis. Annualized return on average equity was 7.95% on a pro forma
basis as compared to 14.18% on an historical basis.
Pro forma Bank only net income for 1995 was $13.1 million as compared to
$18.2 million on a historical basis. Return on average assets was .74% on a pro
forma basis as compared to 1.05% on an historical basis. Return on average
equity was 7.91% on a pro forma basis as compared to 14.29% on an historical
basis.
Assuming the Purchase of 4.0 Million Shares
For the first six months of 1996, pro forma Bank only net income was $6.5
million. Annualized return on average assets was .72% on a pro forma basis.
Annualized return on average equity was 8.23% on a pro forma basis. Pro forma
Bank only net income for 1995 was $12.3 million. Return on average assets was
.70% on a pro forma basis. Return on average equity was 8.16% on a pro forma
basis.
NET INTEREST INCOME
Assuming the Purchase of 4.5 Million shares
Net interest income for the Bank decreased $1.4 million, or 3.8%, for the
six months ended June 30, 1996 and $2.6 million, or 3.8%, for 1995 on a pro
forma basis as compared to historical results. The net interest margin declined
to 4.27% in 1996 and 4.27% in 1995 on a pro forma basis as compared to the
historical net interest margins of 4.39% and 4.38%, respectively. The decline in
net interest margin resulted from the change in the mix of assets on a pro forma
basis as certain earning assets are replaced by a combination of lower earning
and nonearning assets. In connection with the Split-Off Transactions, $110
million net of automobile receivables are expected to be transferred and sold.
The average yield of these loans approximated 8.40% over the periods shown. A
portion of the proceeds from the sale, estimated at $28 million, as well as
funds received from the capital contribution received from the Company,
estimated at $59 million, are assumed to be reinvested in investment securities
yielding 6.50%. It is management's intention to ultimately reinvest these
proceeds in higher yielding loans. Average earning assets on a pro forma basis
decline $22 million, or 1.3% for 1996 and $21 million, or 1.3% for 1995 in
comparison to historical average earning assets of $1.7 billion and $1.6 billion
for 1996 and 1995 respectively.
The negative impact of the change in the mix of assets is partially offset
by the write down of the existing investment securities to fair market value at
the balance sheet date in accordance with purchase accounting
67
<PAGE> 69
requirements. The resulting discount is accreted into interest income over the
life of the respective securities, which approximates 7 years.
Net interest income on a consolidated pro forma basis is further reduced,
by $1.1 million for the six months ended June 30, 1996 and $2.1 million for the
1995 year, for the estimated interest expense for Company debt. The interest
expense is based on the debt outstanding of approximately $26 million and $25
million at January 1, 1996 and 1995 respectively.
Assuming the Purchase of 4.0 Million shares
Net interest income for the Bank decreased $1.9 million, or 5.3%, for the
six months ended June 30, 1996 and $3.7 million, or 5.3%, for 1995 on a pro
forma basis as compared to historical results. The net interest margin declined
to 4.25% in 1996 and 4.25% in 1995 on a pro forma basis. The decrease in net
interest income was greater than under the purchase of 4.5 million shares
because the decline in the number of shares purchased increased the First Cash
Component due as part of the Split-Off Transactions. The First Cash component
increased $16 million to $68 million from $52 million. The increase in the Cash
Component reduced the earnings on the excess proceeds from the loan sale as the
excess proceeds were reduced to $12 million from $28 million.
PROVISION FOR LOAN LOSSES
The pro forma provision for loan losses decreases $360,000, or 17.5% for
the six months ended June 30, 1996 and $470,000, or 11.6% for 1995 as compared
to the historical provision of $2.1 million and $4.1 million for 1996 and 1995
respectively. The decrease in the provision is a result of the disposition of
the net $110 million of automobile receivables. The reductions in the provision
represent the estimated provisions relating to the automobile receivables
identified to be sold or transferred as a result of the Split-Off Transactions.
NONINTEREST EXPENSE
Assuming the Purchase of 4.5 Million Shares
The Bank's pro forma noninterest expense for the first six months of 1996
increased $1.7 million, or 6.3%, to $28.9 million as compared to $27.2 million
on a historical basis. Noninterest expense for 1995 increased $3.3 million, or
6.2%, to $56.9 million on a pro forma basis as compared to $53.5 million on a
historical basis. The increase is primarily attributable to the amortization of
the goodwill created as a result of the Split-Off Transactions. The write-up of
the Bank's premises and equipment to estimated fair value also results in
increased depreciation expenses. The negative impact of these charges is
partially offset by the estimated cost reductions as a result of the Bank's
departure from the automobile receivables business. Estimated savings from the
salaries and other direct expenses of the origination and servicing of these
loans totaled $425,000 for the six months ended June 30,1996 and $950,000 for
the 1995 year.
Total noninterest expense on a consolidated pro forma basis is further
increased, by $1.3 million for the six months ended June 30, 1996 and $2.7 for
the year ended 1995, as a result of estimated Company expenses for salaries and
overhead.
Assuming the Purchase of 4.0 Million Shares
The Bank's pro forma noninterest expense for the first six months of 1996
increased $1.8 million, or 6.4%, to $29.0 million. Noninterest expense for 1995
increased $3.4 million, or 6.3%, to $56.9 million on a pro forma basis. The
increase in goodwill amortization was slightly larger assuming the purchase of
4.0 million shares.
FINANCIAL CONDITION
LOAN PORTFOLIO
As a result of the transfer and sale of the $110 million of net automobile
receivables, the Bank's pro forma loan portfolio declines 9.0% to $1.128 billion
and 9.3% to $1.085 billion at June 30, 1996 and December 31,
68
<PAGE> 70
1995, respectively. The mix of the loan portfolio changes as a result of the
sale and transfer. Consumer loans as a percentage of the total loan portfolio
decreases to 11% at June 30, 1996 on a pro forma basis from 19% on a historical
basis.
ALLOWANCE FOR LOAN LOSSES
In connection with the sale and transfer of the $111 million of automobile
receivables, the allowance for loan losses is assumed to be reduced by $1
million. The Bank's pro forma allowance as a percentage of total loans at June
30, 1996 is 2.03% as compared to 1.91% on a historical basis.
INVESTMENT SECURITIES
Investment securities increase $87.5 million assuming the purchase of 4.5
million shares and $71.0 million assuming the purchase of 4.0 million shares.
The increase in investment securities was a result of the reinvestment of the
remaining proceeds received from the sale of certain automobile receivables and
the capital contribution from the Company to the Bank. In addition, securities
designated as held to maturity are assumed to be written up to the fair market
value of the securities at the balance sheet date.
CAPITAL RESOURCES
Assuming the Purchase of 4.5 Million Shares
Total pro forma Bank equity at June 30, 1996 increases $41 million as
compared to historical equity of $129 million. Pro forma equity is first
decreased by approximately $82 million due to the distribution of cash and Used
Automobile Receivables to New Reliance. The application of purchase accounting
at the Bank then results in a pro forma increase in total equity of $64 million
at June 30, 1996. Finally, Bank equity is increased with a capital contribution
of $59 million.
Although total pro forma Bank equity increases from historical equity, the
Bank's pro forma tangible capital at June 30, 1996 decreases $25 million. Tier 1
risk-based capital at June 30, 1996 is 8.27% on a pro forma basis as compared to
9.47% on a historical basis. Pro forma total risk-based capital is 9.52% at June
30, 1996 as compared to 10.72% on a historical basis.
Assuming the Purchase of 4.0 Million Shares
Total pro forma Bank equity at June 30, 1996 increases $26 million as
compared to historical equity of $129 million. Pro forma equity is first
decreased by approximately $99 million due to the distribution of cash and loans
to New Reliance. The application of purchase accounting at the Bank then results
in a pro forma increase in total equity of $60 million at June 30, 1996.
Finally, Bank equity is increased with a capital contribution of $59 million.
Although total pro forma Bank equity increases from historical equity, the
Bank's pro forma tangible capital at June 30, 1996 decreases $42 million. Tier 1
risk-based capital at June 30, 1996 is 7.02% on a pro forma basis. Pro forma
total risk-based capital is 8.28% at June 30, 1996.
It is management's intention that the Bank remain "well capitalized" after
the consummation of the Split-Off Transactions. Management expects 4.5 million
shares will be purchased in connection with the Split-Off Transactions. In
addition, management expects the Bank's earnings subsequent to June 30, 1996 to
raise the Bank's historical total equity such that the assumed capital
contribution of $59 million results in a total risk-based capital ratio of at
least 10.0% at the closing. Alternatively, management could obtain subordinated
to debt to ensure capital at the target level is obtained. A failure to meet the
regulatory risk-based capital guidelines for a "well capitalized" institution
potentially impacts the Bank's use of brokered certificates of deposit as a
funding source and may increase FDIC deposit insurance premiums.
69
<PAGE> 71
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
As a result of the sale of the automobile receivables and the proceeds from
the capital contribution, the Bank's liquidity on a pro forma basis would
improve. The immediate impact to the Bank's interest rate risk profile and gap
position as a result of the Split-Off Transactions is dependent on the term and
structure of the investment securities acquired with the cash received. After
re-deployment of the net sale proceeds and the capital contribution consistent
with the Bank's existing assets/liability management strategy, no significant
impact to the Bank's position and profile is expected.
70
<PAGE> 72
BUSINESS
GENERAL
Following the consummation of the Split-Off Transactions, the Company, a
newly incorporated bank holding company, will wholly own the Bank, which
commenced operations over 60 years ago as Main State Bank. The Bank provides a
full range of commercial and consumer banking services both to small and mid-
size businesses and to individuals through its ten branch offices in Chicago
neighborhoods and suburban Cook and DuPage Counties. The Bank's historical
market niche has been providing commercial loans to small and mid-size companies
located in the Chicago metropolitan area. The Company also wholly owns the
Mortgage Company, a Delaware corporation, which began operations in the first
quarter of 1996 and competes in the subprime mortgage market for residential
loans on a brokered basis. The Mortgage Company is located in Altamonte Springs,
Florida and, through its subsidiaries, operates primarily in the Southeastern
United States.
Main State Bank was acquired by Irwin Cole and Sidney J Taylor in 1969. In
1978, Drovers National Bank was purchased and several years later CTFG was
created as a holding company to own and operate these two banks. The Bank of
Yorktown was acquired in 1982 and Wheeling Trust & Savings Bank, Ford City Bank
& Trust Co. and Skokie Trust & Savings Bank were acquired in 1984. At the end of
1988, the banks (other than the Bank of Yorktown), were merged into Cole Taylor
Bank, which became the first Illinois bank to deliver services through a branch
bank system. The Bank of Yorktown was merged into Cole Taylor Bank in 1992.
OPERATIONS OF THE COMPANY AFTER THE SPLIT-OFF TRANSACTIONS; GROWTH STRATEGY
The Company's strategy for the Bank and Mortgage Company is to continue to
improve their earnings and financial condition by following the key initiatives
outlined below.
Grow and Improve Core Commercial Bank Business. The Company intends to
continue to grow and improve the Bank's core commercial bank business and to
further improve its management of credit and interest rate risk. The Bank's
strategy will be to continue to emphasize relationship banking for small to mid-
sized business customers in the Chicago metropolitan market. The Bank also
intends to improve its core business by selling additional banking services to
its existing customer base.
Increase Fee Income. The Company plans to continue to increase the Bank's
fee income by more intensively marketing an integrated array of lending, cash
management, investment and trust services and other fee producing products. The
Bank's marketing efforts have focused on offering its core fee income services
to new and existing customers, through initiatives in its professional and
executive banking area, as well as marketing new financial services through its
retail operations.
Expand Deposit Gathering Capabilities. The Company intends to expand
deposit gathering capabilities by considering strategic opportunities to open de
novo bank branches, such as its planned branch site expected to open in late
1997 across from the Old Orchard shopping mall in north suburban Chicago, to
complement the Bank's existing branch network. The Company will continue to
market products and services which expand its customer base and enhance its
relationships with existing customers. Finally, the Company intends to increase
its cross-selling of deposit products to customers of other Bank products.
Selectively Expand Subprime Mortgage Financing Activities. The Company
plans to continue to expand the Mortgage Company's subprime mortgage financing
activities by purchasing additional loans, by increasing its warehouse funding
capability and by opening retail offices in the Chicago area or in other
regions.
THE BANK
The Bank offers various loan products such as commercial and industrial
loans, residential construction and mortgage loans, consumer loans and a full
range of deposit services including checking, savings and money market accounts
and certificates of deposit. The Bank's trust and investment department provides
a wide array of trust services for corporations and individuals.
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<PAGE> 73
The Bank's primary market is the Chicago metropolitan area. According to
the 1990 census, the Chicago metropolitan area is the third largest metropolitan
area in the United States with a population of approximately 7.1 million. With
approximately 600,000 manufacturing jobs, 1.1 million jobs in retail/wholesale
trade, transportation and public utilities, and 300,000 jobs in finance,
insurance and real estate, the Chicago metropolitan area follows only the New
York and Los Angeles metropolitan areas in total non-agricultural wage and
salary employment. The Chicago metropolitan area is not dependent on any
particular industry, and population and employment in the area remained
relatively constant from 1980 to 1990. Five of the Bank's branch offices are
located in Chicago neighborhoods and the remainder are located in suburban Cook
and DuPage counties. A substantial majority of the Bank's total consolidated net
loans are attributable to customers located in the Chicago metropolitan area.
Generally, each branch draws most of its deposits from and makes most of its
consumer and small business loans within a three mile radius of the respective
branch; however, the Bank's branches provide commercial banking services and
make industrial loans to companies located throughout the Chicago metropolitan
area.
The following table presents certain information about each of the Bank's
branches:
<TABLE>
<CAPTION>
TOTAL DEPOSITS AT JUNE 30, 1996
BANK BRANCH YEAR OPENED OR ACQUIRED -------------------------------
- ---------------------------------------- ----------------------- (IN THOUSANDS)
<S> <C> <C>
Chicago Branches:
824 East 63rd Street (Woodlawn) Opened 1993 $ 12,157
1965 North Milwaukee Avenue (Chicago) Acquired 1969 89,474
850 West Jackson Boulevard (Jackson) Opened 1987 33,385
11542 West 47th Street (Ashland) Acquired 1978 175,368
7601 South Cicero Avenue (Cicero) Acquired 1984 198,830
Suburban Branches:
Lombard (Yorktown) Acquired 1982 154,595
Skokie Acquired 1984 384,791
Burbank Acquired 1984 179,590
Broadview Opened 1996 26,850
Wheeling Acquired 1984 231,291
</TABLE>
The Bank's staff focuses on establishing and maintaining long-term
relationships with customers. The Bank encourages its officers to actively
participate in community organizations and, within credit and rate of return
parameters, the Bank attempts to ensure that it meets the credit needs of its
communities and that it invests in local municipal securities. The Bank has
focused its efforts on its "Relationship Builders" advertising campaign and
promoting programs such as the Bank's "Sweat Equity" program, in which
commercial lenders, branch managers and trust officers from the Bank spend a day
working at a customer's business.
LOANS AND INVESTMENTS
General. In allocating its assets among locally generated loans, investment
assets and other earning assets, the Bank attempts to maximize return while
managing risk at an acceptable level. The Bank has identified and implemented
strategies to reach these goals, including an emphasis on quality local loan
growth, diversification and long-term performance of its earning asset
portfolios. The following is a brief description of the types of lending and
investment activities engaged in by the Bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial Condition
- -- Loan Portfolio" and "Management's Discussion and Analysis of Pro Forma
Financial Condition and Results of Operations -- Financial Condition -- Loan
Portfolio."
Commercial and Industrial Loans. Commercial and industrial loans represent
the largest portion of the Bank's loan portfolio. On a pro forma basis after
giving effect to the Split-Off Transactions, approximately 59% of loans
outstanding are in this category. The Bank makes both collateralized and
unsecured loans. Collateral for loans generally includes accounts receivable,
inventory, equipment and real estate. Included in
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<PAGE> 74
this category are commercial real estate loans which are generally
collateralized by owner-occupied properties used for business purposes.
Real Estate--Residential Construction Loans. The real estate-residential
construction loan portfolio consists primarily of loans to professional
homebuilders and developers. These loans have increased in recent years
primarily because of an increase in homebuilding in the Chicago metropolitan
area. Generally, these loans are structured with three components: a
non-revolving lot loan which is used to fund costs other than construction, such
as marketing and architectural costs and financing fees; a construction revolver
primarily relating to pre-sold homes; and a letter of credit which the bank
issues to guarantee the performance of a customer to a third party. These loans
generally mature and are completely repaid within two years and bear interest at
an annual rate based upon prime. On a pro forma basis after giving effect to the
Split-Off Transactions, approximately 14% of the Bank's loans are residential
construction loans.
Real Estate Mortgage Loans. The real estate mortgage loan portfolio
primarily consists of first mortgage loans for single-family properties. On a
pro forma basis after giving effect to the Split-Off Transactions, 16% of the
Bank's loan portfolio is real estate mortgage loans. Approximately 65% of the
portfolio consists of fixed rate loans, with approximately 50% of the fixed rate
loans comprised of balloon loans with 3 to 5 year original maturities. The
remaining 35% of the portfolio consists of adjustable rate mortgage loans.
Beginning in 1995 and throughout 1996, the Bank began selling all conforming
mortgages into the secondary market. In late 1995, the Bank began purchasing
loans on a wholesale basis from approved mortgage bankers and other financial
intermediaries. Currently, approximately 60% of originations are originated
through the Bank's retail network and 40% are originated through its wholesale
sources. Both retail and wholesale loans are underwritten by the Bank and
processed for pooling and sale into the secondary market.
From the time a formal commitment is extended to the borrower until the
sale of the resulting mortgage loan to the secondary mortgage market investor,
the Bank is exposed to changes in interest rates which impact the market values
of these loans. The primary method used to manage interest rate risk is forward
sale of the mortgages or mortgage securities. Management of this risk is
monitored daily by the Mortgage Risk Management Committee of the Bank. Mortgage
loans held for sale are valued at the lower of cost or fair value. Fair value is
the commitment price for loans sold forward and market prices for loans not
hedged.
Servicing of loans sold is retained or released based upon which method
provides a more economic outcome. Beginning in 1995, the Bank adopted SFAS No.
122, "Accounting for Mortgage Servicing Rights," which allows the Bank to
capitalize the fair value of the loan servicing rights at the time the loans are
sold into the secondary market. The servicing rights are then amortized over the
estimated servicing life of the loan and is a reduction of loan servicing
income. Since 1995, the Bank has retained the servicing rights on approximately
75% of the loans sold into the secondary market. The current servicing portfolio
consists primarily of FHLMC and FNMA mortgage backed securities pool servicing
that was originated in-house. The Bank has not purchased any mortgage servicing
rights. The Bank derives servicing income by collecting the difference between
the note rate of the loans and the pass-through rate paid to the investor.
Typically, this difference is 25 to 35 basis points of the loan balances. The
Bank also receives late and service charge revenue generated from these loans.
During 1995 and 1996, the Bank sold a portion of these servicing rights,
representing 20% in 1995 and 12% in 1996, of the servicing loan balances.
Consumer Loans. Prior to the Split-Off Transactions, the Bank's consumer
loan portfolio included home equity loans, credit card loans and loans secured
by automobiles. Because the Bank is discontinuing its Automobile Finance
Business as a result of the Split-Off Transactions, after the Closing the Bank's
consumer loan business will primarily be comprised of its home equity and credit
card lines. The Bank's consumer loan portfolio consists of both collateralized
and unsecured loans to individuals for various personal reasons, such as home
improvements. This category includes home equity lines of credit issued by the
Bank that can be drawn at the discretion of the borrower. The majority of home
equity lines, after giving effect to the outstanding loan balance of any
existing mortgage loan, does not exceed 80% of the appraised value of the
underlying real estate collateral. On a pro forma basis after giving effect to
the Split-Off Transactions, approximately 11% of loans outstanding are consumer
loans.
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Loan Approval Procedures and Authority. The Bank's Loan Policy is
established by the Board of Directors based upon the recommendations of the
Bank's Chief Credit Officer and the Credit Policy Committee. The Loan Policy of
the Bank is reviewed and reaffirmed by the Board of Directors not less often
than annually. The Bank's Lending Guidelines for its various product lines are
approved by the Credit Policy Committee and reviewed annually by that committee
as well as the Directors' Loan Committee. These guidelines and policies set
forth the underwriting criteria for the various types of loans originated by the
Bank based upon the risks attendant to each type of loan, the borrowers of such
loans and the types of collateral. The Credit Policy Committee also determines
the adequacy of the Bank's allowance for loan losses.
The Bank delegates lending decision authority among various committees and
officers based primarily on the size of the loan sought. With limited
exceptions, the Bank generally applies a self-imposed maximum of $10.0 million
total credit exposure for each borrower. The Loan Committee of the Bank reviews
all loans in excess of $100,000, and any loan which would result in an aggregate
credit exposure to a borrower in excess of $500,000 requires the prior approval
of the Loan Committee of the Bank. Loans in excess of $500,000 that result in an
aggregate credit exposure to a borrower in excess of $5.0 million require the
prior approval of the Credit Policy Committee. All loans or commitments in
excess of $2.0 million are presented for review on a monthly basis to the
Directors' Loan Committee (which includes members of the Bank's Board of
Directors). Subject to these requirements, each loan officer has authority to
approve loans that comply with the Bank's commercial lending guidelines and loan
policies of up to a specified amount which is determined based upon such
person's experience and position with the Bank. Any exception to the Bank's
commercial lending guidelines and loan policies must be approved by a higher
authority, such as the Loan Committee or Credit Policy Committee.
Investment Portfolio. The Company's investment portfolio is used primarily
to provide a source of earnings and secondarily for liquidity management
purposes. Management maintains an investment grade portfolio oriented toward
U.S. government and U.S. government agency securities. The portfolio is
comprised of U.S. Treasury securities, U.S. government agency instruments and a
modest amount of investment grade obligations of state and political
subdivisions. In managing its interest rate exposure the Company also invests in
mortgage-backed securities and floating rate collateralized mortgage
obligations. Investment securities of the Company on a pro forma basis were
506.5 million, or 26.7% of pro forma total assets, at June 30, 1996. Virtually
all of the Bank's securities at June 30, 1996 were rated investment grade by a
nationally recognized rating organization. The Bank is a party to two interest
rate swap contracts with a combined notional amount of $75 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Financial Condition -- Investment Securities" and "Management's
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operation -- Financial Condition -- Investment Securities."
DEPOSITS
Each of the Bank branches offers the usual and customary range of
depository products provided by commercial banks, including checking, savings
and money market accounts, and certificates of deposit. Deposits at each Bank
are insured by the Federal Deposit Insurance Corporation up to statutory limits.
The Bank also gathers deposits through brokerage relationships and the National
Certificates of Deposit Network. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
TRUST AND INVESTMENT DEPARTMENT
The Bank's trust and investment department provides a wide array of trust
services for corporations and individuals. As of June 30, 1996, the Bank's trust
asset mix consisted of approximately 33% employee benefits, 33% exchange/land
trusts, 19% personal trusts, 10% retail trusts and 5% corporate trusts.
Historically, the trust and investment department primarily has serviced its
commercial customers out of its office located near downtown Chicago. Recently,
however, the Bank has placed a greater emphasis on offering trust services to
its retail as well as commercial customers out of its other branch offices. The
Bank's trust department is also emphasizing ESOPs, tax deferred exchanges and
employee benefit plans to commercial business customers for additional growth.
The Bank's retail investment securities activities are sold through a third
party agreement with a registered broker/dealer to effect securities and annuity
transactions for retail clients.
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<PAGE> 76
COMPETITION
The banking business is highly competitive. The Bank encounters competition
primarily in seeking deposits and in obtaining loan customers. The Bank's
principal competitors include other commercial banks, savings and loan
associations, mutual funds, money market funds, finance companies, credit
unions, mortgage companies, the United States Government, private issuers of
debt obligations and suppliers of other investment alternatives, such as
securities firms. In recent years, several major multi-bank holding companies
have entered the Chicago metropolitan market. Generally, these financial
institutions are significantly larger than the Bank and have access to greater
capital and other resources. As a result of these and other factors, future
growth opportunities for the Bank may be limited. In addition, many of the
Bank's non-bank competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally insured banks and
state regulations governing state chartered banks. As a result, such non-bank
competitors may have advantages over the Bank in providing certain services.
THE MORTGAGE COMPANY
During the fourth quarter of 1995, the Company formed a new subsidiary, the
Mortgage Company. In the first quarter of 1996, the Mortgage Company entered the
subprime mortgage market for loans secured by first and second mortgages on a
brokered basis. Depending on referrals from independent brokers, the
subsidiaries of the Mortgage Company, originate, warehouse and resell
residential mortgages of borrowers who do not qualify for conventional loans or
whose borrowing needs are not met by traditional residential mortgage lenders.
Such borrowers may not satisfy the more rigid underwriting standards of the
traditional residential mortgage lending market for a number of reasons, such as
blemished credit histories (from past loan delinquencies or bankruptcy),
inability to provide income verification data or lack of established credit
history. Management of the Mortgage Company believes that this market is
underserved by traditional lenders. Therefore, there is less competition in this
market and interest rates are higher than on mortgage loans for more
credit-worthy borrowers.
These wholesale originated loans are funded using the underwriting criteria
of selected secondary mortgage market investors and are typically sold to one of
those buyers after a period of warehousing at the Mortgage Company, which
generally ranges from 30 to 90 days or longer. The Mortgage Company is currently
funding such loans at a rate of approximately $3 million per month. Once funded
and prior to sale, the loans are carried under either a) a warehouse line of
credit granted by the Bank or b) advances from the Company.
The Mortgage Company derives its income principally from gains on the sale
of loans and, to a lesser degree, from net interest income on loans being held
for sale. In instances wherein a sold loan is prepaid during the first year
after sale, the Mortgage Company may be obligated to refund a portion of the
premium paid by the secondary mortgage market investors for such loan. In
addition, the agreements under which the loans are sold to institutional buyers
contain representations and warranties which are standard in the mortgage
industry. Violations of these representations and warranties could constitute
grounds for a requirement for the seller of the loan to repurchase any such
loan. Furthermore, the agreements under which the loans are sold contain
indemnification provisions which are standard in the mortgage industry and which
could require the payment of sums beyond the repurchase price. All obligations
of the Mortgage Company and its subsidiaries under the various loan sales
agreement, including, without limitation, obligations to make refunds, to
repurchase loans and to indemnify, will be guaranteed by the Company.
The Mortgage Company's operations are located in Altamonte Springs,
Florida. Through its subsidiaries, the Mortgage Company currently provides
mortgage services primarily to borrowers in the southeastern United States.
EMPLOYEES
After giving effect to the Split-Off Transactions, the Company, the Bank
and the Mortgage Company will have a total of approximately 660 full-time
equivalent employees. None of the employees of the Company, the Bank or the
Mortgage Company is subject to a collective bargaining agreement. The Company,
the Bank and the Mortgage Company consider their relationship with their
employees to be good.
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PROPERTIES
The principal offices of both the Company and the Bank are located in the
Bank's main office building at 350 East Dundee Road, Wheeling, Illinois. The
Bank's main office is leased by the Bank and consists of a three-story building
which has six drive-up windows. The Bank occupies approximately 58,310 square
feet. The Bank also owns an adjacent 1.65 acre parking lot which can accommodate
approximately 150 cars. Both the building and the land are leased by the Bank
under a renegotiated lease which commenced on January 1, 1995 and expires March
21, 2010, with options to extend until March 31, 2025.
The Company owns six of the buildings from which the Bank branches are
operated, although the underlying land for two of these properties is leased.
The Company leases buildings for its Woodlawn, Jackson and Cicero branches,
which in accordance with the current lease terms expire in or may be extended to
May 2013, March 2014, and January 2002, respectively.
LEGAL PROCEEDINGS
The Bank and the Mortgage Company are from time to time parties to various
legal actions arising in the normal course of business. Management believes that
there is no proceeding threatened or pending against the Company, the Bank or
the Mortgage Company which, if determined adversely, would have a material
adverse impact on the financial condition or results of operations.
On February 16, 1996, five former Bank branch managers filed suit in the
U.S. District Court (Northern District of Illinois) against the Bank, CTFG and
certain officers of the Bank and CTFG claiming age discrimination, race
discrimination (as to one of them) and defamation. The plaintiffs seek
compensatory and punitive damages. The case is currently in the discovery phase
and has not been set for trial. The Bank believes that the complaint is without
merit and intends to vigorously defend the allegations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company will, as of the
Closing, be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Jeffrey W. Taylor............. 44 Chairman of the Board, Chief Executive Officer and
Director of the Company, Chairman of the Board and
Director of the Bank and Director of the Mortgage
Company
Bruce W. Taylor............... 41 President and Director of the Company, President,
Director and Chief Executive Officer of the Bank and
Director of the Mortgage Company
Sidney J Taylor............... 73 Director of the Company and Director of the Bank
Richard W. Tinberg(1)......... 46 Director of the Company
Melvin E. Pearl(1)............ 58 Director of the Company
Adelyn Dougherty(1)........... 66 Director of the Company
John Christopher Alstrin...... 50 Chief Financial Officer and Director of the Company, the
Bank and the Mortgage Company
Richard C. Keneman............ 52 Director and Executive Vice President of the Bank
Frank DeGradi................. 48 Executive Vice President of the Bank and President and
Director of the Mortgage Company
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
JEFFREY W. TAYLOR is Chairman of the Board, Chief Executive Officer and a
director of the Company and Chairman of the Board and a director of both the
Bank and the Mortgage Company. Mr. Taylor will have served as a director of CTFG
from its inception in 1984 until the Closing. From February 1994 until prior to
the Split-Off Transactions, Mr. Taylor served as Chairman and Chief Executive
Officer of CTFG and Chairman of the Bank. From 1990 to February 1994, Mr. Taylor
served as Vice Chairman of CTFG and Chairman and Chief Executive Officer of the
Bank. Mr. Taylor served as Vice Chairman of Banking Strategy from April 1990
until the end of 1990. Mr. Taylor began his career with the Bank in 1978 as
Associate General Counsel and has held several management positions with the
Bank since that time. Mr. Taylor is the son of Sidney J Taylor and the brother
of Bruce W. Taylor.
BRUCE W. TAYLOR is President and a director of the Company and President
and Chief Executive Officer of the Bank and a director of the Mortgage Company.
Mr. Taylor will have served as a director of CTFG from its inception in 1984
until the Closing. From February 1994 until prior to the Split-Off Transactions,
Mr. Taylor served as President of CTFG in addition to President and Chief
Executive Officer of the Bank. From 1991 to February 1994, Mr. Taylor served as
Vice Chairman of CTFG and President and Chief Operating Officer of the Bank. Mr.
Taylor began working for Cole Taylor Bank in 1979 and has held several
management positions with the Bank since that time. Mr. Taylor is the son of
Sidney J Taylor and the brother of Jeffrey W. Taylor.
SIDNEY J TAYLOR is a director of the Company and of the Bank and will have
been a director of CTFG from its inception in 1984 until the Closing. From the
inception of CTFG through February 1994, Mr. Taylor served as its Chairman and
Chief Executive Officer. Mr. Taylor has over 50 years of banking experience. Mr.
Taylor began his banking career in 1946 and in 1960 became the President of Main
State Bank. In 1969, Mr. Taylor purchased Main State Bank with Irwin H. Cole and
became Chairman of the Board. Mr. Taylor is the father of Jeffrey W. Taylor and
Bruce W. Taylor.
RICHARD W. TINBERG is a director of the Company and will have been a
director of CTFG from 1995 until the Closing. Since 1985, Mr. Tinberg has been
the President and Chief Executive Officer of The Bradford Group, a group of
organizations engaged in the development and marketing of collectibles and Chief
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Executive Officer of Hammacher Schlemmer & Company, which specializes in the
marketing of innovative products and gifts.
MELVIN E. PEARL is a director of the Company and will have been a director
of CTFG from its inception in 1984 until the Closing. Mr. Pearl is a Partner
with the law firm of Katten, Muchin & Zavis.
ADELYN DOUGHERTY is a director of the Company and will have been a director
of CTFG from August 1995 until the Closing. Ms. Dougherty retired in August 1996
as the President of the Institute of European and Asian Studies. From 1988 to
1992, Ms. Dougherty was Senior Vice President and director of Human Resources
for First Colonial Bankshares Corporation, a holding company for sixteen banks
and three non-bank subsidiaries located in the greater metropolitan Chicago
area.
JOHN CHRISTOPHER ALSTRIN is a director and the Chief Financial Officer of
the Company. Mr. Alstrin will have been the Chief Financial Officer of CTFG from
August 1995 until the Closing. Mr. Alstrin also has been Chief Financial Officer
and a Director of the Bank since August 1995, and has served as a director of
the Mortgage Company since its inception. From March 1989 to June 1994, Mr.
Alstrin was the Chief Financial Officer and the Chief Investment Officer of the
Farm & Home Financial Corp., a multi-state financial services corporation.
RICHARD C. KENEMAN has been the Bank's Executive Vice
President-Relationship Banking Division, since August 1990. Since 1991, Mr.
Keneman also has served as director of the Bank. Prior to joining the Bank, Mr.
Keneman was Senior Vice President of the bank consulting firm BMR, Inc., held
executive management positions with First America Bank, Atlanta, Georgia and
served as a director of Escambia Bank in Pensacola, Florida.
FRANK S. DEGRADI has been the President and a director of the Mortgage
Company since its inception and has been the Bank's Executive Vice
President-Mortgage Banking and Servicing since April 1995. Mr. DeGradi was Vice
President and Regional Manager for Norwest Mortgage in Southfield, Michigan from
October 1994 to March 1995 and was Senior Vice President, Regional Manager, for
Independence One Mortgage Corporation, which was purchased by Norwest Mortgage
in 1994, from November 1983 to September 1994.
KEY EMPLOYEES
Other key employees of the Company will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Roy Postel........................... 51 Chief Credit Officer of the Bank
Jean C. Schmidt...................... 52 Director of Human Resources and Business
Planning of the Bank
Richard Schwartz..................... 57 Executive Vice President of the Bank
Richard S. White, Jr................. 62 Executive Vice President of the Bank
</TABLE>
ROY POSTEL has been the Bank's Chief Credit Officer since 1990 and
currently serves as chairman of the Bank's Loan Committee. Prior to joining the
Bank, Mr. Postel was President of Columbian Financial Corp. in Kansas City,
Missouri, and prior to that served as Senior Vice President, Corporate Loan
Review for Boatmen's Bancshares in St. Louis, Missouri.
JEAN C. SCHMIDT is the Company's Director of Human Resources and Business
Planning and will have held such position with CTFG from 1993 until the closing.
From 1991 to 1993, Ms. Schmidt was Vice President in charge of human resources
consulting services for Management Resource Group, Inc. and from 1990 to 1991
Ms. Schmidt performed human resources consulting services at Management
Partners, Inc. in Brentwood, Tennessee. Ms. Schmidt also served as Senior Vice
President and Director of Corporate Human Resources of First America Corp., a
bank holding company based in Nashville, Tennessee.
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RICHARD SCHWARTZ has been the Bank's Executive Vice President-Acquisitions
since June 1994. From 1963 to 1994 Mr. Schwartz was employed by American
National Bank and Trust Company of Chicago, ultimately serving as Executive Vice
President and Director of Middle Market Commercial Banking.
RICHARD S. WHITE, JR. has been the Bank's Executive Vice President-Trust &
Investment Department and Director, Trust Services since December 1994. From
1988 to 1994, Mr. White was Senior Executive Vice President, Trust & Investments
for Premier Bank of Baton Rouge, Louisiana. From 1982 to 1988, Mr. White held
several executive positions at Republic Bank in Houston, Texas.
TERM OF OFFICE
Each member of the Board of Directors of the Company will be elected
annually. All officers of the Company will serve at the pleasure of the Board of
Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate contains provisions (i) eliminating the personal
liability of its directors for monetary damages resulting from breaches of their
fiduciary duty to the extent permitted by the General Corporation Law of
Delaware and (ii) indemnifying its directors and officers to the fullest extent
permitted by the General Corporation Law of Delaware, including circumstances in
which indemnification is otherwise discretionary. These provisions in the
Certificate do not eliminate the duty of care and, in appropriate circumstances,
equitable remedies such as an injunction or other forms of non-monetary relief
would remain available under Delaware law. Each director will continue to be
subject to liability for breach of a director's duty of loyalty to the Company
or its stockholders, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for any transaction from
which the director derived an improper personal benefit and for improper
distributions to stockholders. These provisions also do not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Company's By-Laws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by law. The By-Laws also permit the
Company to secure insurance on behalf of any person it is required or permitted
to indemnify for any liability arising out of his or her actions in such
capacity, regardless of whether the By-Laws would permit indemnification. The
Company maintains liability insurance for its directors and officers.
The Company intends to enter into agreements to indemnify its directors and
certain of its officers, in addition to the indemnification provided for in the
Certificate and By-Laws. These agreements, among other things, will indemnify
the Company's directors and such officers for all direct and indirect expenses
and costs (including, without limitation, all reasonable attorneys' fees and
related disbursements, other out of pocket costs and reasonable compensation for
time spent by such persons for which they are not otherwise compensated by the
Company or any third person) and liabilities of any type whatsoever (including,
but not limited to, judgments, fines and settlement fees) actually and
reasonably incurred by such person in connection with either the investigation,
defense, settlement or appeal of any threatened, pending or completed action,
suit or other proceeding, including any action by or in the right of the
corporation, arising out of such person's services as a director or officer of
the Company or as a director, officer, employee or other agent of any subsidiary
of the Company or any other company or enterprise to which the person provides
services at the request of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain talented and
experienced directors and officers.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policies as
expressed in the Act and is therefore unenforceable.
At present, there is no pending litigation or proceeding involving any
director or officer of the Company where indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification.
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BOARD COMMITTEES
The Board of Directors intends to establish four standing committees: the
Nominating Committee, the Audit Committee, the Compensation Committee and the
Executive Committee. The Nominating Committee will conduct a continuing study of
the size, structure and composition of the Board, will determine Board selection
and retention criteria and will nominate proposed directors. The Audit Committee
will recommend the appointment of auditors and oversee the accounting and audit
functions of the Company. The Compensation Committee will determine executive
officers' and key employees' salaries and bonuses and administer any future
stock option plan. The Executive Committee will have the authority to take all
actions which the Board of Directors as a whole would be able to take, except as
limited by applicable law.
DIRECTOR COMPENSATION
Directors who are not employees or officers of the Company will receive
$ for each Board and committee meeting attended. In addition, all
directors may be reimbursed for certain expenses in connection with attendance
at Board and committee meetings. Other than with respect to reimbursement of
expenses, directors who are employees or officers of the Company will not
receive additional compensation for service as a director.
EXECUTIVE COMPENSATION
The Company was incorporated on October 9, 1996. Therefore, the requirement
for prior years' information regarding the Chief Executive Officer of the
Company and the next four most highly compensated executives of the Company is
not applicable. The following table sets forth the estimated compensation to be
paid by the Company to such individuals (collectively, the "Named Officers").
ESTIMATED COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION COMPENSATION
- ------------------------------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Jeffrey W. Taylor................................ $365,510 $127,929 $ 19,378 $ 43,216
Chairman of the Board and Chief Executive Officer
of the Company(2)
Bruce W. Taylor.................................. 344,525 120,619 22,269 40,389
President of the Company(3)
Sidney J Taylor.................................. 300,000 -- 76,675 97,884
Director of the Company(4)
Richard S. White, Jr............................. 309,000 20,000 2,425 41,440
Executive Vice President of the Bank(5)
Richard Keneman.................................. 216,300 27,729 37,835 28,190
Executive Vice President of the Bank(6)
</TABLE>
- ---------------
(1) The Company anticipates that bonuses in each future year will be based upon
the Company's performance compared to budgeted goals set by the
Compensation Committee each year. Different groups of executives will
receive a percentage of salary for surpassing earnings, returns on assets
and return on equity goals established by the Compensation Committee. The
classifications of employees will involve committee judgments as to the
value of the employee to the Company and in the market place and the growth
and contribution demonstrated by the executive.
(2) "Other Annual Compensation" includes the following estimated amounts: $833
for reimbursement of premiums to be paid by Mr. Taylor for split-dollar
life insurance for Mr. Taylor for 1997 and $18,445 in reimbursement for
country club dues and company car costs to be paid in 1997. "All Other
Compensation" includes an estimated: $5,250 in 401(k) contributions by the
Company to the Profit Sharing/ESOP, $24,899 in contributions to the
deferred compensation plan which the Company expects to establish, $5,625
in ESOP stock account contributions to the Profit Sharing/ESOP and payments
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totaling $7,442, representing the full dollar value of all premiums
expected to be paid by the Company for split-dollar life insurance for Mr.
Taylor.
(3) "Other Annual Compensation" includes the following estimated amounts: $771
for reimbursement of premiums to be paid by Mr. Taylor for split-dollar
life insurance for Mr. Taylor for 1997 and $21,498 in reimbursement for
country club dues and company car costs to be paid in 1997. "All Other
Compensation" includes an estimated: $5,250 in 401(k) contributions by the
Company to the Profit Sharing/ESOP, $22,855 in contributions to the
deferred compensation plan which the Company expects to establish, $5,625
in ESOP stock account contributions to the 401(k)/ESOP and payments
totaling $6,659, representing the full dollar value of all premiums
expected to be paid by the Company for split-dollar life insurance for Mr.
Taylor.
(4) "Other Annual Compensation" includes the following estimated amounts:
$81,893 for reimbursement of premiums to be paid by Mr. Taylor for
split-dollar life insurance for Mr. Taylor for 1997 and $14,782 in
reimbursement for country club dues and company car costs to be paid in
1997. "All Other Compensation" includes an estimated: $5,250 in 401(k)
contributions by the Company to the Profit Sharing/ESOP, $5,625 in ESOP
stock account contributions to the Profit Sharing/ESOP and payments
totaling $87,009, representing the full dollar value of all premiums
expected to be paid by the Company for split-dollar life insurance for Mr.
Taylor.
(5) "Other Annual Compensation" includes an estimated $379 for reimbursement of
premiums to be paid by Mr. White for split-dollar life insurance for Mr.
White for 1997 and $2,046 in reimbursement for country club dues to be paid
in 1997. "All Other Compensation" includes an estimated: $5,250 in 401(k)
contributions by the Company to the Profit Sharing/ESOP, $16,008 in
contributions to the deferred compensation plan which the Company expects
to establish, $5,625 in ESOP stock account contributions to the Profit
Sharing/ESOP and payments totaling $14,557, representing the full dollar
value of all premiums expected to be paid by the Company for split-dollar
life insurance for Mr. White.
(6) "Other Annual Compensation" includes an estimated $945 for reimbursement of
premiums to be paid by Mr. Keneman for split-dollar life insurance for Mr.
Keneman for 1997 and $12,464 in reimbursement for country club dues to be
paid in 1997. "All Other Compensation" includes an estimated: $5,250 in
401(k) contributions by the Company to the Profit Sharing/ESOP, $9,354 in
contributions to the deferred compensation plan which the Company expects
to establish, $5,625 in ESOP stock account contributions to the Profit
Sharing/ESOP and payments totaling $7,961, representing the full dollar
value of all premiums expected to be paid by the Company for split-dollar
life insurance for Mr. Keneman.
STOCK OPTION PLANS
The Company currently does not have a stock option plan in place. However,
the Company intends to establish such a plan in the future and accordingly
expects to reserve 500,000 shares of TCG Common for issuance under such plan.
SEVERANCE AGREEMENTS
Subject to the approval of the Compensation Committee, the Company intends
to enter into severance agreements with Richard White, Richard Keneman and
certain other officers (collectively, the "Senior Managers"). The terms of these
agreements are still under the consideration of the Compensation Committee.
PROFIT SHARING/ESOP
The Profit Sharing/ESOP is a defined contribution plan that is designed to
qualify under Sections 401(a), 401(k) and 4975(e)(7) of the Code. Prior to the
Closing, CTFG will transfer to the Profit Sharing/ESOP the account balances held
in the Cole Taylor Financial Group, Inc. Employee Stock Ownership Plan (the
"CTFG ESOP") and the Cole Taylor Financial Group, Inc. 401(k)/Profit Sharing
Plan (the "CTFG Profit Sharing") on behalf of the active and former Bank
employees and any employee of CTFG who will be a Bank employee on the Closing.
The Profit Sharing/ESOP is intended to provide substantially the same benefits
on substantially the same terms as the CTFG ESOP and the CTFG Profit
Sharing/ESOP.
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The Profit Sharing/ESOP will permit each eligible employee of the Company to
elect to contribute, through payroll deductions, a specified percentage of his
or her compensation up to the statutory limitation. The Company will make a
matching contribution and a profit sharing contribution to the Profit
Sharing/ESOP. The profit sharing contribution will be an amount determined at
the discretion of the Board of Directors. The Company's contribution may be made
in the form of shares of TCG Common, cash to be invested in shares of TCG
Common, or cash to be invested as directed by the Profit Sharing/ESOP
participants. The account values to be transferred from the CTFG ESOP and CTFG
Profit Sharing to the Profit Sharing/ESOP for each of the Named Executives above
as of June 30, 1996 are as follows: Jeffrey W. Taylor, $ ; Bruce W.
Taylor, $ ; Sidney J. Taylor, $ ; Richard S. White, Jr., $ ;
Richard Keneman, $ .
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SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The Company currently has issued and outstanding one share of common stock,
which is held by CTFG and was issued in connection with the Company's
incorporation. This share will be delivered as part of the Split-Off
Transactions. In addition, as part of the Split-Off Transactions, the Company
will issue additional shares to CTFG to be delivered to subscribers, or in
CTFG's discretion, issued directly to subscribers.
SUBSCRIPTION BY CERTAIN PERSONS
The following table sets forth certain information regarding the TCG Common
which, based on commitments the Company has received as of the date of this
Prospectus, is projected to be beneficially owned as of the Closing by (i) each
stockholder known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of TCG Common, (ii) each director of the
Company, (iii) each Named Executive Officer and (iv) all directors and executive
officers of the Company as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the TCG Common listed below, based on
information provided by such owners, will have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable. Except as set forth below, the address of each of the stockholders
named below is the Company's principal executive and administrative office.(1)
<TABLE>
<CAPTION>
PERCENT OF
NAME NUMBER OF SHARES COMMON STOCK
-------------------------------------------- ---------------- ------------
<S> <C> <C>
............................................ %
------- ---
Total.................................. %
======= ===
</TABLE>
- ---------------
(1) To be completed after expressions of interest are received following
distribution of the Preliminary Prospectus.
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SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of the Company and its subsidiaries, including the Bank,
can be materially affected not only by management decisions and general economic
conditions, but also by applicable statutes and regulations and the legislative
and governmental actions of Congress and the various federal and state
regulatory agencies with jurisdiction over the Company and the Bank, such as the
Federal Reserve Board ("FRB"), Federal Deposit Insurance Corporation ("FDIC")
and the Illinois Office of Banks and Real Estate ("IOBRE"). The effect of
applicable statutes, regulations and policies can be significant, cannot be
predicted with a high degree of certainty and can change over time. Furthermore,
such statutes, regulations and other pronouncements and policies are intended to
protect the Bank's depositors and the FDIC's deposit insurance fund, not to
protect stockholders. Bank holding companies and banks are subject to
enforcement actions by their regulators for statutory and regulatory violations
and safety and soundness considerations. In addition to compliance with
statutory and regulatory limitations and requirements concerning financial,
managerial and operating matters, regulated financial institutions such as the
Company and the Bank must file periodic and other reports and information with
their regulators and are subject to examination by each of their regulators.
The statutory requirements applicable to, and regulatory supervision of,
bank holding companies and banks have increased significantly and have undergone
substantial change in recent years. These changes are embodied in, among others,
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Community Development Act") and the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "IBBEA"), and the regulations
promulgated thereunder. Many of the regulations promulgated pursuant to FDICIA
have only recently been finalized, and the provisions of the Community
Development Act and IBBEA are still being implemented. As a result, the impact
of these new laws on the Company and the Bank cannot be predicted with
certainty.
Legislation may be introduced from time to time that could, if enacted,
have significant impact on the operations of the Company and its subsidiaries.
On September 30, President Clinton signed into law the Deposit Insurance Funds
Act of 1996 ("DIFA") which imposes assessments on federally-insured depository
institutions to contribute towards the cost of interest due on bonds issued
between 1987 and 1989 to resolve failed savings and loan associations. Because
the Bank has no Savings Association Insurance Fund ("SAIF")--assessable
deposits, it will not be required to pay the special assessment imposed by DIFA.
However, to cover the annual assessment for the period from January 1, 1997
until December 31, 1999, banks, including the Bank, will pay semiannually on
their Bank Insurance Fund ("BIF") deposit base 1.29 basis points, according to
revised Banking Committee estimates. Starting in the year 2000 until the FICO
bonds are retired, banks and thrifts will pay the FICO assessment on a pro rata
basis (estimated to run 2.43 basis points on each institution's insured deposit
base). Congress currently is considering legislation to broaden the powers of
bank holding companies and permit other financial service companies to own
banks. Legislation also has been introduced in the Congress to restructure the
federal bank regulatory system. Although the Secretary of Treasury of the United
States and the Chairman of the FRB have previously expressed support for
restructuring the federal bank regulatory system, there can be no certainty as
to the effect, if any, that such legislation would have on the regulation of the
Company or the Bank. In addition, on August 23, 1996, the FRB proposed sweeping
changes to Regulation Y, a key bank holding company regulation, that would allow
new activities by bank holding companies and their non-bank subsidiaries,
broaden existing operations and reduce or eliminate certain restrictions. It is
unclear, however, whether and in what form these proposed changes will be
implemented and, if implemented, the impact, if any, such changes will have on
the Company.
The following discussion and other references to and descriptions of the
regulation of financial institutions and their parent holding companies
contained herein are not intended to constitute and do not purport to be a
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complete statement of all legal restrictions and requirements applicable to the
Company and the Bank, and all such descriptions are qualified in their entirety
by reference to applicable statutes, regulations and policies.
REGULATION OF BANK HOLDING COMPANIES AND THEIR NON-BANK SUBSIDIARIES
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended ("BHCA"). As such, the Company is subject to
regulation, supervision and examination by the FRB. The Company is also subject
to the limitations and requirements of the Illinois Bank Holding Company Act
("IBHCA"). These limitations and requirements, however, are no more restrictive
in most instances than those imposed by the BHCA and the FRB. The business and
affairs of the Company are regulated in a variety of ways, including limitations
on acquiring control of other banks and bank holding companies, limitations on
activities and investments, regulations relating to capital requirements and
limitations on payment of dividends. In addition, it is the FRB's policy that a
bank holding company is expected to act as a source of financial strength to
banks that it owns or controls and, as a result, the FRB could require the
Company to commit resources to support the Bank in circumstances in which the
Company might not do so absent the FRB's policy.
In 1996, Federal Reserve examiners began to assign a formal supervisory
rating to the adequacy of a bank holding company's and its member bank's risk
management processes, including their internal controls. The emphasis on sound
risk management processes and strong internal controls reflects the Federal
Reserve's view that proper risk management is critical to the conduct of safe
and sound banking activities in light of new technologies, activities in product
innovation and other changes to the banking industry.
ACQUISITION OF BANKS AND BANK HOLDING COMPANIES
The BHCA generally prohibits a bank holding company from (1) acquiring,
directly or indirectly, more than 5% of the outstanding shares of any class of
voting securities of a bank or bank holding company, (2) acquiring control of a
bank or another bank holding company, (3) acquiring all or substantially all of
the assets of a bank or (4) merging or consolidating with another bank holding
company, without first obtaining FRB approval. In considering an application
with respect to any such transaction, the FRB is required to consider a variety
of factors, including the potential anti-competitive effects of the transaction,
the financial conditions, managerial resources and future prospects of the
combining and resulting institutions, the convenience and needs of the
communities the combined organization would serve, the record of performance of
each combining organization under the Community Reinvestment Act and the
prospective availability to the FRB of information appropriate to determine
ongoing regulatory compliance with applicable banking laws. In addition, both
the federal Change In Bank Control Act and the Illinois Banking Act ("IBA")
impose limitations on the ability of one or more individuals or other entities
to acquire control of the Company or the Bank.
AFFILIATE TRANSACTIONS
The Federal Reserve Act and IBA impose certain limitations on extensions of
credit and other transactions by and between banks and their parent holding
companies or affiliates of their parent holding companies. Under the Bank
Holding Company Act Amendments of 1970 and the FRB's regulations, a bank holding
company and its bank and nonbanking subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property and the furnishing of any services.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
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INTERSTATE BANKING AND BRANCHING
Until September 29, 1995, the BHCA prohibited a bank holding company from
acquiring control of a bank whose principal office is located outside of the
state in which the principal place of business of the bank holding company is
located unless specifically authorized by applicable state law. The IBHCA
permitted Illinois bank holding companies to acquire control of banks in any
state and permitted bank holding companies whose principal place of business is
in another state to acquire control of Illinois banks or bank holding companies,
provided the other state afforded reciprocal rights to Illinois bank holding
companies and certain other requirements were satisfied.
As of September 29, 1995, interstate acquisitions of banks and bank holding
companies were permitted without geographic limitation. Beginning June 1, 1997,
the IBBEA authorizes a bank to merge with a bank in another state as long as
neither of the states has opted out of interstate branching between the date of
enactment of the IBBEA and May 31, 1997. The IBBEA also provides that states may
enact laws permitting interstate bank merger transactions prior to June 1, 1997.
Once a bank has established branches in a state through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the state where any bank involved in the interstate merger
transaction could have established or acquired branches under applicable federal
or state law. A bank may also establish and operate a de novo branch in a state
in which the bank does not maintain a branch if that state expressly permits
such de novo branching. A bank that has established a branch in a state through
de novo branching may establish and acquire additional branches in such state in
the same manner and to the same extent as a bank having a branch in such state
as a result of an interstate merger. If a state opts out of interstate branching
within the specified time period, no bank in any other state may establish a
branch in the opting out state, whether through an acquisition or de novo.
Legislation was recently enacted in Illinois to permit Illinois chartered banks,
such as the Bank, to establish out-of-state branches by merger beginning June 1,
1997 and permit out-of-state banks to branch into Illinois as of the same date.
The restrictions described above represent limitations on expansion by the
Company and the Bank, the acquisition of control of the Company by another
company and the disposition by the Company of all or a portion of the stock of
the Bank or by the Bank of all or a substantial portion of its assets.
PERMITTED NON-BANKING ACTIVITIES
The BHCA generally prohibits a bank holding company from engaging in
activities or acquiring or controlling, directly or indirectly, more than 5% of
the voting securities or assets of any company engaged in any activity other
than banking, managing or controlling banks and bank subsidiaries or another
activity that the FRB has determined, by regulation or otherwise, to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Subject to certain exceptions, a bank holding company must
obtain the prior approval of the FRB to engage in or acquire control of a
company engaging in a permissible nonbanking activity.
In evaluating such applications, the FRB will consider, among other
relevant factors, whether permitting the bank holding company to engage in the
activity in question can reasonably be expected to produce benefits to the
public (such as increased convenience, competition or efficiency) that outweigh
any possible adverse effects (such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or safety and soundness
concerns). Those activities that the FRB has determined by regulation to be
closely related to banking include real estate mortgage lending, the principal
activity of the Mortgage Company. Recent proposed amendments to the FRB
regulations implementing the BHCA would streamline the application process and,
in some cases, limit the FRB's evaluation to a determination of whether the bank
holding company in question is well managed and capitalized.
CAPITAL REQUIREMENTS
The FRB has adopted minimum risk-based capital standards for bank holding
companies. The FRB requires bank holding companies to maintain certain minimum
ratios of risk-weighted capital to total risk-adjusted assets. Risk-adjusted
assets include a "credit equivalent amount" of off-balance sheet items,
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determined in accordance with conversion factors set forth in the FRB's
regulations. In August 1995, the federal bank regulators implemented a final
rule to revise and expand the conversion factors used to calculate the credit
equivalent amounts to recognize certain derivative contracts and transactions
subject to qualifying bilateral netting arrangements. Each asset and off-balance
sheet item, after certain adjustments, is assigned to one of four risk-weighing
categories, 0%, 20%, 50% or 100%, and the risk-adjusted values then are added
together to determine the total amount of risk-weighted assets.
A bank holding company must meet two risk-based capital standards, a "core"
or "Tier 1" capital requirement and a total capital requirement. The current
regulations require that a bank holding company maintain Tier 1 capital equal to
4% of risk-adjusted assets and total capital equal to 8% of risk-adjusted
assets, at least one-half of which must be Tier 1 capital. Tier 1 capital
consists of common stockholders' equity; qualifying noncumulative perpetual
preferred stock; qualifying cumulative perpetual preferred stock (up to 25% of
total Tier 1 capital); and minority interests in the equity accounts of
consolidated subsidiaries. Core capital excludes goodwill and certain other
intangible assets. It is intended that the Preferred Stock will be considered
Tier 1 capital for the purposes of those regulations.
Total capital represents the sum of Tier 1 capital plus "Tier 2" capital,
less certain deductions. Tier 2 or "supplementary" capital consists, subject to
certain limitations, of allowances for loan and lease losses (up to 1.25% of
total weighted risk assets); perpetual preferred stock (to the extent not
included in Tier 1 capital); hybrid capital instruments; perpetual debt;
mandatory convertible debt securities; term subordinated debt; and intermediate
term preferred stock. In determining total capital, a bank holding company must
deduct its investments in unconsolidated banking and finance subsidiaries and,
as determined by the FRB on a case-by-case basis, other designated subsidiaries
or associated companies, reciprocal holdings of certain securities of banking
organizations; and other deductions required by regulation or determined by the
FRB on a case-by-case basis.
The FRB also has established a minimum leverage ratio requirement for bank
holding companies. The minimum leverage ratio, which is defined as Tier 1
capital divided by average quarterly assets (net of allowance for losses and
goodwill), is 3% for banking organizations that do not anticipate significant
growth and that have well-diversified risk (including no undue interest rate
risk), excellent asset quality, high liquidity and good earnings. Banking
organizations, however, generally are expected to operate well above these
minimum risk-based ratios and are expected to have ratios of at least 100 to 200
basis points above the stated minimum, depending upon their particular condition
and growth plans. Higher capital ratios could be required if warranted by the
particular circumstances or risk profile of a given banking organization. The
FRB has not advised the Company of any specific minimum Tier 1 leverage ratio
applicable to it.
As of June 30, 1996, CTFG had Tier 1 and total risk-based capital ratios of
9.65% and 10.90%, respectively, and a Tier 1 leverage ratio of 7.92%. As
adjusted for the Split-Off Transactions and giving effect to the offering of
Preferred Stock described hereby, the Company will have pro forma June 30, 1996
Tier 1 and total risk-based capital ratios of 6.45% and 7.70%, respectively, and
a leverage ratio of 4.85%.
The failure of a bank holding company to meet its risk-weighted capital
ratios may result in supervisory action, as well as an inability to obtain
approval of any regulatory applications and, potentially, increased frequency of
examination. The nature and intensity of the supervisory action will depend upon
the level of noncompliance. Under the IBHCA, no bank holding company may acquire
control of a bank if, at the time it applies for approval or at the time the
transaction is consummated, its ratio of total capital to total assets as
determined in accordance with then applicable FRB regulations, is or will be
less than 7%.
The federal bank regulators have previously indicated a desire to raise
minimum capital requirements for banking organizations and have suggested that
revisions to the risk-based capital requirements should be made. The effect of
any future change in the required capital ratios of the Company or the Bank
cannot be determined at this time.
Risk-based capital ratios which focus principally on broad categories of
credit risk are only one indicator of the overall financial health of a bank
organization. They do not incorporate other factors that can affect the
Company's financial condition, such as overall interest rate risk exposure,
liquidity, funding and market risks,
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the quality and level of earnings, investment or loan portfolio concentrations,
the quality of loans and investments, the effectiveness of loan and investment
policies and management's ability to monitor and control financial and operating
risks.
In the event that the subsidiary institution fails to meet minimum capital
requirements and is required to submit a capital restoration plan, such plan
would be acceptable only if the parent holding company guarantees compliance
with the plan up to the lesser of 5% of the institution's total assets or the
amount necessary to bring the institution into compliance with capital standards
applicable at the time that the institution fails to comply.
DIVIDENDS
The FRB has indicated that banking organizations should generally pay cash
dividends out of current operating earnings and the current rate of earnings
retention should be consistent with the organization's capital needs, asset
quality and overall financial condition. A banking organization experiencing
earnings weaknesses should not pay cash dividends which exceed its net income or
which could only be funded in ways that would weaken its financial health or
undermine its ability to serve as a source of strength to its subsidiary bank,
such as by borrowing. The FRB may, and in certain circumstances must, prohibit a
bank holding company from making any capital distributions without prior FRB
approval if the subsidiary institution is undercapitalized. See "--Capital
Requirements." The FRB also may impose limitations on the payment of dividends
as a condition to its approval of certain applications, including applications
for approval of mergers or acquisitions. Between 1989 and 1992, the FRB did not
permit CTFG, then the Bank's parent holding company, to pay dividends on its
stock without the FRB's prior consent. In 1992, the FRB modified this
restriction to require only prior notification of such dividends. In 1993, the
FRB informed CTFG that CTFG was permitted to pay dividends without restriction.
REGULATION OF BANKS
The Bank is a banking corporation organized under the IBA. As such, it is
subject to regulation, supervision and examination by the IOBRE. The Bank is a
member of the Federal Reserve System and, therefore, subject to regulation,
supervision and examination by the FRB. The deposit accounts of the Bank are
insured up to applicable limits by the FDIC's Bank Insurance Fund (the "BIF").
Thus, the Bank is also subject to regulation, supervision and examination by the
FDIC. In certain instances, statutes administered and regulations promulgated by
certain of these agencies are more stringent than those of other agencies with
jurisdiction. In these instances, the Bank must comply with the more stringent
restrictions, prohibitions or requirements.
The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, the
Bank's capital ratios, payment of dividends, liquidity requirements, the nature
and amount of the investments that the Bank may make, transactions with
affiliates, community and consumer lending, internal policies and controls,
reporting by and examination of the Bank and changes in control of the Bank. The
federal bank regulators have recently adopted an interest rate risk component to
the risk capital requirements to assess the exposure of banks to declines in the
economic value of the bank's capital due to changes in interest rates.
DEPOSIT INSURANCE
As a BIF-insured institution, the Bank is required to pay deposit premiums
to the BIF. The FDIC has implemented a risk-based deposit insurance assessment
system under which each insured depository institution is assigned to one of
nine categories based upon its level of capital and an evaluation of other
supervisory factors and assessed insurance premiums accordingly. These premium
rates for the semiannual period beginning July 1, 1996 range from 0.0% of
deposits included in an institution's "assessment base" for the highest rated
institutions to .27% of such deposits for the lowest rated institutions, with
well-capitalized and well-managed institutions paying only the statutory minimum
yearly fee of $2,000. Risk classification of an insured institution is made by
the FDIC for each semiannual assessment period.
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In August 1995, the FDIC revised the schedule for BIF-insured institutions
to lower the premium rates to .04% for the highest rated institutions and .31%
for the lowest rated institutions. The BIF rates were further reduced to 0.0%
for the highest rated institutions and .27% for the lowest rated institutions
effective January 1, 1996. The FDIC left untouched the premium levels for the
period beginning July 1, 1996. Rates may be increased in the future if the
designated reserve ratio for BIF falls below 1.25%, or are otherwise modified by
the FDIC or the Congress. The FDIC may propose additional changes in the
assessment rate matrix at a later date.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound banking practices, is in a condition
that is unsafe or unsound for the continuation of operations or otherwise has
violated any applicable law, regulation or order, or any condition imposed in
writing by or in a written agreement with the FDIC. The FDIC also may suspend
deposit insurance temporarily during the pendency of a proceeding to terminate
insurance if the institution has no tangible capital.
CAPITAL REQUIREMENTS
FRB regulations establish the same three minimum capital standards for
insured state member banks as they do for bank holding companies. Under the FRB
regulations, the Bank's capital ratios are computed in a manner substantially
similar to the manner in which bank holding company capital ratios are
determined. See "Regulation of Bank Holding Companies and Their Non-Bank
Subsidiaries--Capital Requirements." The FRB capital requirements are minimum
requirements and higher levels of capital will be required if warranted by the
particular circumstances or risk profile of an individual bank.
FDICIA provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers under this provision depends
on whether the institution in question is "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Under regulations adopted by the federal banking
regulators, a bank is considered "well capitalized" if it (i) has a total
risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital
ratio of 6% or greater, (iii) has a leverage ratio of 5% or greater and (iv) is
not subject to any order or written directive to meet and maintain a specific
capital level. An "adequately capitalized" bank is defined as one that (i) has a
total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based
capital ratio of 4% or greater, (iii) has a leverage ratio of 4% or greater (or
3% or greater in the case of a bank with the highest composite regulatory
examination rating that is not experiencing or anticipating significant growth)
and (iv) does not meet the definition of a well capitalized bank. A bank would
be considered (A) "undercapitalized" if it has (i) a total risk-based capital
ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or
(iii) a leverage ratio of less than 4% (or 3% in the case of a bank with the
highest composite regulatory examination rating that is not experiencing or
anticipating significant growth); (B) "significantly undercapitalized" if the
bank has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier 1
risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than
3% and (C) "critically undercapitalized" if the bank has a ratio of tangible
equity to total assets of equal to or less than 2%. The appropriate federal
banking regulator may downgrade a bank to the next lower category if the
regulator determines (i) after notice and opportunity for hearing or response,
that the bank is in an unsafe or unsound condition or (ii) that the bank has
received (and not corrected) a less-than-satisfactory rating for any of the
categories of asset quality, management earnings or liquidity in its most recent
exam.
As of June 30, 1996, the Bank qualified as "well capitalized," with a total
risk-based capital ratio of 10.72%, a Tier 1 risk-based capital ratio of 9.47%
and a leverage ratio of 7.31%. As adjusted for the Split-Off Transactions and
giving effect to the offering of Preferred Stock described hereby and the
assumption of the Credit Facilities, the Bank will have pro forma June 30, 1996
total and Tier 1 risk-based capital ratios of 9.52% and 8.27% respectively, and
a leverage ratio of 6.19%, as of the Closing.
Depending upon the capital category to which an institution is assigned,
the regulators' supervisory and corrective powers, many of which are mandatory
in certain circumstances, include a prohibition on capital distributions by the
institution if, after making the distribution, it would be undercapitalized;
prohibition on
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payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching or new lines of business, requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; requiring the holding
company to divest the institution or other nonbanking subsidiaries; prohibiting
the holding company from making any distributions without FRB approval,
prohibiting the payment of principal or interest on subordinated debt; and,
ultimately, appointing a receiver for the institution. See "--Regulation of Bank
Holding Companies and Their Non-Bank Subsidiaries--Dividends."
DIVIDENDS
Under the IBA, the Bank is permitted to declare and pay dividends in
amounts up to the amount of its accumulated net profits, provided that it shall
retain in its surplus at least one-tenth of its net profits since the date of
the declaration of its most recent previous dividend until said additions to
surplus, in the aggregate, equal at least the paid-in capital of the Bank. In no
event may the Bank, while it continues its banking business, pay dividends in
excess of its net profits then on hand (after deductions for losses and bad
debts). The Bank is also subject to various regulatory policies and requirements
relating to the payment of dividends. See "--Capital Requirements."
The FRB permits a state member bank such as the Bank to pay dividends,
while it continues its banking operations, in an amount not greater than its net
profits then on hand, after deducting therefrom its losses and bad debts. No
state member bank may pay as a dividend any portion of its paid-in capital and
no state member bank may pay dividends if its accumulated losses equal or exceed
its undivided profits then on hand. The FRB cash dividend policy statement
described above (See "Regulation of Bank Holding Companies and Their Non-Bank
Subsidiaries--Dividends") also applies to the payment of dividends by state
member banks.
INSIDER AND AFFILIATE TRANSACTIONS
The Bank is subject to certain restrictions imposed by the Federal Reserve
Act and the IBA on any extensions of credit to, purchase of assets from, and
other transactions with the Company and its nonbanking subsidiaries, on
investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans made by the Bank.
Such restrictions prevent the Company and its affiliates from borrowing
from the Bank unless the loans are secured by marketable obligations of
specified amounts. Further, such secured loans, investments and other
transactions between the Bank and the Company or its affiliates are limited to
10% of the Bank's capital and surplus (as defined by federal regulations) and
such secured loans, investments and other transactions are limited, in the
aggregate, to 20% of either the Bank's capital and surplus (as defined by
federal regulations). The sales of some assets, for example the sales of
mortgages by the Mortgage Company to the Bank, are exempt from these percentage
limitations and security requirements only if specific regulatory requirements
are met. In addition, all covered transactions with affiliates must comply with
regulations prohibiting terms that would be preferential to the Company or the
Mortgage Company. There have been no intercompany transactions between the
Company or the Mortgage Company and the Bank which would implicate these
provisions.
Certain limitations and reporting requirements also are placed on
extensions of credit by the Bank to principal stockholders of the Company and to
directors and certain executive officers of the Company, its non-bank
subsidiaries and the Bank and to "related interests" of such principal
stockholders, directors and officers. In addition, any director or officer of
the Company or the Bank or principal stockholder of the Company may be limited
in his or her ability to obtain credit from banks with which the Bank maintains
a correspondent relationship.
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COMMUNITY REINVESTMENT ACT
In connection with its lending activities, the Bank is subject to a variety
of federal and state laws designed to protect borrowers and promote lending to
various sectors of the economy and population. Included among these are the Home
Mortgage Disclosure Act ("HMDA"), Real Estate Settlement Procedures Act
("RESPA"), Truth-In-Lending Act ("TILA"), the Equal Credit Opportunity Act
("ECOA"), Fair Credit Reporting Act ("FCRA"), the Community Reinvestment Act
("CRA") and similar Illinois laws applicable to, among other things, usury,
credit discrimination and business practices.
The CRA requires a bank to define the communities that it serves, identify
the credit needs of such communities and adopt and implement a "Community
Reinvestment Act Statement" pursuant to which it offers credit products and
takes other actions that respond to the credit needs of the communities. Under
FIRREA, the FRB is required to conduct annual CRA examinations of insured
financial institutions and to assign to them a CRA rating of "outstanding,"
"satisfactory," "needs improvement" or "unsatisfactory" based on their record of
meeting community needs.
The federal banking regulatory agencies will take into account the CRA
ratings of combining organizations and their level of compliance with the Equal
Credit Opportunity Act in connection with acquisitions involving a change in
control of a financial institution and, if any of the combining institutions has
a CRA rating of "needs improvement" or "unsatisfactory," the agency may deny the
application or require corrective action as a condition of its approval. In
1995, 1994 and 1993 the Bank's CRA rating was "satisfactory". Under recently
approved regulations, the Bank will be subject to a new system for evaluating
its actual performance in meeting community needs beginning with the December
1996 examination. There can be no certainty as to the effect, if any, that such
changes will have on the Bank.
The operations of the Mortgage Company and its subsidiaries are subject to
HMDA, RESPA, TILA, ECOA, the regulations promulgated thereunder and similar
state laws applicable to among other things, usury, credit discounts and
business practices. Provisions of those statutes and related regulations
prohibit discrimination and require disclosure of certain basic information to
mortgagors such as credit and settlement costs. Each of the subsidiaries of the
Mortgage Company has or will obtain all necessary licenses in all states in
which it conducts or expects to conduct its mortgage operations.
ANNUAL AUDIT, REPORTING AND MANAGERIAL CONTROL REQUIREMENTS
Under FDICIA, the FDIC was required to promulgate regulations requiring
FDIC-insured financial institutions over a certain size to have an annual
independent audit of their financial statements in accordance with generally
accepted auditing standards, to have an independent audit committee of outside
directors, and to file with the FDIC and their respective primary federal
regulators annual reports, attested to by their independent auditors, as to
their internal control structure and compliance with certain designated laws and
regulations. The FDIC's regulations apply these requirements to insured
depository institutions with total assets of $500 million or more. The
requirements can be satisfied by audit procedures adhered to by a parent entity
such as the Company that is consolidated with the Bank for financial reporting
purposes. Legislation is pending that could result in substantial changes to the
audit requirements. There is no certainty as to what, if any, effect such
legislation may have on the Company or the Bank.
BROKERED DEPOSITS
The FDIC has issued a rule regarding the ability of depository institutions
to accept brokered deposits, i.e. deposits obtained through a deposit broker.
The rule provides that (i) an "undercapitalized" institution is prohibited from
accepting, renewing or rolling over brokered deposits, (ii) an "adequately
capitalized" institution must obtain a waiver from the FDIC before accepting,
renewing or rolling over brokered deposits and is subject to limitations on the
rate of interest payable on brokered deposits, and (iii) a "well capitalized"
institution may accept or renew brokered deposits without restriction. At June
30, 1996 the Bank had brokered deposits of $128.4 million and was considered
"well capitalized" for purposes of this rule. See "Risk Factors--Liquidity
Management".
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OTHER FDICIA RULES
The banking agencies have also adopted or proposed rules to implement
provisions of FDICIA, the Community Development Act and the IBBEA, including:
(i) real estate lending standards for banks, which provide guidelines concerning
loan-to-value ratios for various types of real estate loans; (ii) revisions to
the risk-based capital rules to account for interest rate risk, concentration of
credit risk, transferring of assets without recourse and the risks posed by
"non-traditional activities"; (iii) rules requiring depository institutions to
develop and implement internal procedures to evaluate and control credit and
settlement exposure to their correspondent banks; (iv) rules prohibiting, with
certain exceptions, state member banks from making equity investments of types
and amounts not permissible for national banks; and (v) rules addressing various
"safety and soundness" issues, including operations and managerial standards,
standards for asset quality, earnings and stock valuations, and compensation
standards for the officers, directors, employees and principal shareholders of
the depository institution.
CHANGE IN CONTROL
As an Illinois bank, the Bank is subject to the rules regarding change in
control of Illinois banks contained in the IBA. The Company is also subject to
these rules by virtue of its control of the Bank. Generally, the IBA provides
that no person or entity or group of affiliated persons or entities may, without
the IOBRE's consent, directly or indirectly, acquire control of an Illinois
bank. Such control is presumed if any person, directly or indirectly, owns or
controls 20% or more of the outstanding stock of an Illinois bank or such lesser
amount as would enable the holder or holders, by applying cumulative voting, to
elect one director of the bank.
In evaluating applications for acquisition of control of an Illinois bank
or bank holding company, in addition to the IOBRE's consideration of other
factors deemed relevant, the IOBRE must find that the character of the proposed
management of the bank, after the change in control will assure reasonable
promise of successful, safe and sound operation, that the future earnings
prospects of the bank after the promised change in control are favorable, and
that any prior involvement that the proposed controlling persons or the proposed
management of the institution after the change in control have had with any
other financial institution has been conducted in a safe and sound manner. See
"Regulation of Bank Holding Companies and Their Non-Bank Subsidiaries --
Acquisition of Banks and Bank Holding Companies."
The IOBRE has reviewed the Split-Off Transactions and on September 9, 1996
issued its determination that such transactions do not constitute a change of
control for purposes of the IBA.
REGULATION OF THE MORTGAGE COMPANY
The Mortgage Company's business is subject to extensive regulations at both
the Federal and state level. Regulated matters include loan origination, credit
activities, truth in lending, maximum interest rates and finance and other
charges, disclosure to customers, equal credit opportunity, the terms of secured
transactions, the collection, repossession and claims handling procedures
utilized by the Mortgage Company, multiple qualifications and licencing
requirements for doing business in various jurisdictions and other trade
practices.
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CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS, OFFICERS AND FAMILY MEMBERS
Certain of the directors and officers of the Company and of the Bank and
members of their immediate families, and firms and corporations with which they
are associated, have had transactions with the Bank, including borrowings and
investments in certificates of deposit. These arrangements will continue after
the Closing. Management believes that all such loans and investments have been
made in the ordinary course of business of the Bank, have been made on
substantially the same terms, including interest rates paid or changed and
collateral required, as those prevailing at the time for comparable transactions
with unaffiliated persons, and did not involve more than the normal risk of
collectibility or present other unfavorable features. As of December 31, 1995,
the aggregate outstanding amount of all loans which are projected to exceed
$60,000 to officers and directors of the Company, and members of their immediate
families and firms and corporations in which they have at least a 10% beneficial
interest was approximately $20 million. The Company relies on its directors and
executive officers for identification of loans to their related interests.
The Company expects that its primary insurance brokers will be Dann
Brothers, Inc., which provides property and casualty insurance brokerage
services, and Benefit Planning Associates, which provides health insurance
brokerage services. Each of Russell Dann and Scott Dann, the brothers-in-law of
Jeffrey W. Taylor, beneficially owns approximately 25% of the capital stock of
Dann Brothers, Inc. Each of Russell Dann, Scott Dann and Armand Dann, the
father-in-law of Jeffrey Taylor and a director of the Bank, beneficially owns
approximately 16% of the partnership interests of Benefit Planning Associates.
During 1995, CTFG paid total commissions of approximately $180,000 to Dann
Brothers, Inc. and Benefit Planning Associates in connection with various
insurance policies. The Company anticipates it will pay commissions in
substantially similar amounts in 1997.
It is expected that the Company will reimburse the Taylor family for
expenses incurred in connection with the organization of the Company and the
transactions contemplated by the Split-Off Transactions. Such expenses are
estimated to be $2 million.
The Share Exchange Agreement between CTFG and members of the Taylor Family
provides for a series of Split-Off Transactions. The Company was formed solely
for the purpose of facilitating the Split-Off Transactions. Accordingly, the
Share Exchange Agreement and related agreements and arrangements affecting the
Company, some of which will continue beyond the Closing, were negotiated with
CTFG and executed by representatives of the Taylor Family. See "Risk Factors --
Risks Arising from the Split-Off Transactions -- Interest of Taylor Family;
Possible Conflicts of Interests"; "-- Liabilities Under Share Exchange
Agreement"; and "The Split-Off Transactions."
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses the material U.S. federal income tax
consequences of the purchase of TCG Common by delivery of CTFG Common. This
summary is based upon the currently existing provisons of the Code, applicable
Treasury regulations thereunder, current administrative interpretations and
court decisions, all of which are subject to change, possibly with retroactive
effect. The summary assumes that the holders of shares of CTFG Common hold such
shares as a capital asset within the meaning of Section 1221 of the Code.
Further, the discussion does not address the U.S. federal income tax
consequences of the Offer to holders that are subject to special federal income
tax treatment, including without limitation, foreign persons, banks, insurance
companies, tax-exempt entities, retirement plans and dealers in securities. In
addition, the discussion does not address any consequences arising under the
laws of any state, locality or foreign jurisdiction. AS A RESULT, EACH HOLDER OF
CTFG COMMON IS URGED TO CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE OFFER TO SUCH HOLDER, INCLUDING THE APPLICATION AND EFFECTS
OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
On September 3, 1996, CTFG received the Tax Ruling from the IRS to the
effect that the distribution of shares of TCG Common to CTFG stockholders in
exchange for shares of CTFG Common will be treated as a tax-free transaction
under Section 355 of the Code. According to the Tax Ruling:
1. No gain or loss will be recognized by CTFG upon the exchange of shares
of TCG Common for shares of CTFG Common.
2. No gain or loss will be recognized by (and no amount will be included in
the income of) a CTFG stockholder upon the receipt of shares of TCG
Common in exchange for shares of CTFG Common.
3. The tax basis of the shares of TCG Common received pursuant to the
Offering will be the same as the tax basis of the shares of CTFG Common
surrendered in the Offering.
4. The holding period of the shares of TCG Common received pursuant to the
Offering will include the holding period of the shares of CTFG Common
surrendered in the Offering, provided that the shares of CTFG Common are
held as capital assets on the date of the Closing.
Although the Tax Ruling is generally binding upon the IRS, it is subject to
the accuracy of certain factual representations and assumptions contained in
CTFG's request for the Tax Ruling. The Company is unaware of any present facts
or circumstances that would cause such representations and assumptions to be
inaccurate. However, if the IRS were to take the position that such
representations were violated or that such assumptions were inaccurate, the Tax
Ruling may be invalidated. If the IRS took the position that the purchase of TCG
Common by delivery of CTFG Common did not qualify as a tax-free transaction, and
such position were upheld, then CTFG would be required to recognize taxable gain
equal to the difference between the fair market value and CTFG's tax basis in
the TCG Common. In addition, those CTFG stockholders receiving TCG Common in the
Offering would be taxable on the receipt of the TCG Common which, depending on
the stockholder's individual circumstances, would either require: (i)
recognition of gain or loss based upon the difference between the fair market
value of the TCG Common received and the tax basis of the CTFG Common
surrendered in the Offering, or (ii) recognition of dividend income equal to the
value of the TCG Common received, without reduction for the CTFG stockholder's
basis in the CTFG Common surrendered in the Offering.
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THE OFFER
GENERAL
The TCG Common is being offered in the Offer to the Selected Offerees,
which are: (i) Eligible Participants, (ii) the Profit Sharing/ESOP with respect
to the shares of CTFG Common held in the ESOP stock accounts thereunder, (iii)
the Taylor Family, (iv) certain officers, directors and employees of the Bank
and CTFG, and (v) selected other CTFG stockholders. At the Closing, the CTFG
Common will be delivered to CTFG as a part of the Split-Off Transactions.
Under the Share Exchange Agreement, CTFG will accept for delivery a minimum
of 4.0 million and a maximum of 4.5 million shares of CTFG Common. In the event
less than 4.0 million shares of TCG Common are subscribed for by the Expiration
Date, the Offer will terminate. In the event more than 4.5 million shares of TCG
Common are subscribed for, the Taylor Family, in its discretion, will allocate
the shares, with first preference being given to the Taylor Family. As of the
date of this Prospectus, the Taylor Family beneficially owns 3,996,241 shares of
CTFG Common which in the aggregate could be used to purchase 88.8% of the TCG
Common offered hereby (assuming the maximum number of shares subscribed for).
Under the terms of the Share Exchange Agreement, no more than 49.9% of the TCG
Common issued in the Offer may be issued to persons who are not members of the
Taylor Family.
The Company has made application for the registration of the securities
being offered hereby under the applicable securities laws of all states in which
the Offer will be made which do not provide for an exemption therefrom. In the
event that the Offer is not permitted under the law of any state or states, or
in the event that qualification of the TCG Common in such state or states would
prove to be impracticable in the judgement of the Taylor Family, the Company
will not offer the opportunity to subscribe in such state or states.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of any Subscription Letter will be determined by the
Company and the Taylor Family, in their sole discretion, whose determination
will be final and binding. The Taylor Family, in its discretion, will determine
the identities of and offered amounts to the Selected Offerees, and the Taylor
Family and the Company have no obligation to (i) make the Offer to any person,
(ii) accept any Subscription Letter, or (iii) allow any person to subscribe for
all of the TCG Common they desire to purchase. The Offer is not being made to
CTFG stockholders generally.
TERMS OF THE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus,
the Subscription Letter and the Share Exchange Agreement, CTFG will sell one
share of TCG Common for each share of CTFG Common delivered by the Selected
Offerees and accepted by the Taylor Family in the Offer. Holders may use some or
all of their CTFG Common as consideration for TCG Common pursuant to the Offer,
subject to the Taylor Family's right to reject any Subscription Letter. TCG
Common may not be purchased for cash.
As of the date of this Prospectus, there was one share of TCG Common
outstanding, which was issued to CTFG in connection with the Company's
incorporation. As of September 20, 1996, there were 14,758,569 shares of CTFG
Common outstanding and held of record by 649 stockholders (although CTFG has
been informed that there are in excess of 6,500 beneficial owners).
Except as set forth below with respect to Eligible Participants and the
Profit Sharing/ESOP, only a registered holder of CTFG Common (or such holder's
legal representative or attorney-in-fact), as reflected on the records of the
transfer agent for CTFG and selected by the Taylor Family, may subscribe for TCG
Common. There will be no fixed record date for determining registered holders of
CTFG Common entitled to participate in the Offer.
A validly delivered Subscription Letter shall be accepted when, as and if
the Taylor Family has given oral or written notice thereof to the Escrow Agent.
The Escrow Agent will act as agent for subscribers for the purposes of
delivering the CTFG Common to CTFG and receiving the TCG Common at the Closing.
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If any subscription is not accepted by the Taylor Family, certificates for
any such unaccepted CTFG Common will be returned, without expense, to the
subscriber as promptly as practicable. Holders who purchase TCG Common in the
Offer will not be required to pay brokerage commissions or fees or, subject to
the instructions in the Subscription Letter, transfer taxes with respect to the
purchase of TCG Common pursuant to the Offer. The Company will pay all such
charges and expenses, other than certain applicable taxes, in connection with
the Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 12:00 a.m., Chicago time, on December
, 1996, unless the Taylor Family, in its sole discretion, extends the Offer,
in which case the term "Expiration Date" shall mean the latest date and time to
which the Offer is extended.
In order to extend the Offer, the Taylor Family will notify the Escrow
Agent of any extension by oral or written notice and will notify the Selected
Offerees, each prior to 9:00 a.m., Chicago time, on the next business day after
the previously scheduled Expiration Date.
The Taylor Family reserves the right (i) to delay acceptance of any
subscription delivered by a Selected Offeree, (ii) to extend the Offer, (iii) if
any of the conditions set forth below under "--Conditions of the Offer" shall
not have been satisfied, to terminate the Offer, by giving oral or written
notice of such delay, extension or termination to the Escrow Agent, or (iv) to
amend the terms of the Offer in any manner. If the Offer is amended in a manner
determined by the Taylor Family to constitute a material change, the Taylor
Family will promptly disclose such amendments by means of a prospectus
supplement that will be distributed to the Selected Offerees, and the Taylor
Family will extend the Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure to
the Selected Offerees, if the Offer would otherwise expire during such five to
ten business day period.
PROCEDURES FOR DELIVERY
Except as set forth below with respect to the Eligible Participants'
special election under the Profit Sharing/ESOP, only a registered holder whose
name appears on a security as the owner of CTFG Common may purchase TCG Common
in the Offer. To subscribe in the Offer, a holder must complete, sign and date
the Subscription Letter, or a facsimile thereof, have the signatures thereon
guaranteed and mail or otherwise deliver such Subscription Letter or such
facsimile, together with the shares of CTFG Common and any other required
documents, to the Escrow Agent at the address set forth below under "Escrow
Agent" for receipt prior to the Expiration Date.
The delivery of a subscription together with certificates for TGC Common
will constitute, once accepted, an agreement between such holder and the Taylor
Family in accordance with the terms and subject to the conditions set forth
herein and in the Subscription Letter.
THE METHOD OF DELIVERY OF THE SHARES OF CTFG COMMON AND THE SUBSCRIPTION
LETTER AND ALL OTHER REQUIRED DOCUMENTS TO THE ESCROW AGENT IS AT THE ELECTION
AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE ESCROW AGENT BEFORE THE EXPIRATION
DATE. NO SUBSCRIPTION LETTER OR SHARES OF CTFG COMMON SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTION FOR SUCH
HOLDERS.
Any beneficial owner whose shares of CTFG Common are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee and who
wishes to subscribe should contact the registered holder promptly and instruct
such registered holder to deliver such shares of CTFG Common on such beneficial
owner's behalf. See "Instruction to Registered Holder from Beneficial Owner"
included with the Subscription Letter.
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Signatures on a Subscription Letter or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below). In the
event that signatures on a Subscription Letter or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution").
If the Subscription Letter is signed by a person other than the registered
holder of any shares of CTFG Common listed therein, such shares of CTFG Common
must be endorsed or accompanied by a properly completed stock power, signed by
such registered holder as such registered holder's name appears on such shares
of CTFG Common.
If the Subscription Letter or any shares of CTFG Common or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and evidence
satisfactory to the Company of their authority to so act must be submitted with
the Subscription Letter.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Subscriptions will be determined by the
Taylor Family in its sole discretion, which determination will be final and
binding. The Taylor Family reserves the absolute right to reject any and all
Subscriptions not properly delivered or any shares of CTFG Common, the Taylor
Family's acceptance of which would, in the opinion of counsel for the Taylor
Family, be unlawful. The Taylor Family also reserves the right to waive any
defects, irregularities or conditions of delivery as to particular shares of
CTFG Common. The Taylor Family's interpretation of the terms and conditions of
the Offer (including the instructions in the Subscription Letter) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with delivery of the shares of CTFG Common must be cured within such
time as the Taylor Family shall determine. Although the Taylor Family intends to
notify holders of defects or irregularities with respect to delivery of the
shares of CTFG Common, neither the Taylor Family, the Escrow Agent nor any other
person shall incur any liability for failure to give such notification. Delivery
of the shares of CTFG Common will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Subscriptions received
by the Escrow Agent that are not validly delivered and as to which the defects
or irregularities have not been cured or waived will be returned by the Escrow
Agent to the delivering holders, unless otherwise provided in the applicable
Subscription Letter, as soon as practicable following the Expiration Date.
By subscribing, each subscriber will represent to the Company that, among
other things, neither the holder nor any Beneficial Owner(s) is an "affiliate,"
as defined under Rule 405 of the Securities Act, of the Company except as
otherwise disclosed to the Company in writing.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to subscribe and (i) whose shares of CTFG Common are not
immediately available, or (ii) who cannot deliver their shares of CTFG Common or
the applicable Subscription Letter or any other required documents to the Escrow
Agent prior to the Expiration Date, may effect delivery if:
(a) The delivery is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Escrow Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such shares of CTFG Common or the number of shares of CTFG Common being
delivered, stating that the delivery is being made thereby and guaranteeing
that, within five business days after the Expiration Date, the Subscription
Letter (or facsimile thereof) together with the certificate(s) representing
the shares of CTFG Common and any other documents required by the
Subscription Letter will be deposited by the Eligible Institution with the
Escrow Agent; and
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(c) Such properly completed and executed Subscription Letter (or
facsimile thereof), as well as the certificate(s) representing all
delivered shares of CTFG Common in proper form for transfer and all other
documents required by the Subscription Letter are received by the Escrow
Agent within five business days after the Expiration Date.
Upon request to the Escrow Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to subscribe according to the guaranteed delivery
procedures set forth above.
WITHDRAWAL OF SUBSCRIPTIONS
Except as otherwise provided herein, subscriptions may be withdrawn at any
time prior to the Expiration Date. To withdraw a subscription, a written or
facsimile transmission notice of withdrawal must be received by the Escrow Agent
at its address set forth herein prior to the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the subscriber (the "Depositor"), (ii)
identify the CTFG Common to be withdrawn (including the certificate number or
numbers and number of shares), and (iii) be signed by the holder in the same
manner as the original signature on the Subscription Letter by which such
subscription was delivered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Taylor Family in its sole discretion,
which determination shall be final and binding on all parties. Any subscriptions
so withdrawn will be deemed not to have been validly delivered for purposes of
the Offer and no shares of TCG Common will be issued with respect thereto unless
the subscription so withdrawn is validly re-delivered. Properly withdrawn
subscriptions may be re-delivered by following one of the procedures described
above under "--Procedures for Delivery" at any time prior to the Expiration
Date.
Any subscriptions which have been delivered but which are not accepted due
to rejection of delivery or termination of the Offer, or which have been validly
withdrawn, will be returned as soon as practicable to the holder thereof without
cost to such holder.
CONDITIONS OF THE OFFER
Notwithstanding any other term of the Offer, the Taylor Family shall not be
required to accept, or issue shares of TCG Common for, any subscription, and may
terminate the Offer as provided herein before the acceptance of such
subscription, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Offer which, in
the sole judgment of the Taylor Family, might materially impair the ability
of the Taylor Family to proceed with the Offer or materially impair the
contemplated benefits of the Offer, or any material adverse development has
occurred in any existing action or proceeding with respect to the Company
or any of its subsidiaries; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the sole judgment of the Taylor Family, might materially
impair the ability of the Taylor Family to proceed with the Offer or
materially impair the contemplated benefits of the Offer to the Company; or
(c) the Closing of the Split-Off Transactions does not occur prior to
the fortieth business day after the date of this Prospectus; or
(d) any governmental approval has not been obtained, which approval
the Taylor Family shall, in its sole discretion, deem necessary for the
consummation of the Offer as contemplated hereby.
If the Taylor Family determines in its sole discretion that any of the
conditions are not satisfied, the Taylor Family may (i) refuse to accept any
subscriptions and return all subscriptions, including delivered shares of CTFG
Common to the subscribers, (ii) extend the Offer and retain all subscriptions
delivered prior to the Expiration Date, subject, however, to the rights of
holders to withdraw such subscriptions (see "--Withdrawal of Delivery") or (iii)
waive such unsatisfied conditions with respect to the Offer and accept all
validly delivered subscriptions which have not been withdrawn. If such
determination or waiver constitutes a material change to the Offer, the Taylor
Family will promptly disclose such determination or waiver by means
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of a prospectus supplement that will be distributed to the Selected Offerees,
and the Taylor Family will extend the Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of disclosure
to the Selected Offerees, if the Offer would otherwise expire during such five
to ten business day period.
ESCROW AGENT
Cole Taylor Bank has been appointed as Escrow Agent for the Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Subscription Letter and requests for Notices of Guaranteed
Delivery by Selected Offerees should be directed to the Escrow Agent addressed
as follows:
<TABLE>
<S> <C>
By Mail, Hand Deliver or Overnight Courier: By Facsimile Transmission:
Cole Taylor Bank Cole Taylor Bank
350 East Dundee Road 350 East Dundee Road
Wheeling, Illinois 60090 Wheeling, Illinois 60090
Attention: Attention:
(847) (847)
</TABLE>
FEES AND EXPENSES
The expenses of soliciting subscriptions for shares of TCG Common will be
borne by the Company. The solicitation is being made by the Taylor Family and by
officers of the Company and its affiliates.
Neither the Taylor Family nor the Company has retained any dealer-manager
in connection with the Offer and will not make any payments to brokers, dealers
or others soliciting acceptance of the Offer. The Company, however, will pay the
Escrow Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Offer will be paid
by the Company and are estimated in the aggregate to be approximately
$ . Such expenses include fees and expenses of the Escrow Agent and
transfer agent and registrar, accounting and legal fees and printing costs,
among others.
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SPECIAL ELECTION UNDER THE PROFIT SHARING/ESOP
BACKGROUND
In connection with the Split-Off Transactions, the Company has established
the Profit Sharing/ESOP, which was formed as a result of a spin-off from the
CTFG Profit Sharing and the CTFG ESOP. The Company has appointed State Street
Bank & Trust Co. to serve as the independent trustee (the "Trustee") of the
trust that funds and forms a part of the Profit Sharing/ESOP.
On or prior to the Closing, CTFG will transfer from the CTFG Profit Sharing
and the CTFG ESOP to the Profit Sharing/ESOP trust the account balances of the
employees who are or will be employed by the Bank and former Bank employees (the
"Bank Employees"). Shares of CTFG Common allocated to the Bank Employees'
account balances will be transferred in-kind. The shares of CTFG Common held in
the "Company Stock Fund" under the CTFG Profit Sharing will be transferred to
the "CTFG stock fund" under the Profit Sharing/ESOP and the shares of CTFG
Common held in the Bank Employees' account balances in the CTFG ESOP will be
transferred to the "ESOP stock accounts" under the Profit Sharing/ESOP. The
Profit Sharing/ESOP participants will become 100 percent vested in their account
balances that are transferred from the CTFG Profit Sharing and the CTFG ESOP.
SPECIAL ELECTION FOR ELIGIBLE PARTICIPANTS
"Eligible Participants" are those Bank Employees who, on November 15, 1996,
held shares of CTFG Common in the Company Stock Fund under the CTFG Profit
Sharing, which were transferred to the CTFG stock fund under the Profit
Sharing/ESOP. Eligible Participants will be permitted to make a special one-time
election to direct the Trustee to participate in the Offer, purchase shares of
TCG Common by delivering their shares of CTFG Common. Upon the execution of the
Eligible Participants' direction to participate in the Offer, the TCG Common
will be held in the Eligible Participants' ESOP stock accounts under the Profit
Sharing/ESOP and will be subject to the special ESOP provisions. See "--ESOP
Provisions." Following this one-time special election to purchase TCG Common,
the Eligible Participants will not have the option to direct the Trustee to
purchase shares of TCG Common in accordance with the terms of the Offer.
The Eligible Participants who do not make the foregoing election will
continue to hold shares of CTFG Common in the CTFG stock fund. These Eligible
Participants will have until December 15, 1997 to direct the Trustee to
liquidate their holdings in the CTFG stock fund and transfer the proceeds to one
of the other investment funds offered under the Profit Sharing/ESOP.
As a condition to the Trustee's execution of the Eligible Participants'
directions to purchase shares of TCG Common pursuant to the Offer, the Trustee
must receive an opinion from its financial advisor, HLHZ, on the date of the
Closing to the effect that the fair market value of the shares of TCG Common
received in the Offering is no less than the fair market value of the shares of
CTFG Common that are being delivered and that the overall transaction is fair to
the Profit Sharing/ESOP from a financial point of view. In determining the fair
market value of the TCG Common for such purposes, the Trustee and its financial
advisor will employ the same methodologies as will apply in the case of the
regular appraisals of the fair market value of the TCG Common held in the Profit
Sharing/ESOP. See "--Appraisal." The opinion of HLHZ as to the fair market value
of TCG Common to be received in the Offering by the Trustee at Closing will be
based upon the relevant facts and circumstances as of the time immediately prior
to the Closing. In connection with rendering its opinion, the financial advisor
will be paid a fee by the Company of approximately $60,000. HLHZ will also be
indemnified by the Company after the Closing against liabilities arising out of
the issuance of the opinion.
The Trustee must also determine, prior to following the Eligible
Participants' directions, that (i) the purchase of TCG Common pursuant to the
Offer is consistent with the provisions of the Profit Sharing/ESOP document,
(ii) the Eligible Participants have not been subjected to coercion or undue
pressure in making their decision, all necessary information has been provided
to the Eligible Participants and clearly false or misleading information has not
been distributed to the Eligible Participants, and (iii) following the Eligible
Participants' directions would not violate ERISA. The fiduciary obligations of
the Trustee do not include a
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determination of the advisability of any particular individual's decision
whether or not to direct the Trustee to purchase TCG Common.
PROCEDURE FOR MAKING THE SPECIAL ELECTION
Eligible Participants may direct the Trustee to deliver all or a portion of
their shares of CTFG Common held in their CTFG stock fund accounts under the
Profit Sharing/ESOP by completing the enclosed "Special Election Card." Eligible
Participants are requested to complete, execute and return the Special Election
Card, regardless of whether they elect to direct the Trustee to deliver any of
their shares of CTFG Stock. The Trustee, subject to its fiduciary obligations,
will cause the CTFG Common to be purchased for the accounts of electing Eligible
Participants in accordance with their directions.
The Special Election Cards may be returned in the enclosed envelope to the
Trustee at the following address: State Street Bank and Trust Company,
Batterymarch Park III, Three Pine Hill Drive, Quincy, MA 02169,
Attn: , facsimile number .
THE METHOD OF DELIVERY OF THE SPECIAL ELECTION CARD IS AT THE ELECTION AND
RISK OF THE ELIGIBLE PARTICIPANT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT THE ELIGIBLE PARTICIPANT USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE TRUSTEE
BEFORE THE EXPIRATION DATE. NO SPECIAL ELECTION CARD SHOULD BE SENT TO THE
COMPANY.
To be effective, the completed, signed Special Election Card must be
received by the Trustee on or before the (the "Special Election
Termination Date"). Any Eligible Participant for whom the Trustee has not
received a completed and signed Special Election Card by the Special Election
Termination Date will be deemed to have elected not to deliver any of their
shares of CTFG Common and purchase shares of TCG Common pursuant to the Offer.
Once the Special Election Card is received by the Trustee, the directions
specified thereon will be final and irrevocable.
Any questions about how to complete the Special Election Card or how to
make the special election may be directed to: .
Except as otherwise provided herein, the Eligible Participants' election to
sell shares of CTFG Common may be withdrawn at any time prior to the Special
Election Expiration Date. To withdraw an election on a submitted Special
Election Card, a written or facsimile transmission notice of withdrawal must be
received by the Trustee at its address set forth above prior to the Special
Election Expiration Date. Any such notice of withdrawal must (i) specify the
name of the Eligible Participant having deposited the Special Election Card to
be withdrawn, and (ii) be signed by such Eligible Participant.
ESOP PROVISIONS
Upon the execution of the Eligible Participants' election under the Special
Election Cards, the shares of TCG Common received pursuant to the election will
be held in the Eligible Participants' ESOP stock accounts under the Profit
Sharing/ESOP and will be subject to the special ESOP provisions. The ESOP
provisions of the Profit Sharing/ESOP are substantially similar to the
provisions of the CTFG ESOP. Shares of TCG Common held in the ESOP stock
accounts may not be liquidated and transferred to another investment option
under the Profit Sharing/ESOP. Upon termination of employment, participants will
be entitled only to an in-kind, lump sum distribution of shares of TCG Common.
Since the Company does not intend to list the shares of TCG Common on any
securities exchange and no active trading market for the TCG Common is expected
to develop, the Company is the sole market for the sale of the distributed
shares of TCG Common. Upon receipt of a distribution, participants will have
certain "put" rights to require the Company to purchase the stock at the current
appraised fair market value. The Company may purchase the TCG Common with a
single cash payment or with an adequately secured, five-year interest bearing
promissory note.
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The Plan participants will have the right to direct the Trustee how to vote
the shares of TCG Common held in their ESOP stock accounts only with respect to
significant corporate transactions such as a merger, recapitalization, or sale
of substantially all of the assets of the Company.
SPECIAL ELECTION SUITABILITY CONSIDERATION
The Eligible Participants' special election to direct the Trustee to sell
their shares of CTFG Common and purchase shares of TCG Common pursuant to the
Offer is purely voluntary on the part of the Eligible Participants. Any shares
of TCG Common received by the Trustee will be automatically allocated to the
Eligible Participants' ESOP stock accounts under the Profit Sharing/ESOP and
will be subject to the ESOP provisions. Management makes no recommendation as to
the suitability of an investment in the TCG Common by any Eligible Participant.
Eligible Participants should consult their own investment advisors as to the
suitability of an investment in TCG Common for their accounts.
SUBSTITUTION OF EXISTING DIVERSIFIED PLAN ASSETS FOR SPECULATIVE TCG COMMON
An election by an Eligible Participant to direct the Trustee to sell his or
her shares of CTFG Common held in the CTFG stock fund under the Profit
Sharing/ESOP and purchase shares of TCG Common is, in effect, a decision to sell
an investment that may be liquidated and invested in one or more of the various
investment funds under the Profit Sharing/ESOP and to purchase an investment in
TCG Common that, for reasons provided herein, is inherently a more speculative
investment. An investment in TCG Common is subject to greater risk of loss than
an investment in the investment funds under the Profit Sharing/ESOP.
LACK OF MARKET FOR TCG COMMON
A public market for the TCG Common does not exist and no such market will
develop following the consummation of the Offer. The Company anticipates that it
will not be required to register the TCG Common pursuant to the Exchange Act,
and does not presently intend voluntarily to effect such a registration. The
Company does not presently intend to list the TCG Common on any securities
exchange or to have bid and asked prices therefor quoted on the National
Association of Securities Dealers Automated Quotation System.
RESALE OF TCG COMMON SHARES DISTRIBUTED FROM PROFIT SHARING/ESOP
Distributions. Participants under the Profit Sharing/ESOP will receive
in-kind distributions of the TCG Common allocated to their ESOP stock accounts
only after they terminate employment, subject to the terms of the Profit
Sharing/ESOP.
Put Rights. Following receipt of a distribution of shares of TCG Common,
the holders will have certain "put" rights entitling them to sell all or any of
their shares to the Company. The Company has the legal obligation to honor the
holders' put rights by purchasing the shares at a purchase price equal to the
fair market value of the TCG Common as of the most recent Appraisal. See
"--Appraisal." The Company may purchase the shares with cash or an adequately
secured, five-year interest bearing promissory note. Any such promissory note
will be payable in five equal annual principal installments (with the first
installment due 30 days after the exercise of the put option) with interest
adjusted annually each December 31 to equal the prime rate published on such
date in The Wall Street Journal, plus one percent, provided that the Company in
its discretion may shorten the period for payment of the principal amount of the
note (but may not decrease the applicable interest rate).
Right of First Refusal. The shares of TCG Common distributed from the
Profit Sharing/ESOP will be subject to a right of first refusal in favor of the
Company and the Profit Sharing/ESOP. A holder of such shares who has received a
bona fide offer to purchase such shares shall, prior to accepting such offer,
notify the Company and the Trustee as to the terms of the proposed offer. The
Company and the Trustee shall then have 30 days within which to notify the
selling holder as to whether they wish to purchase all or any of the shares
offered for sale. If the Company or the Trustee elect to purchase any of the
offered shares, closing of the sale will occur not more than 60 days following
the delivery of the original notice of sale. If any offered shares are
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not purchased by the Company and the Trustee, the selling holder shall be free
to sell them to the proposed purchaser identified in the original notice of
sale; provided, that if the sale is not completed within 120 days after the
delivery of the original notice of sale, then the selling holder shall again be
subject to the foregoing rights of first refusal. These rights of first refusal
will terminate upon the consummation of a public offering.
Restrictive Legend. Each certificate representing shares of TCG Common
distributed from the Profit Sharing/ESOP shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RIGHTS OF FIRST REFUSAL IN FAVOR OF THIS CORPORATION AND THE TRUSTEE OF
THIS CORPORATION'S PROFIT SHARING/ESOP, AND MAY NOT BE TRANSFERRED, SOLD,
ASSIGNED, PLEDGED HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH
TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION
COMPLIES WITH THE PROVISIONS OF THIS CORPORATION'S PROFIT SHARING/ESOP (A
COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THIS CORPORATION AND WILL BE
MAILED TO A STOCKHOLDER WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT BY
THIS CORPORATION OF A WRITTEN REQUEST THEREFOR FROM SUCH STOCKHOLDER). NO
TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT AS
OTHERWISE PROVIDED IN SUCH PROFIT SHARING/ESOP.
POTENTIAL INABILITY OF COMPANY TO REPURCHASE SHARES
The Company could experience potentially significant repurchase obligation
when employees with significant holdings of TCG Common in the Profit
Sharing/ESOP exercise their put rights. The Company believes it will have
sufficient cash flow to satisfy its repurchase obligations. However, there can
be no assurance that the Company's repurchase obligations will not be
significantly greater than presently anticipated. Such repurchase obligations
could result in a significant drain on the Company's cash resources.
In view of the foregoing, there can be no assurance that holders of TCG
Common will be able to resell any or all of the TCG Common shares at any time.
APPRAISAL
The Trustee will retain an independent financial advisor to appraise the
fair market value of the TCG Common as of each June 30 and December 31,
commencing on (the "Appraisal"). The Appraisal will be made in
accordance with the "adequate consideration" requirements under Section 3(18) of
ERISA and the Department of Labor's proposed regulations thereunder. In
accordance with such requirement, in formulating the Appraisal the Trustee's
financial advisor will assess the fair market value of the TCG Common by (i)
applying a discounted cash flow valuation methodology; (ii) comparing the
Company to comparable public companies, and (iii) if appropriate, applying a
liquidation value methodology.
The Trustee will determine the fair market value of the TCG Common as of
each June 30 and December 31, taking into consideration the Appraisal as of that
date and any other factors it deems relevant. The Trustee's determination as to
the fair market value of the TCG Common will be final and binding on the Company
and the holders of the shares of TCG Common distributed from the Profit
Sharing/ESOP for the purposes of the put rights, except that holders of such
shares would have a potential claim for benefits or breach of fiduciary duty
under ERISA if they believe that the Trustee undervalued the TCG Common.
The purchase price payable by the Company for any shares of TCG Common upon
the exercise of the put right described above will be determined by reference to
the most recent Appraisal.
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TRUSTEE'S ELECTION FOR ESOP STOCK ACCOUNTS
The Trustee will be permitted to participate in the Offer by selling the
shares of CTFG Common transferred from the Bank Employees' accounts in the CTFG
ESOP to the ESOP stock accounts under the Profit Sharing/ESOP. The Trustee will
make the purchase decision in its sole and independent discretion; the
participants are not required or permitted to direct the Trustee with respect to
the shares of CTFG stock held in their ESOP stock accounts under the Profit
Sharing/ESOP.
In making the decision to purchase TCG Common to be held in the ESOP stock
accounts, the Trustee must act in accordance with its fiduciary responsibilities
under the ERISA. The Trustee will purchase the shares of TCG Common only if it
receives an opinion from its financial advisor, HLHZ, on the date of the Closing
to the effect that the fair market value of the shares of TCG Common purchased
pursuant to the Offer is no less than the fair market value of the shares of
CTFG Common that are being sold and the overall transaction is fair to the
Profit Sharing/ESOP from a financial point of view. In addition, the Trustee
must determine that the transaction is prudent and in the best interests of the
participants from a financial point of view.
The Trustee shall be required to subscribe for TCG Common and deliver the
CTFG Common held in the ESOP stock accounts under the Profit Sharing/ESOP in
accordance with the delivery procedures as set forth herein in "The Offer."
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10 million shares,
of which 7.0 million shares are Common Stock, par value $.01 per share, and 3.0
million shares are preferred stock, par value $.01 per share. Giving effect to
the Offer, upon consummation of the Split-Off Transactions there will be between
4 million and 4.6 million shares of TCG Common outstanding (depending upon the
amount exchanged). No shares of preferred stock are currently outstanding.
The following description of the capital stock of the Company and certain
provisions of Delaware General Corporation Law, the Certificate, Certificate of
Designation (as defined) and By-Laws is a summary and is qualified in its
entirety by the Delaware General Corporation Law, as amended, (the "DGCL") and
the Certificate, Certificate of Designation and By-Laws, which have been filed
as exhibits to the Company's Registration Statement on Form S-4, of which this
Prospectus forms a part.
COMMON STOCK
The shares of TCG Common which will be issued and outstanding as of the
closing of the Common Stock offering described hereby will be validly issued,
fully paid and nonassessable. Subject to the rights of holders of Preferred
Stock which may be issued, the holders of outstanding shares of TCG Common are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors of the Company may from time
to time determine. The shares of TCG Common are neither redeemable nor
convertible, and the holders thereof have no preemptive or subscription rights
to purchase any securities of the Company. Upon liquidation, dissolution or
winding up of the Company, the holders of TCG Common are entitled to receive,
pro rata, the assets of the Company which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of Preferred Stock then outstanding. Each
outstanding share of TCG Common is entitled to one vote on all matters submitted
to a vote of stockholders. There is no cumulative voting in the election of
directors.
The Board of Directors of the Company may approve for issuance, without
approval of the holders of TCG Common, preferred stock which has voting,
dividend or liquidation rights superior to the TCG Common and which may
adversely affect the rights of holders of TCG Common. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of the holders of TCG Common and could have the effect of delaying,
deferring or preventing a change in control of the Company.
PREFERRED STOCK
The Company has filed a Registration Statement on Form S-1 relating to
$38.25 million of Noncumulative Perpetual Preferred Stock, Series A (the
"Preferred Stock"). The Preferred Stock is expected to be sold in the Preferred
Stock Offering. There is no assurance, however, that the actual terms of the
Preferred Stock will conform to the terms disclosed herein.
The Certificate authorizes the Board of Directors of the Company to issue
preferred stock in classes or series and to establish the designations,
preferences, qualifications, limitations or restrictions of any class or series
with respect to the rate and nature of dividends, the price and terms and
conditions on which shares may be redeemed, the terms and conditions for
conversion or exchange into any other class or series of the stock, voting
rights and other terms. Pursuant to this authority the Board of Directors of the
Company is expected to designate 1,530,000 shares of Preferred Stock, $25.00
stated value per share. The rights, preferences, privileges, qualifications,
restrictions and limitations of the Preferred Stock will be described in a
Certificate of Designation filed with the Delaware Secretary of State (the
"Certificate of Designation").
The shares of Preferred Stock which will be issued and outstanding as of
the closing of the Preferred Stock Offering will be validly issued, fully paid
and nonassessable. The rights of holders of Preferred Stock could be subject to,
and may be adversely affected by, the rights of holders of any additional series
of preferred stock that may be issued in the future and that may rank prior to,
or on parity with, as to dividends or distributions of assets, the Preferred
Stock described herein. However, any such issuance will be subject to the
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approval of the holders of shares of Preferred Stock entitled to cast at least
two-thirds of the votes entitled to be cast by the holders of the Preferred
Stock then outstanding, voting together separately as a class. See "--Voting
Rights."
The shares of Preferred Stock will not be convertible into shares of TCG
Common of the Company and will have no preemptive rights. No fractional shares
of Preferred Stock will be issued. The Company will treat the Preferred Stock as
Tier 1 Capital for purposes of the risk-based capital guidelines of the Federal
Reserve Board. The shares of Preferred Stock will be subject to redemption under
the circumstances described under "--Redemption at the Option of the Company"
below.
Since the Company is a holding company, the right of the Company, and hence
the rights of creditors and shareholders of the Company, to participate in any
distribution of assets of any subsidiary upon its liquidation or reorganization
or otherwise is necessarily subject to the prior claims of creditors of such
subsidiary, including depositors in the case of the Bank, except to the extent
that claims of the Company itself as a creditor of the subsidiary may be
recognized.
DIVIDEND RIGHTS
Noncumulative cash dividends on the Preferred Stock will accrue from the
date of original issuance (the "Date of Original Issue") and will be payable
quarterly in arrears at an annual rate of no greater than $ per share,
when, as and if declared by the Board of Directors of the Company, or a duly
authorized committee thereof, out of funds legally available therefor, for a
quarterly dividend period (a "Dividend Period") on the fifteenth day of each
March, June, September, and December, commencing on March 15, 1997 (each, a
"Dividend Payment Date"), to the holders of record on such respective dates, not
more than 30 days and not less than 60 days preceding the related Dividend
Payment Date, as may be determined by the Board of Directors, or a duly
authorized committee thereof, in advance of such Dividend Payment Date.
Dividends payable for any period of less than a quarter will be paid on the
basis of a 360-day year of twelve 30 day months. When a Dividend Payment Date
falls on a non-business day, the dividend will be paid on the next business day.
Holders of Preferred Stock will not participate in dividends, if any, declared
and paid on the TCG Common.
The right of holders of Preferred Stock to receive dividends will be
noncumulative. Accordingly, if the Board fails to declare a dividend on the
Preferred Stock for a Dividend Period, then holders of the Preferred Stock will
have no right to receive a dividend for that Dividend Period, and the Company
will have no obligation to pay the dividend accrued for that Dividend Period,
whether or not dividends are declared for any subsequent period.
Under the DGCL, the Company can pay dividends on the Preferred Stock only
out of (i) the Company's surplus, which is equal to the amount by which its net
assets (excess of assets over liabilities) exceed the stated capital
attributable to all outstanding shares of capital stock), or (ii) if it has no
surplus, its net profits for the current or preceding year. If the Company has
no surplus or profits, it would be unable to pay the scheduled dividends on the
Preferred Stock. The Company's right to pay dividends on the Preferred Stock
also will be subject to certain restrictions under the Company's Credit
Facilities. See "The Split-Off Transactions--Related Financing."
No full dividends will be declared or paid or set apart for payment on any
share of the Preferred Stock or any share of any other class of stock, or series
thereof, in any such case ranking on a parity with or junior to the Preferred
Stock as to dividends unless full dividends for the then-current Dividend Period
on the Preferred Stock have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such
payment. When dividends are not paid in full upon the Preferred Stock and any
other series or class of stock ranking on a parity with the Preferred Stock as
to dividends, all dividends declared upon the Preferred Stock and such other
series or class of stock will be declared pro rata so that the amount of
dividends declared per share on the Preferred Stock and such other series or
class of stock will in all cases bear the same ratio that accrued dividends per
share (which in the case of the Preferred Stock will not include any
accumulation in respect of undeclared or unpaid dividends for prior Dividend
Periods) on the Preferred Stock and on such other series or class of stock bear
to each other.
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Except as set forth in the paragraph immediately following, so long as any
shares of Preferred Stock are outstanding, unless the full dividends on all
outstanding shares of Preferred Stock have been declared and paid or set apart
for payment for the current Dividend Period and except as provided in the
immediately preceding paragraph, (i) no dividend (other than a dividend in TCG
Common or in any other stock of the Company ranking junior to the Preferred
Stock as to dividends or distribution of assets upon liquidation, dissolution or
winding up) may be declared and paid, or set aside for payment, or other
distribution declared or made, on the TCG Common or on any other stock ranking
junior to or on a parity with Preferred Stock as to dividends or distribution of
assets upon liquidation, dissolution or winding up, and (ii) no shares of TCG
Common or shares of any other stock of the Company ranking junior to or on a
parity with Preferred Stock as to dividends or distribution of assets upon
liquidation, dissolution or winding up, will be redeemed, purchased or otherwise
acquired for any consideration by the Company or any subsidiary of the Company
(nor may any moneys be paid to or made available for a sinking or other fund for
the redemption, purchase or other acquisition of any shares of any such stock),
other than by conversion into or exchange for TCG Common or any other stock of
the Company ranking junior to the Preferred Stock as to dividends or
distribution of assets upon liquidation, dissolution or winding up.
Participants with ESOP stock account balances under the Profit Sharing/ESOP
will have the right to exercise certain limited "put" rights requiring the
Company to purchase their shares of TCG Common following their termination of
employment with the Company and the Bank. These former Profit Sharing/ ESOP
participants will receive in-kind distribution of shares of TCG Common, subject
to the terms of the Profit Sharing/ESOP. Upon receipt of their shares of TCG
Common, former participants will have a "put" right entitling them to sell the
shares to the Company. The rights of the Preferred Stockholders described in the
preceding paragraph notwithstanding, the Company has a legal obligation to honor
a holder's "put" rights by purchasing the shares of TCG Common at a purchase
price that is equal to the fair market value, as determined by the Trustee of
the Profit Sharing/ESOP, based on a valuation report by an independent
appraiser. The Company may pay for these shares of TCG Common in cash or by
issuing a five-year, interest-bearing promissory note.
DIVIDEND RATE
Except as provided below, the dividend rate per annum referred to above for
any Dividend Period is expected to be no greater than % per annum (or
$ per share of Preferred Stock). The amount of dividends payable per share
for each Dividend Period shall be computed by dividing the annual rate by four.
REDEMPTION AT THE OPTION OF THE COMPANY
Shares of Preferred Stock will not be redeemable prior to December 15,
2001. On or after such date, the shares of Preferred Stock will be redeemable at
the option of the Company, in whole or in part, at any time or from time to time
on not less than 30, nor more than 60, days' written notice, at a redemption
price of $25.00 per share, plus an amount equal to dividends declared and unpaid
for the then-current Dividend Period (without accumulation of accrued and unpaid
dividends for prior Dividend Periods and without interest) to the date fixed for
redemption.
On or before 12:00 noon, Chicago time, on the date fixed for redemption,
the Company shall deposit with a paying agent (which may be an affiliate of the
Company), which shall be a bank or trust company organized and in good standing
under the laws of the United States, the state of Illinois or the state of New
York, and having capital, surplus and undivided profits aggregating at least
$100 million in funds necessary for such redemption, in trust, with irrevocable
instructions and authorization that such funds be applied to the redemption of
the shares of Preferred Stock called for redemption upon surrender of
certificates for such shares (properly endorsed or assigned for transfer). Such
deposit shall be deemed to constitute full payment of such shares to their
holders and from and after the date of such deposit, notwithstanding that any
certificates for such shares shall not have been surrendered for cancellation,
the shares represented thereby shall no longer be deemed to be outstanding.
Thereafter, all rights of the holders of such shares as holders of Preferred
Stock (except the right to receive the redemption price, but without interest)
will cease.
107
<PAGE> 109
In no event shall the Company redeem less than all the outstanding shares
of Preferred Stock, unless dividends for the then-current Dividend Period to the
date fixed for redemption for such series shall have been declared and paid or
set apart for payment on all outstanding shares of Preferred Stock; provided
however, that the foregoing provisions will not prevent, if otherwise permitted,
the purchase or acquisition by the Company of such shares pursuant to a tender
or exchange offer made on the same terms to holders of all the outstanding
shares of Preferred Stock, and mailed to the holders of record of all such
outstanding shares at such holders' addresses as the same appear on the books of
the Company; provided, further, that if some, but less than all, of the shares
of Preferred Stock are to be purchased or otherwise acquired pursuant to such
tender or exchange offer and the number of shares so tendered exceeds the number
of such shares so to be purchased or otherwise acquired by the Company, the
shares of Preferred Stock tendered will be purchased or otherwise acquired by
the Company on a pro rata basis (with adjustments to eliminate fractions)
according to the number of such shares tendered by each holder tendering shares
of Preferred Stock.
If less than all of the outstanding shares of Preferred Stock are to be
redeemed, the Company will select the shares to be redeemed by lot, pro rata (as
nearly may be), or in such other equitable manner as the Board of Directors of
the Company may determine.
Any optional redemption by the Company will be with the approval of the
Federal Reserve Board, unless at the time the Federal Reserve Board determines
that its approval is not required.
VOTING RIGHTS
Except as indicated below and except as required by applicable law, the
holders of the Preferred Stock shall have no voting rights.
Generally, in the election of directors, the holders of Preferred Stock,
voting separately as a class, together with the holders of shares of any one or
more other series of preferred stock entitled to vote in the election of
directors, shall be entitled to elect one director (and to exercise any right of
removal or replacement of such director). If a Voting Event (as hereinafter
defined) occurs, the holders of a majority of the shares of Preferred Stock,
voting separately as a class with the holders of shares of any one or more other
series of preferred stock entitled to vote upon the occurrence of such Voting
Event, will be entitled commencing with the Company's next annual meeting of
stockholders and at each subsequent annual meeting of stockholders, unless prior
thereto such Voting Event has been terminated, to elect one additional director
of the Company, (and to exercise any right of removal or replacement of such
director). At elections for such director, each holder of Preferred Stock and
any other series of preferred stock entitled to vote shall be entitled to one
vote (or fraction thereof) for each $25.00 of liquidation preference to which
such preferred stock is entitled, with the remaining directors of the Company to
be elected by the holders of shares of any other class or classes or series of
stock entitled to vote therefor. The Board of Directors of the Company at no
time will include more than two directors who have been elected by the holders
of shares of Preferred Stock or other preferred stock. Until such Voting Event
has been terminated, any director who has been so elected by the holders of
shares of Preferred Stock and other preferred stock may be removed at any time,
either with or without cause, only by the affirmative vote of the holders of the
shares at the time entitled to cast a majority of the votes entitled to be cast
for the election of any such director at a special meeting of such holders
called for that purpose, and any vacancy thereby created may only be filled by
the vote of such holders. If and when such Voting Event has been terminated, the
holders of shares of Preferred Stock then outstanding and so authorized will be
divested of the foregoing special voting rights, subject to revesting upon the
further occurrence of a Voting Event. Upon termination of such Voting Event, the
terms of office of any person who may have been elected a director by vote of
the holders of shares of Preferred Stock and such other series of Preferred
Stock pursuant to the foregoing special voting rights will immediately
terminate.
A "Voting Event" will be deemed to have occurred in the event that
dividends payable on any share or shares of Preferred Stock shall not be
declared and paid at the stated rate for the equivalent of six full quarterly
Dividend Periods (whether or not consecutive). A Voting Event will be deemed to
have been terminated when all such dividends in arrears have been declared and
paid or declared and set apart for payment in full, subject always to the
revesting of the right of holders of the Preferred Stock voting as a class
108
<PAGE> 110
with the holders of any other preferred stock, to elect a director as provided
above in the event of any future failure on the part of the Company to pay
dividends at the stated rate for any six full quarterly Dividend Periods
(whether or not consecutive).
The Company is not permitted to amend, alter or repeal (whether by merger,
consolidation or otherwise) any provisions of the Certificate or the Certificate
of Designation so as to adversely affect the rights, powers or preferences of
the Preferred Stock or the holders thereof without the approval of the holders
of two-thirds of the outstanding shares of Preferred Stock voting separately as
a class. The Company may not, without the consent of the holders of at least
two-thirds of the outstanding shares of Preferred Stock, voting separately as a
class, create, authorize or increase the authorized or issued amount of shares
of any class of stock ranking prior to or on a parity with the Preferred Stock
as to dividends or distribution of assets on liquidation.
Under regulations adopted by the Federal Reserve Board, the Preferred Stock
may be deemed a "class of voting securities" and a holder of 25% or more of such
Preferred Stock (or a holder of 5% or more if it otherwise exercises a
"controlling influence" over the Company) may then be subject to regulation as a
bank holding company in accordance with the BHCA. In addition, at such time (i)
any bank holding company may be required to obtain the approval of the Federal
Reserve Board under the BHCA, to acquire or retain 5% or more of the Preferred
Stock and (ii) any person other than a bank holding company may be required to
obtain the approval of the Federal Reserve Board under the Bank Change in
Control Act to acquire 10% or more of the Preferred Stock.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of shares of Preferred Stock will be
entitled to receive out of assets of the Company available for distribution to
stockholders, before any distribution of assets is made on the Common Stock or
on any other class or series of stock of the Company ranking junior to the
shares of Preferred Stock, upon liquidation, liquidating distributions in the
amount of $25.00 per share, plus an amount equal to dividends declared and
unpaid for the then-current Dividend Period up to the date of liquidation
(without accumulation of accrued and unpaid dividends for prior Dividend
Periods) to the date fixed for payment of such distribution. After such payment,
the holders of shares of Preferred Stock will be entitled to no other payments.
If, in such case, the assets of the Company will be insufficient to make the
full liquidating payment on the Preferred Stock and liquidating payments on any
other class or series of stock of the Company ranking on a parity with the
Preferred Stock as to any such distribution, then such assets will be
distributed among the holders of the Preferred Stock and such other series of
stock, ratably in proportion to the respective full preferential amounts to
which they are entitled. A consolidation or merger of the Company with or into
any other corporation or corporations or the merger or consolidation of any
other corporation into or with the Company or plan of exchange between the
Company and any other corporation (in which consolidation or merger or plan of
exchange any stockholders of the Company received distributions of cash or
securities or other property), or the sale, lease or conveyance, whether for
cash, shares of stock, securities or properties, of all or substantially all the
assets of the Company will not be regarded as a liquidation, dissolution or
winding up of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the TCG Common and the Preferred Stock
will be Cole Taylor Bank.
109
<PAGE> 111
LEGAL MATTERS
The validity of the shares of TCG Common offered hereby will be passed upon
for the Company by McDermott, Will & Emery, Chicago, Illinois.
EXPERTS
The financial statements of the Bank as of December 31, 1995 and 1994 and
for each of the years in the two year period ended December 31, 1995 have been
included in this Prospectus and the Registration Statement in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the TCG Common offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the TCG
Common offered hereby, reference is made to the Registration Statement.
Statements made in the Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete; with respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits thereto
may be inspected, without charge, at the public reference facilities maintained
by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, and 7
World Trade Center, Suite 1300, New York, NY 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site that contains reports, proxy statements and other
information filed by the Company at (http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by CTFG with the Commission,
are incorporated herein by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1995, as
amended by a Form 10-K/A filed April 29, 1996;
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and
June 30, 1996; and
3. Current Reports on Form 8-K dated June 12, 1996 and October 10, 1996.
4. Proxy Statement on Schedule 14(A) filed October 15, 1996.
All documents filed by CTFG with the SEC pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, after the date
of this Prospectus and prior to the Expiration Date, shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so
110
<PAGE> 112
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
This Prospectus incorporates and may incorporate documents by reference
which are not presented herein or delivered herewith. These documents, other
than the exhibits thereto, are available without charge from the Company to each
person, including any beneficial owner to whom this Prospectus is delivered,
upon the written or oral request of such person to Taylor Capital Group, Inc.,
350 East Dundee Road, Wheeling, Illinois 60090, Attention: J. Christopher
Alstrin. In order to ensure timely delivery of such documents, any request
should be made within 15 business days of the date of mailing of this
Prospectus.
111
<PAGE> 113
INDEX TO FINANCIAL STATEMENTS
COLE TAYLOR BANK
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report.................................................. F-2
Financial Statements:
Balance Sheets as of June 30, 1996 (unaudited) and December 31, 1995 and
1994..................................................................... F-3
Statements of Income for the six months ended June 30, 1996 and 1995
(unaudited) and for the years ended December 31, 1995 and 1994 and the
year ended December 31, 1993 (unaudited)................................. F-4
Statement of Changes in Stockholder's Equity for the six months ended June
30, 1996 (unaudited) and for the years ended December 31, 1995 and 1994
and for the year ended December 31, 1993 (unaudited)..................... F-5
Statements of Cash Flows for the six months ended June 30, 1996 and 1995
(unaudited) and for the years ended December 31, 1995 and 1994 and for
the year ended December 31, 1993 (unaudited)............................. F-6
Notes to Financial Statements............................................... F-7 - F-22
</TABLE>
All schedules are omitted, because they are not required or applicable, or
the required information is shown in the financial statements or notes thereto.
The financial statements of Taylor Capital Group, Inc. have been omitted,
because Taylor Capital Group, Inc. has not yet issued any stock, has no assets
and no liabilities and has not conducted any business other than of an
organizational nature.
F-1
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Cole Taylor Bank:
We have audited the balance sheets of Cole Taylor Bank (a wholly owned
subsidiary of Cole Taylor Financial Group, Inc.) as of December 31, 1995 and
1994, and the related statements of income, changes in stockholder's equity and
cash flows for each of the years in the two year period ended December 31, 1995.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cole Taylor Bank (a wholly
owned subsidiary of Cole Taylor Financial Group, Inc.) as of December 31, 1995
and 1994 and the results of its operations and its cash flows for each of the
years in the two year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
October 18, 1996
Chicago, Illinois
KPMG PEAT MARWICK LLP
F-2
<PAGE> 115
COLE TAYLOR BANK
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and due from banks.................................. $ 102,071 $ 87,547 $ 69,715
Federal funds sold....................................... 15,400 5,000 23,600
Investment securities:
Available-for-sale, at fair value...................... 342,269 361,735 58,431
Held-to-maturity, at amortized cost (fair value of
$77,304 (unaudited), $80,239 and $386,474 at June
30, 1996, and December 31, 1995 and 1994,
respectively)....................................... 75,290 76,613 405,988
Loans held for sale, net of unrealized losses of $303
(unaudited), at June 30, 1996.......................... 41,856 15,748 1,554
Loans, less allowance for loan losses of $24,475
(unaudited), $23,869 and $22,833 at June 30, 1996, and
December 31, 1995 and 1994, respectively............... 1,214,052 1,172,005 1,105,790
Premises, leasehold improvements and equipment, net...... 16,945 16,844 13,873
Other assets............................................. 39,725 38,540 40,702
---------- ---------- ----------
Total assets...................................... $1,847,608 $1,774,032 $1,719,653
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Noninterest-bearing.................................... $ 300,259 $ 318,117 $ 318,800
Interest-bearing....................................... 1,186,073 1,045,958 974,611
---------- ---------- ----------
Total deposits...................................... 1,486,332 1,364,075 1,293,411
Short-term borrowings.................................... 146,373 202,033 243,997
Accrued interest, taxes and other liabilities............ 14,987 14,180 15,384
Long-term borrowings..................................... 70,836 61,003 47,864
---------- ---------- ----------
Total liabilities................................. 1,718,528 1,641,291 1,600,656
---------- ---------- ----------
Commitments and contingent liabilities
Stockholder's equity:
Common stock, $10 par value; 1,500,000 shares
authorized, issued and outstanding.................. 15,000 15,000 15,000
Surplus................................................ 50,826 50,826 50,826
Retained earnings...................................... 68,408 66,993 56,777
Unrealized holding loss on securities
available-for-sale, net of income taxes............. (5,154) (78) (3,606)
---------- ---------- ----------
Total stockholder's equity........................ 129,080 132,741 118,997
---------- ---------- ----------
Total liabilities and stockholder's equity........ $1,847,608 $1,774,032 $1,719,653
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 116
COLE TAYLOR BANK
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------ -----------------------------------
1996 1995 1995 1994 1993
------- ------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.................. $54,376 $50,559 $103,654 $ 87,057 $ 76,160
Interest on investment securities:
Taxable.................................. 11,269 12,742 25,382 25,045 21,928
Tax-exempt............................... 1,943 1,980 3,976 3,891 3,638
Interest on cash equivalents................ 497 300 672 274 102
------- ------- -------- -------- --------
Total interest income............... 68,085 65,581 133,684 116,267 101,828
------- ------- -------- -------- --------
Interest expense:
Deposits.................................... 26,229 22,363 47,034 32,998 27,472
Short-term borrowings....................... 4,468 7,014 13,584 9,483 6,639
Long-term borrowings........................ 1,795 1,841 3,748 1,637 1,036
------- ------- -------- -------- --------
Total interest expense.............. 32,492 31,218 64,366 44,118 35,147
------- ------- -------- -------- --------
Net interest income........................... 35,593 34,363 69,318 72,149 66,681
Provision for loan losses..................... 2,052 2,332 4,056 7,374 10,521
------- ------- -------- -------- --------
Net interest income after provision
for loan losses................... 33,541 32,031 65,262 64,775 56,160
------- ------- -------- -------- --------
Noninterest income:
Service charges............................. 4,269 3,458 7,452 7,199 6,947
Trust fees.................................. 1,774 1,644 3,539 3,095 2,944
Legal settlement............................ -- -- -- -- 2,438
Investment securities gains, net............ -- -- -- 8 565
Other noninterest income.................... 1,621 1,744 3,236 2,585 2,531
------- ------- -------- -------- --------
Total noninterest income............ 7,664 6,846 14,227 12,887 15,425
------- ------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits.............. 14,781 14,073 28,973 28,691 28,069
Occupancy of premises, net.................. 2,349 2,421 4,880 4,885 5,114
Furniture and equipment..................... 1,519 1,321 2,651 2,385 2,458
Computer processing......................... 999 788 1,676 1,444 1,403
Legal fees.................................. 744 742 1,655 1,106 1,116
Advertising and public relations............ 917 783 1,582 2,298 2,183
FDIC deposit insurance...................... 2 1,408 1,451 2,646 2,400
Other real estate and repossessed asset
expense.................................. 675 6 1,169 999 1,292
Other noninterest expense................... 5,239 5,238 9,512 10,794 9,891
------- ------- -------- -------- --------
Total noninterest expense........... 27,225 26,780 53,549 55,248 53,926
------- ------- -------- -------- --------
Income before income taxes.................... 13,980 12,097 25,940 22,414 17,659
Income taxes.................................. 4,665 3,566 7,774 6,512 4,937
------- ------- -------- -------- --------
Net income.......................... $ 9,315 $ 8,531 $ 18,166 $ 15,902 $ 12,722
======= ======= ======== ======== ========
Earnings per share............................ $ 6.21 $ 5.69 $ 12.11 $ 10.60 $ 8.48
======= ======= ======== ======== ========
Cash dividends declared per share............. $ 5.27 $ 1.87 $ 5.30 $ 3.07 $ 4.27
======= ======= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 117
COLE TAYLOR BANK
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND FOR THE YEARS
ENDED DECEMBER 31, 1995 AND 1994 AND FOR THE YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAIN (LOSS) ON
SECURITIES
COMMON RETAINED AVAILABLE-
STOCK SURPLUS EARNINGS FOR-SALE TOTAL
------- ------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 (unaudited).... $15,000 $40,826 $ 39,153 $ -- $ 94,979
Adoption of SFAS No. 115 (unaudited).... 462 462
Dividends on common stock -- $4.267 per
share (unaudited).................... (6,400) (6,400)
Net income (unaudited).................. 12,722 12,722
------- ------- ------- ------- --------
Balance at December 31, 1993.............. 15,000 40,826 45,475 462 101,763
Change in unrealized holding loss on
investment securities, net of income
taxes................................ (4,068) (4,068)
Capital contribution.................... 10,000 10,000
Dividends on common stock -- $3.067 per
share................................ (4,600) (4,600)
Net income.............................. 15,902 15,902
------- ------- ------- ------- --------
Balance at December 31, 1994.............. 15,000 50,826 56,777 (3,606) 118,997
Change in unrealized holding gain on
investment securities, net of income
taxes................................ 3,528 3,528
Dividends on common stock -- $5.300 per
share................................ (7,950) (7,950)
Net income.............................. 18,166 18,166
------- ------- ------- ------- --------
Balance at December 31, 1995.............. 15,000 50,826 66,993 (78) 132,741
Six months ended June 30, 1996
(unaudited):
Change in unrealized holding loss on
investment securities, net of income
taxes................................ (5,076) (5,076)
Dividends on common stock -- $5.267 per
share................................ (7,900) (7,900)
Net income.............................. 9,315 9,315
------- ------- ------- ------- --------
Balance at June 30, 1996.................. $15,000 $50,826 $ 68,408 $ (5,154) $129,080
======= ======= ======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 118
COLE TAYLOR BANK
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- -------- --------- --------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 9,315 $ 8,531 $ 18,166 $ 15,902 $ 12,722
Adjustments to reconcile net income to net cash provided
by operating activities:
Investment security gains, net......................... -- -- -- (8) (565)
Amortization of premiums and discounts, net............ 494 577 1,024 2,058 2,518
Deferred loan fee amortization......................... (1,252) (1,182) (2,515) (2,146) (1,851)
Provision for loan losses.............................. 2,052 2,332 4,056 7,374 10,521
(Gain) loss on sales of loans originated for sale...... (447) (201) (150) 87 --
Loans originated and held for sale..................... (130,409) (20,510) (87,250) (17,795) --
Proceeds from sales of loans originated for sale....... 104,586 17,318 73,368 16,154 --
Depreciation and amortization.......................... 1,487 1,244 2,534 2,343 2,343
Amortization of intangible assets...................... 100 97 196 180 121
Deferred income taxes.................................. (371) (168) 16 (1,239) (2,662)
Provision for other real estate........................ 43 89 243 587 266
Other, net............................................. (479) (116) 75 158 (115)
Changes in assets and liabilities:
Accrued interest receivable.......................... 314 1,627 (251) (4,045) 1
Other assets......................................... 2,078 4,123 1,940 434 (655)
Accrued interest, taxes and other liabilities........ 807 (2,097) (1,204) 814 3,145
-------- -------- --------- --------- ---------
Net cash provided by operating activities.... (11,682) 11,664 10,248 20,858 25,789
-------- -------- --------- --------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities............. (49,811) (24,319) (27,228) -- --
Purchases of held-to-maturity securities............... (1,077) (2,934) (4,744) (93,993) (71,220)
Proceeds from principal payments and maturities of
available-for-sale securities........................ 60,327 11,263 29,130 29,879 --
Proceeds from principal payments and maturities of
held-to-maturity securities.......................... 2,372 9,863 33,317 52,075 90,400
Proceeds from sales of investment securities........... -- -- -- 525 41,914
Proceeds from sale of loans............................ -- -- 28,924 -- --
Net increase in loans.................................. (43,938) (36,931) (100,743) (178,878) (191,922)
Net additions to premises, leasehold improvements and
equipment............................................ (1,588) (2,550) (5,502) (4,438) (2,124)
Acquisition of land trust customer base................ (204) (204) -- (887)
Proceeds from sale of other real estate................ 1,791 2,145 2,145 2,227 1,164
-------- -------- --------- --------- ---------
Net cash used in investing activities........ (31,924) (43,667) (44,905) (192,603) (132,675)
-------- -------- --------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits.................... 122,257 (9,425) 70,664 112,566 49,995
Net (decrease) increase in short-term borrowings....... (55,660) 7,264 (41,964) 34,770 56,968
Repayments of long-term borrowings..................... (40,167) (22,111) (37,111) (15,076) (50)
Proceeds from long-term borrowings..................... 50,000 35,000 50,250 25,250 32,250
Proceeds from capital contribution..................... -- -- -- 10,000 77
Dividends paid......................................... (7,900) (2,800) (7,950) (4,600) (6,400)
-------- -------- --------- --------- ---------
Net cash provided by financing activities.... 68,530 7,928 33,889 162,910 132,840
-------- -------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents..... 24,924 (24,075) (768) (8,835) 25,954
Cash and cash equivalents, beginning of year............. 92,547 93,315 93,315 102,150 76,196
-------- -------- --------- --------- ---------
Cash and cash equivalents, end of year................... $117,471 $ 69,240 $ 92,547 $ 93,315 $ 102,150
======== ======== ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................... $ 31,698 $ 30,571 $ 63,339 $ 46,612 $ 35,901
Income taxes....................................... 8,150 8,576 7,348
Supplemental disclosures of noncash investing and
financing activities:
Unrealized holding (loss) gain on investment
securities, net of income taxes...................... (5,076) 2,904 3,528 (4,068) 462
Securitization of mortgage loans transferred to
investment securities................................ -- -- -- 33,414 106,260
Reclassification of investment securities from
held-to-maturity to available-for-sale............... -- -- 299,858 -- 94,821
Mortgage servicing rights originated................... 807 -- 958 -- --
Real estate acquired through foreclosure............... 446 768 2,465 1,090 2,050
Sale of other real estate financed..................... -- -- -- -- 1,575
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 119
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
Cole Taylor Bank ("the Bank") is a wholly owned subsidiary of Cole Taylor
Financial Group, Inc. ("CTFG", or "the Parent"). The accounting and reporting
policies of the Bank conform to generally accepted accounting principles and
general reporting practices within the banking industry. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates. The results of operations for the six month period ended
June 30, 1996 is not necessarily indicative of the results to be expected for
the full year. The following is a summary of the more significant accounting and
reporting policies:
INVESTMENT SECURITIES:
Securities that may be sold as part of the Bank's asset/liability or
liquidity management or in response to or in anticipation of changes in interest
rates and resulting prepayment risk, or for other similar factors, are
classified as available-for-sale and carried at fair value. Unrealized holding
gains and losses on such securities are reported net of tax in a separate
component of stockholder's equity. Securities that the Bank has the ability and
positive intent to hold to maturity are classified as held-to-maturity and
carried at amortized cost, adjusted for amortization of premiums and accretion
of discounts using the interest method. Realized gains and losses on the sales
of all securities are reported in income and computed using the specific
identification method. The Bank did not maintain a trading portfolio in 1996 or
prior years.
LOANS HELD FOR SALE:
Mortgage loans held for sale are carried at the lower of cost or market as
determined by the aggregate method. In determining the aggregate lower of cost
or market, the unrealized gains and losses associated with the corresponding
closed loans, outstanding commitments to originate loans and the forward
sale/delivery commitments used to hedge these loans and loan commitments are
netted together. Market prices are generally taken from on-line market reporting
services or dealer quoted prices for specialized loans and commitments.
LOANS:
Loans are stated at the principal amount outstanding, net of unearned
discount. Unearned discount on consumer loans is recognized as income over the
terms of the loans using the sum-of-the-months-digits method, which approximates
the interest method. Interest on other loans is accrued on the principal amount
outstanding during the period. Loan origination and commitment fees and certain
direct loan origination costs are deferred and the net amount amortized as an
adjustment of the related loans' yields.
ALLOWANCE FOR LOAN LOSSES:
An allowance for loan losses has been established to provide for those
loans which may not be repaid in their entirety. The allowance is increased by
provisions for loan losses charged to expense and decreased by charge-offs, net
of recoveries. Although a loan is charged off by management when deemed
uncollectible, collection efforts continue and future recoveries may occur.
The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
including their financial position and collateral values, and other factors and
estimates
F-7
<PAGE> 120
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
which are subject to change over time. Estimating the risk of loss and amount of
loss on any loan is necessarily subjective and ultimate losses may vary from
current estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in income in the periods in which they
become known.
Effective January 1, 1995, the Bank adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures." A loan is
considered impaired, based on current information and events, if it is probable
that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. SFAS
No. 114 and SFAS No. 118 do not apply to certain groups of small-balance
homogenous loans which are collectively evaluated for impairment and are
generally represented by consumer and residential mortgage loans or loans which
are measured at fair value or at the lower of cost or fair value. The Bank
generally identifies impaired loans within the nonaccrual and restructured
commercial and commercial real estate portfolios on an individual loan-by-loan
basis. The measurement of impaired loans is generally based on the present value
of expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. Prior to January 1, 1995, the Bank's
impaired loans were described as, and included in, nonaccrual loans. The
adoption of SFAS No. 114 and SFAS No. 118 had no impact on the Bank's
nonperforming assets or financial statements, determined as of January 1, 1995.
INCOME RECOGNITION ON IMPAIRED LOANS AND NONACCRUAL LOANS:
Loans, including impaired loans, are generally placed on a nonaccrual basis
for recognition of interest income when, in the opinion of management,
uncertainty exists as to the ultimate collection of principal or interest. The
nonrecognition of interest income on an accrual basis does not constitute
forgiveness of the interest. While a loan is classified as nonaccrual,
collections of interest and principal are generally applied as a reduction to
principal outstanding.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms of
interest and principal.
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Premises, leasehold improvements and equipment are reported at cost less
accumulated depreciation and amortization. Depreciation is charged to operating
expense using the straight-line and accelerated methods over a three to thirty
year period, the estimated useful lives of the assets. Leasehold improvements
are amortized over a three to thirty year period, which represents the shorter
of the lease term or the estimated useful life of the improvement.
OTHER REAL ESTATE:
Other real estate primarily includes properties acquired through
foreclosure or deed in lieu of foreclosure. Other real estate is recorded in
other assets at the lower of the amount of the loan balance or the current fair
value. Fair value is based on the estimated sales price of the property less any
selling expenses. Any charge-off of the loan balance to fair value when the
property is acquired is charged to the allowance for loan losses. Subsequent
provisions for losses, operating expenses and gains or losses on the sale of
other real estate are charged or credited to other real estate expense.
F-8
<PAGE> 121
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MORTGAGE SERVICING RIGHTS:
Effective January 1, 1995, the Bank adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights." This new standard requires that an entity recognize
as separate assets the right to service mortgage loans for others, however those
servicing rights are acquired, eliminating the previously existing accounting
distinction between servicing rights acquired through purchase transactions and
those acquired through loan originations. This statement requires the assessment
of capitalized mortgage servicing rights for impairment to be based on the
current fair value of those rights.
The fair value of capitalized mortgage servicing rights is estimated using
the present value of estimated expected future cash flows based upon assumptions
on interest, default and prepayment rates which are consistent with assumptions
that market participants would utilize. The Bank stratifies the capitalized
mortgage servicing rights generally on the basis of the note rate and loan type
for purposes of measuring impairment. Impairment is recognized through a
valuation allowance for each impaired stratum. Capitalized mortgage servicing
rights are amortized in proportion to, and over the period of, estimated net
servicing income similar to the interest method. The amortization of capitalized
mortgage servicing rights is reflected in the income statement as a reduction to
mortgage servicing fee income.
INTANGIBLE ASSETS:
Intangible assets are comprised of the excess cost over net assets acquired
and are principally allocated, based on independent appraisals, to core deposit
benefit, land trust customer base and goodwill. These intangibles are being
amortized on a straight-line basis over eleven to forty years.
INCOME TAXES:
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
income tax provision.
FINANCIAL INSTRUMENTS:
In the ordinary course of business the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit, unused
lines of credit, letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.
The Bank uses interest-rate exchange agreements (swaps) to manage interest
rate risk. These contracts are designated and are effective as hedges of
specific existing assets and liabilities. Net interest income (expense)
resulting from the differential between exchanging floating and fixed rate
interest payments is recorded on a current basis. The Bank's asset and liability
management and investment policies do not allow the use of derivative financial
instruments for trading purposes.
STATEMENTS OF CASH FLOWS:
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are sold with maturities of three months or less.
F-9
<PAGE> 122
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. CASH AND DUE FROM BANKS:
The Bank is required to maintain a reserve balance with the Federal Reserve
Bank. The average reserve balance for the years ended December 31, 1995 and 1994
was approximately $7.7 million and $9.1 million, respectively.
3. INVESTMENT SECURITIES:
The amortized cost and estimated fair value of investment securities at
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Treasury securities..................... $ 110,897 $ 964 $ (173) $ 111,688
U.S. government agency securities............ 55,131 698 (91) 55,738
Mortgage-backed securities................... 195,827 1,014 (2,532) 194,309
-------- ------ ------- --------
Total Available-for-Sale................ 361,855 2,676 (2,796) 361,735
-------- ------ ------- --------
Held-to-Maturity:
State and municipal obligations.............. 67,110 3,646 (23) 70,733
Other securities............................. 9,503 3 -- 9,506
-------- ------ ------- --------
Total Held-to-Maturity.................. 76,613 3,649 (23) 80,239
-------- ------ ------- --------
Total................................ $ 438,468 $6,325 $ (2,819) $ 441,974
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Treasury securities....................... $ 11,051 $ 43 $ (7) $ 11,087
Mortgage-backed securities..................... 52,927 -- (5,583) 47,344
-------- ------ -------- --------
Total Available-for-Sale.................. 63,978 43 (5,590) 58,431
-------- ------ -------- --------
Held-to-Maturity:
U.S. Treasury securities....................... 110,207 -- (3,942) 106,265
U.S. government agency securities.............. 51,240 32 (3,107) 48,165
Mortgage-backed securities..................... 170,266 59 (12,564) 157,761
State and municipal obligations................ 66,639 1,398 (1,394) 66,643
Other securities............................... 7,636 4 -- 7,640
-------- ------ -------- --------
Total Held-to-Maturity.................... 405,988 1,493 (21,007) 386,474
-------- ------ -------- --------
Total.................................. $ 469,966 $1,536 $ (26,597) $ 444,905
======== ====== ======== ========
</TABLE>
On November 15, 1995, the Financial Accounting Standards Board issued its
Special Report on the implementation of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Guidance in the Special Report
allows entities to reclassify securities, including held-to-maturity debt
securities, without calling into question the intent of the entity to hold debt
securities to maturity in the future.
F-10
<PAGE> 123
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Special Report indicates that the one-time reclassification permitted should
occur as of a single date between November 15, 1995 and December 31, 1995. In
conjunction with the provisions contained in the Special Report, the Bank
reclassified approximately $299.8 million of held-to-maturity securities, at
amortized cost, into the available-for-sale classification. Unrealized gains of
approximately $400,000 were recorded as a result of this reclassification.
The amortized cost and estimated fair value of investment securities at
December 31, 1995, categorized by the earlier of call or contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Available-for-Sale:
Due in one year or less................................ $ 89,173 $ 89,951
Due after one year through five years.................. 76,855 77,475
Mortgage-backed securities............................. 195,827 194,309
-------- --------
Totals............................................ $ 361,855 $ 361,735
======== ========
Held-to-Maturity:
Due in one year or less................................ $ 5,459 $ 5,516
Due after one year through five years.................. 31,043 32,621
Due after five years through ten years................. 30,983 32,969
Due after ten years.................................... 9,128 9,133
-------- --------
Totals............................................ $ 76,613 $ 80,239
======== ========
</TABLE>
Mortgage-backed securities are collateralized by residential real estate
loans and consist primarily of Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC) certificates.
Proceeds from sales of investment securities available for sale and the
related gross realized gains and losses are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales.................................... $ -- $525 $41,914
Gross realized gains................................... -- 8 717
Gross realized losses.................................. -- -- (152)
</TABLE>
Investment securities with an approximate book value of $297 million at
December 31, 1995 were pledged to collateralize certain deposits, securities
sold under agreements to repurchase and for other purposes as required or
permitted by law.
F-11
<PAGE> 124
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LOANS:
Loans classified by type at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Commercial and industrial............................. $ 638,497 $ 611,670
Real estate--construction............................. 121,547 94,223
Real estate--mortgage................................. 207,377 202,455
Consumer.............................................. 231,717 224,927
Other loans........................................... 2,061 1,136
---------- ----------
Gross loans...................................... 1,201,199 1,134,411
Less: Unearned discount............................... (5,325) (5,788)
---------- ----------
Total loans...................................... 1,195,874 1,128,623
Less: Allowance for loan losses....................... (23,869) (22,833)
---------- ----------
Loans, net....................................... $1,172,005 $1,105,790
========== ==========
</TABLE>
Loans on a nonaccrual basis, including impaired loans, at December 31,
1995, 1994 and 1993 were approximately $9.9 million, $10.5 million and $10.4
million, respectively. Interest on these loans included in income amounted to
$240,000, $346,000 and $78,000 in 1995, 1994 and 1993, respectively. The total
interest income which would have been recognized under the original terms of the
loans was $1,073,000, $942,000 and $827,000 in 1995, 1994 and 1993,
respectively.
At December 31, 1995, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS No. 114 totaled $9.6 million, of
which $3.9 million related to impaired loans which do not require a related
allowance for loan losses because the loans have been partially written down
through charge-offs, and $5.7 million related to loans with a corresponding
allowance for loan losses of $604,000. For the year ended December 31, 1995, the
average recorded investment in impaired loans was approximately $7.8 million.
The Bank recognized $39,000 of interest on impaired loans during the portion of
the year that they were impaired.
The Bank provides several types of loans to its customers including
residential, construction, commercial and consumer loans. Lending activities are
conducted with customers in a wide variety of industries as well as with
individuals with a wide variety of credit requirements. The Bank does not have a
concentration of loans in any specific industry. Credit risks tend to be
geographically concentrated in that the majority of the Bank's customer base
lies within the Chicago metropolitan area.
Activity in the allowance for loan losses for the years ended December 31,
1995, 1994 and 1993 consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................................ $22,833 $19,740 $14,661
Provision for loan losses................................... 4,056 7,374 10,521
Loans charged-off........................................... (4,901) (5,158) (7,971)
Recoveries on loans previously charged-off.................. 1,881 877 2,529
------- ------- -------
Net charge-offs............................................. (3,020) (4,281) (5,442)
------- ------- -------
Balance at end of year...................................... $23,869 $22,833 $19,740
======= ======= =======
</TABLE>
F-12
<PAGE> 125
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Bank has extended loans to directors and executive officers of the
Bank, the Parent and their related interests. The aggregate loans outstanding as
reported by the directors and executive officers of the Bank and their related
interests, which individually exceeded $60,000, totaled $20.3 million, $7.4
million and $11.8 million at December 31, 1995, 1994 and 1993, respectively.
During 1995, 1994 and 1993, new loans totaled $20.2 million, $2.2 million and
$6.3 million, respectively, and repayments totaled $7.3 million, $6.6 million
and $4.1 million, respectively. In the opinion of management, these loans were
made in the normal course of business and on substantially the same terms for
comparable transactions with other borrowers and do not involve more than a
normal risk of collectibility. The Bank relies on its directors and executive
officers for identification of loans to their related interests.
At December 31, 1995, 1994 and 1993, mortgage loans serviced for others
totaled $195 million, $166 million and 135 million, respectively.
5. PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Premises, leasehold improvements and equipment at December 31, 1995 and
1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements........................... $ 4,524 $ 2,915
Buildings and improvements...................... 7,522 5,577
Leasehold improvements.......................... 4,398 4,234
Furniture, fixtures and equipment............... 19,039 17,255
-------- --------
Total cost................................. 35,483 29,981
Less accumulated depreciation and
amortization.................................. (18,639) (16,108)
-------- --------
Net book value............................. $ 16,844 $ 13,873
======== ========
</TABLE>
6. OTHER REAL ESTATE AND REPOSSESSED ASSETS:
Other real estate and repossessed assets included in other assets in the
balance sheet at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Other real estate................................... $2,928 $2,843
Repossessed assets.................................. 2,488 356
------- -------
- -
Net book value................................. $5,416 $3,199
======== ========
</TABLE>
Activity in the allowance for other real estate for the years ended
December 31, 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................. $ 795 $ 482 $ 381
Provision for other real estate.............. 243 587 266
Charge-offs.................................. (451) (274) (165)
----- -----
Balance at end of year....................... $ 587 $ 795 $ 482
===== =====
</TABLE>
F-13
<PAGE> 126
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. MORTGAGE SERVICING RIGHTS:
Capitalized mortgage servicing rights included in other assets in the
balance sheet totaled $895,000 as of December 31, 1995, which approximates fair
value. For the year ended December 31, 1995, amortization of capitalized
mortgage servicing rights totaled $68,000. During 1995, there were no valuation
allowances established for capitalized mortgage servicing rights.
8. INTEREST-BEARING DEPOSITS:
Interest-bearing deposits at December 31, 1995 and 1994 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- --------
(IN THOUSANDS)
<S> <C> <C>
NOW accounts.......................................... $ 66,049 $ 57,795
Savings accounts...................................... 124,210 135,291
Money market deposits................................. 266,351 275,384
Certificates of deposit, less than $100,000........... 292,489 214,162
Certificates of deposit, $100,000 or more............. 84,910 61,089
Public time deposits.................................. 114,127 132,940
Brokered certificates of deposit...................... 97,822 97,950
---------- --------
Total............................................ $1,045,958 $974,611
========== ========
</TABLE>
Interest expense on certificates of deposit, $100,000 or more, was $3.4
million, $1.7 million and $1.1 million for the years ended December 31, 1995,
1994 and 1993, respectively.
At December 31, 1995 the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------- --------
<S> <C>
1996....................................... $465,011
1997....................................... 104,108
1998....................................... 11,889
1999....................................... 3,333
2000 and thereafter........................ 5,007
--------
$589,348
========
</TABLE>
9. SHORT-TERM BORROWINGS:
Short-term borrowings at December 31, 1995 and 1994 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Securities sold under agreements to repurchase......... $148,546 $181,624
Federal funds purchased................................ 43,500 48,450
U.S. Treasury tax and loan note option................. 9,987 13,923
-------- --------
Total............................................. $202,033 $243,997
======== ========
</TABLE>
Securities sold under agreements to repurchase generally mature within 1 to
180 days from the transaction date. Under the terms of the repurchase
agreements, if the market value of the pledged securities declines below the
repurchase liability, the Bank may be required to provide additional collateral
to the buyer.
F-14
<PAGE> 127
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Average balance during the year............ $196,728 $179,027 $143,057
Average interest rate during the year...... 5.81% 4.13% 3.22%
Maximum month end balance during the
year..................................... $224,907 $190,142 $166,523
</TABLE>
Additional information with respect to securities sold under agreements to
repurchase as of December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
COLLATERAL
-----------------------------------------------------
U.S. TREASURY AND
GOVERNMENT AGENCY MORTGAGE-BACKED
WEIGHTED SECURITIES SECURITIES
AVERAGE ------------------------ ------------------------
REPURCHASE INTEREST AMORTIZED ESTIMATED AMORTIZED ESTIMATED
TERM LIABILITY RATE COST FAIR VALUE COST FAIR VALUE
- --------------------------- ---------- -------- --------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Overnight.................. $ 93,429 5.43% $23,244 $ 23,387 $ 75,899 $ 74,763
Up to 30 days.............. 27,604 5.13 10,177 10,285 19,903 19,699
30 to 90 days.............. 9,673 5.49 514 519 10,587 10,574
Over 90 days............... 17,840 5.72 6,859 6,986 13,147 13,185
-------- ---- ------- ------- -------- --------
$148,546 5.41% $40,794 $ 41,177 $ 119,536 $ 118,221
======== ==== ======= ======= ======== ========
</TABLE>
Under the treasury tax and loan note option, the Bank is authorized to
accept U.S. Treasury deposits of excess funds along with the deposits of
customer taxes. These liabilities bear interest at a rate of .25% below the
average federal funds rate and are collateralized by a pledge of various
investment securities.
At December 31, 1995, the Bank had outstanding and unused lines of credit
for short-term borrowings with various entities totaling $233 million.
10. INCOME TAXES:
The components of the income tax expense (benefit) for the years ended
December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense:
Federal................................. $7,758 $ 7,751 $ 7,599
Deferred tax expense (benefit):
Federal................................. 16 (1,139) (2,662)
State................................... -- (100) --
------ ------- -------
Total................................ 16 (1,239) (2,662)
------ ------- -------
Applicable income taxes............ $7,774 $ 6,512 $ 4,937
====== ======= =======
</TABLE>
F-15
<PAGE> 128
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
AMOUNT
--------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Fixed assets, principally due to differences in depreciation..... $ 478 $ 316
Loans, principally due to allowance for loan losses.............. 8,454 8,092
State net operating loss carryforwards........................... 261 941
Deferred income, principally net loan origination fees........... 1,183 1,248
Other real estate................................................ 352 276
Other accruals................................................... 216 353
------- -------
Gross deferred tax assets..................................... 10,944 11,226
Less valuation allowance......................................... (261) (941)
------- -------
Gross deferred tax assets, net of valuation allowance......... 10,683 10,285
------- -------
DEFERRED TAX LIABILITIES:
Discount accretion............................................... (224) (123)
Mortgage servicing rights........................................ (313) --
------- -------
Gross deferred tax liabilities................................ (537) (123)
------- -------
Subtotal.................................................... 10,146 10,162
------- -------
Tax effect of unrealized holding losses on investment
securities.................................................... 42 1,941
------- -------
Net deferred tax assets..................................... $10,188 $12,103
======= =======
</TABLE>
There was no securities transactions tax effect for 1995. The securities
transactions tax effect for 1994 and 1993 was approximately $3,000 and $198,000,
respectively.
At December 31, 1995 and 1994, the Bank had net operating loss
carryforwards for Illinois state income tax purposes of approximately $6 million
and $20 million, respectively. These carryforwards will expire at various dates
through the year 2006. A valuation allowance has been provided for these net
operating loss carryforwards because of the uncertainty surrounding their
recognition prior to their expiration.
Income tax expense (benefit) was different from the amounts computed by
applying the federal statutory rate of 35% in 1995, 1994 and 1993 to income
before income taxes because of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense at statutory rate $ 9,079 $ 7,845 $ 6,181
(Decrease) increase in taxes resulting from:
Tax-exempt interest income, net of disallowed
interest deduction......................... (1,423) (1,448) (1,370)
Other, net.................................... 118 115 126
------- ------- -------
Total...................................... $ 7,774 $ 6,512 $ 4,937
======= ======= =======
</TABLE>
F-16
<PAGE> 129
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. LONG-TERM BORROWINGS:
Long-term borrowings consisted of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Federal Home Loan Bank (FHLB) various advances ranging from $5 million to
$15 million due at various dates through May 8, 1997; collateralized by
qualified first mortgage residential loans and FHLB stock totaling
approximately $256 million and $7 million, respectively, as of December
31, 1995; weighted average interest rates at December 31, 1995 and 1994
are 6.33% and 5.99%, respectively...................................... $60,000 $47,000
Chicago Equity Fund non-interest bearing notes payable over a five to
seven year period in approximately equal annual installments........... 1,003 864
------- -------
Total............................................................... $61,003 $47,864
======= =======
</TABLE>
Following are the scheduled maturities of long-term borrowings at December
31, 1995:
<TABLE>
<CAPTION>
YEAR
-------------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1996.............................................. $ 50,166
1997.............................................. 10,204
1998.............................................. 192
1999.............................................. 151
2000.............................................. 109
Thereafter........................................ 181
-------
Total........................................ $ 61,003
=======
</TABLE>
12. EMPLOYEE BENEFIT PLANS:
The employees of the Bank participate in the employee benefit plans of
CTFG, consisting of the CTFG Profit Sharing Plan, the CTFG 401(k) Plan, and the
CTFG ESOP. Company contributions are at the discretion of the CTFG Board of
Directors, with the exception of certain matching of employee contributions and
a minimum ESOP contribution sufficient to service the ESOP debt. During 1995,
1994 and 1993, Bank contributions paid to the profit-sharing plan and ESOP were
$1.5 million, $1.2 million and $857,000, respectively.
13. RELATED PARTY TRANSACTIONS:
Included in other assets are amounts due from and to the Parent and other
affiliates. As of December 31, 1995 and 1994, the amounts due from the Parent
and other affiliates totaled $131,000 and $46,000, respectively. The amount due
to the Parent as of December 31, 1995 totaled $99,000.
During the years ended December 31, 1995, 1994 and 1993, payments were made
to the Parent and other affiliates for interest expense on securities sold under
agreements to repurchase totaling $303,000, $173,000 and $43,000, respectively.
The Bank received from the Parent and other affiliates, $422,000, $418,000
and $509,000, during the years ended December 31, 1995, 1994 and 1993,
respectively, for office space and various services performed by Bank employees
on behalf of the Parent and other affiliates. These services include accounting,
marketing,
F-17
<PAGE> 130
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
operations, human resources, and legal services. These fees were recorded as a
reduction to occupancy and salaries and employee benefits. During 1995, the Bank
paid $1.1 million to the Parent for various services which include acquisition
related services, human resources services, and audit services during 1995.
These fees are included in salaries and employee benefits. No such payments were
made in 1994 or 1993.
14. ALLOCATION OF PARENT COMPANY EXPENSES:
The Parent Company provides certain executive and other services to the
Bank. Costs related to those services are not allocated to the Bank, nor are the
costs reflected in the Bank's financial statements. The Parent estimates these
costs to be $2.86 million, $1.82 million and $1.69 million for the years ended
December 31, 1995, 1994 and 1993, respectively. These costs are computed using
various estimates and a predefined formula based upon assets, revenues and
employees. The above estimates would change if different methods were applied.
15. COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS:
COMMITMENTS:
The Bank is obligated in accordance with the terms of various long-term
noncancelable operating leases for premises (land and building) and office space
and equipment. The terms of the leases generally require periodic adjustment of
the minimum lease payments based on an increase in the consumer price index. In
addition, the Bank is obligated to pay the real estate taxes assessed on the
properties and certain maintenance costs. Certain of the leases contain renewal
options for periods of up to five years. Total rental expense was approximately
$2.0 million, $2.3 million and $1.9 million for 1995, 1994 and 1993,
respectively.
Estimated future minimum rental commitments under these operating leases as
of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR
------------------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1996................................................... $ 1,718
1997................................................... 1,642
1998................................................... 1,472
1999................................................... 858
2000................................................... 821
Thereafter............................................. 7,205
-------
Total............................................. $ 13,716
=======
</TABLE>
CONTINGENCIES:
The Bank is a defendant in various legal proceedings arising in the normal
course of business. In the opinion of management, based on the advice of legal
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Bank's financial position.
FINANCIAL INSTRUMENTS:
The Bank is party to various financial instruments with off-balance sheet
risk. The Bank uses these financial instruments in the normal course of business
to meet the financing needs of customers and to effectively manage exposure to
interest rate risk. These financial instruments include commitments to extend
credit, standby letters of credit, interest-rate exchange contracts (swaps) and
forward commitments to sell loans. When viewed in terms of the maximum exposure,
those instruments may involve, to varying degrees,
F-18
<PAGE> 131
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheet. Credit risk is the possibility that a
counterparty to a financial instrument will be unable to perform its contractual
obligations. Interest rate risk is the possibility that, due to changes in
economic conditions, the Bank's net interest income will be adversely affected.
The Bank mitigates its exposure to credit risk through its internal
controls over the extension of credit. These controls include the process of
credit approval and review, the establishment of credit limits, and, when deemed
necessary, securing collateral. Collateral held varies but may include deposits
held in financial institutions; U.S. Treasury securities; other marketable
securities; income-producing commercial properties; accounts receivable;
inventories; and property, plant and equipment. The Bank manages its exposure to
interest rate risk, on a limited basis, by using off-balance sheet instruments
to offset existing interest rate risk of its assets and liabilities, and by
generally setting variable rates of interest on contingent extensions of credit.
The following is a summary of the contractual or notional amount of each
significant class of off-balance sheet financial instrument outstanding. The
Bank's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
these instruments. For interest-rate exchange contracts (swaps) and forward
commitments to sell loans the contract or notional amounts substantially exceed
actual exposure to credit loss.
At December 31, 1995, the contractual or notional amounts are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Financial instruments wherein contract amounts represent credit
risk:
Commitments to extend credit................................... $394,877
Standby letters of credit...................................... 53,683
Financial instruments wherein notional amounts exceed the amount
of credit risk:
Interest rate exchange agreements (swaps)...................... $ 75,000
Forward commitments to sell loans.............................. 18,926
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Such instruments are
generally issued for one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Most of the Bank's standby letters of credit are
expected to expire undrawn.
An interest-rate exchange contract (swap) is an agreement in which two
parties agree to exchange, at specified intervals, interest payment streams
calculated on an agreed-upon notional principal amount with at least one stream
based on a specified floating-rate index. The Bank's objective in holding
interest-rate swaps is interest rate risk management. The Bank entered into an
agreement based on a $25 million notional amount to assume variable-market
indexed interest payments in exchange for fixed-rate interest payments. The
original maturity of this agreement (12/6/98) was five years and the fixed-rate
component received is 5.32%. The variable-interest rate component paid is based
on three-month LIBOR and was 5.81% as of December 31, 1995. The Bank also
entered into an agreement based on a $50 million notional amount to assume
fixed-rate interest payments in exchange for variable-market indexed payments.
The original maturity of this agreement
F-19
<PAGE> 132
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5/12/97) was 2 years and the fixed-rate component paid is 5.97%. The
variable-interest component paid is based on the federal funds rate and was
5.65% as of December 31, 1995.
The Bank enters into forward commitments to sell loans to manage the
interest rate risk exposure of mortgage banking activities. The hedging activity
helps to protect the Bank from a risk that the market value of mortgage loans
intended to be sold will be adversely affected by changes in interest rates. At
December 31, 1995, the Bank's forward commitments to sell loans had delivery
commitments expiring within three months. Gross unrealized losses on forward
sale commitments, based on dealer-quoted prices, approximated $103,000 at
December 31, 1995.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 (SFAS No. 107),
"Disclosures about Fair Value of Financial Instruments," requires disclosure of
the estimated fair value of financial instruments. For the Bank, a significant
portion of its assets and liabilities are considered financial instruments as
defined in SFAS No. 107. Many of the Bank's financial instruments, however, lack
an available, or readily discoverable, trading market as characterized by a
willing buyer and willing seller engaging in an exchange transaction.
Significant estimations and present value calculations were used by the Bank for
the purposes of estimating fair values. Accordingly, fair values are based on
various factors relative to expected loss experience, current economic
conditions, risk characteristics, and other factors. The assumptions and
estimates used in the fair value determination process are subjective in nature
and involve uncertainties and significant judgment and, therefore, fair values
cannot be determined with precision. Changes in assumptions could significantly
affect these estimated values.
The methods and assumptions used to determine fair values for each
significant class of financial instruments are presented below:
CASH AND CASH EQUIVALENTS:
Cash, due from banks and federal funds sold are reported at amounts which
approximate fair value in the balance sheet.
INVESTMENT SECURITIES:
Fair values for investment securities are determined from quoted market
prices. If a quoted market price is not available, fair value is estimated using
quoted market prices for similar instruments. The fair values pertaining to
investment securities are disclosed in Note 3.
LOANS:
Fair values of loans have been estimated by the present value of future
cash flows, using current rates at which similar loans would be made to
borrowers with similar credit ratings and the same remaining maturities. The
estimated fair value of the entire loan portfolio as of December 31, 1995 and
1994 was $1.21 billion and $1.11 billion, respectively.
DEPOSIT LIABILITIES:
Deposit liabilities with stated maturities have been valued at the present
value of future cash flows using rates which approximate current market rates
for similar instruments. Fair values of demand deposits are equal to the
respective amounts due on demand. The carrying amount of variable rate
instruments approximates fair value. The estimated fair value of deposit
liabilities as of December 31, 1995 and 1994 was $1.366 billion and $1.287
billion, respectively.
F-20
<PAGE> 133
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
Short-term borrowings and long-term debt have been valued at present values
of future cash flows using rates which approximate current market rates for
similar instruments. The estimated fair value of short-term borrowings as of
December 31, 1995 and 1994 was $202 million and $244 million, respectively. The
estimated fair value of long-term debt as of December 31, 1995 and 1994 was $61
million and $48 million, respectively.
FINANCIAL INSTRUMENTS:
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of these commitments is not
material. The fair value of interest rate swap agreements is estimated using
quoted market prices for similar instruments. The estimated fair value of
interest rate exchange contracts (swaps) as of December 31, 1995 and 1994 was
$(796,000) and $(2.4) million, respectively.
17. REGULATORY DISCLOSURES
The Bank is subject to various capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1995, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1995, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as "well-capitalized" under
the regulatory framework for prompt corrective action. To be categorized
"well-capitalized" the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
F-21
<PAGE> 134
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Bank's actual capital amounts and ratios as of December 31, 1995 and
1994 are also presented in the following table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSE ACTION PROVISION
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Total Capital
(to Risk Weighted Assets)..... $146,770 11.44 $102,597 >8.00 $128,246 >10.00
Tier 1 Capital
(to Risk Weighted Assets)..... 130,642 10.19 51,248 >4.00 76,948 >6.00
Tier 1 Capital
(to Average Assets)........... 130,642 7.41 70,533 >4.00 88,166 >5.00
As of December 31, 1994
Total Capital
(to Risk Weighted Assets)..... 135,492 11.44 94,758 >8.00 118,448 >10.00
Tier 1 Capital
(to Risk Weighted Assets)..... 120,587 10.18 47,379 >4.00 71,069 >6.00
Tier 1 Capital
(to Average Assets)........... 120,587 7.15 67,423 >4.00 84,279 >5.00
</TABLE>
18. DEFINITIVE SHARE AGREEMENT
On June 12, 1996 the Board of Directors of CTFG approved a definitive share
agreement as amended providing for the split-off of the Bank to an investment
group headed by CTFG's Chairman, President, and Company director and co-founder.
Under the terms of the agreement, CTFG will receive between 4.0 and 4.5 million
shares of common stock of CTFG plus the Bank's used automobile receivables
business, principally consisting of cash and sales finance receivables secured
by automobiles and cash amounts. The aggregate value of the cash and receivables
to be transferred to CTFG will range from $82 million to $98 million depending
on the number of shares exchanged. The Bank anticipates that the split-off
transaction will be consummated by the first quarter of 1997.
F-22
<PAGE> 135
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 9
The Split-Off Transactions................ 17
Use of Proceeds........................... 28
Pro Forma Capitalization.................. 29
Selected Bank Financial Data.............. 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 31
Unaudited Pro Forma Condensed Consolidated
Financial Statements.................... 54
Management's Discussion and Analysis of
Pro Forma Financial Condition and
Results of Operations................... 67
Business.................................. 71
Management................................ 77
Security Ownership of Management and
Certain Beneficial Owners............... 83
Supervision and Regulation................ 84
Certain Transactions...................... 93
Certain U.S. Federal Income Tax
Consequences............................ 94
The Offer................................. 95
Special Election Under the Profit
Sharing/ESOP............................ 100
Trustee's Election for ESOP Stock
Accounts................................ 104
Description of Capital Stock.............. 105
Legal Matters............................. 110
Experts................................... 110
Additional Information.................... 110
Incorporation of Certain Documents by
Reference............................... 110
Index to Financial Statements............. F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
MINIMUM: 4,000,000 SHARES
MAXIMUM: 4,500,000 SHARES
TAYLOR CAPITAL
GROUP, INC.
COMMON STOCK, $.01 PAR VALUE
--------------------
PROSPECTUS
--------------------
OCTOBER , 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 136
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Delaware law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to an action (other than an action by
or in the right of the corporation) by reason of his service as a director or
officer of the corporation, or his service, at the corporation's request, as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees) that are actually and reasonably
incurred by him ("Expenses"), and judgments, fines and amounts paid in
settlement that are actually and reasonably incurred by him, in connection with
the defense or settlement of such action, provided that he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Although Delaware law permits a corporation to indemnify any person referred to
above against Expenses in connection with the defense or settlement of an action
by or in the right of the corporation, provided that he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the corporation's
best interests, if such person has been judged liable to the corporation,
indemnification is only permitted to the extent that the Court of Chancery (or
the court in which the action was brought) determines that, despite the
adjudication of liability, such person is entitled to indemnity for such
Expenses as the court deems proper. The determination as to whether a person
seeking indemnification has met the required standard of conduct is to be made
(1) by a majority vote of a quorum of disinterested members of the board of
directors, or (2) by independent legal counsel in a written opinion, if such a
quorum does not exist or if the disinterested directors so direct or (3) by the
stockholders. The General Corporation Law of the State of Delaware also provides
for mandatory indemnification of any director, officer, employee or agent
against Expenses to the extent such person has been successful in any proceeding
covered by the statute. In addition, the General Corporation Law of the State of
Delaware provides the general authorization of advancement of a director's or
officer's litigation expenses in lieu of requiring the authorization of such
advancement by the board of directors in specific cases, and that
indemnification and advancement of expenses provided by the statute shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement or otherwise.
It is expected that the Taylor Family will propose that the Company agree
to indemnify and hold harmless the Taylor Family in the event the Company
breaches agreements entered into by the Company in connection with the Split-Off
Transactions. It is contemplated that this indemnification agreement, which will
be subject to the approval of the independent directors of the Company, would
also cover certain Taylor Family liabilities and obligations which are placed on
the Taylor Family pursuant to the Split-Off Transactions and which may be
considered personal to the Taylor Family. Under the proposed agreement, the
Company would be obligated to indemnify the Taylor Family against the Taylor
Family's liabilities under certain provisions of the Share Exchange Agreement,
but only to the extent that any particular liability does not arise as a result
of a reckless breach of the Share Exchange Agreement by the Taylor Family.
The Certificate and By-Laws provide for indemnification of the Company's
directors, officers, employees and other agents to the fullest extent not
prohibited by the Delaware law.
The Company intends to enter into agreements to indemnify its directors and
certain officers, in addition to the indemnification provided for in the
Certificate and By-Laws. These agreements, among other things, will indemnify
the Company's directors and officers for all direct and indirect expenses and
costs (including, without limitation, all reasonable attorneys' fees and related
disbursements, other out of pocket costs and reasonable compensation for time
spent by such persons for which they are not otherwise compensated by the
Company or any third person) and liabilities of any type whatsoever (including,
but not limited to, judgments, fines and settlement fees) actually and
reasonably incurred by such person in connection with either the investigation,
defense, settlement or appeal of any threatened, pending or completed action,
suit or other proceeding, including any action by or in the right of the
corporation, arising out of such person's services as a
II-1
<PAGE> 137
director, officer, employee or other agent of the Company, any subsidiary of the
Company or any other company or enterprise to which the person provides services
at the request of the Company. The Company believes that these provisions and
agreements are necessary to attract and retain talented and experienced
directors and officers.
The Company maintains liability insurance for the benefit of its directors
and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <S> <C>
2 -- Amended and Restated Share Exchange Agreement dated June 12, 1996 among Cole Taylor
Financial Group, Inc. and the Taylor Family, incorporated by reference to the
Company's Registration Statement on Form S-1 covering shares of %
Noncumulative Perpetual Preferred Stock, Series A, filed on October 24, 1996 (File
No. 333-14713)
3.1 -- Certificate of Incorporation of Taylor Capital Group, Inc. dated October 9, 1996,
incorporated by reference to the Company's Registration Statement on Form S-1
covering shares of % Noncumulative Perpetual Preferred Stock, Series A, filed
on October 24, 1996 (File No. 333-14713)
3.2 -- By-Laws of Taylor Capital Group, Inc., incorporated by reference to the Company's
Registration Statement on Form S-1 covering shares of % Noncumulative
Perpetual Preferred Stock, Series A, filed on October 24, 1996 (File No. 333-14713)
*5.1 -- Opinion of McDermott, Will & Emery regarding legality
*10.1 -- Loan Agreement between LaSalle National Bank and Taylor Capital Group, Inc., dated
10.2 -- Form of Cole Taylor Bank 401(k) Profit Sharing and Employee Stock Ownership Plan,
incorporated by reference to the Company's Registration Statement on Form S-1
covering shares of % Noncumulative Perpetual Preferred Stock, Series A, filed
on October 24, 1996 (File No. 333-14713)
10.3 -- Form of Cole Taylor Bank 401(k) Profit Sharing and Employee Stock Ownership Trust,
incorporated by reference to the Company's Registration Statement on Form S-1
covering shares of % Noncumulative Perpetual Preferred Stock, Series A, filed
on October 24, 1996 (File No. 333-14713)
10.4 -- Form of Escrow Agreement by and among Cole Taylor Financial Group, Inc., the Taylor
Family and The Northern Trust Company
*10.5 -- Escrow Agreement between Taylor Capital Group, Inc. and Cole Taylor Bank (as Escrow
Agent)
*10.6 -- Form of Subscription Letter
21 -- Subsidiaries of Taylor Capital Group, Inc., incorporated by reference to the
Company's Registration Statement on Form S-1 covering shares of %
Noncumulative Perpetual Preferred Stock, Series A, filed on October 24, 1996 (File
No. 333-14713)
23.1 -- Consent of KMPG Peat Marwick LLP
*23.2 -- Consent of McDermott, Will & Emery (See Exhibit 5.1 above)
24 -- Power of Attorney (included with the signature page to the Registration Statement)
27 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
II-2
<PAGE> 138
(b) Financial Statement Schedules:
None.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 1
EXHIBIT 10.4
ESCROW AGREEMENT
ESCROW AGREEMENT, made this ____ day of June, 1996, by and among Cole
Taylor Financial Group, Inc., a Delaware corporation ("CTFG"), those certain
persons listed on Schedule 7(b) of that certain Share Exchange Agreement dated
June __, 1996 by and among CTFG and such persons (the "Taylor Family") and
represented by the members of the Taylor Family shown on the signature page
hereof and The Northern Trust Company (the "Escrow Agent").
WHEREAS, CTFG and the Taylor Family have entered into a Share Exchange
Agreement (the "Agreement") in respect of the sale by CTFG of all the issued and
outstanding shares of capital stock and ownership interests in Cole Taylor Bank
(the "Bank") to the Taylor Family; and
WHEREAS, the Agreement requires that 750,000 shares of CTFG common stock
(the "Escrow Amount") be deposited in escrow by the Taylor Family pending
resolution of certain matters; and
WHEREAS, the Taylor Family agreed to and is prepared to place the Escrow
Amount in escrow with Escrow Agent; and
WHEREAS, the Escrow Agent is prepared to accept the deposit of the Escrow
Amount in escrow.
NOW THEREFORE, the parties agree as follows:
1. Escrow Agent shall open an escrow account on the date hereof in the joint
names of CTFG and the Taylor Family, entitled "CTFG/Taylor Agreement Escrow
Account".
2. The Taylor Family shall deliver the Escrow Amount to Escrow Agent for
deposit into the Escrow Account effective as of the date of the opening of said
Escrow Account.
3. Escrow Agent shall hold the Escrow Amount in escrow until such time as it
receives (i) a final order or judgment of a court of competent jurisdiction
directing the disposition of the Escrow Amount or any part thereof, together
with an opinion of counsel to CTFG or counsel to the Taylor Family to the
effect that such order or judgment is final and not subject to appeal or (ii)
joint written notice from CTFG and the persons whose names appear below as
representatives of the Taylor Family in which event Escrow Agent shall
distribute the Escrow Amount in accordance with the final order or judgment or
the joint written notice, as the case may be. The Escrow Agent shall hold any
interest,
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dividends, distributions or other earnings on the Escrow Amount for the sole
benefit of the Taylor Family and shall pay such amounts as instructed in
writing from time to time by the Taylor Family.
4. Any cash funds deposited in the Escrow Account shall be invested by Escrow
Agent in CTFG securities, government securities or certificates of deposit as
instructed by the Taylor Family. CTFG Stock deposited in the Escrow Account
shall be held for investment and shall not be sold or transferred except
pursuant to the requirements of this Escrow Agreement.
5. The duties and responsibilities of the Escrow Agent shall be limited to
those expressly set forth in this Agreement. No implied duties or
discretionary powers may be imputed to it by the terms of this Agreement, or
otherwise. The Escrow Agent shall not be subject to, nor obliged to recognize,
any other instrument governing the rights or duties of the other parties to
this Agreement, even though reference thereto may be made in this Agreement.
6. The Escrow Agent may disregard any and all notices or instructions
received from any source, except only (i) such notices or instructions as are
specifically provided for in this Agreement and (ii) orders or process of any
court of competent jurisdiction. If from time to time any property held
pursuant to this Agreement becomes subject to any order, judgment, decree,
injunction or other judicial process of any court of competent jurisdiction
("Order"), the Escrow Agent may comply with any such Order without liability to
any person, even though such Order may thereafter be annulled, reversed,
modified or vacated.
7. Whenever the Escrow Agent should receive or become aware of any conflicting
demands or claims with respect to this Agreement or the rights of any of the
parties hereto or any property held hereunder, the Escrow Agent may without
liability refrain from any action until the conflict has been resolved or,
alternatively, may tender into the registry or custody of any court which the
Escrow Agent determines to have jurisdiction all money or property in its hands
under this Agreement, together with such legal pleadings as it deems
appropriate, less a reasonable allowance for its outside legal fees and other
reasonable out-of-pocket expenses, and thereupon be discharged from all further
duties and liabilities under this Agreement. Any inaction or filing of
proceedings pursuant to this section shall not deprive the Escrow Agent of its
compensation during such inaction or prior to such filing.
8. Unless otherwise specifically indicated herein the Escrow Agent shall
proceed as soon as practicable to collect any checks or other collection items
at any time deposited hereunder. All
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such collections shall be subject to the usual collection agreement regarding
items received by its commercial banking department for deposit or collection.
The Escrow Agent shall have no duty (1) to collect from any party any money,
securities or documents required to be deposited with it, (2) to notify anyone
of any payment or maturity under the terms of any instrument deposited
hereunder, or (3) to take any legal action to enforce payment of any check,
note or security deposited with it.
9. Except as may be specifically provided herein concerning investments of
cash, the Escrow Agent shall have no liability to pay interest on any money
held pursuant to this Agreement. The Escrow Agent may use its own bond
department in purchasing or selling securities. The Escrow Agent shall not be
liable for any depreciation or change in the value of such documents or
securities or any property evidenced thereby or for any losses incurred in
liquidating securities or other property to satisfy a distribution request.
All distributions provided for hereunder shall be made by the Escrow Agent from
the Escrow Amount or any interest, dividends, distributions or other earnings
thereon, subject to any unpaid fees and unreimbursed out-of-pocket expenses of
the Escrow Agent permitted by this Agreement which are then outstanding, in the
order that proper requests therefor are received by the Escrow Agent. In no
event shall the Escrow Agent be required to seek contributions from any source
or to advance its own funds in order to satisfy a distribution request.
10. The Escrow Agent shall not be responsible for any recitals of fact in this
Agreement, or for the sufficiency, form, execution, validity or genuineness of
any documents or securities deposited under this Agreement or for any
signature, endorsement or any lack of endorsement thereon, or for the accuracy
of any description therein, or for the identity, authority or rights of the
persons executing or delivering the same or this Agreement.
11. The Escrow Agent shall be fully protected in relying without investigation
upon any written notice, demand, certificate or document which it in good faith
believes to be genuine, as to the truth and accuracy of the statements made
therein, the identity and authority of the persons executing the same and the
validity of any signature thereon. Although the Escrow Agent may demand
specific authorizations (including corporate resolutions, incumbency
certificates and the like) or identification from a party or its representative
prior to taking any action hereunder, no such demand shall constitute a waiver
or deprive the Escrow Agent of the protections afforded by this paragraph.
12. The Escrow Agent shall not be personally liable for any act taken or
omitted by it under this Agreement in good faith and in the exercise of its own
best judgment. In no event shall the
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Escrow Agent be liable to any person for special, indirect or consequential
damages of any kind, even if it is advised of the possibility thereof. The
parties shall jointly and severally indemnify, defend and hold harmless the
Escrow Agent from and against any and all claims that may be asserted against
the Escrow Agent by any third parties and any and all liability, loss, cost or
expense (including outside attorneys' fees in a reasonable amount) that may be
incurred by the Escrow Agent as a result of any such claim or otherwise as a
result of acting as Escrow Agent hereunder unless due to bad faith, gross
negligence or wilful misconduct. The obligations of the parties under this
paragraph shall survive termination of this Agreement and distribution of the
Deposit.
13. The Escrow Agent may engage nationally recognized legal counsel to advise
it concerning any of its duties in connection with this Agreement, or in case
it becomes involved in litigation on account of being Escrow Agent under this
Agreement, and reliance on the advice of such counsel shall fully protect the
Escrow Agent except for any action taken by Escrow Agent in bad faith or do to
its gross negligence or willful misconduct.
14. The Escrow Agent shall be entitled to a fee of $3,000, payable in advance
for each 12-month period or any part thereof, without proration plus
reimbursement for its reasonable expenses, including outside attorneys' fees in
a reasonable amount. The fees and expenses of the Escrow Agent shall be paid
by CTFG.
15. Any notices or communication required or permitted hereunder shall be
sufficiently given if in writing and (a) delivered in person, (b) mailed by
certified or registered mail, postage prepaid or (c) transmitted by facsimile,
as follows:
If to Escrow Agent, addressed to:
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
Attn: Frank D. Szymanek
Facsimile: (312) 557-2704
If to CTFG, addressed to:
Cole Taylor Financial Group, Inc.
350 East Dundee Road
Wheeling, IL 60090
Attn: James I. Kaplan
Facsimile: (847) 808-9145
With a copy addressed to:
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Mayer, Brown & Platt
190 South LaSalle Street
Chicago, IL 60603
Attn: Scott J. Davis
Facsimile: (312) 701-7711
If to the Taylor Family, addressed to:
Mr. Jeffrey Taylor
62 Lakewood
Highland Park, IL 60035
Fax: (847)___-____
With a copy addressed to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606
Attn: Mark L. Yeager
Fax: (312) 984-2099
Whenever under this Agreement the time for giving a notice or performing an
act falls upon a Saturday, Sunday, or holiday, such time shall be extended to
the next business day.
16. Any Escrow Agent may resign by written notice to the other parties to this
Agreement. Any such resignation shall be effective upon delivery of the
property then held in escrow to the successor Escrow Agent, whereupon the
resigning Escrow Agent shall be discharged of any further duties under this
Agreement. If an Escrow Agent resigns, the other parties shall appoint a
successor Escrow Agent; provided that if no successor is appointed within 30
days after resignation, the resigning Escrow Agent may appoint as successor any
corporation with trust powers in the United States or may tender the Deposit
into court as provided in paragraph 4.3 hereof.
17. The Escrow Agent shall not be responsible for any delays or failure to
perform caused by circumstances reasonably beyond its control, including but
not limited to breaches by other parties of their obligations hereunder, delays
by messengers or other independent contractors, mechanical or computer
failures, malfunctioning or breakdowns in public utilities, securities
exchanges, Federal Reserve Banks, or securities depositories; interference by
governmental units; strikes, lockouts, or civil disobedience; fires or other
casualties, acts of God or other similar occurrences.
18. The rights and duties of CTFG and the Taylor Family to each other shall be
governed by the laws of the state of Delaware. The rights and duties of the
Escrow Agent shall be determined in
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accordance with the laws of the State of Illinois without reference to its
conflict of law principles. This Agreement shall be deemed to be a contract
made and to be performed in the State of Illinois.
19. This Agreement may be amended from time to time by written instrument
executed by all the parties other than the Escrow Agent; provided that duties
and liabilities of the Escrow Agent may not thereby be changed without its
prior written consent.
20. This Agreement shall benefit, and be binding upon, only the parties hereto
and their respective heirs, estates, successors and assigns (each a "Party").
Nothing in this Agreement shall be construed to give any right against the
Escrow Agent to any person who is not a Party. The Escrow Agent shall have no
duty, express or implied, to any non-Party and no such person shall be deemed a
"third party beneficiary" of this Agreement.
21. The Escrow Agent shall furnish CTFG and the Taylor Family upon the request
of either CTFG or the Taylor Family with a report showing receipts and
disbursements during the period and a priced list of (publicly traded) assets.
Valuations appearing on such reports or otherwise utilized hereunder may be
obtained from third parties generally recognized as sources of pricing
information, but the Escrow Agent shall not be liable for the accuracy of
valuations furnished by recognized pricing sources.
22. This Agreement contains the entire agreement among the parties hereto with
respect to the subject matter hereof and may not be amended or modified in any
manner except by an instrument signed by all parties hereto.
* * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
COLE TAYLOR FINANCIAL GROUP, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
"TAYLOR FAMILY" REPRESENTATIVES
-------------------------------------
Sidney Taylor
-------------------------------------
Jeffrey Taylor
-------------------------------------
Bruce Taylor
-------------------------------------
Iris Taylor
THE NORTHERN TRUST COMPANY
By:
-------------------------
Name:
------------------------
Title:
-----------------------
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EXHIBIT 23.1
[KPMG PEAT MARWICK LLP LOGO]
Consent of Independent
Certified Public Accountants
The Board of Directors
Cole Taylor Bank:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Chicago, Illinois
October 22, 1996
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 102,289
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,400
<TRADING-ASSETS> 0
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<LOANS> 1,172,722
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<SHORT-TERM> 146,373
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0
36,250
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<NET-INCOME> 5,081
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<LOANS-NON> 11,938
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