<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File No. 333-14713
TAYLOR CAPITAL GROUP, INC.
Exact Name of Registrant as Specified in Charter
Delaware 36-4108550
-------- ----------
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification Number
350 East Dundee Road, Suite 300
Wheeling, Illinois 60090-3199
Address of Principal Executive Offices
(847) 808-6369
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
The number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date:
Class Outstanding at November 1 , 1997
- ----------------------------- ---------------------------------
Common Stock, $.01 Par Value 4,640,453
<PAGE> 2
TAYLOR CAPITAL GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION.......................................................................... PAGE
----
<S> <C>
Item 1. Financial Statements
Balance Sheets -
Successor Basis - Taylor Capital Group, Inc. - Consolidated
September 30, 1997; Predecessor Basis - Cole Taylor Bank -
December 31, 1996.................................................................... 3
Statements of Income -
Successor Basis - Taylor Capital Group, Inc. - Consolidated For the
Three Months Ended September 30, 1997; Predecessor Basis - Cole
Taylor Bank - For the Three Months Ended September 30, 1996;
Successor Basis - Taylor Capital Group, Inc. - Consolidated For
the Period of February 12, 1997 to September 30, 1997; Predecessor
Basis - Cole Taylor Bank - For the Nine Months Ended
September 30, 1996................................................................... 4
Statements of Cash Flows -
Successor Basis - Taylor Capital Group, Inc. - Consolidated For the
Period of February 12, 1997 to September 30, 1997; Predecessor Basis
- Cole Taylor Bank - For the Nine Months Ended September 30, 1996.................... 5
Notes to Financial Statements............................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 25
Item 6. Exhibits and Reports on Form 8-K......................................................... 25
</TABLE>
2
<PAGE> 3
TAYLOR CAPITAL GROUP, INC.
BALANCE SHEETS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Successor
Basis - Taylor
Capital Group, Predecessor
Inc. - Basis - Cole
Consolidated Taylor Bank -
September 30, December 31,
1997 1996
-------------- --------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 94,826 $ 67,021
Interest-bearing deposits with banks 136 14,564
Federal funds sold 20,000 5,675
Investment securities:
Available-for-sale, at fair value 407,181 328,817
Held-to-maturity, at amortized cost (fair value of $82,302 and $77,758 at
September 30, 1997 and December 31, 1996, respectively) 81,267 74,972
Loans held for sale, net, at lower of cost or market 26,451 25,153
Loans, net of allowance for loan losses of $25,202 and $24,184 at September 30,
1997 and December 31, 1996, respectively 1,160,378 1,175,657
Premises, leasehold improvements and equipment, net 20,986 15,247
Other real estate and repossessed assets, net 1,636 1,119
Auto loan sale proceeds receivable 66,570
Goodwill and other intangibles 36,272 2,478
Other assets 34,789 35,232
---------- ----------
Total assets $1,883,922 $1,812,505
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 327,801 $ 334,068
Interest-bearing 1,088,454 1,072,832
---------- ----------
Total deposits 1,416,255 1,406,900
Short-term borrowings 186,233 162,182
Accrued interest, taxes and other liabilities 19,424 16,788
Long-term borrowings 122,000 85,000
---------- ----------
Total liabilities 1,743,912 1,670,870
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares authorized,
Series A 9% noncumulative perpetual, 1,530,000 shares
issued and outstanding, $25 stated value 38,250 --
Common stock, $.01 par value; 7,000,000 shares authorized, 4,640,453
shares issued and outstanding 46 --
Common stock, $10 par value; 1,500,000 shares authorized, issued and
outstanding 15,000
Surplus 99,330 52,028
Unearned compensation - stock grants (2,781) --
Retained earnings 4,433 76,586
Unrealized holding gain (loss) on securities available-for-sale, net of
income taxes 732 (1,979)
---------- ----------
Total stockholders' equity 140,010 141,635
---------- ----------
Total liabilities and stockholders' equity $1,883,922 $1,812,505
========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
TAYLOR CAPITAL GROUP, INC.
STATEMENTS OF INCOME (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Successor Successor
Basis - Taylor Basis - Taylor
Capital Group, Predecessor Capital Group, Predecessor
Inc. - Basis - Cole Inc. - Basis - Cole
Consolidated Taylor Bank - Consolidated Taylor Bank -
For the Three For the Three For the Period of For the Nine
Months Ended Months Ended Feb. 12, 1997 to Months Ended
Sep. 30, 1997 Sep. 30, 1996 Sep. 30, 1997 Sep. 30, 1996
---------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $27,664 $27,723 $68,588 $82,099
Interest on investment securities:
Taxable 6,556 5,877 16,473 17,146
Tax-exempt 729 949 1,873 2,892
Interest on cash equivalents 852 555 1,310 1,052
------- -------- -------- --------
Total interest income 35,801 35,104 88,244 103,189
------- -------- -------- --------
Interest expense:
Deposits 13,382 13,873 32,898 40,102
Short-term borrowings 2,586 2,069 6,204 6,537
Long-term borrowings 2,010 1,059 4,614 2,854
------- -------- -------- --------
Total interest expense 17,978 17,001 43,716 49,493
------- -------- -------- --------
Net interest income 17,823 18,103 44,528 53,696
Provision for loan losses 1,769 953 3,157 3,005
------- -------- -------- --------
Net interest income after provision
for loan losses 16,054 17,150 41,371 50,691
------- -------- -------- --------
Noninterest income:
Service charges 2,441 2,230 6,076 6,499
Trust fees 978 923 2,335 2,697
Investment securities gains, net 329 329
Other noninterest income 2,665 931 4,589 2,552
------- -------- -------- --------
Total noninterest income 6,413 4,084 13,329 11,748
------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits 9,344 7,515 22,886 22,634
Occupancy of premises, net 1,541 1,451 3,938 3,801
Furniture and equipment 868 837 2,239 2,510
Computer processing 584 485 1,460 1,484
Advertising and public relations 444 408 963 1,325
Goodwill and other intangible amortization 642 50 1,620 149
Other real estate and repossessed asset
expense 249 222 447 897
Other noninterest expense 3,558 2,606 8,801 7,999
------- -------- -------- --------
Total noninterest expense 17,230 13,574 42,354 40,799
------- -------- -------- --------
Income before income taxes 5,237 7,660 12,346 21,640
Income taxes 2,128 2,623 4,816 7,288
------- -------- -------- --------
Net income $ 3,109 $ 5,037 $ 7,530 $14,352
======= ======== ======== ========
Net income applicable to common stockholders $ 2,248 $ 5,340
======= ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
TAYLOR CAPITAL GROUP, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Successor
Basis - Taylor
Capital Group, Predecessor
Inc. - Basis - Cole
Consolidated Taylor Bank -
For the Period of For the Nine
Feb. 12, 1997 to Months Ended
Sep. 30, 1997 Sep 30, 1996
------------------ ---------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 7,530 $ 14,352
Investment securities gains, net (329) --
Gain on sale of merchant credit cards (1,230) --
Provision for loan losses 3,157 3,005
Gain on sales of loans originated for sale (2,622) (822)
Loans originated and held for sale (157,804) (173,913)
Proceeds from sales of loans originated for sale 154,970 171,113
Depreciation and amortization 3,933 2,386
Other adjustments to net income, net 637 1,238
Net changes in other assets and liabilities (8,460) (266)
-------- --------
Net cash (used in) provided by operating activities (218) 14,617
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (173,772) (154,883)
Proceeds from sales of available-for-sale securities (61,568) --
Proceeds from principal payments and maturities of available-for-sale
securities (77,091) 137,826
Purchases of held-to-maturity securities (8,834) (3,228)
Proceeds from principal payments and maturities of held-to-maturity
securities 2,830 3,027
Proceeds from the sale of CT Mortgage assets 9,394 --
Proceeds from sale of merchant credit cards 1,230 --
Net increase in loans (20,004) (43,168)
Net cash of Bank and Mortgage Company acquired in Split-Off Transactions 62,503 --
Other, net (1,846) 1,396
-------- --------
Net cash provided by (used in) investing activities 10,160 (59,030)
-------- --------
Cash flows from financing activities:
Net increase in deposits 65,449 91,732
Net decrease in short-term borrowings (56,396) (48,623)
Repayments of long-term borrowings (15,000) (50,000)
Proceeds from long-term borrowings 77,000 75,000
Net proceeds from issuance of preferred stock 36,105 --
Dividends paid (2,138) (10,100)
-------- --------
Net cash provided by financing activities 105,020 58,009
-------- --------
Net increase in cash and cash equivalents 114,962 13,596
Cash and cash equivalents, beginning of period -- 92,547
-------- --------
Cash and cash equivalents, end of period $114,962 $106,143
======== ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation:
The successor basis Taylor Capital Group, Inc. consolidated financial
statements for the period February 12, 1997 to September 30, 1997 include
the accounts of Taylor Capital Group, Inc. (the "Parent Company" or the
"Company") and its wholly owned subsidiaries, Cole Taylor Bank (the
"Bank") and CT Mortgage Company, Inc. (the "Mortgage Company"). All
intercompany balances and transactions have been eliminated in
consolidation. Taylor Capital Group, Inc. is a newly formed bank holding
company which was formed to consummate the acquisition of the Bank and
Mortgage Company. Taylor Capital Group, Inc. acquired the Bank and the
Mortgage Company on February 12, 1997 in Split-Off Transactions (as
defined below), which were accounted for by the purchase method of
accounting. Prior to February 12, 1997, the Bank and Mortgage Company were
wholly owned subsidiaries of Cole Taylor Financial Group, Inc. ("CTFG"),
now known as Reliance Acceptance Group, Inc.
The Split-Off Transactions were a series of transactions pursuant to which
CTFG transferred the common stock of the Bank and the Mortgage Company to
the Company and then transferred all of the common stock of the Company to
certain CTFG stockholders in exchange for 4.5 million shares of CTFG common
stock, a dividend from the Bank to CTFG consisting of cash and loans
totaling approximately $84 million and a cash payment of approximately $1.1
million for the Mortgage Company.
The predecessor basis Cole Taylor Bank financial statements report the
financial position and results of operations of Cole Taylor Bank on its
historical accounting basis.
The unaudited interim financial statements have been prepared pursuant to
the rules and regulations for reporting on Form 10-Q. Accordingly, certain
disclosures required by generally accepted accounting principles are not
included herein. These interim statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Special Financial Report on Form 10-K for the year ended December 31, 1996,
as filed with the Securities and Exchange Commission.
Interim statements are subject to possible adjustment in connection with
the annual audit of the Company for the year ended December 31, 1997. In
the opinion of management of the Company, the accompanying unaudited
interim consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of the consolidated financial position and consolidated
results of operations for the periods presented.
The results of operations for the period of February 12, 1997 to September
30, 1997 are not necessarily indicative of the results to be expected for
the full year. Certain reclassifications were made to the predecessor basis
Cole Taylor Bank 1996 financial statements to conform to the successor
basis Taylor Capital Group, Inc. 1997 presentation.
6
<PAGE> 7
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Acquisition of Cole Taylor Bank and CT Mortgage Company, Inc.:
The Company acquired the Bank and Mortgage Company in the Split-Off
Transactions which were consummated on February 12, 1997. The Bank is a
$1.9 billion asset commercial bank. The Mortgage Company began operations
in early 1996 and competes in the subprime mortgage market for residential
loans on a brokered basis. The acquisition has been accounted for by the
purchase method of accounting, and accordingly, the results of operations
of the Bank and Mortgage Company are included in the Company's consolidated
financial statements from February 12, 1997, the date of the Split-Off
Transactions.
The Company's cost of the acquired Bank consisted of three components: (1)
$17.2 million, which represented the proportionate interest in the Bank's
book value based on the split-off stockholder group's proportionate
ownership prior to the Split-Off Transactions, (2) $81.1 million, which
represented the proportionate fair value of the common stock of CTFG
exchanged by the split-off stockholder group, and (3) $2.3 million, which
represented estimated direct acquisition costs for accountants, attorneys,
financial advisors and other professionals to consummate the transaction.
The amount by which the purchase price exceeded the fair value of the net
assets acquired approximated $37.8 million and is reflected as goodwill in
the consolidated financial statements at September 30, 1997. The goodwill
is being amortized over 15 years using the straight-line method.
The Company acquired the Mortgage Company through a cash payment of $1.1
million which exceeded the fair value of the net assets acquired by
$416,000. The resulting goodwill was initially being amortized over 15
years using the straight-line method. On August 5, 1997, however, the
Mortgage Company sold its operations headquartered in Florida. The
purchaser of the Mortgage Company's Florida assets acquired substantially
all of the outstanding loans held for sale, the pipeline of loan
commitments outstanding and the furniture and equipment. In addition, the
purchaser agreed to assume the lease obligations for the facilities and
hired all the related Mortgage Company employees. Because the Florida-based
operations generated the majority of the Mortgage Company's cashflow, the
remaining goodwill was written off in August 1997. The proceeds from the
sale, net of related disposition expenses, the carrying value of the assets
sold and goodwill resulted in a loss of approximately $50,000.
7
<PAGE> 8
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATMENTS (Continued)
3. Investment Securities:
The amortized cost and estimated fair values of investment securities
at September 30, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Successor Basis - Taylor Capital Group, Inc. - Consolidated
September 30, 1997
---------------------------------------------------------------
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 $213,514 $ 751 $ (69) $214,196
U.S. government agency securities 15,818 31 (4) 15,845
Mortgage-backed securities 176,739 723 (322) 177,140
-------- ------- ----- --------
Total Available-for-Sale 406,071 1,505 (395) 407,181
-------- ------- ----- --------
Held-to-Maturity:
State and municipal obligations 63,063 1,043 (11) 64,095
Other securities 18,204 3 -- 18,207
-------- ------- ----- --------
Total Held-to-Maturity 81,267 1,046 (11) 82,302
-------- ------- ----- --------
Total $487,338 $ 2,551 $(406) $489,483
======== ======= ===== ========
<CAPTION>
Predecessor Basis - Cole Taylor Bank
December 31, 1996
---------------------------------------------------------------
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 $ 123,824 $ 267 $ (353) $123,738
U.S. government agency securities 44,855 256 (36) 45,075
Mortgage-backed securities 163,479 668 (4,143) 160,004
--------- ------ ------- --------
Total Available-for-Sale 332,158 1,191 (4,532) 328,817
--------- ------ ------- --------
Held-to-Maturity:
State and municipal obligations 62,948 2,798 (16) 65,730
Other securities 12,024 4 -- 12,028
--------- ------ ------- --------
Total Held-to-Maturity 74,972 2,802 (16) 77,758
--------- ------ ------- --------
Total $ 407,130 $3,993 $(4,548) $406,575
========= ====== ======= ========
</TABLE>
Proceeds from the sales of investment securities available-for-sale and the
related realized gains for the third quarter of 1997 were $61,568,000 and
$329,000 respectively.
8
<PAGE> 9
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATMENTS (Continued)
4. Loans:
Loans classified by type at September 30, 1997 and December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Successor
Basis - Taylor
Capital Group, Predecessor
Inc. - Basis - Cole
Consolidated Taylor Bank -
September 30, December 31,
1997 1996
-------------- --------------
(in thousands)
<S> <C> <C>
Commercial and industrial $ 669,157 $ 655,919
Real estate-construction 184,169 192,759
Real estate-mortgage 180,593 176,819
Consumer 151,721 171,270
Other loans 1,067 4,622
----------- ----------
Gross loans 1,186,707 1,201,389
Less: Unearned discount (1,127) (1,548)
----------- ----------
Total loans 1,185,580 1,199,841
Less: Allowance for loan losses (25,202) (24,184)
----------- ----------
Loans, net $ 1,160,378 $1,175,657
=========== ==========
</TABLE>
5. Interest-Bearing Deposits:
Interest-bearing deposits at September 30, 1997 and December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Successor
Basis - Taylor
Capital Group, Predecessor
Inc. - Basis - Cole
Consolidated Taylor Bank -
September 30, December 31,
1997 1996
-------------- --------------
(in thousands)
<S> <C> <C>
NOW accounts $ 96,300 $ 77,693
Savings accounts 113,670 118,056
Money market deposits 246,473 244,302
Certificates of deposit 416,511 408,681
Public time deposits 130,508 143,415
Brokered certificates of deposit 84,992 80,685
---------- ----------
Total $1,088,454 $1,072,832
========== ==========
</TABLE>
9
<PAGE> 10
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Long-Term Borrowings:
Long-term borrowings consisted of the following at September 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
Successor
Basis - Taylor
Capital Group, Predecessor
Inc. - Basis - Cole
Consolidated Taylor Bank -
September 30, December 31,
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
COLE TAYLOR BANK:
Federal Home Loan Bank (FHLB) - various advances ranging from $10 million to $25
million due at various dates through May 8, 1998, collateralized by qualified
first mortgage residential loans and FHLB stock; weighted average interest rates
at September 30, 1997 and
December 31, 1996 were 6.00% and 5.91%, respectively. $ 95,000 $85,000
TAYLOR CAPITAL GROUP, INC.:
Unsecured $25 million term loan bearing interest at prime rate or LIBOR plus
1.25%, annual principal reductions of $1 million commencing 1999 and a balloon
payment of $22 million on February 12, 2002; interest rate at
September 30, 1997 was 6.97%. 25,000 --
Unsecured $7 million revolving credit facility bearing interest at prime rate or
LIBOR plus 1.25%, maturing February 12, 1998; interest rate at
September 30, 1997 was 8.5%. 2,000 --
-------- -------
Total $122,000 $85,000
======== =======
</TABLE>
On February 12, 1997, the Parent Company executed a loan agreement with an
unaffiliated bank for a $25 million term loan and a $5 million revolving credit
facility. On February 27, 1997 the loan agreement was amended, increasing the
revolving credit facility amount from $5 million to $7 million. The loan
agreement includes certain defined financial covenants relating to the Bank with
respect to regulatory capital, return on average assets, nonperforming assets
and Parent Company leverage. In addition, the Bank's common stock is held in
safekeeping at the unaffiliated bank and, in the event of default under the loan
agreement, the Company must pledge the Bank's stock to that bank. As of
September 30, 1997, the Company was in compliance with the provisions of the
loan agreement.
10
<PAGE> 11
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Employee Benefit Plans
The Company has an Incentive Compensation Plan (the "Plan") that allows
for the granting of stock options, stock awards and stock appreciation
rights. Under the Plan, 563,066 shares of common stock have been reserved.
During the third quarter, stock options were granted under stock option
agreements for 163,892 shares of common stock effective as of June 30,
1997. Stock options were granted at the fair market value of the stock on
the date of grant ($22.00 per share), as determined by an independent
appraisal. The stock options vest over a five year period (vesting at 20%
per year) and expire 10 years following the grant date. Upon death,
disability, retirement or change of control of the Company (as defined)
vesting is accelerated to 100%. The Company has elected to account for the
stock options using the intrinsic value method and accordingly no
compensation expense was recognized in connection with the granting of the
stock options.
On September 30, 1997, 140,453 shares of common stock were awarded under a
restricted stock agreement. Vesting of the shares requires continuous
service by each participant through June 30, 2000. The vesting rate is 50%
on June 30, 2000, 75% on June 30, 2001 and 100% on June 30, 2002 or upon
termination or death, disability, retirement or change of control of the
Company. If a participant terminates employment prior to the end of the
continuous service period, the entire stock award is forfeited.
Compensation expense equal to the fair market value of the grants is being
recognized over the vesting period. For the three months ended September
30, 1997, compensation expense related to the stock awards totaled
$309,000.
In connection with the granting of the stock options and awards, stock
transfer agreements are executed with the participants. These agreements
place certain restrictions on the transfer of any shares acquired through
option exercise or award and provide the participants with limited rights
to "put" the stock so acquired back to the Company. The Company's
repurchase liability, including ESOP obligations, is limited to $3,000,000
per year. The Company may satisfy the put obligations with cash or
through the issuance of 5 year installment notes to the participants.
8. Financial Instruments with Off-Balance Sheet Risk:
The Company is a party to various financial instruments with off-balance
sheet risk. The Company 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.
At September 30, 1997, the contractual or notional amounts were as follows:
<TABLE>
<CAPTION>
Amount
-------------
(in thousands)
<S> <C>
Financial instruments wherein contract amounts represent credit risk:
Commitments to extend credit $ 501,848
Standby letters of credit 67,335
Financial instruments wherein notional amounts exceed the amount of credit risk:
Interest rate exchange agreement (swap) $ 25,000
Forward commitments to sell loans 12,000
</TABLE>
11
<PAGE> 12
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In connection with the application of the purchase method of accounting for
the Split-Off Transactions, the only outstanding interest rate swap
was recorded at its fair value ($400,000 discount) at February 12, 1997. The net
interest income (expense) from the swap, which is a designated hedge against
certain floating rate commercial loans, is recorded on a current basis, included
in loan interest income. The purchase accounting adjustment is being accreted on
a straight line basis over the remaining term of the swap, which matures
December 12, 1998. The fair value of the swap at September 30, 1997 was
$133,000.
9. Accounting Developments:
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," effective January 1, 1997. SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment's of liabilities based on a consistent application of a
financial-components approach that focuses on control. In December 1996, SFAS
127 was issued which provides for the deferral of the effective date of certain
provisions of SFAS 125. The impact of the pronouncements did not have a material
effect on the consolidated balance sheet of the Company.
12
<PAGE> 13
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of financial
condition and results of operations of the Company as of and for the dates and
periods indicated. This discussion should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto appearing
elsewhere in this Form 10-Q.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Taylor Capital
Group, Inc. (the "Parent Company" or the "Company") and its wholly owned
subsidiaries, Cole Taylor Bank (the "Bank") and CT Mortgage Company, Inc. (the
"Mortgage Company"). The Company is a newly formed bank holding company which
was formed to consummate the acquisition of the Bank and Mortgage Company on
February 12, 1997 in Split-Off Transactions (as defined below) which were
accounted for by the purchase method of accounting. Management's discussion and
analysis compares the results of operations and financial condition of the
consolidated Company with the results of operations and financial condition of
the Bank on a stand alone predecessor basis for prior periods. This discussion
should be read in conjunction with the Company's Special Financial Report on
Form 10-K for the year ended December 31, 1996, which contains the audited
financial statements of Cole Taylor Bank on a stand alone predecessor basis for
the years ended December 31, 1996 and 1995.
The Split-Off Transactions were a series of transactions pursuant to which CTFG
transferred the common stock of the Bank and the Mortgage Company to the Company
and then transferred all of the common stock of the Company to certain CTFG
stockholders in exchange for 4.5 million shares of CTFG common stock, a dividend
from the Bank to CTFG consisting of cash and loans totaling approximately $84
million and a cash payment of approximately $1.1 million for the Mortgage
Company.
RESULTS OF OPERATIONS
Overview
Generally, the financial results of the consolidated Company in comparison to
the Bank on a stand alone predecessor basis present reduced profitability. The
primary reasons for the decline in consolidated profitability include: (1) the
application of purchase accounting which resulted in the recording of $37.8
million of goodwill and the related goodwill amortization expense, (2) the
inclusion of approximately $27 million in acquisition debt and the related
interest expense and (3) the addition of salary and operating expenses of the
newly formed Parent Company. Additionally, the 1997 consolidated financial
results of the Company on a successor basis, which commenced operations on
February 12, 1997, include less than a full nine months of operations.
For the third quarter of 1997, consolidated net income was $3.1 million.
Annualized return on average assets and return on average equity were .65% and
8.92%, respectively. For the period of February 12, 1997 to September 30, 1997,
consolidated net income was $7.5 million. For this period, annualized return on
average assets and return on average equity were .64% and 9.25%, respectively.
Net income for the Bank on the predecessor basis for the period January 1, 1997
to February 11, 1997 was $2.3 million.
Net income for the Bank on the predecessor basis for the quarter ended September
30, 1996 was $5.0 million. Annualized return on average assets and return on
average equity for the Bank during the third quarter of 1996 were 1.09% and
15.19%, respectively. Net income for the Bank on the predecessor basis for the
nine months ended September 30, 1996 was $14.4 million. For this period,
annualized return on average assets and return on average equity were 1.06% and
14.48%, respectively.
13
<PAGE> 14
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 Company's principal source of earnings. The amount of net interest income
is affected by changes in the volume and mix of earning assets and
interest-bearing liabilities and the level of rates earned or paid on those
assets and interest-bearing liabilities.
Consolidated net interest income (with an adjustment for tax-exempt income) for
the third quarter of 1997 was $18.4 million. For the period of February 12, 1997
to September 30, 1997 consolidated net interest income (with an adjustment for
tax-exempt income) was $46.0 million. Net interest income (with an adjustment
for tax-exempt income) for the Bank on the predecessor basis for the third
quarter of 1996 and for the first nine months of 1996 was $18.7 million and
$55.5 million, respectively. The lower net interest income for the first three
quarters of the year reported on the successor basis was principally due to the
consolidated reporting period for 1997 consisting of 43 fewer days of interest
earned than the Bank's 1996 predecessor basis period.
Net interest margin, which is determined by dividing taxable-equivalent net
interest income by average earning assets, was 4.13% for the third quarter of
1997 for the consolidated Company. Consolidated net interest margin for the
period of February 12, 1997 to September 30, 1997 was 4.21%. Net interest margin
for the Bank on the predecessor basis for the third quarter of 1996 and for the
first nine months of 1996 was 4.24% and 4.33%, respectively. The net interest
margin on a consolidated successor basis was lower than that of the predecessor
Bank on a stand alone basis because of the addition of the Parent Company's term
loan and revolving credit facility, which increased the consolidated Company's
cost of long-term borrowings, and the recording of approximately $37.8 million
of goodwill, which resulted in the Company's consolidated nonearning assets
increasing as a percentage of total assets.
The year-to-date net interest margin at the Bank was essentially unchanged from
the prior year's period. An increase in yield resulting from the net write-down
of investment securities related to the Split-Off Transactions, along with a 1
basis point decline in total funding costs, were offset by an overall reduction
in earning asset yield brought about by changes in asset mix.
The following table sets forth certain information relating to the Company's and
the predecessor Bank's average consolidated balance sheets and reflects the
yield on average earning assets and cost of average liabilities for the periods
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% income tax rate in each period presented.
14
<PAGE> 15
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND YIELDS / RATES
SUCCESSOR BASIS - TAYLOR CAPITAL GROUP, PREDECESSOR BASIS - COLE TAYLOR
INC. - CONSOLIDATED FOR THE THREE BANK - FOR THE THREE
MONTHS ENDED SEP. 30. 1997 MONTHS ENDED SEP. 30, 1996
-------------------------------- -------------------------------
YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%)(3) BALANCE INTEREST (%)(3)
------------ --------- ------- ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (dollars in thousands)
Investment securities (1):
Taxable $ 414,757 $ 6,556 6.27 % $ 380,993 $ 5,877 6.14 %
Non-taxable (tax equivalent) 62,143 1,207 7.71 64,456 1,461 9.02
---------- -------- ---------- -------
Total investment securities 476,900 7,763 6.46 445,449 7,338 6.55
---------- -------- ---------- -------
Interest-bearing cash equivalents 58,788 852 5.75 42,098 555 5.24
---------- -------- ---------- -------
Loans (2):
Commercial and industrial 866,931 20,027 9.17 815,328 18,469 9.01
Real estate mortgages 212,900 3,948 7.36 208,164 3,704 7.08
Consumer and other 151,428 3,419 8.96 242,237 5,148 8.45
Fees on loans 364 494
Less: Allowance for loan losses (25,037) (25,019)
---------- -------- ---------- -------
Net loans (tax equivalent) 1,206,222 27,758 9.13 1,240,710 27,815 8.92
---------- -------- ---------- -------
Total earning assets 1,741,910 36,373 8.28 1,728,257 35,708 8.22
---------- -------- ---------- -------
Nonearning Assets:
Cash and due from banks 75,456 69,921
Premises and equipment, net 21,347 16,810
Accrued interest and other
assets 69,182 29,721
---------- ----------
Total nonearning assets 165,985 116,452
---------- ----------
TOTAL ASSETS $1,907,895 36,373 7.56 $1,844,709 35,708 7.70
========== -------- ========== -------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand
deposits $ 332,783 2,986 3.56 $ 344,709 3,105 3.58
Savings deposits 115,682 746 2.56 121,360 785 2.57
Time deposits 673,784 9,650 5.68 717,213 9,983 5.54
---------- ------- ---------- -------
Total deposits 1,122,249 13,382 4.73 1,183,282 13,873 4.66
---------- ------- ---------- -------
Short-term borrowings 201,133 2,586 5.10 151,905 2,069 5.42
Long-term borrowings 124,489 2,010 6.41 71,793 1,059 5.87
---------- ------- ---------- -------
Total interest-bearing
liabilities 1,447,871 17,978 4.93 1,406,980 17,001 4.81
---------- ------- ---------- -------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 303,030 289,493
Accrued interest and other
liabilities 18,641 16,316
---------- ---------
Total noninterest-bearing
liabilities 321,671 305,809
---------- ---------
STOCKHOLDERS' EQUITY 138,353 131,920
---------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,907,895 17,978 $1,844,709 17,001
========== ------ ========== -------
Net interest income (tax
equivalent) 18,395 $18,707
====== =======
Net interest spread 3.35 % 3.41 %
Net interest margin 4.13 % 4.24 %
==== ====
- ------------------------------------
(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.
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND YIELDS / RATES
SUCCESSOR BASIS - TAYLOR CAPITAL GROUP, PREDECESSOR BASIS - COLE
INC. - CONSOLIDATED FOR THE PERIOD OF TAYLOR BANK - FOR THE NINE
FEB. 12, 1997 TO SEP. 30, 1997 MONTHS ENDED SEP. 30, 1996
------------------------------- ------------------------------
YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%)(3) BALANCE INTEREST (%)(3)
------------ --------- ------- ----------- --------- ------
INTEREST-EARNING ASSETS: (dollars in thousands)
Investment securities (1):
<S> <C> <C> <C> <C> <C> <C>
Taxable
$ 408,983 $16,473 6.36% $ 365,617 $17,146 6.26%
Non-taxable (tax equivalent) 62,407 3,096 7.84 65,098 4,450 9.13
---------- ------- ---- ---------- ------- ----
Total investment securities 471,390 19,569 6.56 430,715 21,596 6.70
---------- ------- ---- ---------- -------
Interest-bearing cash equivalents 36,337 1,310 5.70 26,671 1,052 5.27
Loans (2): ---------- ------- ---- ---------- -------
Commercial and industrial 861,169 49,792 9.14 799,016 54,247 9.07
Real estate mortgages 208,410 9,645 7.31 221,140 12,096 7.31
Consumer and other 149,174 8,411 8.91 234,253 14,673 8.37
Fees on loans 975 1,347
Less: Allowance for loan losses (24,893) (24,723)
---------- ------- ---- ---------- -------
Net loans (tax equivalent) 1,193,860 68,823 9.11 1,229,686 82,363 8.95
---------- ------- ---- ---------- -------
1,701,587 89,702 8.33 1,687,072 105,011 8.31
Total earning assets ---------- ------- ---- ---------- -------
NONEARNING ASSETS:
Cash and due from banks 72,572 68,210
Premises and equipment, net 21,207 16,997
Accrued interest and other
assets 66,035 31,587
Total nonearning assets 159,814 116,785
---------- ----------
TOTAL ASSETS $1,861,401 89,702 7.61 $1,803,857 105,011 7.78
========== ------- ========== -------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand
deposits $ 322,296 7,182 3.52 $ 340,348 9,096 3.57
Savings deposits 117,366 1,900 2.56 122,468 2,349 2.56
Time deposits 670,415 23,816 5.61 685,664 28,657 5.58
---------- ------- ---------- -------
Total deposits 1,110,077 32,898 4.68 1,148,480 40,102 4.66
---------- ------- ---------- -------
Short-term borrowings 189,403 6,204 5.18 160,046 6,537 5.46
Long-term borrowings 110,377 4,614 6.61 64,070 2,854 5.95
---------- ------- ---------- -------
Total interest-bearing
liabilities 1,409,857 43,716 4.90 1,372,596 49,493 4.82
---------- ------- ---------- -------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 297,680 283,840
Accrued interest and other
liabilities 24,712 15,382
---------- ----------
Total noninterest-bearing
liabilities 332,392 299,222
---------- ----------
STOCKHOLDERS' EQUITY 129,152 132,039
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,861,400 43,716 $1,803,857 49,493
========== ====== ========== ======
Net interest income (tax $45,986 $55,518
equivalent) ======= =======
Net interest spread 3.43% 3.49%
Net interest margin 4.21% 4.33%
==== ====
</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.
15
<PAGE> 16
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Noninterest Income
The following table shows the noninterest income for the periods indicated:
<TABLE>
<CAPTION>
Successor Successor
Basis - Taylor Basis - Taylor
Capital Group, Predecessor Capital Group, Predecessor
Inc. - Basis - Cole Inc. - Basis - Cole
Consolidated Taylor Bank - Consolidated Taylor Bank -
For the Three For the Three For the Period of For the Nine
Months Ended Months Ended Feb. 12, 1997 to Months Ended
Sep. 30, 1997 Sep. 30, 1996 Sep. 30, 1997 Sep. 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Deposit service charges $ 2,202 $ 2,029 $ 5,510 $ 5,960
Retail credit card service charges 135 122 324 317
Merchant credit card service charges 104 79 242 222
Trust Fees 978 923 2,335 2,697
Mortgage banking income 939 539 2,130 1,435
ATM fees 202 60 474 187
Gain on sale of merchant credit cards 1,230 --- 1,230 ---
Gain on sale of securities 329 --- 329 ---
Other noninterest income 294 331 755 930
------- ------- ------- -------
Total noninterest income $ 6,119 $ 4,084 $12,574 $11,748
======= ======= ======= =======
</TABLE>
Total noninterest income for the consolidated Company was $6.4 million for the
third quarter of 1997 and $13.3 million for the period of February 12, 1997 to
September 30, 1997. Total noninterest income for the Bank on the predecessor
basis for the third quarter of 1996 was $4.1 million, and for the first nine
months of 1996 was $11.7 million. Excluding the gain on sales of securities and
merchant credit cards, noninterest income reported on the successor basis for
the period of February 12, 1997 to September 30, 1997 was essentially unchanged
despite the consolidated Company's 1997 reporting period having 43 fewer days
than the Bank's predecessor basis 1996 reporting period. This was due to
increased income from mortgage banking, gains on sales of investment securities
and increased ATM fees.
In September 1997, the Bank sold its merchant credit card deposit program to an
unrelated third party resulting in a realized gain of $1,230,000. Monthly
merchant credit card deposit program fees averaged $31,000 in 1997 prior to the
sale of the program. Although these merchant customers' accounts are still
within the Bank, this service fee income is expected to be significantly reduced
in the future
Included in the consolidated Company's mortgage banking income are gains on the
sale of mortgage loans relating to the Mortgage Company's operations. These
gains were $119,000 for the three months ended September 30, 1997, and $570,000
for the period of February 12, 1997 to September 30, 1997. No Mortgage Company
gains are included in the Bank's predecessor basis 1996 results. On August 5,
1997 the Mortgage Company sold its operations headquartered in Florida. The
purchaser of the Mortgage Company's Florida assets acquired substantially all of
the outstanding loans held for sale, the pipeline of loan commitments
outstanding and the furniture and
16
<PAGE> 17
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
equipment. In addition, the purchaser agreed to assume the lease obligations
for the facilities and hired all of the related Mortgage Company employees. The
proceeds from the sale, net of related disposition expenses, the carrying value
for the assets sold and goodwill resulted in a loss of approximately $50,000.
The Florida-based operations generated the majority of the Mortgage Company's
cashflow. Therefore, the sale of the Florida-based operations is expected to
significantly reduce the Mortgage Company's income going forward.
The security gains for the quarter and the period February 12, 1997 to September
30, 1997 were a result of a modest realignment of the Bank's mortgage backed
securities portion of the available-for-sale investment portfolio. Such
realignments may occur in the future, resulting in gains or losses. These
occasional realignments are undertaken in response to changing market conditions
and reflects Management's intention to modify the Bank's interest rate risk
profile.
Noninterest Expense
Total noninterest expense for the consolidated Company was $17.2 million for the
third quarter of 1997 and $42.4 million for the period of February 12, 1997 to
September 30, 1997. Total noninterest expense for the Bank on the predecessor
basis for the third quarter of 1996 was $13.6 million, and for the first nine
months of 1996 was $40.8 million. The higher noninterest expense on the
successor basis for the period of February 12, 1997 to September 30, 1997,
despite the consolidated Company's 1997 reporting period having 43 fewer days
than the Bank's predecessor basis 1996 reporting period, was primarily due to
higher amortization expense of goodwill related to the acquisition of the Bank.
Salaries and employee benefits represent the largest category of noninterest
expense, accounting for 54.2% and 54.0% of total noninterest expense for the
consolidated Company's three months ended September 30, 1997, and for the period
of February 12, 1997 to September 30, 1997, respectively. Included in the
consolidated Company's salaries and employee benefits for the three months ended
September 30, 1997 was $805,000 of expense relating to the Mortgage and Parent
Companies. For the period of February 12, 1997 to September 30, 1997, the
salaries and employee benefits expense relating to the Mortgage and Parent
Companies totaled $2.1 million. Total average headcount at the Bank for 1997 was
640 as compared to 650 for 1996. The implementation of new long-term incentive
compensation plans in 1997 also increased total salary and benefits expense
$714,000.
Noninterest expense other than salaries and benefits expense totaled $8.0
million for the consolidated Company for the third quarter of 1997 and $19.5
million for the period of February 12, 1997 to September 30, 1997. Noninterest
expense other than salaries and benefits expense for the Bank on the predecessor
basis for the third quarter of 1996 and the first nine months of 1996 totaled
$6.1 million and $18.2 million, respectively. The consolidated Company's
reporting period for the three months ended September 30, 1997 and for the
period of February 12, 1997 to September 30, 1997 included $642,000 and
$1,620,000, respectively, of goodwill amortization and $562,000 and $1,360,000,
respectively, of other noninterest expense relating to the Mortgage and Parent
Companies. Occupancy and furniture and equipment expenses increased
approximately $530,000 as a result of the increased amortization of purchase
accounting adjustments from the write-up of the premises, leasehold improvements
and equipment to their fair value in connection with the Split-Off Transactions.
In addition, 1997 occupancy costs include land rent of $138,000 for the new
branch facility that opened in 1997.
17
<PAGE> 18
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Income Taxes
The effective income tax rate for the consolidated Company for the period of
February 12, 1997 to September 30, 1997 was 39.0%. The effective income tax rate
for the Bank on the predecessor basis for the first nine months of 1996 was
33.7%. The Bank's lower effective income tax rate for 1996 was due to the
utilization for book purposes of state net operating loss carryforwards.
Financial Condition
Overview
The consolidated Company's total assets were $1.88 billion at September 30,
1997. The Company's average earning assets for the third quarter of 1997 were
$1.77 billion. For the period of February 12, 1997 to September 30, 1997 the
Company's average earning assets were $1.73 billion. In connection with the
Split-Off Transactions, the Company sold or transferred approximately $100
million in consumer loans secured by automobiles. Approximately $67 million of
consumer loans were sold on December 31, 1996. The remaining $32 million of
consumer loans were transferred to CTFG on the date of the consummation of the
Split-Off Transactions. In comparison to the third quarter of 1996 and the first
nine months of 1996, the Bank's loan portfolio composition changed as a result
of the sale and transfer of the consumer loans, offset by growth in commercial
loans.
Investment securities increased as a result of the reinvestment of the proceeds
of the preferred stock offering which was contributed to the Bank to supplement
capital in connection with the Split-Off Transactions.
Nonearning assets increased as a result of the recognition of approximately
$37.8 million in goodwill and the estimated $7.2 million write-up of the Bank's
premises, leasehold improvements and equipment using the purchase method of
accounting for the Split-Off Transactions.
The consolidated Company's long-term borrowings include the Parent Company's
$25 million term loan and $2 million outstanding under the revolving credit
facility, which were funded in connection with the Split-Off Transactions.
18
<PAGE> 19
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 periodically 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.
The following table sets forth the amounts of nonperforming loans and other
assets at the end of periods indicated:
NONPERFORMING ASSETS
<TABLE>
<CAPTION> Basis - Cole
Successor Basis - Taylor Taylor Bank
Capital Group, Inc. - Consolidated ----------------
Sept. 30, June 30, March 31, December 31,
1997 1997 1997 1996
------------- ----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans contractually past due 90 days or more but
still accruing $ 2,600 $ 2,323 $ 2,310 $ 2,820
Nonaccrual loans 10,959 10,969 11,261 10,898
--------- --------- --------- ---------
Total nonperforming loans 13,559 13,292 13,571 13,718
Other real estate 1,570 1,800 1,862 865
Other repossessed assets 66 48 39 254
--------- --------- --------- ---------
Total nonperforming assets $ 15,195 $ 15,140 $ 15,472 $ 14,837
========= ========= ========= =========
Nonperforming loans to total loans 1.12 % 1.07 % 1.12 % 1.12 %
Nonperforming assets to total loans plus repossessed
property 1.25 1.22 1.28 1.21
Nonperforming assets to total assets 0.81 0.79 0.84 0.82
</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.
19
<PAGE> 20
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table summarizes, for the periods indicated, activity in the
allowance for loan losses, including amounts charged-off, amount of recoveries,
additions to the allowance charged to operating expense, the ratio of annualized
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:
<TABLE>
<CAPTION>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Successor Successor
Basis - Taylor Basis - Taylor
Capital Group, Predecessor Capital Group, Predecessor
Inc. - Basis - Cole Inc. - Basis - Cole
Consolidated Taylor Bank - Consolidated Taylor Bank -
For the Three For the Three For the Period of For the Nine
Months Ended Months Ended Feb. 12, 1997 to Months Ended
Sep. 30, 1997 Sep. 30, 1996 Sep. 30, 1997 Sep. 30, 1996
------------- ------------- ----------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Average total loans $ 1,231,259 $ 1,265,729 $ 1,218,753 $ 1,254,409
=========== =========== =========== ===========
Total loans at end of period $ 1,212,031 $ 1,256,214
=========== ===========
ALLOWANCE FOR LOAN LOSSES:
Allowance at beginning of period $ 24,709 $ 24,475 $ 24,607 $ 23,869
Charge-offs (1,407) (984) (3,116) (2,799)
Recoveries 131 186 554 555
----------- ----------- ----------- -----------
Net charge-offs (1,276) (798) (2,562) (2,244)
----------- ----------- ----------- -----------
Provisions for loan losses 1,769 953 3,157 3,005
----------- ----------- ----------- -----------
Allowance at end of period $ 25,202 $ 24,630 $ 25,202 $ 24,630
=========== =========== =========== ===========
Net charge-offs to average total loans
(annualized) 0.41 % 0.25 % 0.33 % 0.24 %
Allowance to total loans at end of period 2.08 1.96
Allowance to nonperforming loans 183.86 152.30
</TABLE>
20
<PAGE> 21
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Deposits and Borrowed Funds
The Bank's core deposits consist of noninterest and interest-bearing demand
deposits, savings deposits, certain certificates of deposit and certain public
funds and core customer repurchase agreements, which are reported as short term
borrowings. Certificates of deposit distributed through the National CD Network,
brokered certificates of deposit and FHLB advances are also used by the Bank to
support its asset base.
On an average basis, total core deposits increased modestly during the first
nine months of 1997. The mix of core deposits changed reflecting the
seasonality of commercial demand deposits and the increased popularity of
repurchase agreements by core Bank customers, as well as the Bank's marketing
focus during the period which emphasized NOW accounts and certificates of
deposit . The decline in demand deposits between December 1996 and September
1997 reflects the recurring seasonal increase in demand accounts which occurs
at each year end. Core deposit growth during 1997 was sufficient to fund loan
growth. Therefore, minimal additional funding was required from noncore
customer sources. The balance of certificates of deposit obtained through the
National CD Network was $34.1 million and $46.9 at September 30, 1997 and
December 31, 1996, respectively. The balance of brokered certificates of
deposit was $85 million and $81 million at September 30, 1997 and December 31,
1996 respectively.
Capital Resources
The Company actively monitors compliance with bank regulatory capital
requirements, focusing primarily on the risk-based capital guidelines. Under the
risk-based method of capital measurement, computed ratios are dependent on the
amount and composition of assets recorded on the balance sheet as well as the
amount and composition of off-balance sheet items, in addition to the level of
capital.
The Bank's Tier 1 risk-based capital ratios were 9.78% and 10.23% at September
30, 1997 and December 31, 1996, respectively. The Bank's total risk-based
capital ratios were 11.04% and 11.48% at September 30, 1997 and December 31,
1996, respectively. The declines in these ratios were due to the decrease in
tangible capital resulting from the dividend of approximately $84.0 million to
CTFG in connection with the Split-Off Transactions. The Bank's capital was
immediately supplemented with a capital contribution of $58.7 million from the
Parent Company on the date of the consummation of the Split-Off Transactions. As
a result of the capital contribution, the Bank remained above the regulatory
"well capitalized" guidelines subsequent to the Split-Off Transactions.
For the period of February 12, 1997 to September 30, 1997 the Parent Company
declared $2.2 million and $810,000 in preferred stock and common stock
dividends, respectively. On October 14, 1997 the Company declared a dividend of
$.09 per common share, totaling $418,000, payable on October 20, 1997.
On September 30, 1997, the Company awarded 140,453 shares of restricted common
stock under its Incentive Compensation Plan. The issuance of the awards was
recorded in stockholder's equity, with compensation expense equal to the fair
market value of the grants to be recognized over the vesting period.
21
<PAGE> 22
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's and the Bank's capital ratios were as follows for the dates
indicated:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provision
--------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ------------ -------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Total Capital (to Risk Weighted Assets)
Successor Basis - Taylor Capital
Group, Inc. - Consolidated $119,245 9.11 % >$104,739 >8.00 % NA
Cole Taylor Bank 144,488 11.04 > 104,744 >8.00 >$130,930 >10.00 %
Tier I Capital (to Risk Weighted Assets)
Successor Basis - Taylor Capital
Group, Inc. - Consolidated 102,770 7.85 % > 52,370 >4.00 NA
Cole Taylor Bank 128,015 9.78 > 52,372 >4.00 > 78,835 > 6.00
Leverage (1)
Successor Basis - Taylor Capital
Group, Inc. - Consolidated 102,770 5.50 % > 74,745 >4.00 NA
Cole Taylor Bank 128,015 6.85 > 74,717 >4.00 > 93,396 > 5.00
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Predecessor Basis - Cole Taylor Bank $158,874 11.48 % >$110,702 >8.00 % >$138,338 >10.00 %
Tier I Capital (to Risk Weighted Assets)
Predecessor Basis - Cole Taylor Bank 141,492 10.23 > 55,351 >4.00 > 83,027 > 6.00
Leverage (1)
Predecessor Basis - Cole Taylor Bank 141,492 7.63 > 74,158 >4.00 > 92,698 > 5.00
</TABLE>
- ----------------------------------------------
(1) The leverage ratio is defined as Tier 1 capital divided by average
quarterly assets.
Liquidity and Asset/Liability Management
In connection with the Split-Off Transactions, the Bank's liquidity temporarily
increased as the Bank sold certain loans and received a capital contribution
from the Parent Company. During 1997, this cash was redeployed primarily into
investment securities. Growth in customer deposits has been approximately
sufficient to fund loan growth through September 30, 1997, thereby requiring
only temporary increases in wholesale funding sources during the period. The
Company's current liquidity remains within target levels maintained in prior
years and management believes wholesale borrowings remain at prudent levels.
In September 1997, the Bank signed a lease for space in the downtown business
district (the "Loop") area of the city of Chicago with plans to open a branch
facility in early 1998. The cost of the build-out of the space is estimated at
less than $1 million and will be funded from current operations.
22
<PAGE> 23
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Litigation
On October 20, 1997, the Company was served notice of a suit filed by a
shareholder of Cole Taylor Financial Group, Inc., (the former parent company of
Cole Taylor Bank). The suit named as defendants Reliance Acceptance Group, Inc.
(formerly known as Cole Taylor Financial Group, Inc.) and Taylor Capital Group,
Inc. as well as all persons who were the directors of Cole Taylor Financial
Group, Inc. prior to the Split-Off Transactions, including: Jeffrey W. Taylor,
Bruce W. Taylor, Sidney Taylor, Melvin Pearl, Adelyn Dougherty and Richard W.
Tinberg, all of whom ceased serving as directors of Cole Taylor Financial Group,
Inc. upon completion of the Split-Off Transactions and are current directors
of Taylor Capital Group, Inc. The suit alleges breach of duty of disclosure
by Reliance Acceptance Group, Inc. The Plaintiff seeks declaration of the suit
as a class action, rescinding of the Split-Off Transactions and unspecified
damages. Management believes the complaint is without merit and intends to
vigorously defend the allegations. Management is unable to predict at this
early point the eventual outcome of this litigation.
New Accounting Pronouncements
SFAS 128 "Earnings Per Share" was issued in February 1997 and is effective for
financial statements issued for periods ending after December 15, 1997. The
statement specifies the computation, presentation and disclosure requirements
for earnings per share for entities that have issued common stock, if those
securities trade in a public market, either on a stock exchange or in the over
the counter market. Because the Company's common stock is not publicly traded,
the pronouncement does not apply to the Company.
SFAS 129 "Disclosure of Information about Capital Structure" was issued in
February 1997 and is effective for financial statements issued for periods
ending after December 15, 1997. The statement requires disclosure of descriptive
information about securities that is not necessarily related to the computation
of earnings per share. The statement also requires disclosure of information
about the liquidation preference of preferred stock and redeemable stock. The
Company will provide all required disclosures in its consolidated financial
statements for the year ended December 31, 1997.
SFAS No. 130 "Reporting Comprehensive Income" was issued in June 1997. The
statement, which is effective for fiscal years beginning after December 15,
1997, requires the reporting of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The Company currently reports the effect of changes in the
market value of available-for-sale securities as a component of stockholders'
equity. Under SFAS 130, these unrealized gains and losses would be reported in
comprehensive income.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The statement provides guidance for the way
public enterprises report information about operating segments in annual
financial statements and requires selected information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for certain related disclosures about products and services,
geographic areas and major customers. The segment and other information
disclosure are required for
23
<PAGE> 24
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
fiscal years beginning after December 15, 1997. Management is currently
assessing what segment information may be appropriate and informative to
financial statement readers.
Safe Harbor Provision of the Private Securities Reform Act of 1995
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are forward-looking statements
that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management, and that are subject to certain risks or uncertainties. Such
forward-looking statements are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1996. When used in this report, the
words "anticipate", "believe", "estimate", "expect" and similar expressions, as
they relate to the Company or its management, are intended to identify such
forward-looking statements. The Company cautions readers of this Quarterly
Report on Form 10-Q that a number of important factors could cause the
Company's actual results, performance or achievements in 1997, 1998 and beyond
to differ materially from the results, performance or achievements expressed
in, or implied by, such forward-looking statements. These factors include,
without limitation, the general economic and business conditions affecting the
Company's customers; the ability of the Bank to maintain sufficient funds to
respond to the needs of depositors and borrowers; changes in interest rates;
competition from the Company's principal competitors; changes in federal and
state legislation or regulatory requirements; the adequacy of the Company's
allowance for loan losses; contractual, statutory or regulatory restrictions on
the Bank's ability to pay dividends to the Company; and continuing obligations
or potential liabilities arising from the Split-Off Transactions. These and
other factors are more fully described in the Company's previous filings with
the Securities and Exchange Commission including, without limitation, the
Company's Prospectus dated February 7, 1997.
24
<PAGE> 25
TAYLOR CAPITAL GROUP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 20, 1997, the Company was served notice of a suit filed by a
shareholder of Cole Taylor Financial Group, Inc., (the former parent company of
Cole Taylor Bank). The suit named as defendants Reliance Acceptance Group,
Inc. (formerly known as Cole Taylor Financial Group, Inc.) and Taylor Capital
Group, Inc. as well as all persons who were the directors of Cole Taylor
Financial Group, Inc. prior to the Split-Off Transactions, including: Jeffrey
W. Taylor, Bruce W. Taylor, Sidney Taylor, Melvin Pearl, Adelyn Dougherty and
Richard W. Tinberg, all of whom ceased serving as directors of Cole Taylor
Financial Group, Inc. upon completion of the Split-Off Transactions and are
current directors of Taylor Capital Group, Inc. The suit alleges breach of duty
of disclosure by Reliance Acceptance Group, Inc. The Plaintiff seeks
declaration of the suit as a class action, rescinding of the Split-Off
Transactions and unspecified damages. Management believes the complaint is
without merit and intends to vigorously defend the allegations. Management is
unable to predict at this early point the eventual outcome of this litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index on page 27.
(b) Form 8-K - No reports on Form 8-K were filed during the
period covered by this report.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Taylor Capital Group, Inc.
--------------------------------
(Registrant)
Date: November 11, 1997 /s/ J. Christopher Alstrin
------------------ ---------------------------------
J. Christopher Alstrin*
Chief Financial Officer
* Duly authorized to sign on behalf of the Registrant
26
<PAGE> 27
TAYLOR CAPITAL GROUP, INC.
EXHIBIT INDEX
Exhibit
Number Description of Documents
------- ------------------------
12 Statement regarding computation of ratio of earnings to
fixed charges
27 Financial Data Schedule
27
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Successor Successor
Basis - Taylor Basis - Taylor
Capital Group, Predecessor Capital Group, Predecessor
Inc. - Basis - Cole Inc. - Basis - Cole
Consolidated Taylor Bank - Consolidated Taylor Bank -
For the Three For the Three For the Period of For the Nine
Months Ended Months Ended Feb. 12, 1997 to Months Ended
Sep. 30, 1997 Sep. 30, 1996 Sep. 30, 1997 Sep. 30, 1996
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
1 Income before income taxes $ 5,237 $ 7,660 $ 12,346 $ 21,640
ADD BACK FIXED CHARGES:
2 Total interest expense (1) 17,978 17,001 43,716 49,493
3 Interest included in operating lease
rental expense (2) 344 263 860 805
4 Preferred stock dividend (3) 1,324 --- 3,369 ---
-------- --------- -------- --------
5 Adjusted earnings including interest
on deposits 24,883 24,924 60,291 71,938
6 Less: interest expense on deposits 13,382 13,873 32,898 40,102
-------- --------- -------- --------
7 Adjusted earnings excluding interest
on deposits $ 11,501 $ 11,051 $ 27,393 $ 31,836
======== ========= ======== ========
8 Fixed charges including interest
on deposits (line 2 + line 3 + line 4) $ 19,646 $ 17,264 $ 47,945 $ 50,298
======== ========= ======== ========
9 Fixed charges excluding interest
on deposits (line 8 - line 6) $ 6,264 $ 3,391 $ 15,047 $ 10,196
======== ========= ======== ========
RATIO OF EARNINGS TO FIXED CHARGES
Including interest on deposits
(line 5 / line 8) 1.27 1.44 1.26 1.43
======== ========= ======== ========
Excluding interest on deposits
(line 7 / line 9) 1.84 3.26 1.82 3.12
======== ========= ======== ========
</TABLE>
(1) Interest expense includes cash interest expense on deposits and other debt
and amortization of debt issuance costs.
(2) Calculation of interest included in operating lease rental expense is
representative of the interest factor attributable to the lease payment.
(3) Preferred stock dividends have been computed based on $38,250,000 of
preferred stock issued and a dividend rate of 9% per annum. The stock
dividend amount has been grossed up to compute the pretax income equivalent
assuming an estimated 35% tax rate.
28
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TAYLOR
CAPITAL GROUP, INC. FORM 10-Q FOR THE 231 DAY PERIOD ENDED SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> FEB-12-1997
<PERIOD-END> SEP-30-1997
<CASH> 94,826
<INT-BEARING-DEPOSITS> 136
<FED-FUNDS-SOLD> 20,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 407,181
<INVESTMENTS-CARRYING> 81,267
<INVESTMENTS-MARKET> 82,302
<LOANS> 1,212,031
<ALLOWANCE> 25,202
<TOTAL-ASSETS> 1,883,922
<DEPOSITS> 1,416,255
<SHORT-TERM> 186,233
<LIABILITIES-OTHER> 19,424
<LONG-TERM> 122,000
0
38,250
<COMMON> 46
<OTHER-SE> 101,714
<TOTAL-LIABILITIES-AND-EQUITY> 1,883,922
<INTEREST-LOAN> 68,588
<INTEREST-INVEST> 18,346
<INTEREST-OTHER> 1,310
<INTEREST-TOTAL> 88,244
<INTEREST-DEPOSIT> 32,898
<INTEREST-EXPENSE> 43,716
<INTEREST-INCOME-NET> 44,528
<LOAN-LOSSES> 3,157
<SECURITIES-GAINS> 329
<EXPENSE-OTHER> 42,354
<INCOME-PRETAX> 12,346
<INCOME-PRE-EXTRAORDINARY> 7,530
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,530
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.21
<LOANS-NON> 10,959
<LOANS-PAST> 2,600
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 24,607
<CHARGE-OFFS> 3,116
<RECOVERIES> 554
<ALLOWANCE-CLOSE> 25,202
<ALLOWANCE-DOMESTIC> 25,202
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
