<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
SPECIAL FINANCIAL REPORT*
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
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 and Zip Code
(847) 459-1111
Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
---
Aggregate market value of the voting stock held by non-affiliates of the
registrant. $0
On May 2, 1997, there were 4,500,000 shares of the Registrant's common stock
issued and outstanding.
___________________
* This Special Financial Report is filed pursuant to Rule 15d-2 and
contains only financial statements for Cole Taylor Bank on a stand alone
basis for the fiscal year ended December 31, 1996.
<PAGE> 2
EXPLANATORY NOTE
In February 1997, Taylor Capital Group, Inc., a bank holding company (the
"Company"), consummated a public offering of its 9.0% Noncumulative Perpetual
Preferred Stock, Series A (the "Preferred Stock"). The registration statement
(registration no. 333-14713) relating to such offering (the "Taylor
Registration Statement") was declared effective by the Securities and Exchange
Commission (the "Commission") on February 7, 1997.
Rule 15d-2 under the Securities Exchange Act of 1934 provides generally that,
if a registrar files a registration statement under the Securities Act of 1933
which does not contain certified financial statements for the registrant's last
full fiscal year (or for the life of the registrant if less than a full fiscal
year), then the registrant shall, within 90 days after the effective date of
the registration statement, file a special report furnishing certified
financial statements for such last full fiscal year or other period as the case
may be. Rule 15d-2 further provides that such special financial report is to
be filed under cover of the facing sheet appropriate for annual reports of the
registrant.
The Taylor Registration Statement included the audited financial statements of
Cole Taylor Bank, a wholly-owned subsidiary of the Company (the "Bank"), on a
standalone basis. However, the Taylor Registration Statement did not contain
certified financial statements of the Bank for the fiscal year ended December
31, 1996. Therefore, as required by Rule 15d-2, such financial statements are
being filed with the Commission under cover of the facing page of an Annual
Report on Form 10-K.
2
<PAGE> 3
TAYLOR CAPITAL GROUP, INC.
--------------------------
INDEX
-----
<TABLE>
<S> <C>
PAGE
----
Cole Taylor Bank Balance Sheets -
December 31, 1996 and 1995 ............................. 5
Cole Taylor Bank Statements of Income -
For Each of the Years in the Three Year Period Ended
December 31, 1996 ................................... 6
Cole Taylor Bank Statements of Changes in Stockholder's Equity
For Each of the Years in the Three Year Period Ended
December 31, 1996 ................................... 7
Cole Taylor Bank Statements of Cash Flows -
For Each of the Years in the Three Year Period Ended
December 31, 1996 ................................... 8
Cole Taylor Bank Notes to Financial Statements ............... 10
</TABLE>
3
<PAGE> 4
[KPMG Peat Marwick LLP Letterhead]
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, 1996 and
1995, and the related statements of income, changes in stockholder's equity and
cash flows for each of the years in the three year period ended December 31,
1996. 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, 1996
and 1995 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
March 14, 1997
4
<PAGE> 5
COLE TAYLOR BANK
BALANCE SHEETS
(in thousands)
----------------
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
ASSETS ---------- ---------
<S> <C> <C>
Cash and due from banks $67,021 $68,413
Interest-bearing deposits with banks 14,564 19,134
Federal funds sold 5,675 5,000
Investment securities:
Available-for-sale, at fair value 328,817 361,735
Held-to-maturity, at amortized cost (fair value of $77,758 and $80,239 at
December 31, 1996 and 1995, respectively) 74,972 76,613
Loans held for sale, net, at lower of cost or market 25,153 15,748
Loans, net of allowance for loan losses of $24,184 and $23,869 at December 31, 1996
and 1995, respectively 1,175,657 1,172,005
Premises, leasehold improvements and equipment, net 15,247 16,844
Other real estate and repossessed assets, net 1,119 5,416
Auto loan sales proceeds receivable 66,570 ---
Other assets 38,796 33,124
---------- ----------
Total assets $1,813,591 $1,774,032
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Noninterest-bearing $334,068 $318,117
Interest-bearing 1,072,832 1,045,958
---------- ---------
Total deposits 1,406,900 1,364,075
Short-term borrowings 162,182 202,033
Accrued interest, taxes and other liabilities 16,788 14,180
Long-term borrowings 86,086 61,003
---------- ----------
Total liabilities 1,671,956 1,641,291
---------- ----------
Commitments and contingent liabilities
Stockholder's equity:
Common stock, $10 par value; 1,500,000 shares authorized, issued and outstanding 15,000 15,000
Surplus 52,028 50,826
Retained earnings 76,586 66,993
Unrealized holding loss on securities available-for-sale, net of income taxes (1,979) (78)
---------- ----------
Total stockholder's equity 141,635 132,741
---------- ----------
Total liabilities and stockholder's equity $1,813,591 $1,774,032
========== ==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
COLE TAYLOR BANK
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $110,582 $103,654 $87,057
Interest on investment securities:
Taxable 22,987 25,382 25,045
Tax-exempt 3,839 3,976 3,891
Interest on cash equivalents 1,489 672 274
----------- ---------- ----------
Total interest income 138,897 133,684 116,267
----------- ---------- ----------
Interest expense:
Deposits 53,518 47,034 32,998
Short-term borrowings 8,719 13,584 9,483
Long-term borrowings 4,140 3,748 1,637
----------- ---------- ----------
Total interest expense 66,377 64,366 44,118
----------- ---------- ----------
Net interest income 72,520 69,318 72,149
Provision for loan losses 3,307 4,056 7,374
----------- ---------- ----------
Net interest income after provision for loan 69,213 65,262 64,775
losses ----------- ---------- ----------
Noninterest income:
Service charges 8,682 7,452 7,199
Trust fees 3,635 3,539 3,095
Investment securities gains, net --- --- 8
Other noninterest income 3,507 3,236 2,585
----------- ---------- ----------
Total noninterest income 15,824 14,227 12,887
----------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 30,171 28,973 28,691
Occupancy of premises, net 5,198 4,880 4,885
Furniture and equipment 3,017 2,651 2,385
Computer processing 2,033 1,676 1,444
Legal fees 1,473 1,655 1,106
Advertising and public relations 1,764 1,582 2,298
FDIC deposit insurance 2 1,451 2,646
Other real estate and repossessed asset expense 695 1,169 999
Loss on sale of new indirect auto loans 767 --- ---
Other noninterest expense 10,253 9,512 10,794
----------- ---------- ----------
Total noninterest expense 55,373 53,549 55,248
----------- ---------- ----------
Income before income taxes 29,664 25,940 22,414
Income taxes 9,971 7,774 6,512
----------- ---------- ----------
Net income $19,693 $18,166 $15,902
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
COLE TAYLOR BANK
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<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, 1994 $15,000 $40,826 $45,475 $462 $101,763
Change in unrealized holding gain on
investment securities available-for-sale,
net of income taxes (4,068) (4,068)
Capital contribution 10,000 10,000
Dividends on common stock (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 loss on
investment securities available-for-sale,
net of income taxes 3,528 3,528
Dividends on common stock (7,950) (7,950)
Net income 18,166 18,166
-------- ------- -------- --------------- --------
Balance at December 31, 1995 15,000 50,826 66,993 (78) 132,741
Change in unrealized holding loss on
investment securities available-for-sale,
securities, net of income taxes (1,901) (1,901)
Tax benefit associated with exercise of CTFG
common stock options 1,202 1,202
Dividends on common stock (10,100) (10,100)
Net income 19,693 19,693
-------- ------- -------- --------------- --------
Balance at December 31, 1996 $15,000 $52,028 $76,586 $(1,979) $141,635
======== ======= ======== =============== ========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
COLE TAYLOR BANK
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1996 1995 1994
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $19,693 $18,166 $15,902
Adjustments to reconcile net income to net cash provided by operating activities:
Investment security gains, net --- --- (8)
Amortization of premiums and discounts, net 769 1,024 2,058
Deferred loan fee amortization (2,486) (2,515) (2,146)
Provision for loan losses 3,307 4,056 7,374
(Gain) loss on sales of loans originated for sale (1,628) (150) 87
Loss on sale of new indirect auto loans 767 --- ---
Loans originated and held for sale (235,470) (87,250) (17,795)
Proceeds from sales of loans originated for sale 227,531 73,368 16,154
Depreciation and amortization 3,021 2,534 2,343
Amortization of intangible assets 199 196 180
Deferred income taxes 249 16 (1,239)
Provision for other real estate 62 243 587
Other, net (799) 75 158
Changes in assets and liabilities:
Accrued interest receivable 465 (251) (4,045)
Other assets (1,453) 1,940 434
Accrued interest, taxes and other liabilities 3,810 (1,204) 814
--------- ----------- -----------
Net cash provided by operating activities 18,037 10,248 20,858
--------- ----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (200,051) (27,228) ---
Purchases of held-to-maturity securities (3,568) (4,744) (93,993)
Proceeds from principal payments and maturities of available-for-sale securities 229,038 29,130 29,879
Proceeds from principal payments and maturities of held-to-maturity securities 5,150 33,317 52,075
Proceeds from sales of investment securities --- --- 525
Proceeds from sale of loans --- 28,924 ---
Net increase in loans (74,079) (100,743) (178,878)
Net additions to premises, leasehold improvements and equipment (1,340) (5,502) (4,438)
Acquisition of land trust customer base --- (204) ---
Proceeds from sale of other real estate 3,569 2,145 2,227
--------- ----------- -----------
Net cash used in investing activities (41,281) (44,905) (192,603)
--------- ----------- -----------
Cash flows from financing activities:
Net increase in deposits 42,825 70,664 112,566
Net (decrease) increase in short-term borrowings (39,851) (41,964) 34,770
Repayments of long-term borrowings (50,167) (37,111) (15,076)
Proceeds from long-term borrowings 75,250 50,250 25,250
Proceeds from capital contribution --- --- 10,000
Dividends paid (10,100) (7,950) (4,600)
--------- ----------- -----------
Net cash provided by financing activities 17,957 33,889 162,910
--------- ----------- -----------
Net decrease in cash and cash equivalents (5,287) (768) (8,835)
Cash and cash equivalents, beginning of year 92,547 93,315 102,150
--------- ----------- -----------
Cash and cash equivalents, end of year $87,260 $92,547 $93,315
========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
COLE TAYLOR BANK
STATEMENTS OF CASH FLOWS --(Continued)
(in thousands)
--------------
<TABLE>
<CAPTION>
Supplemental disclosures of cash flow information:
For the years ended December 31,
------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $65,462 $63,339 $46,612
Income taxes 8,299 7,448 8,576
Supplemental disclosures of noncash investing and financing activities:
Unrealized holding (loss) gain on investment securities, net of income taxes (1,901) 3,528 (4,068)
Securitization of mortgage loans transferred to investment securities --- --- 33,414
Reclassification of investment securities from held-to-maturity to
available-for-sale --- 299,858 ---
Proceeds receivable on sale of new indirect auto loans 66,570 --- ---
Mortgage servicing rights originated 1,697 958 ---
Real estate acquired through foreclosure 734 2,465 1,090
Tax benefit associated with exercise of CTFG common stock options 1,202 --- ---
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 10
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 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 and consumer 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.
10
<PAGE> 11
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. Summary of Significant Accounting and Reporting Policies, continued:
--------------------------------------------------------
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 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.
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. This does 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 date at which Statement of Financial Accounting Standards No. 114
"Accounting by Creditors for Impairment of a Loan" and No. 118
"Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures" were adopted) the Bank's impaired loans were described
as, and included in, nonaccrual loans.
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
11
<PAGE> 12
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. Summary of Significant Accounting and Reporting Policies, continued:
--------------------------------------------------------
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.
Mortgage Servicing Rights:
-------------------------
The Bank recognizes as separate assets the right to service mortgage
loans for others, however those servicing rights are acquired, and
assesses the capitalized mortgage servicing rights for impairment based
on the current fair value of those rights. Prior to January 1, 1995,
(the date at which Statement of Financial Accounting Standard No. 122
"Accounting for Mortgage Servicing Rights" was adopted) an accounting
distinction was made between servicing rights acquired through purchase
transactions and those acquired through loan originations.
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.
12
<PAGE> 13
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. Summary of Significant Accounting and Reporting Policies, continued:
--------------------------------------------------------
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.
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, 1996 and 1995 was approximately $4.6 million and $7.7 million,
respectively.
13
<PAGE> 14
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Investment Securities:
The amortized cost and estimated fair value of investment securities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
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
======== ====== ======== ========
December 31, 1995
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(in thousands)
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>
14
<PAGE> 15
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Investment Securities, continued:
---------------------
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 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, 1996, 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 $70,084 $70,276
Due after one year through five years 98,595 98,537
Mortgage-backed securities 163,479 160,004
--------- ----------
Totals $332,158 $328,817
========= ==========
Held-to-Maturity:
Due in one year or less $3,477 $3,497
Due after one year through five years 19,961 20,757
Due after five years through ten years 37,645 39,543
Due after ten years 13,889 13,961
--------- ----------
Totals $74,972 $77,758
========= ==========
</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.
15
<PAGE> 16
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Investment Securities, continued:
---------------------
There were no sales of investment securities available-for-sale during 1996
or 1995. During 1994, proceeds from sales of investment securities
available-for-sale and the related gross realized gains were $525,000 and
$8,000, respectively. There were no gross realized losses during 1994.
Investment securities with an approximate book value of $310 million at
December 31, 1996 were pledged to collateralize certain deposits,
securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
4. Loans:
-----
Loans classified by type at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Commercial and industrial $655,919 $638,497
Real estate--construction 192,759 121,547
Real estate--mortgage 176,819 207,377
Consumer 171,270 231,717
Other loans 4,622 2,061
---------- ----------
Gross loans 1,201,389 1,201,199
Less: Unearned discount (1,548) (5,325)
---------- ----------
Total loans 1,199,841 1,195,874
Less: Allowance for loan
losses (24,184) (23,869)
---------- ----------
Loans, net $1,175,657 $1,172,005
========== ==========
</TABLE>
Loans on a nonaccrual basis, including impaired loans, at December 31,
1996, 1995 and 1994 were approximately $10.9 million, $9.9 million and
$10.5 million, respectively. Interest on these loans included in income
amounted to $72,000, $240,000 and $346,000 in 1996, 1995 and 1994,
respectively. The total interest income which would have been recognized
under the original terms of the loans was $1,015,000, $936,000 and $942,000
in 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled
$11.3 million and $9.6 million, respectively, of which $7.6 million and
$3.9 million, respectively, 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 $3.7 million and $5.7 million,
respectively, related to loans with a corresponding allowance for loan
losses of $2.1 million and $604,000, respectively. For the years ended
16
<PAGE> 17
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
4. Loans, continued:
-----
December 31, 1996 and 1995, the average recorded investment in impaired
loans was approximately $11.0 million and $7.8 million, respectively.
During 1996 and 1995, the Bank recognized $115,000 and $39,000,
respectively, 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,
1996, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year $23,869 $22,833 $19,740
Provision for loan losses 3,307 4,056 7,374
Loans charged-off (3,829) (4,901) (5,158)
Recoveries on loans previously charged-off 837 1,881 877
------- ------- -------
Net charge-offs (2,992) (3,020) (4,281)
------- ------- -------
Balance at end of year $24,184 $23,869 $22,833
======= ======= =======
</TABLE>
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
$21.6 million, $20.3 million and $7.4 million at December 31, 1996, 1995,
and 1994, respectively. During 1996, 1995 and 1994, new loans totaled $8.8
million, $20.2 million and $2.2 million, respectively, and repayments
totaled $7.5 million, $7.3 million and $6.6 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, 1996, 1995 and 1994, mortgage loans serviced for others
totaled $290 million, $195 million and $166 million, respectively.
17
<PAGE> 18
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Premises, Leasehold Improvements and Equipment:
----------------------------------------------
Premises, leasehold improvements and equipment at December 31, 1996 and
1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Land and improvements $3,724 $4,524
Buildings and improvements 7,605 7,522
Leasehold improvements 3,298 4,398
Furniture, fixtures and equipment 13,049 19,039
------- -------
Total cost 27,676 35,483
Less accumulated depreciation and amortization (12,429) (18,639)
------- -------
Net book value $15,247 $16,844
======= =======
</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, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Other real estate $865 $2,928
Repossessed assets 254 2,488
------ ------
Net book value $1,119 $5,416
====== ======
</TABLE>
Activity in the allowance for other real estate for the years ended
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year $587 $795 $482
Provision for other real estate 72 243 587
Charge-offs (555) (451) (274)
----- ----- -----
Balance at end of year $104 $587 $795
===== ===== =====
</TABLE>
18
<PAGE> 19
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
7. Auto Loan Sale Proceeds Receivable:
----------------------------------
In relation to the split-off transaction (see Note 18), a portion of the
Bank's indirect new car loan portfolio, which was included within the
Bank's consumer loan portfolio, was sold to an unaffiliated third party for
$66.6 million. A loss of $767,000 was recognized on the sale. Proceeds
related to the sale were received in January 1997.
8. Mortgage Servicing Rights:
-------------------------
Capitalized mortgage servicing rights included in other assets in the
balance sheet totaled $2.3 million and $895,000 as of December 31, 1996 and
1995, respectively, which approximates fair value. For the years ended
December 31, 1996 and 1995, amortization of capitalized mortgage servicing
rights totaled $248,000 and $68,000, respectively. During 1996, a
valuation allowance of $66,000 was established for capitalized mortgage
servicing rights. There was no such valuation allowance established for
capitalized mortgage servicing rights during 1995.
9. Interest-Bearing Deposits:
-------------------------
Interest-bearing deposits at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
NOW accounts $77,693 $66,049
Savings accounts 118,056 124,210
Money market deposits 244,302 266,351
Certificates of deposit, less than $100,000 299,544 292,489
Certificates of deposit, $100,000 or more 109,137 84,910
Public time deposits 143,415 114,127
Brokered certificates of deposit 80,685 97,822
---------- ----------
Total $1,072,832 $1,045,958
========== ==========
</TABLE>
Interest expense on certificates of deposit, $100,000 or more, was $4.3
million, $3.4 million and $1.7 million for the years ended December 31,
1996, 1995 and 1994, respectively.
At December 31, 1996 the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
(in thousands)
<S> <C>
1997 $554,674
1998 61,031
1999 9,403
2000 5,101
2001 and thereafter 2,572
--------
$632,781
========
</TABLE>
19
<PAGE> 20
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
10. Short-Term Borrowings:
---------------------
Short-term borrowings at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Securities sold under agreements to repurchase $126,173 $148,546
Federal funds purchased 26,040 43,500
U.S. Treasury tax and loan note option 9,969 9,987
-------- --------
Total $162,182 $202,033
======== ========
</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.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Average balance during the year $126,484 $196,728 $179,027
Average interest rate during the year 5.46% 5.81% 4.13%
Maximum month end balance during the year $144,825 $224,907 $190,142
</TABLE>
Additional information with respect to securities sold under agreements to
repurchase as of December 31, 1996 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 $121,688 5.20% $38,347 $38,393 $90,884 $88,478
Up to 30 days 4,200 5.22 4,167 4,172 193 182
30 to 90 days --- --- --- --- --- ---
Over 90 days 285 5.00 289 287 --- ---
---------- ------- --------- ---------- --------- ----------
$126,173 5.20% $42,803 $42,852 $91,077 $88,660
========== ======= ========= ========== ========= ==========
</TABLE>
20
<PAGE> 21
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
10. Short-Term Borrowings, continued:
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, 1996, the Bank had outstanding and unused lines of credit
for short-term borrowings with various entities totaling $195 million.
11. Income Taxes:
The components of the income tax expense (benefit) for the years ended
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $8,863 $7,758 $7,751
State 859 -- --
------ ------ ------
Total 9,722 7,758 7,751
Deferred tax expense (benefit):
Federal 249 16 (1,139)
State -- -- (100)
------ ------ ------
Total 249 16 (1,239)
------ ------ ------
Applicable income taxes $9,971 $7,774 $6,512
====== ====== ======
</TABLE>
21
<PAGE> 22
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
11. Income Taxes, 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, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
Amount
---------------
1996 1995
------ ------
(in thousands)
<S> <C> <C>
DEFERRED TAX ASSETS:
Fixed assets, principally due to differences in depreciation $ 634 $ 478
Loans, principally due to allowance for loan losses 8,464 8,454
State net operating loss carryforwards -- 261
Deferred income, principally net loan origination fees 1,234 1,183
Other real estate 36 352
Other accruals 559 216
------- ------
Gross deferred tax assets 10,927 10,944
Less valuation allowance -- (261)
------- ------
Gross deferred tax assets, net of valuation allowance 10,927 10,683
------- ------
DEFERRED TAX LIABILITIES:
Discount accretion (233) (224)
Mortgage servicing rights (797) (313)
------- ------
Gross deferred tax liabilities (1,030) (537)
------- ------
Subtotal 9,897 10,146
------- ------
Tax effect of unrealized holding losses on investment
securities 1,362 42
------- ------
Net deferred tax assets $11,259 $10,188
======= =======
</TABLE>
The Bank had net operating loss carryforwards for Illinois state income tax
purposes of approximately $5 million at December 31, 1995. Such net
operating loss carryforwards were utilized in 1996.
Income tax expense was different from the amounts computed by applying the
federal statutory rate of 35% in 1996, 1995 and 1994 to income before
income taxes because of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------
(in thousands)
<S> <C> <C> <C>
Federal income tax expense at statutory rate $10,382 $9,079 $7,845
(Decrease) increase in taxes resulting from:
Tax-exempt interest income, net of
disallowed interest deduction (1,372) (1,423) (1,448)
State taxes, net 558 -- --
Other, net 403 118 115
------ ------ ------
Total $9,971 $7,774 $6,512
</TABLE> ====== ====== ======
22
<PAGE> 23
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
12. Long-Term Borrowings:
Long-term borrowings consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Federal Home Loan Bank (FHLB) various advances
ranging from $10 million to $25 million due at
various dates through March 20, 1998, collateralized
by qualified first mortgage residential loans and
FHLB stock totaling approximately $228 million and $9
million, respectively, as of December 31, 1996;
weighted average interest rates at December 31, 1996
and 1995 are 5.91% and 6.33%, respectively $85,000 $60,000
Chicago Equity Fund non-interest bearing notes
payable over a five to seven year period in
approximately equal annual installments 1,086 1,003
------- -------
Total $86,086 $61,003
======= =======
</TABLE>
Following are the scheduled maturities of long-term borrowings at December
31, 1996:
<TABLE>
Year Amount
---- --------
(in thousands)
<S> <C>
1997 $35,206
1998 50,216
1999 185
2000 143
2001 116
Thereafter 220
-------
Total $86,086
=======
</TABLE>
13. 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 1996, 1995 and 1994, Bank contributions paid to the
profit-sharing plan and ESOP were $1.2 million, $1.5 million and $1.2
million, respectively.
23
<PAGE> 24
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
14. Related Party Transactions:
--------------------------
Included in other assets are amounts due from and to the Parent and other
affiliates. As of December 31, 1996 and 1995, the amounts due from the
Parent and other affiliates totaled $752,000 and $131,000, respectively.
As of December 31, 1995, the amount due to the Parent totaled $99,000.
There was no amount due to the Parent as of December 31, 1996.
During the years ended December 31, 1996, 1995 and 1994, payments were made
to the Parent and other affiliates for interest expense on securities sold
under agreements to repurchase totaling $117,000, $303,000 and $173,000,
respectively.
The Bank received from the Parent and other affiliates, $889,000, $422,000
and $418,000 during the years ended December 31, 1996, 1995 and 1994,
respectively, for office space and various services performed by Bank
employees on behalf of the Parent and other affiliates. These services
include accounting, marketing, operations, human resources, and legal
services. These fees were recorded as a reduction to occupancy and
salaries and employee benefits. During 1996 and 1995, the Bank paid
$706,000 and $1.1 million, respectively, to the Parent for various services
which include acquisition related services, human resources services, and
audit services. These fees are included in salaries and employee benefits.
No such payments were made in 1994.
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 $2.3 million, $2.0 million
and $2.3 million for 1996, 1995 and 1994, respectively.
Estimated future minimum rental commitments under these operating leases as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- --------------
(in thousands)
<S> <C>
1997 $1,840
1998 1,629
1999 955
2000 836
2001 839
Thereafter 6,367
--------
Total $12,466
========
</TABLE>
24
<PAGE> 25
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
15. Commitments, Contingencies and Financial Instruments, continued:
----------------------------------------------------
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, 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.
25
<PAGE> 26
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
15. Commitments, Contingencies and Financial Instruments, continued:
----------------------------------------------------
At December 31, 1996, 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 $551,097
Standby letters of credit 55,154
Financial instruments wherein notional amounts exceed the amount of
credit risk:
Interest rate exchange agreements (swaps) $75,000
Forward commitments to sell loans 15,000
</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
5.50% as of December 31, 1996. 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 (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 approximately 5.25% as of December 31, 1996.
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
26
<PAGE> 27
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
15. Commitments, Contingencies and Financial Instruments, continued:
----------------------------------------------------
market value of mortgage loans intended to be sold will be adversely
affected by changes in interest rates. At December 31, 1996, the Bank's
forward commitments to sell loans had delivery commitments expiring within
three months. Gross unrealized gains on forward sale commitments, based on
dealer-quoted prices, approximated $27,000 at December 31, 1996.
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, 1996 and 1995 was $1.22 billion and $1.21 billion, respectively.
27
<PAGE> 28
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
16. Fair Value of Financial Instruments, continued:
-----------------------------------
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, 1996 and 1995 was
$1.41 billion and $1.37 billion, respectively.
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, 1996 and 1995 was $162 million and $202
million, respectively. The estimated fair value of long-term debt as of
December 31, 1996 and 1995 was $86 million and $61 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, 1996 and 1995 was
$(456,000) and $(796,000), 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 I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
28
<PAGE> 29
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
17. Regulatory Disclosures, continued:
----------------------
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, 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 I risk-based, and Tier I 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.
The Bank's actual capital amounts and ratios as of December 31, 1996 and
1995 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
-------- -------- --------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted
Assets) $158,874 11.48 % $110,702 >8.00 % $138,338 >10.00 %
Tier I Capital
(to Risk Weighted
Assets) 141,492 10.23 55,351 >4.00 83,027 >6.00
Tier I Capital
(to Average Assets) 141,492 7.63 74,158 >4.00 92,698 >5.00
As of December 31, 1995:
Total Capital
(to Risk Weighted
Assets) $146,770 11.44 % $102,597 >8.00 % $128,246 >10.00 %
Tier I Capital
(to Risk Weighted
Assets) 130,642 10.19 51,248 >4.00 76,948 >6.00
Tier I Capital
(to Average Assets) 130,642 7.41 70,533 >4.00 88,166 >5.00
</TABLE>
18. Split-Off Transaction:
---------------------
On February 12, 1997, CTFG transferred all of the capital stock of the Bank
and CT Mortgage Company, Inc. (the "Mortgage Company"), another wholly
owned subsidiary of CTFG, to Taylor Capital Group, Inc., a newly
incorporated bank holding company, in exchange for 4.5 million shares of
CTFG common stock and approximately $83 million in cash and certain other
assets of the Bank. As a result of the split-off transaction, Cole Taylor
Bank became a wholly-owned subsidiary of Taylor Capital Group, Inc.
29
<PAGE> 30
COLE TAYLOR BANK
NOTES TO FINANCIAL STATEMENTS -- (Continued)
18. Split-Off Transaction, continued:
---------------------
As part of the Split-Off Transaction, Taylor Capital Group provided a
direct capital contribution of approximately $58.7 million to the Bank,
which was funded by net proceeds of approximately $37 million from the
sale of preferred stock and senior debt in the amount of approximately $25
million. This contribution allows the Bank to continue operating as a
well-capitalized institution in accordance with regulatory requirements.
The Bank initially invested the proceeds in investment securities and
thereafter they will be used for general corporate purposes.
30
<PAGE> 31
TAYLOR CAPITAL GROUP, INC.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 22nd day of April,
1997.
TAYLOR CAPITAL GROUP, INC.
By: /s/ JEFFREY W. TAYLOR
---------------------------
Jeffrey W. Taylor
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------- ------------------------------------ --------------
<S> <C> <C>
Chairman and Chief Executive Officer
/s/ JEFFREY W. TAYLOR (principal executive officer) April 22, 1997
- --------------------------
Jeffrey W. Taylor
/s/ BRUCE W. TAYLOR President and Director April 22, 1997
- --------------------------
Bruce W. Taylor
/s/ SIDNEY J TAYLOR Director April 22, 1997
- --------------------------
Sidney J Taylor
Chief Financial Officer and
Director (principal financial and
/s/ J. CHRISTOPHER ALSTRIN accounting officer) April 22, 1997
- --------------------------
J. Christopher Alstrin
/s/ ADELYN DOUGHERTY Director April 22, 1997
- --------------------------
Adelyn Dougherty
/s/ MELVIN E. PEARL Director April 22, 1997
- --------------------------
Melvin E. Pearl
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SPECIAL FINANCIAL REPORT CONTAINS ONLY FINANCIAL STATEMENTS FOR COLE
TAYLOR BANK ON A STAND ALONE BASIS. TAYLOR CAPITAL GROUP ACQUIRED COLE TAYLOR
BANK EFFECTIVE FEB. 12, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 67,021
<INT-BEARING-DEPOSITS> 14,564
<FED-FUNDS-SOLD> 5,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 328,817
<INVESTMENTS-CARRYING> 74,972
<INVESTMENTS-MARKET> 77,758
<LOANS> 1,224,994
<ALLOWANCE> 24,184
<TOTAL-ASSETS> 1,813,591
<DEPOSITS> 1,406,900
<SHORT-TERM> 162,182
<LIABILITIES-OTHER> 16,788
<LONG-TERM> 86,086
0
0
<COMMON> 15,000
<OTHER-SE> 126,635
<TOTAL-LIABILITIES-AND-EQUITY> 1,813,591
<INTEREST-LOAN> 110,582
<INTEREST-INVEST> 26,826
<INTEREST-OTHER> 1,489
<INTEREST-TOTAL> 138,897
<INTEREST-DEPOSIT> 53,518
<INTEREST-EXPENSE> 66,377
<INTEREST-INCOME-NET> 72,520
<LOAN-LOSSES> 3,307
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 55,373
<INCOME-PRETAX> 29,664
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,693
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.35
<LOANS-NON> 10,898
<LOANS-PAST> 2,820
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 23,869
<CHARGE-OFFS> 3,829
<RECOVERIES> 837
<ALLOWANCE-CLOSE> 24,184
<ALLOWANCE-DOMESTIC> 24,184
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
