<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
JANUARY 1, 1997 TO DECEMBER 31, 1997
Commission file no. 333-14713
------------------------------------
TAYLOR CAPITAL GROUP, INC.
Exact Name of registrant as specified in its charter
<TABLE>
<S> <C>
DELAWARE 36-4108550
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
</TABLE>
350 EAST DUNDEE ROAD, SUITE 300
WHEELING, ILLINOIS 60090-3199
Address of principal executive offices and Zip Code
(847) 808-6369
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 [X] No [ ]
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]
None of the voting or nonvoting common stock of the registrant is held by
non-affiliates of the registrant.
On March 26, 1998, there were 4,654,533 shares of the registrant's common
stock issued and outstanding.
The Exhibit Index is located on page 96.
================================================================================
<PAGE> 2
TAYLOR CAPITAL GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I.
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 20
Item 7a Quantitative and Qualitative Disclosures about Market
Risk........................................................ 51
Item 8. Financial Statements and Supplementary Data................. 52
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 85
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 86
Item 11. Executive Compensation...................................... 88
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 91
Item 13. Certain Relationships and Related Transactions.............. 92
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 93
</TABLE>
2
<PAGE> 3
TAYLOR CAPITAL GROUP, INC.
PART I
ITEM 1. BUSINESS
Taylor Capital Group, Inc. (the "Company" or the "Parent Company"), is a
bank holding company, incorporated October 9, 1996, that wholly owns Cole Taylor
Bank (the "Bank"). The Company was formed by certain members of the Bank's
management and related investors to consummate the acquisition of the Bank. The
Company acquired the Bank on February 12, 1997 in the Split-Off Transactions (as
defined below), which were accounted for by the purchase method of accounting.
Prior to February 12, 1997, the Bank was a wholly-owned subsidiary 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 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 and a dividend from the
Bank to CTFG consisting of cash and loans totaling approximately $84 million.
The Company also wholly owns CT Mortgage Company, Inc. (the "Mortgage
Company") and CTRE, Inc., a subsidiary of the Bank.
THE BANK
The Bank commenced operations over 60 years ago as Main State Bank. In
1978, Drovers National Bank was purchased. The Bank of Yorktown was acquired in
1982 and Wheeling Trust & Savings Bank, Ford City Bank & Trust Co. and Skokie
Trust & Savings Bank were acquired in 1984. At the end of 1988, the banks (other
than The Bank of Yorktown), were merged into Cole Taylor Bank. The Bank of
Yorktown was merged into Cole Taylor Bank in 1992.
The Bank provides a full range of commercial and consumer banking services
to small and mid-size businesses and to individuals through its eleven branch
offices in Chicago neighborhoods and suburban Cook County, Illinois and DuPage
County, Illinois. The Bank's historical market niche has been providing
commercial loans to small and mid-size companies located in the Chicago
metropolitan area.
The Bank offers various loan products such as commercial and industrial
loans, residential construction and mortgage loans, consumer loans as well as a
full range of deposit services including checking, savings and money market
accounts and certificates of deposit. The Bank's trust division provides a wide
array of trust services for corporations and individuals.
The Bank's primary market is the Chicago metropolitan area. Five of the
Bank's branch offices are located in Chicago neighborhoods and the remainder are
located in suburban Cook and DuPage counties. A substantial majority of the
Bank's total consolidated net loans are attributable to customers located in the
Chicago metropolitan area. Generally, each branch draws most of its deposits
from and makes most of its consumer and small business loans within a three mile
radius of the respective branch; however, the Bank's branches provide commercial
banking services and make industrial loans to companies located throughout the
Chicago metropolitan area.
The Bank's staff focuses on establishing and maintaining long-term
relationships with customers. The Bank encourages its officers to actively
participate in community organizations and, within credit and rate of return
parameters, the Bank attempts to ensure that it meets the credit needs of its
communities and that it invests in local municipal securities. The Bank has
focused its marketing efforts on its "Relationship Builders" advertising
campaign and promoting programs such as the Bank's "Sweat Equity" program, in
which commercial lenders, branch managers and trust officers from the Bank spend
a day working at a customer's business.
3
<PAGE> 4
TAYLOR CAPITAL GROUP, INC.
PART I
LOANS AND INVESTMENTS
General
In allocating its assets among locally generated loans, investment assets
and other earning assets, the Bank attempts to maximize return while managing
risk at an acceptable level. The Bank has identified and implemented strategies
to reach these goals, including an emphasis on quality local loan growth,
diversification and long-term performance of its earning asset portfolios. The
following is a brief description of lending and investment activities engaged in
by the Bank. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Loan Portfolio."
Commercial and Industrial Loans
Commercial and industrial loans represent the largest portion
(approximately 56% at December 31, 1997) of the Bank's loan portfolio. The Bank
makes both collateralized and unsecured loans. Collateral for loans generally
includes accounts receivable, inventory, equipment and real estate. Included in
this category are commercial real estate loans, which are generally
collateralized by owner-occupied properties used for business purposes.
Real Estate -- Residential Construction Loans
The real estate-residential construction loan portfolio consists primarily
of loans to professional home builders and developers. These loans, which at
December 31, 1997 comprised approximately 15% of the loan portfolio, have
increased as a percentage of total loans outstanding in recent years, primarily
because of an increase in home building in the Chicago metropolitan area.
Generally, these loans are structured with three components: a non-revolving lot
loan which is used to fund costs other than construction such as marketing,
architectural costs and financing fees; a construction revolver primarily
relating to pre-sold homes; and a letter of credit which the bank issues to
guarantee the performance of a customer to a third party. These loans generally
mature and are completely repaid within two years and bear interest at an annual
rate based on prime.
Real Estate -- Mortgage Loans
The real estate-mortgage loan portfolio primarily consists of first
mortgage loans for single-family properties and represents approximately 16% of
the Bank's loan portfolio at December 31, 1997. The Bank generally sells
conforming mortgages into the secondary market. In late 1995, the Bank began
purchasing loans on a wholesale basis from approved mortgage bankers and other
financial intermediaries. Currently, approximately 60% of originations are
originated through the Bank's retail network and 40% are originated through its
wholesale sources. Both retail and wholesale loans are underwritten by the Bank
and the majority are processed for pooling and sale into the secondary market.
From the time a formal commitment is extended to the borrower until the
sale of the resulting mortgage loan to the secondary mortgage market investor,
the Bank is exposed to changes in interest rates which impact the market values
of these loans. The primary method used to manage this risk is forward sale of
either the mortgages or mortgage securities. Mortgage loans held for sale are
valued at the lower of cost or fair value. Fair value is the commitment price
for loans sold forward and market prices for loans not hedged.
Home Equity Lines of Credit
The Bank offers home equity lines of credit through both its retail network
and its wholesale mortgage broker network. These lines can be drawn at the
discretion of the borrower. Approximately 75% of the home equity lines, after
giving effects to the outstanding loan balance of any existing mortgage loan, do
not exceed 80% of the appraised value of the underlying real estate collateral.
Both retail and wholesale loans are underwritten by the Bank.
4
<PAGE> 5
TAYLOR CAPITAL GROUP, INC.
PART I
Consumer Loans
The Bank's consumer loan portfolio consists of both collateralized and
unsecured loans to individuals for various personal reasons, including
automobile purchases, credit cards and home improvement loans. At December 31,
1997, consumer loans comprised approximately 4% of the loan portfolio.
LOAN APPROVAL PROCEDURES AND AUTHORITY
The Bank's Loan Policy is established by the Board of Directors based upon
the recommendations of the Bank's Chief Credit Officer and the Credit Policy
Committee. The Loan Policy of the Bank is reviewed and reaffirmed by the Board
of Directors not less often than annually. The Bank's Lending Guidelines for its
various product lines are approved by the Credit Policy Committee and reviewed
annually by that Committee as well as the Directors' Loan Committee. These
guidelines and policies set forth the underwriting criteria for the various
types of loans originated by the Bank based upon the risks attendant to each
type of loan, the borrowers of such loans and the types of collateral. The
Credit Policy Committee also determines the adequacy of the Bank's allowance for
loan losses.
The Board of Directors has granted designated individuals $1.0 million loan
authority. Credit exposures in excess of $1.0 million, but less than $3.0
million require concurrence approval of both the Lending Division Manager and
the Credit Policy Division. The Bank's Loan Committee, in addition to the
Lending Division Manager and the Credit Policy Division, must approve all loans
and commitments in excess of $100,000 when the aggregate credit exposure is $3.0
million or more. All loans or commitments in excess of $2.0 million are
presented for review on a monthly basis to the Directors' Loan Committee (which
includes members of the Bank's Board of Directors). Subject to these
requirements, each loan officer has authority to approve loans that comply with
the Bank's commercial lending guidelines and loan policies of up to a specified
amount which is determined based upon such person's experience and position with
the Bank. Any exception to the Bank's commercial lending guidelines and loan
policies must be approved by a higher authority, such as the Loan Committee or
Credit Policy Committee.
INVESTMENT PORTFOLIO
The Company's investment portfolio is used primarily to provide a source of
earnings and secondarily for liquidity management purposes. In addition, the
investment portfolio may be used to effect asset and liability management
objectives. The portfolio is comprised of U.S. Treasury securities, U.S.
government agency instruments, mortgage-backed securities, collateralized
mortgage obligations and a modest amount of investment grade obligations of
state and political subdivisions. Virtually all of the Bank's securities at
December 31, 1997 were rated investment grade by a nationally recognized rating
organization. The Bank is a party to one interest rate swap contract with a
notional amount of $25 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition --
Investment Securities."
DEPOSITS
Each of the Bank branches offers the usual and customary range of
depository products provided by commercial banks, including checking, savings
and money market accounts, and certificates of deposit. Deposits at each Bank
are insured by the Federal Deposit Insurance Corporation up to statutory limits.
The Bank also gathers deposits through brokerage relationships and a nationwide
electronic certificate of deposit rate posting service provided by a third party
vendor. Retail investment securities activities on behalf of the Bank's
customers are completed through a third party agreement with a registered
broker/dealer. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Deposits."
5
<PAGE> 6
TAYLOR CAPITAL GROUP, INC.
PART I
TRUST DIVISION
The Bank's Trust and Asset Management Division provides a wide array of
trust services for corporations and individuals. The Bank's trust business mix
consists of approximately 14% employee benefits, 26% exchange/land trusts, 40%
personal trusts, and 20% corporate trusts. Historically, the Trust and Asset
Management Division primarily has serviced its commercial customers out of its
office located near downtown Chicago. The Division is also emphasizing tax
deferred exchanges and employee benefit plans to commercial business customers
for additional growth.
COMPETITION
The banking business is highly competitive. The Bank encounters competition
primarily in seeking deposits and in obtaining loan customers. The Bank's
principal competitors include other commercial banks, savings and loan
associations, mutual funds, money market funds, finance companies, credit
unions, mortgage companies, the United States Government, private issuers of
debt obligations and suppliers of other investment alternatives, such as
securities firms. In recent years, several major multi-bank holding companies
have entered the Chicago metropolitan market. Generally, these financial
institutions are significantly larger than the Bank and have access to greater
capital and other resources. As a result of these and other factors, future
growth opportunities for the Bank may be limited. In addition, many of the
Bank's non-bank competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally insured banks and
state regulations governing state chartered banks. As a result, such non-bank
competitors may have advantages over the Bank in providing certain services.
THE MORTGAGE COMPANY
The Mortgage Company began operations in the first quarter of 1996 in the
subprime mortgage market for loans secured by first and second mortgages on a
brokered basis. The Mortgage Company's principal office was located in Altamonte
Springs, Florida. Depending on referrals from independent brokers, the Mortgage
Company would originate, warehouse and resell residential mortgages of borrowers
who did not qualify for conventional loans or whose borrowing needs were
otherwise not met by traditional residential mortgage lenders. Such borrowers
may not satisfy the more rigid underwriting standards of the traditional
residential mortgage lending market for a number of reasons, such as blemished
credit histories (from past loan delinquencies or bankruptcy), inability to
provide income verification data or lack of established credit history. These
wholesale originated loans were funded using the underwriting criteria of
selected secondary mortgage market investors and were typically sold to one of
those buyers after a period of warehousing at the Mortgage Company.
The Mortgage Company derived its income principally from gains on the sale
of loans and, to a lesser degree, from net interest income on loans being held
for sale. In instances wherein a sold loan was to be prepaid during the first
year after sale, the Mortgage Company may be obligated to refund a portion of
the premium paid by the secondary mortgage market investor for such loan. In
addition, the agreements under which the loans are sold to institutional buyers
contain representations and warranties which are standard in the mortgage
industry. Violations of these representations and warranties could constitute
grounds for a requirement for the seller of the loan to repurchase any such
loan. Furthermore, the agreements under which the loans are sold contain
indemnification provisions which are standard in the mortgage industry and which
could require the payment of sums beyond the repurchase price. All obligations
of the Mortgage Company under the various loan sale agreements, including,
without limitation, obligations to make refunds, to repurchase loans and to
indemnify, were guaranteed by the Company.
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 equipment. In addition, the
purchaser agreed to assume the lease obligations for the facilities and hired
all the Mortgage Company employees. The
6
<PAGE> 7
TAYLOR CAPITAL GROUP, INC.
PART I
Florida-based operations generated the majority of the Mortgage Company's
operations. The Mortgage Company has not originated any loans since the sale of
its Florida operations.
CTRE, INC.
CTRE, Inc. is a subsidiary within which the Company conducts reverse
exchange transactions executed in connection with its real estate trust services
business. CTRE, Inc. acts as a "parking intermediary", temporarily acquiring
certain assets until their sale to the ultimate owner. The acquisitions are
funded entirely with nonrecourse borrowings. During the holding period the
customers lease the assets at rentals approximating the debt service payments on
the borrowings. The assets are not used in the operations of the Company. On
March 19, 1998, the Company sold CTRE, Inc. All assets and borrowings of the
subsidiary were sold with the subsidiary.
EMPLOYEES
At December 31, 1997, the Bank and the Parent Company had a total of
approximately 611 and 6 full-time equivalent employees, respectively. None of
the employees of the Company or the Bank are subject to a collective bargaining
agreement. The Company and the Bank consider their relationships with employees
to be good.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of the Company and its subsidiaries, including the Bank,
can be materially affected not only by management decisions and general economic
conditions, but also by applicable statutes and regulations and the legislative
and governmental actions of Congress and the various federal and state
regulatory agencies with jurisdiction over the Company and the Bank, such as the
Federal Reserve Board ("FRB"), Federal Deposit Insurance Corporation ("FDIC")
and the Illinois Office of Banks and Real Estate ("IOBRE"). The effect of
applicable statutes, regulations and policies can be significant, cannot be
predicted with a high degree of certainty and can change over time. Furthermore,
such statutes, regulations and other pronouncements and policies are intended to
protect the Bank's depositors and the FDIC's deposit insurance fund, not to
protect stockholders. Bank holding companies and banks are subject to
enforcement actions by their regulators for statutory and regulatory violations
and safety and soundness considerations. In addition to compliance with
statutory and regulatory limitations and requirements concerning financial,
managerial and operating matters, regulated financial institutions such as the
Company and the Bank must file periodic and other reports and information with
their regulators and are subject to examination by each of their regulators.
The statutory requirements applicable to, and regulatory supervision of,
bank holding companies and banks have increased significantly and have undergone
substantial change in recent years. These changes are embodied in, among others,
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Community Development Act") and the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "IBBEA"), and the regulations
promulgated thereunder. Many of the regulations promulgated pursuant to FDICIA
have only recently been finalized, and the provisions of the Community
Development Act and IBBEA are still being implemented. As a result, the impact
of these new laws on the Company and the Bank cannot be predicted with
certainty.
Legislation may be introduced from time to time that could, if enacted,
have significant impact on the operations of the Company and its subsidiaries.
On September 30, 1996 President Clinton signed into law the Deposit Insurance
Funds Act of 1996 ("DIFA") which imposes a special assessment on
federally-insured
7
<PAGE> 8
TAYLOR CAPITAL GROUP, INC.
PART I
depository institutions to contribute towards the cost of interest due on bonds
issued between 1987 and 1989 to resolve failed savings and loan associations.
Because the Bank had no Savings Association Insurance Fund ("SAIF") --
assessable deposits, the Company was not required to pay the special assessment
imposed by DIFA. However, to cover the annual Financial Corporation ("FICO")
assessment for the period from January 1, 1997 until December 31, 1999, banks,
including the Bank, pay annually on their Bank Insurance Fund ("BIF") deposit
base 1.29 basis points, according to revised Banking Committee estimates.
Starting in the year 2000 until the FICO bonds are retired, banks and thrifts
will pay the FICO assessment on a pro rata basis (estimated to run 2.43 basis
points on each institution's insured deposit base). Recently enacted legislation
allows well-capitalized bank holding companies to engage in certain activities
without the advance approval of the FRB. Well-capitalized bank holding companies
are required merely to notify the FRB within 10 business days of engaging in
such activity. Congress recently has considered legislation to broaden the
powers of bank holding companies and permit other financial service companies to
own banks. Legislation also has been introduced in the Congress to restructure
the federal bank regulatory system. Although the Secretary of Treasury of the
United States and the Chairman of the FRB have previously expressed support for
restructuring the federal bank regulatory system, there can be no certainty as
to the effect, if any, that such legislation would have on the regulation of the
Company or the Bank.
The following discussion and other references to and descriptions of the
regulation of financial institutions and their parent holding companies
contained herein are not intended to constitute and do not purport to be a
complete statement of all legal restrictions and requirements applicable to the
Company and the Bank, and all such descriptions are qualified in their entirety
by reference to applicable statutes, regulations and policies.
REGULATION OF BANK HOLDING COMPANIES AND THEIR NON-BANK SUBSIDIARIES
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended ("BHCA"). As such, the Company is subject to
regulation, supervision and examination by the FRB. The Company is also subject
to the limitations and requirements of the Illinois Bank Holding Company Act
("IBHCA"). These limitations and requirements, however, are no more restrictive
in most instances than those imposed by the BHCA and the FRB. The business and
affairs of the Company are regulated in a variety of ways, including limitations
on acquiring control of other banks and bank holding companies, limitations on
activities and investments, regulations relating to capital requirements and
limitations on payment of dividends. In addition, it is the FRB's policy that a
bank holding company is expected to act as a source of financial strength to
banks that it owns or controls and, as a result, the FRB could require the
Company to commit resources to support the Bank in circumstances in which the
Company might not do so absent the FRB's policy.
In 1996, Federal Reserve examiners began assigning a formal supervisory
rating relating to the adequacy of a bank holding company's and its member
bank's risk management processes, including their internal controls. The
emphasis on sound risk management processes and strong internal controls
reflects the Federal Reserve's view that proper risk management is critical to
the conduct of safe and sound banking activities in light of new technologies,
activities in product innovation and other changes to the banking industry.
Acquisition of Banks and Bank Holding Companies
The BHCA generally prohibits a bank holding company from (1) acquiring,
directly or indirectly, more than 5% of the outstanding shares of any class of
voting securities of a bank or bank holding company, (2) acquiring control of a
bank or another bank holding company, (3) acquiring all or substantially all of
the assets of a bank, or (4) merging or consolidating with another bank holding
company, without first obtaining FRB approval. In considering an application
with respect to any such transaction, the FRB is required to consider a variety
of factors, including the potential anti-competitive effects of the transaction,
the financial condition, managerial resources and future prospects of the
combining and resulting institutions, the convenience and needs of the
communities the combined organization would serve, the record of performance
8
<PAGE> 9
TAYLOR CAPITAL GROUP, INC.
PART I
of each combining organization under the Community Reinvestment Act ("CRA") and
the prospective availability to the FRB of information appropriate to determine
ongoing regulatory compliance with applicable banking laws. In addition, both
the federal Change In Bank Control Act and the Illinois Banking Act ("IBA")
impose limitations on the ability of one or more individuals or other entities
to acquire control of the Company or the Bank.
Affiliate Transactions
The Federal Reserve Act and IBA impose certain limitations on extensions of
credit and other transactions by and between banks and their parent holding
companies or affiliates of their parent holding companies. Under the Bank
Holding Company Act Amendments of 1970 and the FRB's regulations, a bank holding
company and its bank and nonbanking subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property and the furnishing of any services.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Interstate Banking and Branching
Beginning June 1, 1997, the IBBEA authorizes a bank to merge with a bank in
another state as long as neither of the states has opted out of interstate
branching between the date of enactment of the IBBEA and May 31, 1997. The IBBEA
also provides that states may enact laws permitting interstate bank merger
transactions prior to June 1, 1997. If a state opts out of interstate branching
within the specified time period, no bank in any other state may establish a
branch in the opting out state, whether through an acquisition or de novo. Under
Illinois law, after May 31, 1997, an Illinois chartered bank, such as the Bank,
may establish and maintain branches in another state that may conduct any
activity in the state that is authorized or permitted for any bank that has a
banking charter issued by that state, subject to the same limitations and
restrictions that are applicable to banks charted by the state. In addition, an
out-of-state bank which is the resulting bank in a merger with an Illinois
chartered bank may, after the merger, establish or maintain a branch or branches
in Illinois at the locations where the in-state bank had its main office and
branches in Illinois to the same extent as an in-state bank.
The restrictions described above represent limitations on expansion by the
Company and the Bank, the acquisition of control of the Company by another
company and the disposition by the Company of all or a portion of the stock of
the Bank or by the Bank of all or a substantial portion of its assets.
Permitted Non-Banking Activities
The BHCA generally prohibits a bank holding company from engaging in
activities or acquiring or controlling, directly or indirectly, more than 5% of
the voting securities or assets of any company engaged in any activity other
than banking, managing or controlling banks and bank subsidiaries or another
activity that the FRB has determined, by regulation or otherwise, to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Those activities that the FRB has determined by regulation to
be closely related to banking include real estate mortgage lending, the
principal activity of the Mortgage Company. Subject to certain exceptions, a
bank holding company must obtain the prior approval of the FRB to engage in or
acquire control of a company engaging in a permissible nonbanking activity.
In evaluating such applications, the FRB will consider, among other
relevant factors, whether permitting the bank holding company to engage in the
activity in question can reasonably be expected to produce benefits to the
public (such as increased convenience, competition or efficiency) that outweigh
any possible adverse
9
<PAGE> 10
TAYLOR CAPITAL GROUP, INC.
PART I
effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or safety and soundness concerns).
The recent enactment of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("EGRPRA") streamlines the nonbanking activities
application process for well capitalized and well managed bank holding
companies. Under EGRPRA, qualified bank holding companies may commence a
regulatory approved nonbanking activity without prior notice to the FRB; written
notice is merely required within 10 days after commencing the activity. Also,
under EGRPRA, the prior notice period is reduced to 12 days in the event of any
nonbanking acquisition or share purchase, assuming the size of the acquisition
does not exceed 10% of risk-weighted assets of the acquiring bank holding
company and the consideration does not exceed 15% in Tier 1 capital. This prior
notice requirement also applies to commencing a nonbanking activity de novo
which has been previously approved by order of the FRB, but not yet implemented
by regulations.
Capital Requirements
The FRB has adopted minimum risk-based capital standards for bank holding
companies. The FRB requires bank holding companies to maintain certain minimum
ratios of risk-weighted capital to total risk-adjusted assets. Risk-adjusted
assets include a "credit equivalent amount" of off-balance sheet items,
determined in accordance with conversion factors set forth in the FRB's
regulations. In August 1995, the federal bank regulators implemented a final
rule to revise and expand the conversion factors used to calculate the credit
equivalent amounts to recognize certain derivative contracts and transactions
subject to qualifying bilateral netting arrangements. Each asset and off-balance
sheet item, after certain adjustments, is assigned to one of four risk-weighing
categories, 0%, 20%, 50% or 100%, and the risk-adjusted values then are added
together to determine the total amount of risk-weighted assets.
A bank holding company must meet two risk-based capital standards, a "core"
or "Tier 1" capital requirement and a total capital requirement. The current
regulations require that a bank holding company maintain Tier 1 capital equal to
4% of risk-adjusted assets and total capital equal to 8% of risk-adjusted
assets, at least one-half of which must be Tier 1 capital. Tier 1 capital
consists of common stockholders' equity; qualifying noncumulative perpetual
preferred stock; qualifying cumulative perpetual preferred stock (up to 25% of
total Tier 1 capital); and minority interests in the equity accounts of
consolidated subsidiaries. Core capital excludes goodwill and certain other
intangible assets. It is intended that the Preferred Stock will be considered
Tier 1 capital for the purposes of those regulations.
Total capital represents the sum of Tier 1 capital plus "Tier 2" capital,
less certain deductions. Tier 2 or "supplementary" capital consists, subject to
certain limitations, of allowances for loan and lease losses (up to 1.25% of
total weighted risk assets); perpetual preferred stock (to the extent not
included in Tier 1 capital); hybrid capital instruments; perpetual debt;
mandatory convertible debt securities; term subordinated debt; and intermediate
term preferred stock. In determining total capital, a bank holding company must
deduct its investments in unconsolidated banking and finance subsidiaries and,
as determined by the FRB on a case by case basis, other designated subsidiaries
or associated companies; reciprocal holdings of certain securities of banking
organizations; and other deductions required by regulation or determined by the
FRB on a case-by-case basis.
The FRB also has established a minimum leveraged ratio requirement for bank
holding companies. The minimum leverage ratio, which is defined as Tier 1
capital divided by average quarterly assets (net of allowance for losses and
goodwill), is 3% for banking organizations that do not anticipate significant
growth and that have well-diversified risk (including no undue interest rate
risk), excellent asset quality, high liquidity and good earnings. Banking
organizations, however, generally are expected to operate well above these
minimum risk-based ratios and are expected to have ratios of at least 100 to 200
basis points above the stated minimum, depending upon their particular condition
and growth plans. Higher capital ratios could be required if warranted by the
particular circumstances or risk profile of a given banking organization. The
FRB has not advised the Company of any specific minimum Tier 1 leverage ratio
applicable to it.
10
<PAGE> 11
TAYLOR CAPITAL GROUP, INC.
PART I
As of December 31, 1997, the Company's consolidated regulatory ratios were:
total risk-based capital ratio of 9.21%; a Tier 1 risk-based capital ratio of
7.95%; and a leverage ratio of 5.85%.
The failure of a bank holding company to meet its risk-weighted capital
ratios may result in supervisory action, as well as an inability to obtain
approval of any regulatory applications and, potentially, increased frequency of
examination. The nature and intensity of the supervisory action will depend upon
the level of noncompliance. Under the IBHCA, no bank holding company may acquire
control of a bank if, at the time it applies for approval or at the time the
transaction is consummated, its ratio of total capital to total assets as
determined in accordance with then applicable FRB regulations, is or will be
less than 7%.
The federal bank regulators have previously indicated a desire to raise
minimum capital requirements for banking organizations and have suggested that
revisions to the risk-based capital requirements should be made. The effect of
any future changes in the required capital ratios of the Company or the Bank
cannot be determined at this time.
Risk-based capital ratios which focus principally on broad categories of
credit risk are only one indicator of the overall financial health of a bank
organization. They do not incorporate other factors that can affect the
Company's financial condition, such as overall interest rate risk exposure,
liquidity, funding and market risks, the quality and level of earnings,
investment or loan portfolio concentrations, the quality of loans and
investments, the effectiveness of loan and investment policies and management's
ability to monitor and control financial and operating risks.
In the event that the subsidiary institution fails to meet minimum capital
requirements and is required to submit a capital restoration plan, such plan
would be acceptable only if the parent holding company guarantees compliance
with the plan up to the lesser of 5% of the institution's total assets or the
amount necessary to bring the institution into compliance with capital standards
applicable at the time that the institution fails to comply.
Dividends
The FRB has indicated that banking organizations should generally pay cash
dividends out of current operating earnings and the current rate of earnings
retention should be consistent with the organization's capital needs, asset
quality and overall financial condition. A banking organization experiencing
earnings weaknesses should not pay cash dividends which exceed its net income or
which could only be funded in ways that would weaken its financial health or
undermine its ability to serve as a source of strength to its subsidiary bank,
such as by borrowing. The FRB may, and in certain circumstances must, prohibit a
bank holding company from making any capital distributions without prior FRB
approval if the subsidiary institution is undercapitalized. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Capital Requirements." The FRB also may impose limitations on the payment of
dividends as a condition to its approval of certain applications, including
applications for approval of mergers or acquisitions.
REGULATION OF BANKS
The Bank is a banking corporation organized under the IBA. As such, it is
subject to regulation, supervision and examination by the IOBRE. The Bank is a
member of the Federal Reserve System and, therefore, subject to regulation,
supervision and examination by the FRB. The deposit accounts of the Bank are
insured up to applicable limits by the FDIC's Bank Insurance Fund (the "BIF").
Thus, the Bank is also subject to regulation, supervision and examination by the
FDIC. In certain instances, the statutes administered and regulations
promulgated by certain of these agencies are more stringent than those of other
agencies with jurisdiction. In these instances, the Bank must comply with the
more stringent restrictions, prohibitions or requirements.
11
<PAGE> 12
TAYLOR CAPITAL GROUP, INC.
PART I
The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, the
Bank's capital ratios, payment of dividends, liquidity requirements, the nature
and amount of the investments that the Bank may make, transactions with
affiliates, community and consumer lending, internal policies and controls,
reporting by and examination of the Bank and changes in control of the Bank. The
federal bank regulators have recently adopted an interest rate risk component to
the risk capital requirements to assess the exposure of banks to declines in the
economic value of the bank's capital due to changes in interest rates.
Deposit Insurance
As a BIF-insured institution, the Bank is required to pay deposit premiums
to the BIF. The FDIC has implemented a risk-based deposit insurance assessment
system under which each insured depository institution is assigned to one of
nine categories based upon its level of capital and an evaluation of other
supervisory factors and assessed insurance premiums accordingly. These premiums
rates for the semiannual period beginning January 1, 1996 range from 0.0% of
deposits included in an institution's "assessment base" for the highest rated
institutions to .27% of such deposits for the lowest rated institutions, with
well-capitalized and well-managed institutions paying only the statutory minimum
yearly fee of $2,000. Risk classification of an insured institution is made by
the FDIC for each semiannual assessment period.
In August 1995, the FDIC revised the schedule for BIF-insured institutions
to lower the premium rates to .04% for the highest rated institutions to .31%
for the lowest rated institutions. The BIF rates were further reduced to 0.0%
for the highest rated institutions and .27% for the lowest rated institutions
effective January 1, 1996. The FDIC left untouched the premium levels for the
period beginning July 1, 1996. Rates may be increased in the future if the
designated reserve ratio for BIF falls below 1.25%, or are otherwise modified by
the FDIC or the Congress. The FDIC may propose additional changes in the
assessment rate matrix at a later date.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound banking practices, is in a condition
that is unsafe or unsound for the continuation of operations or otherwise has
violated any applicable law, regulation or order, or any condition imposed in
writing by or in a written agreement with the FDIC. The FDIC also may suspend
deposit insurance temporarily during the pendency of a proceeding to terminate
insurance if the institution has no tangible capital.
Capital Requirements
FRB regulations establish the same three minimum capital standards for
insured state member banks as they do for bank holding companies. Under the FRB
regulations, the Bank's capital ratios are computed in a manner substantially
similar to the manner in which bank holding company capital ratios are
determined. See "Regulation of Bank Holding Companies and Their Non-Bank
Subsidiaries -- Capital Requirements." The FRB capital requirements are minimum
requirements and higher levels of capital will be required if warranted by the
particular circumstances or risk profile of an individual bank.
FDICIA provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers under this provision depends
on whether the institution in question is "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Under regulations adopted by the federal banking
regulators, a bank is considered "well capitalized" if it (i) has a total
risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital
ratio of 6% or greater, (iii) has a leverage ratio of 5% or greater and (iv) is
not subject to any order or written directive to meet and maintain a specific
capital level. An "adequately capitalized" bank is defined as one that (i) has a
total risk-based capital ratio of 8% or greater, (ii) has a Tier 1 risk-based
capital ratio of 4% or greater, (iii) has a leverage ratio of 4% or greater (or
3% or greater in the case of a bank with the highest composite regulatory
examination rating that is not experiencing
12
<PAGE> 13
TAYLOR CAPITAL GROUP, INC.
PART I
or anticipating significant growth) and (iv) does not meet the definition of a
well capitalized bank. A bank would be considered (A) "undercapitalized" if it
has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1
risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than
4% (or 3% in the case of a bank with the highest composite regulatory
examination rating that is not experiencing or anticipating significant growth);
(B) "significantly undercapitalized" if the bank has (i) a total risk-based
capital ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio of less
than 3% or (iii) a leverage ratio of less than 3%; and (C) "critically
undercapitalized" if the bank has a ratio of tangible equity to total assets of
equal to or less than 2%. The appropriate federal banking regulator may
downgrade a bank to the next lower category if the regulator determines (i)
after notice and opportunity for hearing or response, that the bank is in an
unsafe or unsound condition or (ii) that the bank has received (and not
corrected) a less-than-satisfactory rating for any of the categories of asset
quality, management, earnings or liquidity in its most recent exam.
As of December 31, 1997, the Bank qualified as "well capitalized," with a
total risk-based capital ratio of 11.16%; a Tier 1 risk-based capital ratio of
9.90% and a leverage ratio of 7.26%.
Depending upon the capital category to which an institution is assigned,
the regulators' supervisory and corrective powers, many of which are mandatory
in certain circumstances, include a prohibition on capital distributions by the
institution if, after making the distribution, it would be undercapitalized;
prohibition on payment of management fees to controlling persons; requiring the
submission of a capital restoration plan; placing limits on asset growth;
limiting acquisitions, branching or new lines of business; requiring the
institution to issue additional capital stock (including additional voting
stock) or to be acquired; restricting transactions with affiliates; restricting
the interest rates that the institution may pay on deposits; ordering a new
election of directors of the institution; requiring that senior executive
officers or directors be dismissed; prohibiting the institution from accepting
deposits from correspondent banks; requiring the institution to divest certain
subsidiaries; requiring the holding company to divest the institution or other
nonbanking subsidiaries; prohibiting the holding company from making any
distributions without FRB approval; prohibiting the payment of principal or
interest on subordinated debt; and, ultimately, appointing a receiver for the
institution. See "-- Regulation of Bank Holding Companies and Their Non-Bank
Subsidiaries -- Dividends."
Dividends
Under the IBA, the Bank is permitted to declare and pay dividends in
amounts up to the amount of its accumulated net profits, provided that it shall
retain in its surplus at least one-tenth of its net profits since the date of
the declaration of its most recent previous dividend until said additions to
surplus, in the aggregate, equal at least the paid-in capital of the Bank. In no
event may the Bank, while it continues its banking business, pay dividends in
excess of its net profits then on hand (after deductions for losses and bad
debts). The Bank is also subject to various regulatory policies and requirements
relating to the payment of dividends. See "Regulation of Banks -- Capital
Requirements."
The FRB permits a state member bank such as the Bank to pay dividends,
while it continues its banking operations, in an amount not greater than its net
profits then on hand, after deducting therefrom its losses and bad debts. No
state member bank may pay as a dividend any portion of its paid-in capital and
no state member bank may pay dividends if its accumulated losses equal or exceed
its undivided profits then on hand. The FRB cash dividend policy statement
described above (See "Regulation of Bank Holding Companies and Their Non-Bank
Subsidiaries -- Dividends") also applies to the payment of dividends by state
member banks.
Insider and Affiliate Transactions
The Bank is subject to certain restrictions imposed by the Federal Reserve
Act and the IBA on any extensions of credit to, purchase of assets from, and
other transactions with the Company and its nonbanking subsidiaries, on
investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans made by the Bank.
13
<PAGE> 14
TAYLOR CAPITAL GROUP, INC.
PART I
Such restrictions prevent the Company and its affiliates from borrowing
from the Bank unless the loans are secured by marketable obligations of
specified amounts. Further, such secured loans, investments and other
transactions between the Bank and the Company or its affiliates are limited to
10% of the Bank's capital and surplus (as defined by federal regulations) and
such secured loans, investments and other transactions are limited, in the
aggregate, to 20% of the Bank's capital and surplus (as defined by federal
regulations). The sales of some assets, for example the sales of mortgages by
the Mortgage Company to the Bank, are exempt from these percentage limitations
with affiliates, however, the transaction must comply with regulations
prohibiting terms that would be preferential to the Company or the Mortgage
Company and the Bank which would implicate these provisions.
Certain limitations and reporting requirements also are placed on
extensions of credit by the Bank to principal stockholders of the Company and to
directors and certain executive officers of the Company, its non-bank
subsidiaries and the Bank and to "related interests" of such principal
stockholders, directors and officers. In addition, any director or officer of
the Company or the Bank or principal stockholder of the Company may be limited
in his or her ability to obtain credit from banks with which the Bank maintains
a correspondent relationship.
Community Reinvestment Act
In connection with its lending activities, the Bank is subject to a variety
of federal and state laws designed to protect borrowers and promote lending to
various sectors of the economy and population. Included among these are the Home
Mortgage Disclosure Act ("HMDA"), Real Estate Settlement Procedures Act
("RESPA"), Truth-In-Lending Act ("TILA"), the Equal Credit Opportunity Act
("ECOA"), Fair Credit Reporting Act ("FCRA"), the CRA and similar Illinois laws
applicable to, among other things, usury, credit discrimination and business
practices.
The CRA requires a bank to define the communities that it serves, identify
the credit needs of such communities and adopt and implement a "Community
Reinvestment Act Statement" pursuant to which it offers credit products and
takes other actions that respond to the credit needs of the communities. Under
FIRREA, the FRB is required to conduct annual CRA examinations of insured
financial institutions and to assign to them a CRA rating of "outstanding,"
"satisfactory," "needs improvement" or "unsatisfactory" based on their record of
meeting community needs.
The federal banking regulatory agencies will take into account the CRA
ratings of combining organizations and their level of compliance with the Equal
Credit Opportunity Act in connection with acquisitions involving a change in
control of a financial institution and, if any of the combining institutions has
a CRA rating of "needs improvement" or "unsatisfactory," the agency may deny the
application or require corrective action as a condition of its approval. The
Bank's latest CRA relating was "outstanding". Under recently approved
regulations, the Bank will be subject to a new system for evaluating its actual
performance in meeting community needs. There can be no certainty as to the
effect, if any, that any that such changes will have on the Bank.
The operations of the Mortgage Company are subject to HMDA, RESPA, TILA,
ECOA, the regulations promulgated thereunder and similar state laws applicable
to among other things, usury, credit discounts and business practices.
Provisions of those statutes and related regulations prohibit discrimination and
require disclosure of certain basic information to mortgagors such as credit and
settlement costs. Each of the subsidiaries of the Mortgage Company has or will
obtain all necessary licenses in all states in which it conducts or expects to
conduct its mortgage operations.
Annual Audit, Reporting and Managerial Control Requirements
Under FDICIA, the FDIC was required to promulgate regulations requiring
FDIC-insured financial institutions over a certain size to have an annual
independent audit of their financial statements in accordance with generally
accepted auditing standards, to have an independent audit committee of outside
directors, and
14
<PAGE> 15
TAYLOR CAPITAL GROUP, INC.
PART I
to file with the FDIC and their respective primary federal regulators annual
reports, attested to by their independent auditors, as to their internal control
over financial reporting. The FDIC's regulations apply these requirements to
insured depository institutions with total assets of $500 million or more. The
requirements can be satisfied by audit procedures adhered to by a parent entity
such as the Company that is consolidated with the Bank for financial reporting
purposes. Legislation has been considered and may be considered in the future
that could result in substantial changes to the audit requirements. There is no
certainty as to what, if any, effect such legislation may have on the Company or
the Bank.
Brokered Deposits
The FDIC has issued a rule regarding the ability of depository institutions
to accept brokered deposits, i.e. deposits obtained through a deposit broker.
The rule provides that (i) an "undercapitalized" institution is prohibited from
accepting, renewing or rolling over brokered deposits, (ii) an "adequately
capitalized" institution must obtain a waiver from the FDIC before accepting,
renewing or rolling over brokered deposits and is subject to limitations on the
rate of interest payable on brokered deposits, and (iii) a "well capitalized"
institution may accept or renew brokered deposits without restriction. At
December 31, 1997, the Bank had brokered deposits of $70 million and was
considered "well capitalized" for purposes of this rule. See "Risk Factors --
Liquidity Management".
Other FDICIA Rules
The banking agencies have also adopted or proposed rules to implement
provisions of FDICIA, the Community Development Act and the IBBEA, including:
(i) real estate lending standards for banks, which provide guidelines concerning
loan-to-value ratios for various types of real estate loans; (ii) revisions to
the risk-based capital rules to account for interest rate risk, concentration of
credit risk, transferring of assets without recourse and the risks posed by
"non-traditional activities"; (iii) rules requiring depository institutions to
develop and implement internal procedures to evaluate and control credit and
settlement exposure to their correspondent banks; (iv) rules prohibiting, with
certain exceptions, state member banks from making equity investments of types
and amounts not permissible for national banks; and (v) rules addressing various
"safety and soundness" issues, including operations and managerial standards,
standards for asset quality, earnings and stock valuations, and compensation
standards for the officers, directors, employees and principal shareholders of
the depository institution.
Change In Control
As an Illinois bank, the Bank is subject to the rules regarding change in
control of Illinois banks contained in the IBA. The Company is also subject to
these rules by virtue of its control of the Bank. Generally, the IBA provides
that no person or entity or group of affiliated persons or entities may, without
the Commissioner's consent, directly or indirectly, acquire control of an
Illinois bank. Such control is presumed if any person, directly or indirectly,
owns or controls 20% or more of the outstanding stock of an Illinois bank or
such lesser amount as would enable the holder or holders, by applying cumulative
voting, to elect one director of the bank.
In evaluating applications for acquisition of control of an Illinois bank
or bank holding company, in addition to the IOBRE's consideration of other
factors deemed relevant, the IOBRE must find that the character of the proposed
management of the bank, after the change in control will assure reasonable
promise of successful, safe and sound operation; that the future earnings
prospects of the bank after the promised change in control are favorable, and
that any prior involvement that the proposed controlling persons or the proposed
management of the institution after the change in control have had with any
other financial institution has been conducted in a safe and sound manner. See
"Regulation of Bank Holding Companies and Their Non-Bank Subsidiaries --
Acquisition of Banks and Bank Holding Companies."
15
<PAGE> 16
TAYLOR CAPITAL GROUP, INC.
PART I
ITEM 2. PROPERTIES
The principal offices of both the Company and the Bank are located in the
Bank's main office building at 350 East Dundee Road, Wheeling, Illinois. The
Bank's main office is leased by the Bank under a renegotiated lease which
commenced on January 1, 1995 and expires March 31, 2010, with options to
extended until March 31, 2025.
The Company owns six of the buildings from which Bank branches are
operated: Ashland, Skokie, Burbank, Yorktown, Old Orchard and Western. The
company leases the land under the buildings at Yorktown, Old Orchard and
Western. The Company leases the buildings for its Cicero, Woodlawn, Jackson and
West Washington (Chicago Loop location opening April 1998) branches, which in
accordance with the current lease terms expire in or may be extended to January
2002, May 2013, March 2014 and December 2007, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in a number of lawsuits relating
to either or both (1) the Split-Off Transactions which resulted in the Company
being split-off from CTFG (now Reliance Acceptance Group, Inc., hereinafter
referred to as "Reliance") in February, 1997, and (2) the financial and public
reporting of Reliance. The lawsuits name Reliance and/or current or former
officers, directors and stockholders of the Company and Reliance as additional
defendants. Included amongst the defendants are Jeffrey W. Taylor, Chairman of
the Board and Chief Executive Officer of the Company, and Bruce W. Taylor,
President of the Company. One case also names the Bank as a defendant. All of
the lawsuits have been brought as purported class actions on behalf of current
and former stockholders of Reliance.
Four of these actions are pending in Delaware Chancery Court. These cases
allege that the defendants breached their fiduciary duties in connection with
disclosures made to the stockholders prior to the vote which approved the
Split-Off Transactions. These cases seek relief in the form of unspecified
damages, attorneys' fees and rescission of the Split-Off Transactions. Two other
cases are pending in the United States District Court for the Western District
of Texas and one case is pending in the Northern District of Illinois. These
cases allege that the defendants violated the federal securities laws, and the
Illinois action also alleges that the defendants breached common law fiduciary
duties. In addition, the Illinois case alleges that the defendants violated
ERISA and breached duties owed to a subclass consisting of participants in
Reliance's ESOP and 401(k) Profit Sharing Plan. The Texas and Illinois cases
seek unspecified damages, attorneys' fees and rescission of the Split-Off
Transactions.
Seven other similar lawsuits are pending. Although the Company has not been
named as a defendant in those suits, certain directors, officers and
stockholders of the Company, including Jeffrey W. Taylor, Bruce W. Taylor and J.
Christopher Alstrin, Chief Financial Officer of the Company, have been named.
Pursuant to the Share Exchange Agreement in which Jeffrey W. Taylor, Bruce
W. Taylor, Iris A. Taylor, Sidney J. Taylor, Cindy Taylor Bleil, related trusts
and a related partnership (collectively, the "Taylor Family") agreed to acquire
the Company from Reliance, the Taylor Family may be obligated to indemnify
Reliance for 25% of any losses (net of any insurance proceeds paid to, or for
the benefit of Reliance or members of its Board of Directors), including without
limitation, any costs or expenses of defense or settlement of any suits, actions
or proceedings initiated by third-parties and any judgments in such suits,
actions or proceedings relating to the Split-Off Transactions (the "Transaction
Indemnification Obligation"). Subsequently, the Company agreed to indemnify and
hold harmless the Taylor Family from and against any and all liabilities of the
Taylor Family arising under the Transaction Indemnification Obligation. On
February 9, 1998, Reliance filed a voluntary petition under Chapter 11 of the
Bankruptcy Code, and all of the aforementioned cases in which Reliance had been
named as a defendant are now stayed as to Reliance. The Company is unable at
this time to predict the extent to which it might be called upon to fulfill its
indemnification obligations to the Taylor Family with respect to the Transaction
Indemnification Obligations.
16
<PAGE> 17
TAYLOR CAPITAL GROUP, INC.
PART I
All of these cases are in their early stages. The Company believes that it
has meritorious defenses to all of the actions against the Company, and the
Company intends to defend itself vigorously. In addition, the Company has agreed
to advance defense costs that are not otherwise advanced by insurance carriers
on behalf of members of the Taylor Family and directors and officers of the
Company who are defendants in these cases. Such costs will be expensed as
incurred. The Company is unable at this time to predict the potential impact of
the litigation on the financial condition of the Company.
On February 16, 1996, Carolyn B. Blackwell, Sandra Carbone, Phyllis K.
Cramer, George Havelka and Philip A. Roche v. Cole Taylor Bank, Cole Taylor
Financial Group, Inc., Sidney Taylor, Jeffrey Taylor, Bruce Taylor, Richard
Keneman, Daniel Bleil and Fred deRoode was filed by five former Bank branch
managers in the U.S. District Court for the Northern District of Illinois,
Eastern Division, claiming age discrimination, race discrimination (as to one of
them) and defamation. The plaintiffs sought unspecified compensatory and
punitive damages. The Company filed a motion to dismiss and a motion for Summary
Judgment which was granted in the Company's favor. The plaintiffs have obtained
new counsel and have appealed the trial court's order. Their appeal is currently
pending.
The Company is from time to time a party to various other legal actions
arising in the normal course of its business. Management knows of no such other
legal actions threatened or pending against the Company that are likely to have
a material adverse impact on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
17
<PAGE> 18
TAYLOR CAPITAL GROUP, INC.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public market for the Company's common stock.
As of March 26, 1998, the approximate number of stockholders of record of
the common stock was 66, based upon securities position listings furnished to
the Company by the transfer agent and registrar.
The Company has paid regular cash dividends on the common stock since it
commenced operations in the first quarter of 1997. The following table sets
forth, for each quarter in 1997, the dividends declared on the common stock:
<TABLE>
<CAPTION>
DIVIDENDS PER
COMMON SHARE
-------------
<S> <C>
1997:
First Quarter............................................. $0.09
Second Quarter............................................ 0.09
Third Quarter............................................. 0.09
Fourth Quarter............................................ 0.09
</TABLE>
The holders of the common stock are entitled to receive such dividends as
are declared by the Board of Directors of the Company, which considers payment
of dividends quarterly. The common stock dividends are subject to the rights of
holders of preferred stock. It is the intention of the Company to continue to
pay cash dividends on the common stock. There is no assurance that dividends
will be paid by the Company or that dividends will not be reduced or eliminated
in the future. In determining the timing and amount of dividends the Board of
Directors considers the earnings, capital requirements and debt of the Company,
the Bank and Mortgage Company as well as general economic conditions and other
relevant factors. The Bank's ability to pay dividends is subject to regulatory
restrictions. See "Supervision and Regulation."
18
<PAGE> 19
TAYLOR CAPITAL GROUP, INC.
PART II
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below under the caption "Income Statement Data"
and "Balance Sheet Data" for the period of February 12, 1997 to December 31,
1997 and as of December 31, 1997 are derived from the audited financial
statements of the Company. The selected data for the years ended, and as of
December 31, 1996, 1995, 1994 and 1993 are derived from the historical audited
financial statements of the Bank on a stand alone basis. See "Managements
Discussion and Analysis of Financial Condition and Results of Operations --
Basis of Presentation". This data should be read in conjunction with the
financial statements, the notes thereto and other financial information included
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
SUCCESSOR BASIS--
TAYLOR CAPITAL
GROUP, INC. (2)
CONSOLIDATED
FOR THE PERIOD OF PREDECESSOR BASIS--COLE TAYLOR BANK
FEBRUARY 12, 1997 TO -------------------------------------------------
DECEMBER 31, FOR THE YEARS ENDED DECEMBER 31,
-------------------- -------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (1)
Gross interest income.................... $ 122,614 $ 138,897 $ 133,684 $ 116,267 $ 101,828
Gross interest expense................... 60,458 66,377 64,366 44,118 35,147
---------- ---------- ---------- ---------- ----------
Net interest income.................... 62,156 72,520 69,318 72,149 66,681
Provision for loan losses................ 4,061 3,307 4,056 7,374 10,521
Noninterest income....................... 17,873 15,824 14,227 12,887 15,425
Noninterest expense...................... 59,534 55,373 53,549 55,248 53,926
Provision for income taxes............... 6,321 9,971 7,774 6,512 4,937
---------- ---------- ---------- ---------- ----------
Net income............................. $ 10,113 $ 19,693 $ 18,166 $ 15,902 $ 12,722
========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................. $1,855,711 $1,812,505 $1,774,032 $1,719,653 $1,544,095
Investments and federal funds sold....... 482,671 409,464 443,348 488,019 459,349
Loans.................................... 1,204,437 1,224,994 1,211,622 1,130,177 986,384
Allowance for loan losses................ 25,813 24,184 23,869 22,833 19,740
Total deposits........................... 1,377,957 1,406,900 1,364,075 1,293,411 1,180,845
Short-term borrowings.................... 186,053 162,182 202,033 243,997 209,227
Nonrecourse borrowings................... 18,757 -- -- -- --
Notes payable............................ 112,000 85,000 61,003 47,864 37,690
Stockholders' equity..................... 141,070 141,635 132,741 118,997 101,763
EARNINGS PERFORMANCE DATA:
Return on average total assets........... 0.61% 1.08% 1.05% 0.98% 0.87%
Return on average stockholders' equity... 8.64 14.73 14.29 14.50 13.00
Net interest margin (tax-equivalent)..... 4.22 4.35 4.38 4.88 5.11
Ratio of earnings to fixed charges:
Including interest on deposits......... 1.25x 1.44x 1.40x 1.50x 1.49x
Excluding interest on deposits......... 1.80 3.12 2.42 2.84 3.04
BALANCE SHEET AND OTHER KEY RATIOS:
Nonperforming assets to total assets..... 0.81% 0.82% 1.08% 1.03% 1.15%
Nonperforming assets to total loans plus
repossessed property................... 1.25 1.21 1.57 1.56 1.78
Net loan charge-offs to average total
loans.................................. 0.27 0.24 0.26 0.41 0.57
Allowance for loan losses to total
loans.................................. 2.14 1.97 1.97 2.02 2.00
Allowance for loan losses to
nonperforming loans.................... 189.34 176.29 174.76 157.61 156.67
Average stockholders' equity to average
total assets........................... 7.10 7.36 7.34 6.75 6.73
</TABLE>
- ---------------
(1) Neither the Company's nor the Bank's common stock is or was publicly traded,
therefore, the per share disclosure for earnings and dividends is not
presented.
(2) Earnings performance data and net loan charge offs to average total loans
are annualized.
19
<PAGE> 20
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presents management's discussion and analysis of the
consolidated financial condition and results of operations of Taylor Capital
Group, Inc. as of December 31, 1997 and for the period of February 12, 1997 to
December 31, 1997 and of Cole Taylor Bank on a stand-alone basis as of December
31, 1996 and for the period of January 1, 1997 to February 11, 1997 and for the
years ended December 31, 1996 and 1995. This discussion should be read in
conjunction with the "Selected Financial Data," the Company's Financial
Statements and the Notes thereto and other financial data appearing elsewhere in
this Form 10-K.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Taylor
Capital Group, Inc. (the "Parent Company") and its wholly owned subsidiaries
(collectively, with the Parent Company, the "Company"), Cole Taylor Bank (the
"Bank"), CT Mortgage Company, Inc. (the "Mortgage Company") and CTRE, Inc. The
Company is a 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. As a result of the Split-Off Transactions, the consolidated financial
information of the Company for the period February 12, 1997 through December 31,
1997 is presented on a different cost basis than that for the Bank for the
periods prior to the Split-Off Transactions and therefore, is not comparable.
While financial information related to the Bank for the period January 1, 1997
through February 11, 1997 is included in this management discussion and
analysis, the performance for the period is not analyzed because the period is
not sufficient in length to discuss its performance in depth.
The Split-Off Transactions were a series of transactions pursuant to which
Cole Taylor Financial Group, Inc. ("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.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in this Form 10-K
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,
uncertainties or other factors. 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 but are not
the exclusive means of identifying such statements. The Company cautions readers
of this Annual Report on Form 10-K that a number of risks, uncertainties and
other factors could cause the Company's actual results, performance or
achievements in 1998 and beyond to differ materially from the results,
performance or achievements expressed in, or implied by, such forward-looking
statements. These risks, uncertainties and other 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; changes in
customer response to the Bank's pricing strategies; the effects of the year 2000
on the Company's computer systems and the computer systems of its
20
<PAGE> 21
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
loan customers; 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 including pending legal actions. Certain of these risks,
uncertainties and other factors are more fully described elsewhere in this Form
10-K or in the Company's previous filings with the Securities and Exchange
Commission, including, without limitation, the Company's Prospectus dated
February 7, 1997.
OVERVIEW
Generally, the 1997 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 at the time of the Split-Off
which resulted in the recording of $38.3 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 Parent and Mortgage Companies. 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 year's
operations.
For the period of February 12, 1997 to December 31, 1997, approximately
10 1/2 months, the consolidated Company's net income was $10.1 million.
Annualized return on average assets was .61%, while annualized return on average
equity was 8.64%. Total assets of the company were $1.86 billion at December 31,
1997. Loans totaled $1.20 billion. Deposits totaled $1.38 billion and
stockholders' equity was $141.1 million.
The Bank's 1996 net income of $19.7 million represented an 8.4% increase
over net income of $18.2 million in 1995. Return on average assets increased to
1.08% in 1996 compared to 1.05% in 1995. Return on average equity increased to
14.73% in 1996 from 14.29% in 1995. Total assets of the Bank were $1.81 billion
and $1.77 billion as of December 31, 1996 and 1995, respectively. Loans grew to
$1.22 billion in 1996 compared to $1.21 billion in 1995. Total deposits were
$1.41 billion and $1.36 billion at December 31, 1996 and 1995, respectively.
Stockholder's equity increased to $ 141.6 million at December 31, 1996 compared
to $132.7 million at December 31, 1995.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the difference between total interest income earned on
earning assets and total interest expense paid on interest-bearing liabilities,
is the 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 liabilities.
Consolidated net interest income for 1997 (with an adjustment for
tax-exempt income) was $64.2 million. Net interest income (with an adjustment
for tax-exempt income) for 1996 for the Bank on the predecessor basis was $74.9
million, an increase of 4.3% from $71.8 million in 1995. The lower net interest
income reported on the successor basis was principally due to the consolidated
reporting period for 1997 consisting of 42 fewer days of interest earned than
the Bank's 1996 predecessor basis period, as well as the addition of the Parent
Company's term loan and revolving credit facility.
Net interest margin, which is determined by dividing taxable-equivalent net
interest income by average interest-earning assets, was 4.22% (on an annualized
basis) for the consolidated Company for the 1997 reporting period. The net
interest margin on a consolidated successor basis was lower than the 4.35%
margin of the predecessor Bank on a stand alone basis because of the addition of
the Parent Company's term loan and revolving credit facility, the effect of
purchase accounting on the yield on investment securities, decreased loan
21
<PAGE> 22
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
fees and the recording of approximately $38.3 million of goodwill, which
resulted in the Company's consolidated nonearning assets increasing as a
percentage of total assets. The change in loan mix that resulted from the
disposition of the indirect automobile loan portfolio in connection with the
Split-Off Transactions increased the total loan portfolio yield. However, the
total earning asset yield was unchanged as the lower yielding investment
securities portfolio constituted a greater proportion of the Company's earning
assets than in prior years. While funding costs at the Bank remained relatively
unchanged in 1997, the addition of the higher cost Parent and Mortgage Company
debt resulted in higher consolidated costs than that reported by the predecessor
Bank in 1996.
Growth in net interest income on the predecessor basis of $3.1 million
during 1996 was due to a 5.0% increase in average earning assets. Average loan
growth totaled $100 million with the majority of the growth in commercial loans.
Net interest margin for the Bank on the predecessor basis decreased during 1996
to 4.35%, as compared to 4.38% in 1995. The decline in earning assets yield was
primarily due to the decline in the prime rate in 1996. The rate paid on
interest bearing liabilities declined in 1996 from 1995 due to lower market
interest rates and decreased dependence on certain wholesale borrowings.
22
<PAGE> 23
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The following table sets forth certain information relating to the
Company's consolidated and the predecessor Bank's average 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% rate.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND YIELD/RATES
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- TAYLOR
CAPITAL GROUP, INC. -- PREDECESSOR BASIS -- COLE TAYLOR BANK --
CONSOLIDATED -- FOR THE FOR THE YEARS ENDED DECEMBER 31,
PERIOD OF FEBRUARY 12, 1997 ---------------------------------------------------------------
TO DECEMBER 31, 1997 1996 1995
------------------------------- ------------------------------ ------------------------------
YIELD/ YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%)(3) BALANCE INTEREST (%) BALANCE INTEREST (%)
---------- -------- ------- ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities(1):
Taxable..................... $ 412,304 $23,086 6.33% $ 367,546 $22,987 6.25% $ 400,868 $25,382 6.33%
Non-taxable (tax
equivalent)............... 62,709 4,343 7.83 64,825 5,906 9.11 66,904 6,117 9.14
---------- ------- ---------- ------- ---------- -------
Total investment
securities............ 475,013 27,429 6.53 432,371 28,893 6.68 467,772 31,499 6.73
---------- ------- ---------- ------- ---------- -------
Cash Equivalents.............. 31,422 1,544 5.55 28,233 1,489 5.27 11,519 672 5.83
---------- ------- ---------- ------- ---------- -------
Loans(2):
Commercial and industrial... 854,286 68,974 9.12 809,415 73,473 9.08 719,113 68,003 9.46
Real estate mortgages....... 206,468 13,458 7.37 216,096 15,787 7.31 215,601 16,007 7.42
Consumer and other.......... 150,805 11,915 8.93 236,570 19,869 8.40 226,799 18,721 8.25
Fees on loans............... 1,339 1,815 1,294
Less: Allowance for loan
losses.................... (25,114) (24,827) (23,506)
---------- ------- ---------- ------- ---------- -------
Net loans (tax
equivalent)............. 1,186,445 95,686 9.11 1,237,254 110,944 8.97 1,138,007 104,025 9.14
---------- ------- ---------- ------- ---------- -------
Total earning assets.... 1,692,880 124,659 8.32 1,697,858 141,326 8.32 1,617,298 136,196 8.42
---------- ------- ---------- ------- ---------- -------
NONEARNING ASSETS:
Cash and due from banks..... 74,823 69,485 65,453
Premises and equipment,
net....................... 21,541 16,627 15,133
Accrued interest and other
assets.................... 75,696 33,159 33,391
---------- ---------- ----------
Total nonearning
assets................ 172,060 119,271 113,977
---------- ---------- ----------
TOTAL ASSETS.................. $1,864,940 124,659 7.55 $1,817,129 141,326 7.78 $1,731,275 136,196 7.87
========== ------- ========== ------- ========== -------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 329,199 10,374 3.56 $ 338,508 12,062 3.56 $ 344,466 12,494 3.63
Savings deposits.......... 116,472 2,630 2.55 121,497 3,113 2.56 127,987 3,311 2.59
Time deposits............. 650,165 32,271 5.61 687,553 38,343 5.58 552,956 31,229 5.65
---------- ------- ---------- ------- ---------- -------
Total deposits.......... 1,095,836 45,275 4.67 1,147,558 53,518 4.66 1,025,409 47,034 4.59
---------- ------- ---------- ------- ---------- -------
Short-term borrowings......... 194,270 8,870 5.16 160,338 8,719 5.44 233,003 13,584 5.83
Notes payable................. 108,881 6,313 6.55 70,184 4,140 5.90 57,176 3,748 6.56
---------- ------- ---------- ------- ---------- -------
Total interest bearing
liabilities........... 1,398,987 60,458 4.88 1,378,080 66,377 4.82 1,315,588 64,366 4.89
---------- ------- ---------- ------- ---------- -------
</TABLE>
23
<PAGE> 24
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- TAYLOR
CAPITAL GROUP, INC. -- PREDECESSOR BASIS -- COLE TAYLOR BANK --
CONSOLIDATED -- FOR THE FOR THE YEARS ENDED DECEMBER 31,
PERIOD OF FEBRUARY 12, 1997 ---------------------------------------------------------------
TO DECEMBER 31, 1997 1996 1995
------------------------------- ------------------------------ ------------------------------
YIELD/ YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%)(3) BALANCE INTEREST (%) BALANCE INTEREST (%)
---------- -------- ------- ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NONINTEREST-BEARING
LIABILITIES:
Noninterest-bearing
deposits.................. 301,941 289,389 273,667
Nonrecourse borrowings(4)... 8,330 -- --
Accrued interest and other
liabilities............... 23,348 15,991 14,903
---------- ---------- ----------
Total
noninterest-bearing
liabilities........... 333,619 305,380 288,570
---------- ---------- ----------
STOCKHOLDERS' EQUITY.......... 132,334 133,669 127,117
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........ $1,864,940 $1,817,129 $1,731,275
========== ========== ==========
Net interest income (tax
equivalent)................. $64,201 $74,949 $71,830
======= ======= =======
Net interest spread........... 3.44% 3.50% 3.53%
Net interest margin........... 4.22% 4.35% 4.38%
==== ==== ====
</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.
(4) Interest expense on nonrecourse borrowings is presented net on the income
statement with trust fees.
24
<PAGE> 25
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The following table allocates the changes in net interest income to changes
in reporting periods, average balances or average rates for earning assets and
interest-bearing liabilities. The change in net interest income due to both
volume and rates has been allocated proportionately. The successor basis change
in net interest income for 1997 includes a reporting period variance, described
as a change due to days, which reflects the impact of the 42 day shorter
reporting period in 1997. Interest income is measured on a tax-equivalent basis
using a 35% rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- TAYLOR CAPITAL GROUP,
INC. -- CONSOLIDATED -- FOR THE PERIOD OF
FEBRUARY 12, 1997 TO DECEMBER 31, 1997 PREDECESSOR BASIS -- COLE
COMPARED TO THE PREDECESSOR BASIS -- TAYLOR BANK -- FOR THE
COLE TAYLOR BANK FOR THE YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1996 1996 COMPARED TO 1995
------------------------------------------ ---------------------------
CHANGE DUE TO CHANGE DUE TO
------------------------------ -----------------
VOLUME DAYS RATE NET VOLUME RATE NET
-------- --------- ------- --------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Investment securities:
Taxable.................... $ 2,829 $ (3,002) $ 272 $ 99 $(2,087) $ (308) $(2,395)
Tax-exempt................. (188) (565) (810) (1,563) (189) (22) (211)
Cash equivalents.............. 174 (201) 82 55 887 (70) 817
Loans......................... (4,490) (12,442) 1,674 (15,258) 8,870 (1,951) 6,919
------- -------- ------ -------- ------- ------- -------
Total interest earned........... (1,675) (16,210) 1,218 (16,667) 7,481 (2,351) 5,130
------- -------- ------ -------- ------- ------- -------
INTEREST PAID ON:
Interest-bearing demand
deposits................... (331) (1,349) (8) (1,688) (214) (218) (432)
Savings deposits.............. (128) (342) (13) (483) (167) (31) (198)
Time deposits................. (2,096) (4,196) 220 (6,072) 7,511 (397) 7,114
Short-term borrowings......... 1,769 (1,153) (465) 151 (4,002) (863) (4,865)
Notes payable................. 2,493 (821) 501 2,173 793 (401) 392
------- -------- ------ -------- ------- ------- -------
Total interest paid............. 1,707 (7,861) 235 (5,919) 3,921 (1,910) 2,011
------- -------- ------ -------- ------- ------- -------
Net interest income............. $(3,382) $ (8,349) $ 983 $(10,748) $ 3,560 $ (441) $ 3,119
======= ======== ====== ======== ======= ======= =======
</TABLE>
Provision for Loan Losses
Management determines a provision for loan losses which it considers
sufficient to maintain an adequate level of allowance for loan losses. In
evaluating the adequacy of the allowance for loan losses, consideration is given
to historical charge-off experience, growth of the loan portfolio, changes in
the composition of the loan portfolio, general economic conditions, information
about specific borrower situations including their financial position and
collateral values, and other factors and estimates which are subject to change
over time. Estimating the risk of loss and amount of loss on any loan is
subjective. Ultimate losses may vary from current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, the adjustments are
reported in income through the provision for loan losses in the appropriate
period.
The consolidated Company's provision for loan losses, on the successor
basis, for the shorter 1997 reporting period, was $4.1 million, which includes
the provision for loan losses from the Mortgage Company of $165,000. The
provision for loan losses for the Mortgage Company in 1996 was $35,000. The
predecessor basis Bank's 1996 provision for loan losses was $3.3 million, a
decrease of $749,000, or 18.5%, from 1995's provision for loan losses of $4.1
million. The decline in the provision in 1996 resulted primarily from the sale
of indirect
25
<PAGE> 26
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
auto loans in December 1996, as the reserve for loan losses was adjusted to
reflect the nonrecourse sale of those loans. Net charge-offs, through the
allowance for loan losses, during the 1997 reporting period on the successor
basis were $2.9 million. On the predecessor basis, net charge-offs through the
allowance for loan losses were $3.0 million for both 1996 and 1995. See
"Financial Condition -- Allowance for Loan Losses."
Noninterest Income
The following table shows noninterest income for the periods indicated:
NONINTEREST INCOME
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL PREDECESSOR BASIS -- COLE TAYLOR BANK
GROUP, INC. -- ---------------------------------------
CONSOLIDATED FOR THE
FOR THE PERIOD OF PERIOD OF
FEBRUARY 12, 1997 TO JANUARY 1, 1997 FOR THE YEARS ENDED
DECEMBER 31, TO FEBRUARY 11, DECEMBER 31,
-------------------- --------------- --------------------
1997 1997 1996 1995
-------------------- --------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposit service charges................ $ 7,500 $1,022 $ 7,934 $ 7,006
Retail credit card service charges..... 472 60 446 193
Merchant credit card processing fees... 307 40 302 253
Trust fees............................. 3,331 359 3,635 3,539
Gain on sales of loans................. 2,598 169 983 563
Mortgage loan servicing income......... 341 57 943 1,125
ATM Fees............................... 693 63 289 262
Other noninterest income............... 1,000 160 1,292 1,286
Gain on sale of merchant credit card
program.............................. 1,230 -- -- --
Investment securities gains............ 401 -- -- --
------- ------ ------- -------
Total noninterest income.......... $17,873 $1,930 $15,824 $14,227
======= ====== ======= =======
</TABLE>
Total noninterest income for the consolidated Company was $17.9 million for
the period of February 12, 1997 to December 31, 1997. Noninterest income for
1997, excluding the impact of investment securities gains and the gain on the
sale of the merchant credit card program, was $16.2 million. The Bank's
predecessor basis 1996 noninterest income was $15.8 million, an increase of $1.6
million, or 11.2%, from $14.2 million in 1995.
Deposit service charges totaled $7.5 million for the consolidated Company
for the period of February 12, 1997 to December 31, 1997. The Bank's predecessor
basis deposit service charges totaled $7.9 million in 1996. The lower deposit
service charge income on the successor basis is primarily due to the Company's
1997 reporting period having 42 fewer days than the Bank's predecessor basis
1996 reporting period. Deposit service charges on the predecessor basis
increased $.9 million, or 13.2%, in 1996 from $7.0 million in 1995. The increase
was the result of increases in the business deposit account service charges.
Retail credit card service charges of $472,000 for the consolidated Company
for the period of February 12, 1997 to December 31, 1997 were higher than the
$446,000 reported in the Bank's predecessor basis 1996 reporting period despite
the 42 fewer days in the period. The increase in retail credit card service
charges was a result of the growth in the credit card portfolio since 1995.
Merchant credit card processing fees of $307,000 for the consolidated
Company for the period of February 12, 1997 to December 31, 1997 approximated
the $302,000 reported by the Bank's predecessor basis 1996 reporting period
despite the 42 fewer days in the period and the sale of the majority of the
merchant
26
<PAGE> 27
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
credit card deposit processing business in September 1997 to an unrelated third
party. The sale resulted in a realized gain of $1,230,000. Monthly merchant
credit card deposit processing fees averaged $31,000 in 1997 prior to the sale.
Merchant credit card processing fee income is expected to be significantly
reduced in the future.
Trust fees for the consolidated Company were $3.3 million for the period of
February 12, 1997 to December 31, 1997. The Bank's predecessor basis trust fees
in 1996 were $3.6 million. The lower trust fee income on the successor basis is
primarily due to the Company's 1997 reporting period having 42 fewer days than
the Bank's predecessor basis 1996 reporting period. Fee income generated from
the reverse exchange program that was sold in 1998 was not significant in 1997.
See "Financial Condition -- Nonearning Assets". Trust fees for the predecessor
Bank were relatively unchanged from 1995 to 1996.
Gain on sales of loans was $2.6 million for the consolidated Company for
the period of February 12, 1997 to December 31, 1997. The 1997 consolidated gain
on sales of loans includes $632,000 in gains attributable to the Mortgage
Company. The gain on sales of loans for the Bank's predecessor period was
$983,000 and $563,000 in 1996 and 1995 respectively. The increase from 1996 to
1997 was primarily due to a higher percentage of loans sold with servicing
released. The increase from 1995 to 1996 was due to a greater volume of loans
sold.
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 equipment. In addition, the
purchaser agreed to assume the lease obligations for the facilities and hired
all the Mortgage Company employees. The proceeds for the sale, net of related
disposition expenses, the carrying value of the assets sold, payments for
pipeline commitments that subsequently closed and the write-off of goodwill of
$403,000 resulted in a loss of approximately $10,000. The Florida-based
operations comprised the majority of the Mortgage Company's operations. Since
the sale, the Mortgage Company has not originated any loans. The Mortgage
Company is not expected to generate any significant income in 1998.
Mortgage loan servicing income was $341,000 for the consolidated Company
for the period of February 12, 1997 to December 31, 1997. The Bank did not
purchase any mortgage servicing rights in 1997 or in prior years. All servicing
rights were generated from loans originated by the Company. Both 1996 and 1995
show gains from bulk sales of mortgage servicing rights, $451,000 in 1996 and
$487,000 in 1995. Amortization of capitalized mortgage servicing rights
increased in each of the three years. The Bank's portfolio of mortgage loans
serviced for others was $311 million, $283 million and $195 million at December
31, 1997, 1996 and 1995 respectively. On January 30, 1998, the Bank contracted
to sell the servicing rights for approximately $270 million of mortgage loans
serviced for others. The mortgage servicing rights were obtained through loan
origination by the Bank where the loan was subsequently sold. Management
estimates that the proceeds from the sale, after all related expenses, will
result in a gain of approximately $1.4 million in 1998. The sale of the mortgage
servicing rights is expected to reduce loan servicing income in 1998.
ATM fee income was $693,000 for the consolidated Company for the period of
February 12, 1997 to December 31, 1997. The Bank's predecessor basis 1996 ATM
fee income was $289,000. The consolidated Company's higher ATM fee income is due
to the implementation of a surcharge fee in the 4th quarter of 1996. The Bank's
predecessor basis ATM fees for 1996 and 1995 were relatively unchanged.
Other noninterest income, which principally includes standby letters of
credit fees, fees from financial services (i.e., the sale of certain insurance
products and other financial services products), and vault rental fees, totaled
$1.0 million for the consolidated Company for the 1997 reporting period. The
Bank's predecessor basis other noninterest income for 1996 totaled $1.3 million.
The lower other noninterest income on the successor basis is primarily the
result of the consolidated Company's 1997 reporting period having 42 fewer
27
<PAGE> 28
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
days than the Bank's predecessor basis 1996 reporting period. Other noninterest
income in 1996 and 1995 on the predecessor basis remained fairly flat.
Investment security gains for the consolidated Company for the period of
February 12, 1997 to December 31, 1997 were $401,000. There were no investment
security sales or gains in 1996 or 1995 on the predecessor basis. During the
period of February 12, 1997 to December 31, 1997, the proceeds from security
sales were $53.2 million with a resultant gross gain of $401,000. The securities
sales were a result of a modest realignment of the Bank's mortgage-backed
securities portfolio. These realignments were undertaken in response to changing
market conditions and reflects management's actions to modify the Bank's
interest rate risk profile.
Noninterest Expense
The following table shows noninterest expense for the periods indicated:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS--COLE TAYLOR BANK
CONSOLIDATED ------------------------------------------
FOR THE PERIOD OF FOR THE PERIOD
FEBRUARY 12, 1997 TO OF JANUARY 1, 1997 FOR THE YEARS ENDED
DECEMBER 31, TO FEBRUARY 11, DECEMBER 31
-------------------- ------------------ --------------------
1997 1997 1996 1995
-------------------- ------------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits........ $31,683 $3,645 $30,171 $28,973
Occupancy of premises, net............ 5,298 656 5,198 4,880
Furniture and equipment............... 3,262 322 3,017 2,651
Computer processing................... 2,004 222 2,033 1,676
Legal fees............................ 2,227 194 1,473 1,655
Advertising and public relations...... 1,713 157 1,764 1,582
Goodwill and other intangible
amortization........................ 2,253 20 199 196
Other real estate and repossessed
asset expense....................... 551 31 695 1,169
Other noninterest expense............. 10,543 1,219 10,823 10,767
------- ------ ------- -------
Total noninterest expense........... $59,534 $6,466 $55,373 $53,549
======= ====== ======= =======
Efficiency ratio (1).................. 74.77% 61.60% 62.68% 64.10%
</TABLE>
- ---------------
(1) Noninterest expense divided by an amount equal to net interest income plus
noninterest income, less security gains.
Total noninterest expense for the consolidated Company for the period of
February 12, 1997 to December 31, 1997 was $59.5 million. Total noninterest
expense on the Bank's predecessor basis in 1996 was $55.4 million, a $1.8
million, or 3.4%, increase from noninterest expense in 1995 of $53.5 million.
The higher noninterest expense in 1997, despite the consolidated Company's 1997
reporting period having 42 fewer days than the predecessor Bank's reporting
period, was primarily due to the inclusion of the noninterest operating expenses
of the Parent and Mortgage Companies which totaled $4.9 million and the
amortization of the goodwill related to the Split-Off Transactions of $2.3
million.
Salaries and employee benefits represent the largest category of
noninterest expense. For the consolidated Company's period of February 12, 1997
to December 31, 1997, salaries and benefits totaled $31.7 million. Salaries and
benefits for 1996 on the predecessor basis totaled $30.2 million. Included in
the consolidated
28
<PAGE> 29
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Company's salary and benefits expense for the 1997 reporting period was $2.8
million of expense relating to the Mortgage and Parent Companies, and $1.5
million of expense primarily resulting from the establishment of new long-term
incentive plans, partially offset by the consolidated Company's 1997 reporting
period having 42 fewer days than the predecessor Bank's 1996 reporting period.
In 1996, the Bank's predecessor basis salaries and benefits increased $1.2
million, or 4.1%, to $30.2 million from $29.0 million in 1995. This increase
resulted from a $1.1 million increase in expenses relating to the Bank's
incentive, employee stock ownership, and profit sharing plans. During the period
of February 12, 1997 to December 31, 1997, the consolidated Company had average
full-time equivalent employees of 606, while the Bank averaged 604 and 676
full-time equivalent employees in 1996 and 1995, respectively.
Occupancy expenses for the consolidated Company for the period of February
12, 1997 to December 31, 1997 were $5.3 million. Occupancy expenses in 1996 for
the predecessor Bank were $5.2 million. The consolidated Company's occupancy
expense for the 1997 reporting period includes expenses of $31,000 relating to
the Mortgage and Parent Companies, $194,000 related to the Bank's Old Orchard
(Skokie, IL) branch which opened in late 1997 and increased depreciation of
purchase accounting adjustments resulting from the write-up of the premises to
their fair value in connection with the Split-Off Transactions, partially offset
by the consolidated Company's 1997 reporting period having 42 fewer days.
Occupancy expenses in 1996 for the predecessor Bank, increased $318,000, or
6.5%, over 1995 due to the Bank's Broadview, IL branch which opened in late
1996. In December 1997, the Company signed a lease to open an additional banking
facility at 111 West Washington Street, in downtown Chicago. The facility is
expected to open in April of 1998.
Furniture and equipment expenses for the consolidated Company for the
period of February 12, 1997 to December 31, 1997 totaled $3.3 million. The
predecessor Bank's 1996 furniture and equipment expense totaled $3.0 million.
The consolidated Company's higher expense in the 1997 reporting period is due to
the inclusion of $43,000 of expense relating to the Mortgage and Parent
Companies, increased depreciation of purchase accounting adjustments resulting
from the write-up of the furniture and equipment to their fair value in
connection with the Split-Off Transactions, partially offset by the consolidated
Company's 1997 reporting period having 42 fewer days than the predecessor Bank's
1996 reporting period. The predecessor Bank's furniture and equipment expenses
increased $366,000, or 13.8% in 1996 from $2.7 million in 1995 due to technology
enhancements and new banking facilities.
Computer processing expense is comprised of payments to third party
processors primarily for the Company's "mission critical" data processing
applications, including loans, deposits, general ledger and ATM operations. The
expense for the consolidated Company for the period of February 12, 1997 to
December 31, 1997 was $2.0 million. The Bank's predecessor basis 1996 computer
processing expense also was $2.0 million. Increases in amounts paid to third
party processors in 1997 was offset by the shorter 1997 reporting period.
Computer processing expense in 1996 for the predecessor Bank increased $357,000,
or 21.3%, from $1.7 million in 1995. This 1996 increase was attributable to
volume increases in retail credit card processing charges and enhancements in
certain data processing systems made in 1995.
Legal fees for the consolidated Company for the period of February 12, 1997
to December 31, 1997 totaled $2.2 million. The predecessor Bank's 1996 legal
fees totaled $1.5 million. Legal expenses at the Parent and Mortgage Companies,
included in the 1997 consolidated total of $2.2 million, were $707,000. The
consolidated Company's higher expense is generally attributable to increased
litigation costs associated with various legal actions against the Company.
Legal fees for the Bank in 1996 decreased $182,000 from $1.7 million in 1995.
The predecessor Bank's 1995 expense includes increased litigation costs
associated with various legal actions concluded in 1995. Unless and until the
Company can obtain reimbursement for certain litigation related legal expenses,
the Company's total legal expense in 1998 could exceed that reported in 1997.
See "Litigation".
29
<PAGE> 30
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Advertising and public relations expense for the consolidated Company for
the period of February 12, 1997 to December 31, 1997 was $1.7 million.
Advertising and public relations expense in 1996 for the predecessor Bank was
$1.8 million. The consolidated Company's 1997 expense includes increased
advertising related to the opening of the Bank's new Old Orchard branch, offset
by the shorter 1997 reporting period. Advertising and public relations expenses
in 1996 for the predecessor Bank increased $182,000, or 11.5%, from $1.6 million
in 1995 because of an increased emphasis on direct marketing.
Goodwill and other intangible amortization expense for the consolidated
Company for the period of February 12, 1997 to December 31, 1997 totaled $2.3
million. The Bank's predecessor basis 1996 and 1995 goodwill and other
intangible amortization expense totaled $199,000 and $196,000, respectively. The
consolidated Company's 1997 expense includes higher amortization of goodwill
related to the acquisition of the Bank and Mortgage Company.
Other real estate and repossessed asset expense for the consolidated
Company for the period of February 12, 1997 to December 31, 1997 was $551,000.
The predecessor Bank's other real estate and repossessed asset expense was
$695,000 in 1996 and $1.1 million in 1995. The 1997 decrease in expense was
primarily due to the disposition in the spring of 1996 of a significant
repossessed business property initially acquired in August of 1995. Provision
for losses on other real estate included in these amounts were $252,000, $72,000
and $243,000 for the successor basis reporting period of February 12, 1997 to
December 31, 1997, and for the predecessor Bank's years ended December 31, 1996,
and 1995, respectively. The principal balance of other real estate and
repossessed assets outstanding as of December 31, 1997, 1996, and 1995 was $1.5
million, $1.1 million and $5.4 million, respectively. See "Financial Condition
- -- Nonperforming Loans and Assets."
Other noninterest expense (which principally includes certain professional
fees, FDIC insurance, consulting, outside services and other operating expenses
such as telephone, postage, office supplies and printing, etc.) for the
consolidated Company for the period of February 12, 1997 to December 31, 1997
totaled $10.5 million. The Bank's predecessor basis 1996 expense totaled $10.8
million. The lower expense on the successor basis is primarily a result of the
consolidated Company's shorter 1997 reporting period. The predecessor Bank's
other noninterest expense was relatively flat in 1996 compared to 1995.
Income Taxes
Income tax expense for the period of February 12, 1997 to December 31, 1997
totaled $6.3 million. The effective income tax rate for the consolidated Company
approximated 38.5%. In connection with the Split-Off Transactions, the Company
acquired state net operating loss carryforwards and deductible temporary
differences totaling approximately $60 million. In accordance with generally
accepted accounting principles, the state income tax benefit of these items is
applied against goodwill when recognized, rather than as a reduction of income
tax expense. A valuation allowance was established at the date of the
acquisition to reduce the deferred state income tax asset to an amount deemed
more likely than not to be realized. At December 31, 1997, $1.5 million of the
valuation allowance relates to the acquired deferred state benefits. Future
reductions in that portion of the valuation allowance, if appropriate, would
reduce the goodwill recognized in connection with the acquisition of the Bank.
No valuation reserve for deferred federal income tax assets was established at
December 31, 1997 as management has determined that it is more likely than not
that the deferred assets can be supported by carrybacks of federal taxable
income to amounts paid in 1997 and taxable income estimated for 1998.
Income tax expense for the Bank on the predecessor basis was $10.0 million
for 1996 and $7.8 million for 1995. The effective income tax rate was 33.6% and
30.0% for 1996 and 1995, respectively. The effective income tax rate was lower
than that reported for the consolidated Company primarily because the benefits
of the Bank's state net operating loss carryforwards lowered income tax expense
under the predecessor basis of accounting. In addition, the successor basis
includes the impact of nondeductible goodwill amortization expense.
30
<PAGE> 31
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
FINANCIAL CONDITION
Investment Securities
The purpose of the investment portfolio is primarily to provide a source of
earnings and secondarily for liquidity management purposes. In managing the
portfolio and the composition of the entire balance sheet, the Company seeks a
balance among earnings, credit and liquidity considerations, with a goal of
maximizing longer-term overall profitability.
The following tables present the composition and maturities of the
investment portfolio by major category as of the periods indicated:
INVESTMENT PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- TAYLOR CAPITAL GROUP, INC. -- CONSOLIDATED
---------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
--------------------- --------------------- ---------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury securities...... $205,007 $205,784 -- -- $205,007 $205,784
U.S. government agency
securities.................. 13,261 13,345 -- -- 13,261 13,345
Mortgage-backed securities.... 95,364 95,999 -- -- 95,364 95,999
States and political
subdivisions................ -- -- 65,034 66,319 65,034 66,319
Collateralized mortgage
obligations................. 84,330 84,017 -- -- 84,330 84,017
Other securities.............. -- -- 18,217 18,262 18,217 18,262
-------- -------- ------- ------- -------- --------
Total.................. $397,962 $399,145 $83,251 84,581 $481,213 $483,726
======== ======== ======= ======= ======== ========
</TABLE>
31
<PAGE> 32
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR BASIS -- COLE TAYLOR BANK
---------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY TOTAL
--------------------- --------------------- ---------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996:
U.S. Treasury securities........ $123,824 $123,738 -- -- $123,824 $123,738
U.S. government agency
securities.................... 44,855 45,075 -- -- 44,855 45,075
Mortgage-backed securities...... 163,239 159,771 -- -- 163,239 159,771
States and political
subdivisions.................. -- -- 62,948 65,730 62,948 65,730
Collateralized mortgage
obligations................... 240 233 -- -- 240 233
Other securities................ -- -- 12,024 12,028 12,024 12,028
-------- -------- ------- ------- -------- --------
Total.................... $332,158 $328,817 $74,972 77,758 $407,130 $406,575
======== ======== ======= ======= ======== ========
December 31, 1995:
U.S. Treasury securities........ $110,897 $111,688 -- -- $110,897 $111,688
U.S. government agency
securities.................... 55,131 55,738 -- -- 55,131 55,738
Mortgage-backed securities...... 195,463 193,953 -- -- 195,463 193,953
States and political
subdivisions.................. -- -- 67,110 70,733 67,110 70,733
Collateralized mortgage
obligations................... 364 356 -- -- 364 356
Other securities................ -- -- 9,503 9,506 9,503 9,506
-------- -------- ------- ------- -------- --------
Total.................... $361,855 $361,735 $76,613 80,239 $438,468 $441,974
======== ======== ======= ======= ======== ========
</TABLE>
During 1997, the Bank's investment portfolio increased in size primarily as
a result of the liquidity generated in connection with the Split-Off
Transactions. Excess cash from the sale of indirect auto loans along with the
capital contribution from the Parent Company to the Bank was invested in the
portfolio, primarily in U.S. Treasury securities. During the year, proceeds
received from regular repayments and sales of mortgage-backed securities were
reinvested primarily in collateralized mortgage obligations. Of the
collateralized mortgage obligations, approximately $76.3 million are high
coupon, sequential pay securities that are also known as synthetic premiums
because the coupons on these securities exceed those on the underlying mortgage
loans. Although of similar or shorter duration, these securities have greater
market value risk than the mortgage-backed securities they replaced in the
portfolio since they were purchased at high premiums.
32
<PAGE> 33
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
INVESTMENT PORTFOLIO -- MATURITY AND YIELDS
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
MATURING
-----------------------------------------------------------------------
AFTER ONE BUT AFTER ONE BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
---------------- ---------------- --------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ----- -------- ----- ------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale securities(1):
U.S. Treasury securities.......... $ 95,087 5.72% $110,697 6.12% $ -- --% $ -- --% $205,784 5.94%
U.S. government agency
securities...................... 3,092 6.48 10,254 6.66 -- -- -- -- 13,346 6.62
Mortgage-backed securities
(3)........................... 17,808 6.12 57,498 6.09 18,503 6.46 2,190 7.61 95,999 6.20
Collateralized mortgage
obligations(3)................ 11,672 6.57 72,345 6.63 -- -- -- -- 84,017 6.64
-------- -------- ------- ------- --------
Total available-for-sale...... 127,659 250,794 18,503 2,190 399,146
-------- -------- ------- ------- --------
Held-to-maturity securities(2):
States and political
subdivisions(4)................. 7,717 8.93 25,789 8.36 28,764 7.68 2,764 7.31 65,034 8.09
Other securities.................. -- -- 25 6.00 800 8.06 17,392 6.81 18,217 6.86
-------- -------- ------- ------- --------
Total held-to-maturity........ 7,717 25,814 29,564 20,156 83,251
-------- -------- ------- ------- --------
Total securities............ $135,376 $276,608 $48,067 22,346 482,397
======== ======== ======= ======= ========
</TABLE>
- ---------------
(1) Based on estimated fair value.
(2) Based on amortized cost.
(3) Maturities of mortgage-backed securities and collateralized mortgage
obligations are based on anticipated lives of the underlying mortgages, not
contractual maturities.
(4) Rates on obligations of states and political subdivisions have been adjusted
to tax equivalent yields using a 35% income tax rate.
Investments in U.S. Treasury securities and U.S. government agency
securities are generally considered to have low credit risk. The mortgage-backed
securities consist principally of direct "pass through" securities issued by the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). These securities are also considered to have low
credit risk, but do possess market value risk due to the prepayment risk of
mortgage-backed securities. The Company generally invests in state and municipal
investment securities which are rated investment grade by nationally recognized
rating organizations. Certain municipal issues, however, which are restricted to
the Company's local market area, are not rated and undergo the Bank's standard
underwriting procedures for loan transactions. Other securities are primarily
composed of Federal Reserve Bank stock and Federal Home Loan Bank stock that are
required to be maintained for various purposes. At December 31, 1997, the
Company held no securities of any single issuer, other than the U.S. Treasury
and U.S. government agency securities, including FNMA, that exceeded 10% of
stockholders' equity. Although the Company holds securities issued by
municipalities within the state of Illinois which, in the aggregate, exceed 10%
of stockholders' equity, none of the holdings from individual municipal issues
exceed this threshold.
A significant portion of the Company's investment securities portfolio
(approximately 61.9% at December 31, 1997) is used as collateral for public
funds time deposits and securities sold under agreement to repurchase.
33
<PAGE> 34
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Loan Portfolio
The Company's primary source of income is interest on loans. The following
table presents the composition of the Company's and the predecessor Bank's loan
portfolios at the end of the periods indicated:
LOAN PORTFOLIO
<TABLE>
<CAPTION>
SUCCESSOR
BASIS -- TAYLOR
CAPITAL
GROUP, INC. --
CONSOLIDATED PREDECESSOR BASIS -- COLE TAYLOR BANK
DECEMBER 31, DECEMBER 31,
--------------- ------------------------------------------------------
1997 1996 1995 1994 1993
--------------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial and industrial......... $ 671,506 $ 655,919 $ 638,497 $ 611,670 $ 580,587
Real estate-residential
construction.................... 179,855 192,759 121,547 94,223 71,030
Real estate-mortgage.............. 165,258 176,819 207,377 202,455 135,322
Mortgage loans held-for-sale...... 31,771 25,153 15,748 1,554 --
Home equity lines of credit....... 104,287 86,648 65,371 52,628 41,945
Consumer.......................... 50,391 84,622 166,346 172,299 160,157
Other loans....................... 2,448 4,622 2,061 1,136 1,559
---------- ---------- ---------- ---------- ---------
Gross loans.................. 1,205,516 1,226,542 1,216,947 1,135,965 990,600
Less: Unearned discount........... (1,079) (1,548) (5,325) (5,788) (4,216)
---------- ---------- ---------- ---------- ---------
Total loans.................. 1,204,437 1,224,994 1,211,622 1,130,177 986,384
Less: Allowance for loan losses... (25,813) (24,184) (23,869) (22,833) (19,740)
---------- ---------- ---------- ---------- ---------
Loans, net................... $1,178,624 $1,200,810 $1,187,753 $1,107,344 $ 966,644
========== ========== ========== ========== =========
</TABLE>
At December 31, 1997, the consolidated Company's gross loans totaled $1.21
billion. At December 31, 1996, the predecessor Bank's gross loans totaled $1.23
billion. The decline in loans between 1997 and 1996 is primarily due to the
transfer of the indirect auto loans (included in the Consumer category) to CTFG
in connection with the Split-Off Transactions. For the predecessor Bank, gross
loans at December 31, 1996, increased $9.6 million over the previous year end.
The increase is net of the sale of approximately $67 million of indirect auto
loans completed on December 31, 1996 in contemplation of the Split-Off
Transactions.
Commercial and industrial loans, the largest component of the Company's
loan portfolio, were $671.5 million at December 31, 1997. Commercial and
industrial loans for the predecessor Bank were $655.9 million at December 31,
1996. Commercial and industrial loans represented 55.7% of the Company's loan
portfolio at December 31, 1997, and 53.5% and 52.5%, of the predecessor Bank's
loan portfolio at December 31, 1996 and 1995, respectively.
Real estate-residential construction loans of the consolidated Company
totaled $179.9 million at December 31, 1997. Real estate-residential
construction loans of the predecessor Bank totaled $192.8 million at December
31, 1996. Real estate-residential construction loans represented 14.9% of the
consolidated Company's loan portfolio at December 31, 1997, and 15.7% and 10.0%,
of the predecessor Bank's loan portfolio at December 31, 1996 and 1995,
respectively.
At December 31, 1997, real estate-mortgage loans of the consolidated
Company were $165.3 million. At December 31, 1996, real estate-mortgage loans of
the predecessor Bank were $176.8 million. Real estate-mortgage loans of the
consolidated Company represented 13.7% of gross loans as of December 31,
34
<PAGE> 35
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
1997, and 14.4% and 17.0%, of the predecessor Bank's gross loans at December 31,
1996 and 1995, respectively. The declining trend in mortgage loans is due to
normal loan amortization and prepayments and management's asset/liability
strategy during 1997 and 1996 to limit investment in long-term maturity mortgage
loans.
Mortgage loans held-for-sale of the consolidated Company and of the
predecessor Bank totaled $31.8 million and $25.2 million as of December 31, 1997
and December 31, 1996, respectively. The increase in mortgage loans held for
sale from 1993 to 1997 reflects the increase in mortgage loan origination over
the years as well as and the strategic plan to sell the majority of conforming
mortgage loans originated rather than holding them in the Company's loan
portfolio.
Home equity lines of credit outstanding totaled $104.3 million as of
December 31, 1997, for the consolidated Company, and $86.6 million as of
December 31, 1996 for the predecessor Bank. Home equity lines of credit
outstanding of the consolidated Company represented 8.7% of gross loans at
December 31, 1997, and 7.1% and 5.4% of the predecessor Bank's gross loans at
December 31, 1996 and 1995, respectively.
Consumer loans of the consolidated Company and of the predecessor Bank were
$50.4 million at December 31, 1997, and $84.6 million at December 31, 1996,
respectively. Consumer loans consist of home equity loans, indirect and direct
auto loans, credit card loans and other personal secured and unsecured loans.
The decline in 1997 was due to the predecessor Bank transferring approximately
$32 million of indirect auto loans to CTFG in connection with the Split-Off
Transactions. The decline between 1995 and 1996 was primarily due to the sale of
approximately $67 million of indirect auto loans completed in December 1996 in
anticipation of the Split-Off Transactions. Consumer loans represented 4.2% of
the consolidated Company's gross loans as of December 31, 1997, and 6.9% and
13.7%, of the predecessor Bank's gross loans at December 31, 1996 and 1995,
respectively. (Included in consumer loans were retail credit card loans totaling
$10.1 million, $9.8 million, $5.8 million and $128,000 at December 31, 1997,
1996, 1995 and 1994 respectively.)
The following table sets forth the remaining maturities, net of unearned
discount for certain commercial and consumer loans, at December 31, 1997:
MATURITIES AND RATE SENSITIVITY OF LOANS (1)
<TABLE>
<CAPTION>
OVER 1 YEAR
THROUGH 5 YEARS OVER 5 YEARS
--------------------- ---------------------
ONE YEAR FIXED FLOATING FIXED FLOATING
OR LESS RATE RATE RATE RATE TOTAL
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial........ $318,852 $202,356 $ 74,539 $ 56,493 $ 18,660 $ 670,900
Real estate-residential
construction................... 97,005 21,969 55,989 4,892 -- 179,855
Real estate-mortgage............. 9,022 27,146 -- 60,735 68,355 165,258
Mortgage loans held-for-sale..... 31,771 -- -- -- -- 31,771
Home equity lines of credit...... 5,812 -- 1,862 -- 96,613 104,287
Consumer......................... 12,662 34,812 -- 2,444 -- 49,918
Other loans...................... 2,448 -- -- -- -- 2,448
-------- -------- -------- -------- -------- ----------
Total..................... $477,572 $286,283 $132,390 $124,564 $183,628 $1,204,437
======== ======== ======== ======== ======== ==========
</TABLE>
(1) Maturities based upon contractual dates. Demand loans are included in the
one year or less category and totaled $15.5 million as of December 31,
1997. Balances are shown net of unearned discount.
35
<PAGE> 36
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 may become aware of borrowers that may not be able to meet
the contractual requirements of loan agreements. Such loans are placed under
close supervision with consideration given to placing the loan on a nonaccrual
status, the need for an additional allowance for loan loss, and (if appropriate)
a partial or full charge-off. Those loans on which management does not expect to
collect interest in the normal course of business are placed on a nonaccrual
status. After a loan is placed on nonaccrual status, any current period interest
previously accrued but not yet collected is reversed against current income.
Interest is included in income subsequent to the date the loan is placed on
nonaccrual status only as interest is received and so long as management is
satisfied that there is no impairment of collateral values. The loan is returned
to accrual status only when the borrower has demonstrated the ability to make
future payments of principal and interest as scheduled.
The following table sets forth the amounts of nonperforming loans and other
assets at the end of the periods indicated:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. --
CONSOLIDATED PREDECESSOR BASIS -- COLE TAYLOR BANK
DECEMBER 31, DECEMBER 31,
------------------ ----------------------------------------
1997 1996 1995 1994 1993
------------------ ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans contractually past due 90 days
or more but still accruing........ $ 2,009 $ 2,820 $ 3,737 $ 4,012 $ 2,151
Nonaccrual loans.................... 11,624 10,898 9,921 10,475 10,449
------- ------- ------- ------- -------
Total nonperforming loans......... 13,633 13,718 13,658 14,487 12,600
Other real estate................... 1,391 865 2,928 2,843 4,628
Other repossessed assets............ 72 254 2,488 356 456
------- ------- ------- ------- -------
Total nonperforming assets........ $15,096 $14,837 $19,074 $17,686 $17,684
======= ======= ======= ======= =======
Nonperforming loans to total
loans............................. 1.13% 1.12% 1.13% 1.28% 1.28%
Nonperforming assets to total loans
plus repossessed property......... 1.25 1.21 1.57 1.56 1.78
Nonperforming assets to total
assets............................ 0.81 0.82 1.08 1.03 1.15
</TABLE>
In addition to the loans presented above, management has identified,
through its internal monitoring, a $4.9 million loan at December 31, 1997 which
exhibits a higher than normal credit risk. This loan is not in default but has
characteristics that management feels might jeopardize the future timely
collection of principal or interest payments.
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
generated from the loan portfolio, but may also be derived from other sources,
such as commitments to extend credit, guarantees, and standby letters of credit.
The allowance for loan losses is increased by provisions charged to expense and
decreased by charge-offs, net of recoveries. Although a loan is charged-off by
management when deemed uncollectible, collection efforts continue and
36
<PAGE> 37
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
future recoveries may occur. The allowance is maintained by management at a
level considered adequate to cover losses that are currently anticipated based
on past loss experience, general economic conditions, information about specific
borrower situations including their financial position, collateral values, and
other factors and estimates which are subject to change over time. Estimating
the risk of loss and amount of loss on any loan is necessarily subjective and
ultimate losses may vary from current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reported in income
through the provision for loan losses in the periods in which they become known.
The adequacy of the allowance for loan losses is monitored by the internal loan
review staff and reported to management and the Board of Directors. Although
management believes that the allowance for loan losses is adequate to absorb any
losses on existing loans that may become uncollectible, there can be no
assurance that the allowance will prove sufficient to cover actual loan losses
in the future. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the adequacy of the Company's
allowance for loan losses. Such agencies may require the Company to make
additional provisions to the allowance based upon their judgments about
information available to them at the time of their examinations. See "Results of
Operations -- Provision for Loan Losses".
37
<PAGE> 38
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 of loans charged-off, amounts of
recoveries, additions to the allowance charged to operating expense, the ratio
of net charge-offs to average total loans, the ratio of the allowance to total
loans at end of period, and the ratio of the allowance to nonperforming loans:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- PREDECESSOR BASIS -- COLE TAYLOR BANK
TAYLOR CAPITAL --------------------------------------------------------------
GROUP, INC. -- FOR THE
CONSOLIDATED FOR PERIOD OF
THE PERIOD OF JANUARY 1,
FEBRUARY 12, 1997 1997 TO
TO DECEMBER 31, FEBRUARY 11, FOR THE YEARS ENDED DECEMBER 31,
------------------ ------------ -----------------------------------------------
1997 1997 1996 1995 1994 1993
------------------ ------------ ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average total loans...................... $1,211,559 $1,220,897 $1,262,081 $1,161,513 $1,053,928 $948,339
========== ========== ========== ========== ========== ========
Total loans at end of period............. $1,204,437 $1,226,072 $1,224,994 $1,211,622 $1,130,177 $986,384
========== ========== ========== ========== ========== ========
ALLOWANCE FOR LOAN LOSSES:
Allowance at beginning of period......... $ 24,607 $ 24,184 $ 23,869 $ 22,833 $ 19,740 $ 14,661
---------- ---------- ---------- ---------- ---------- --------
Charge-offs:
Commercial and industrial.............. (2,201) (32) (1,751) (3,728) (4,280) (6,968)
Real estate-residential
construction......................... -- -- -- -- -- --
Real estate-mortgage................... (178) -- (346) (242) (290) (420)
Consumer and other..................... (1,151) (243) (1,732) (931) (588) (583)
---------- ---------- ---------- ---------- ---------- --------
Total charge-offs.................... (3,530) (275) (3,829) (4,901) (5,158) (7,971)
---------- ---------- ---------- ---------- ---------- --------
Recoveries:
Commercial and industrial.............. 394 188 445 1,581 666 2,344
Real estate-residential
construction......................... -- -- -- -- -- --
Real estate-mortgage................... 27 2 74 40 -- --
Consumer and other..................... 254 53 318 260 211 185
---------- ---------- ---------- ---------- ---------- --------
Total recoveries..................... 675 243 837 1,881 877 2,529
---------- ---------- ---------- ---------- ---------- --------
Net charge-offs.......................... (2,855) (32) (2,992) (3,020) (4,281) (5,442)
---------- ---------- ---------- ---------- ---------- --------
Provision for loan losses................ 4,061 420 3,307 4,056 7,374 10,521
---------- ---------- ---------- ---------- ---------- --------
Allowance at end of period............... $ 25,813 $ 24,572 $ 24,184 $ 23,869 $ 22,833 $ 19,740
========== ========== ========== ========== ========== ========
Net charge-offs to average total loans
(1).................................... 0.27% 0.02% 0.24% 0.26% 0.41% 0.57%
Allowance to total loans at end of
period................................. 2.14 2.00 1.97 1.97 2.02 2.00
Allowance to nonperforming loans......... 189.34 172.13 176.29 174.76 157.61 156.67
</TABLE>
- ---------------
(1) The ratio is annualized for the Successor Basis -- Taylor Capital Group,
Inc. -- Consolidated for the period of February 12, 1997 to December 31,
1997, and for the Predecessor Basis -- Cole Taylor Bank for the period of
January 1, 1997 to February 11, 1997.
Consumer loan charge offs include charge offs relating to retail credit
card loans, indirect and direct auto loans, home equity loans and lines of
credit, overdrafts and all other types of consumer loans. The majority of
38
<PAGE> 39
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
the consumer loan net charge offs for the years presented related to retail
credit card and indirect auto loans. Retail credit card loan net charges offs
were $721,000, $301,000 and $35,000 in 1997, 1996 and 1995 respectively.
Indirect auto loan net charge-offs were $144,000, $803,000, $584,000,
$312,000 and $269,000 in 1997, 1996, 1995, 1994 and 1993 respectively. The
Company sold or transferred the majority of its indirect auto loans in
connection with the Spilt-Off Transactions. Management's strategic plan calls
for no further significant growth in retail credit card loans.
The Company regards the allowance for loan losses as a general reserve
which is available to absorb losses from all loans. However, for purposes of
complying with disclosure requirements of the Securities and Exchange
Commission, the table below presents an allocation of the allowance for loan
losses among the various loan categories and sets forth the percentage of loans
in each category to gross loans. The allocation of the allowance for loan losses
as shown in the table should neither be interpreted as an indication of future
charge-offs, nor as an indication that charge-offs in future periods will
necessarily occur in these amounts or in the indicated proportions.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. --
CONSOLIDATED PREDECESSOR BASIS -- COLE TAYLOR BANK
DECEMBER 31, DECEMBER 31,
------------------ ----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------- ------------------ ------------------ ------------------
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS
AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1)
------- -------- ------- --------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALLOCATED:
Commercial and
industrial.......... $11,741 57.1% $11,467 54.7% $11,163 52.5% $10,693 53.8% $2,658 58.6%
Real estate --
residential
construction........ 3,147 15.3 3,373 16.0 2,127 10.0 1,648 8.3 -- 7.2
Real estate --
mortgage............ 1,661 14.2 1,768 14.7 2,231 18.3 2,040 18.0 37 13.7
Consumer and other.... 1,817 13.4 2,191 14.6 2,972 19.2 2,891 19.9 614 20.5
UNALLOCATED........... 7,447 -- 5,385 -- 5,376 -- 5,561 -- 16,431 --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total allowance for
loan losses......... $25,813 100.0% $24,184 100.0% $23,869 100.0% $22,833 100.0% $19,740 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(1) excludes mortgage loans held-for-sale
During 1994, the Bank revised the manner in which the allowance for loan
losses is allocated to specific loan types for the purpose of complying with
disclosure requirements of the Securities and Exchange Commission. Prior periods
have not been restated. The consolidated Company has maintained the same
allocation of allowance for loan losses to specific loan types as used by the
Bank on the predecessor basis.
Nonearning Assets
The Company recorded $38.3 million of goodwill in connection with the
acquisition of the Bank and Mortgage Company on February 12, 1997. Goodwill for
the consolidated Company totaled $34.4 million as of
39
<PAGE> 40
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
December 31, 1997. Goodwill amortization expense totaled $2.3 million for the
consolidated Company's 1997 reporting period. Goodwill was further reduced at
December 31, 1997 by $1.3 million resulting from state net operating loss
carryforward utilization. See "Results of Operations -- Income Taxes." On August
5, 1997, the Mortgage Company sold its operations headquartered in Florida.
Because the Florida-based operations generated the majority of the Mortgage
Company's earnings, the remaining goodwill of $403,000 was written off in August
1997.
The consolidated Company's nonearning assets include certain assets related
to reverse exchange transactions executed in connection with the Company's real
estate trust services business. The Company acts as a "parking intermediary",
temporarily acquiring certain assets until their sale to the ultimate owner. The
acquisitions are funded entirely with nonrecourse borrowings. During the holding
period, the customers lease the assets at rentals approximating the debt service
payments on the borrowings. The assets are not used in the operations of the
Company and are carried at the lower of the acquisition price or estimated fair
value. Assets related to the reverse exchange program comprise approximately
$18.8 million of other assets at December 31, 1997 and collateralized
nonrecourse borrowings of the same amount. On March 19, 1998, the Company sold
the subsidiary (CTRE, Inc.) within which the reverse exchange business was
conducted. All assets and borrowings of the subsidiary were sold with the
subsidiary. No significant gain or loss was realized as a result of the sale.
See "Financial Condition -- Nonrecourse Borrowings."
Premises, leasehold improvements and equipment, net of accumulated
depreciation and amortization, totaled $22.7 million for the consolidated
Company as of December 31, 1997, and $15.2 million for the predecessor Bank as
of December 31, 1996. In connection with the Split-Off Transactions, the
premises, leasehold improvements and equipment of the consolidated Company were
written-up by approximately $7 million to their fair value. In addition, during
1997 the Bank opened a new branch facility in Skokie, Illinois.
Deposits
The Company's core deposits consist of noninterest- and interest-bearing
demand deposits, savings deposits, certificates of deposit and certain public
funds and core customer repurchase agreements. (Customer repurchase agreements
are reported as short term borrowings.) Brokered and other out-of-market
certificates of deposit and FHLB advances are also used by the company to
support its asset base.
40
<PAGE> 41
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The following table sets forth the distribution of the Company's average
deposit account balances and average cost of funds on each category of deposits
for the periods indicated:
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL GROUP,
INC. --
CONSOLIDATED FOR THE PERIOD
OF FEBRUARY 12, 1997 TO PREDECESSOR BASIS -- COLE TAYLOR BANK
DECEMBER 31, FOR THE YEARS ENDED DECEMBER 31,
---------------------------- -----------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
PERCENT PERCENT PERCENT
AVERAGE OF AVERAGE OF AVERAGE OF
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits..................... $ 301,941 21.60% --% $ 289,389 20.14% --% $ 273,667 21.07% --%
Interest-bearing demand
deposits..................... 329,199 23.55 3.56 338,508 23.56 3.56 344,466 26.52 3.63
Savings deposits............... 116,472 8.33 2.55 121,497 8.45 2.56 127,987 9.85 2.59
Time deposits:
Certificates of deposit,
under $100,000............. 307,397 21.99 5.52 323,219 22.49 5.57 288,736 22.22 5.60
Certificates of deposit, over
$100,000................... 108,393 7.76 5.46 79,719 5.55 5.37 59,210 4.56 5.73
Brokered certificates of
deposit.................... 96,127 6.88 5.99 113,456 7.90 5.78 90,528 6.97 5.30
Public funds................. 138,248 9.89 5.66 171,159 11.91 5.54 114,482 8.81 5.99
---------- ------ ---------- ------ ---------- ------
Total time deposits........ 650,165 46.52 5.61 687,553 47.85 5.58 552,956 42.56 5.65
---------- ------ ---------- ------ ---------- ------
Total deposits........... $1,397,777 100.00% $1,436,947 100.00% $1,299,076 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
Average deposits for the consolidated Company declined 2.7% during the
reporting period of February 12, 1997 to December 31, 1997 from the Bank's
predecessor basis 1996 reporting period. The decline was primarily concentrated
in the brokered and out-of-market certificates of deposit and public funds which
together represent wholesale funding. During 1997, growth in core customer
deposits, including core customer utilization of repurchase agreements, allowed
for reductions in funding obtained from brokered and other out-of-market
certificates of deposit as well as public funds. The mix of core funding changed
as a result of the increased popularity of repurchase agreements utilized by
core Bank customers as well as the Bank's marketing focus during the period
which emphasized certificates of deposit and NOW accounts.
Average deposits increased 10.6% in 1996 over 1995. The increase was
primarily a result of increased public fund time deposits and both core customer
and brokered certificates of deposit. The increase in public fund time deposits
was a result of the Bank encouraging its municipal customers to move from
repurchase agreements to time deposits.
In recent years, earning asset growth has exceeded core deposit growth,
which has resulted in the use of brokered and out-of-market certificates of
deposit and other borrowed funds. The Company offers certificates of deposit to
out-of-market customers by providing rates to a private third party electronic
system which provides certificate of deposit rates from institutions across the
country to its subscribers. The balance of certificates of deposit obtained
through this marketing medium was $32.0 million at December 31, 1997 as compared
to $46.9 million and $43.4 million at December 31, 1996 and 1995 respectively.
The Company also issues brokered certificates of deposit. The balance of
brokered certificates of deposit was $70.0 million, $80.7 million and $97.8
million at December 31, 1997, 1996 and 1995, respectively. Under FDIC
regulations,
41
<PAGE> 42
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
only "well-capitalized" institutions may fund themselves with brokered
certificates of deposit without the prior approval of regulators. The Bank is
categorized as "well-capitalized". In addition, municipal deposits, consisting
of public fund time deposits and repurchase agreements with state and local
governments have become an important funding source for the Bank. Total
municipal time deposits and repurchase agreements approximated $146 million and
$183 million at December 31, 1997 and 1996, respectively. Most of these deposits
are collateralized by investment securities in the Bank's investment portfolio.
Time deposits in denominations of $100,000 or more totaled $226.4 million
at December 31, 1997, down $5.5 million, or 2.4%, from 1996. The following table
sets forth the amount and maturities of time deposits of $100,000 or more at
December 31, 1997:
TIME DEPOSITS $100,000 AND OVER
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
3 months or less........................................... $139,415
Over 3 months through 6 months............................. 41,675
Over 6 months through 12 months............................ 35,279
Over 12 months............................................. 10,075
--------
Total............................................... $226,444
========
</TABLE>
Borrowed Funds
Short-Term Borrowings: The Company also uses short-term borrowings to
support its asset base. These borrowings include federal funds purchased,
securities sold under agreements to repurchase and U.S. Treasury tax and loan
note option accounts. The federal funds purchased are primarily funds obtained
from financial institutions where the Bank acts as one of the selling
institution's primary correspondent banks. The securities sold under agreement
to repurchase are primarily executed with core Bank customers. At December 31,
1997, the consolidated Company's short-term borrowings were $186.1 million. The
predecessor Bank's short-term borrowings at December 31, 1996, were $162.2
million. For the period of February 12, 1997 to December 31, 1997, the
consolidated Company's short-term borrowings averaged $194.3 million.
During 1997 the use of repurchase agreements as an investment product
increased among the Bank's larger commercial customers. The predecessor Bank's
short-term borrowings averaged $160.3 million and $233.0 million, during 1996
and 1995, respectively. The decrease in repurchase agreements between 1996 and
1995 was primarily a result of the Bank's municipal customers moving their funds
from repurchase agreements into public fund time deposits.
42
<PAGE> 43
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The following table reflects categories of short-term borrowings having
average balances during the period greater than 30% of stockholders' equity at
the end of each period. During each reported period, federal funds purchased and
securities sold under repurchase agreements are the only categories meeting this
criteria.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- AT
OR FOR THE PERIOD
OF FEBRUARY 12, PREDECESSOR BASIS -- COLE
1997 TO TAYLOR BANK -- AT OR FOR THE
DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------
1997 1996 1995
------------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal Funds Purchased:
Balance at end of period...................... $ 11,450 $ 26,040 $ 43,500
Weighted average interest rate at end of
period..................................... 6.00% 6.61% 5.94%
Maximum amount outstanding(1)................. $ 29,650 $ 42,045 $ 54,900
Average amount outstanding.................... $ 22,946 $ 28,258 $ 28,227
Weighted average interest rate during
period..................................... 5.48% 5.37% 5.82%
Securities Sold Under Repurchase Agreements:
Balance at end of period...................... $169,550 $126,173 $148,546
Weighted average interest rate at end of
period..................................... 5.05% 5.18% 5.43%
Maximum amount outstanding(1)................. $203,898 $144,825 $224,907
Average amount outstanding.................... $165,321 $126,484 $196,728
Weighted average interest rate during
period..................................... 5.11% 5.46% 5.81%
</TABLE>
- ---------------
(1) Based on amount outstanding at month end during each period.
At December 31, 1997, the Bank had pre-approved overnight federal funds
borrowing lines available from its correspondent banks totaling $185 million.
Nonrecourse Borrowings
Nonrecourse borrowings of the consolidated Company totaled $18.8 million at
December 31, 1997. There were no nonrecourse borrowings of the predecessor Bank
in prior periods. Nonrecourse borrowings consist of debt incurred or assumed in
connection with the acquisition of certain other assets related to the Company's
reverse exchange program. Funds are used to acquire certain assets where the
Company acts as a "parking intermediary", temporarily holding the property until
sale to its ultimate owner. The borrowings are obtained from third-party banks
and the customers initiating the transactions and are collateralized by the
assets acquired. The sole remedy of the lender in event of nonpayment of the
loan is the asset pledged as collateral. During the holding period, the
customers lease the assets at rentals approximating the debt service payments on
the nonrecourse borrowings. On March 19, 1998, the Company sold the subsidiary
(CTRE, Inc.) within which the reverse exchange business was conducted. All
assets and borrowings of the subsidiary were sold with the subsidiary. No
significant gain or loss was realized as a result of the sale. See "Financial
Condition -- Nonearning Assets".
Notes Payable
The Company's notes payable consist of Federal Home Loan Bank advances and
Parent Company debt. Borrowings from the Federal Home Loan Bank of Chicago
(FHLB) totaled $85 million at both December 31, 1997 and December 31, 1996.
Based on the value of collateral pledged at December 31, 1997, the Bank had
additional borrowing capacity at the FHLB of $65 million at December 31, 1997.
The consolidated Company,
43
<PAGE> 44
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
as of December 31, 1997, had Parent Company debt consisting of a $25 million
term loan and a $7 million revolving credit facility, of which $2 million was
then outstanding.
Capital Resources
The Company actively monitors compliance with bank regulatory capital
requirements, focusing primarily on the risk-based capital guidelines. Under the
risk-based capital method of capital measurement, the ratio computed is
dependent on the amount and composition of assets recorded on the balance sheet,
and the amount and composition of off-balance sheet items, in addition to the
level of capital.
The consolidated Company's Tier 1 and total risk-based capital ratios were
7.95% and 9.21%, respectively, at December 31, 1997. The Bank's Tier 1
risk-based capital ratios were 9.90% and 10.23% at December 31, 1997 and
December 31, 1996, respectively. The Bank's total risk-based capital ratios were
11.16% and 11.48% at December 31, 1997 and December 31, 1996, respectively. The
decline in the Bank's ratios was 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.
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
-------- ----- --------- ----- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
Successor Basis -- Taylor Capital Group, Inc. --
Consolidated..................................... $122,432 9.21% .$106,370 .8.00% NA
Cole Taylor Bank................................... 148,043 11.16 . 106,135 .8.00 . 132,669 .10.00%
Tier I Capital (to Risk Weighted Assets)
Successor Basis -- Taylor Capital Group, Inc. --
Consolidated..................................... 105,698 7.95% . 53,185 .4.00 NA
Cole Taylor Bank................................... 131,348 9.90 . 53,068 .4.00 . 79,601 . 6.00
Leverage(1)
Successor Basis -- Taylor Capital Group, Inc. --
Consolidated..................................... 105,698 5.85% . 72,318 .4.00 NA
Cole Taylor Bank................................... 131,348 7.26 . 72,319 .4.00 . 90,399 . 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
As of December 31, 1995:
Total Capital (to Risk Weighted Assets)
Predecessor Basis -- Cole Taylor Bank.............. $146,770 11.44% .$102,597 .8.00% .$128,246 .10.00%
Tier I Capital (to Risk Weighted Assets)
Predecessor Basis -- Cole Taylor Bank.............. 130,642 10.19 . 51,298 .4.00 . 76,948 . 6.00
Leverage(1)
Predecessor Basis -- Cole Taylor Bank.............. 130,642 7.41 . 70,533 .4.00 . 88,166 . 5.00
</TABLE>
- ---------------
(1) The leverage ratio is defined as Tier 1 capital divided by average quarterly
assets.
44
<PAGE> 45
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
For the period of February 12, 1997 to December 31, 1997, the Parent
Company declared $3.1 million and $1.6 million in preferred stock and common
stock dividends, respectively. On December 16, 1997, the Company declared a
dividend of $.09 per common share, totaling $418,000, payable on January 15,
1998.
On March 6, 1998, the Company awarded 14,080 shares of restricted common
stock under its Incentive Compensation Plan. The related compensation expense of
$352,000 will be amortized over the five year vesting period of the awards.
Liquidity
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Company's ability to meet withdrawals either on demand or at contractual
maturity, to repay borrowings as they mature and to make new loans and
investments as opportunities arise. The Bank actively manages its liquidity
position to maintain sufficient funds to respond to the needs of depositors and
borrowers, as well as to take advantage of earnings enhancement opportunities.
In addition to the normal influx of liquidity from core deposit growth, together
with repayments and maturities of loans and investments, the Bank utilizes the
brokered and national certificate of deposit market, FHLB borrowings and federal
funds purchased to meet it liquidity needs. The FHLB borrowings are
collateralized by the Bank's first mortgage residential loans and FHLB stock.
Based on the value of collateral pledged at December 31, 1997, the Bank had
additional borrowing capacity at the FHLB of $65 million at December 31, 1997.
The Bank also maintains pre-approved overnight federal funds borrowing lines at
11 correspondent banks, which provided additional short-term borrowing capacity
of $185 million.
The Bank's management uses two primary measures of liquidity to monitor its
position. The first measure is a static analysis of basic surplus, which
represents the relationship between liquid assets and short-term liabilities
which are vulnerable to non-replacement under abnormally stringent conditions.
The second measure is a 90-day cash flow forecast of the relationship between
identified funding sources and uses and the total funds required to support that
asset position. Management has targeted ranges specified for each of the
measures and maintains a liquidity plan with specific action steps to provide
required liquidity under abnormally stringent conditions.
Overall the Bank's liquidity increased in 1997 as a result of the Split-Off
Transactions and modest loan growth. Cash inflows from operating activities
exceeded operating outflows for the consolidated Company for the period of
February 12, 1997 to December 31, 1997 by $3.6 million. The predecessor Bank's
cash inflows from operating activities exceeded operating outflows by $18.0
million in 1996 and $10.2 million in 1995. Net cash provided by operating
activities was lower in 1997 as compared to 1996 and 1995 primarily due to the
lower net income of the consolidated Company as compared to the predecessor
Bank. Interest received net of interest paid is the principal source of
operating cash inflows in each of the above periods. Management of investing and
financing activities and market conditions determine the level and the stability
of net interest cash flows.
Net cash inflows from investing activities for the consolidated Company for
the period of February 12, 1997 to December 31, 1997 were $7.0 million. Net cash
inflows during this period were attributable to the net cash of the Bank and
Mortgage Company acquired in the Split-Off Transactions. Net cash outflows from
investing activities on the Bank's predecessor basis were $41.3 million in 1996
and $44.9 million in 1995. The net cash outflows in 1996 and 1995 were primarily
due to loan growth.
Net cash inflows from financing activities for the consolidated Company for
the period of February 12, 1997 to December 31, 1997 were $74.0 million. During
this period, net cash inflows were primarily attributable the issuance of
preferred stock of $36.1 million and the Parent Company debt of $27 million in
connection with the Split-Off Transactions. Net cash inflows from financing
activities on the Bank's
45
<PAGE> 46
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
predecessor basis were $18.0 million and $33.9 million in 1996 and 1995,
respectively. In 1996, net cash inflows were attributable to increases in
deposits and additional FHLB advances. In 1995, net cash inflows were primarily
attributable to increases in deposits.
The Parent Company's primary source of funds are dividends received from
the Bank. Dividends received from the Bank in 1997 totaled $8.0 million. The
Bank is subject to dividend restrictions set forth by regulatory authorities,
whereby the bank may not, without prior approval of regulatory authorities,
declare dividends in excess of the sum of the current year's earnings plus the
retained earnings from the prior two years. The dividends, as of December 31,
1997, that the Bank could declare and pay to the Company, without the approval
of regulatory authorities, amounts to approximately $5.9 million. The Parent
Company also has a $7 million revolving credit facility, of which only $2
million was outstanding at December 31, 1997.
Market Risk
The Company's asset/liability management objectives are to manage, to the
degree prudently possible, its exposure to interest rate risk over both a one
year planning horizon and a longer-term strategic horizon and, at the same time,
provide a stable and steadily increasing flow of net interest income. The
Company's primary measurement of interest rate risk is earnings at risk, which
is determined through computerized simulation modeling. The simulation model
assumes a static balance sheet, using the balances, rates, maturities and
repricing characteristics of all of the Bank's existing assets and liabilities
including interest rate swaps. Net interest income is computed by the model
assuming rates unchanged and a parallel shift of market interest rates both up
and down 200 basis points. The impact of imbedded options in such products as
mortgages and mortgage-backed securities is considered through adjustments to
the expected cash flows in each rate scenario. The market interest rate increase
and decrease are modeled as ramps up and down achieving the full 200 basis point
increase by the close of the first 12 month period, with the second twelve month
period simulating a rate "shock". Changes in net interest income in the rising
and declining rate scenarios are then measured against the net interest income
in the rates unchanged scenario. At December 31, 1997, the net interest income
at risk for year one in the rates declining scenario was calculated as $2.3
million (or 3.5% of the net interest income in the rates unchanged scenario).
The net interest income at risk for year one in the rates rising scenario was
calculated as basically unchanged (change of less than 1% of the net interest
income in the rates unchanged scenario). The simulation modeling indicates that
the Company's net interest income is potentially exposed to declining market
interest rates. Management uses this information to determine the term of its
wholesale borrowings and the duration of the investment securities it purchases
as well as the marketing emphasis for the products offered and promoted to the
Bank's customers.
Prior to December 31, 1997, the Bank's exposure to rising market interest
rates was greater than its exposure to falling rates. The change in the interest
rate risk position was due to changes in the Bank's balance sheet structure and
composition and changes in existing market interest rates, which impacts the
imbedded optionality of the Bank's various products.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates. No
assurance can be given that the actual net interest income would increase or
decrease by the amounts computed in response to a 200 basis point increase in
market interest rates.
The Company also uses static gap analysis to identify the timing of the
maturity or repricing of its interest-earning assets and interest-bearing
liabilities. A static gap matrix is prepared reflecting the difference between
the maturity and repricing dates of the existing assets and liabilities for the
unchanged, rising and declining market interest rate scenarios. The Company's
gap position, as reflected by the following gap table which assumes market
interest rates unchanged, is commonly described as liability sensitive, which
means its
46
<PAGE> 47
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
liabilities may mature or reprice faster than its assets. Unlike simulation
modeling, gap analysis does not consider the specific repricing characteristics
of the underlying assets and liabilities and, therefore, is much less effective
as an indicator of an entity's exposure to changes in market interest rates.
Interest rate swaps have been entered into by the Company to reduce then
existing balance sheet interest rate risk. The present notional amount of all of
the interest rate swaps as of December 31, 1997 is $25 million. The swap
contract is designated as a hedge against certain floating-rate commercial loans
and the Company pays a variable rate (LIBOR based) in exchange for receiving a
fixed rate. In periods of rising interest rates, the value of the swap contract
decreases and the Company either receives less or pays more under the terms of
the contract. Conversely, the related loans against which the hedge is
designated, would earn at the now higher rate, thereby substantially offsetting
the negative impact of the swap contract. Therefore, the effect of the contract
is to fix the interest received on the hedged loans. Basically, if economic
conditions reduce the value of a specific swap, that reduction in value is
offset by the improved profitability of the hedged financial instruments.
During the period of February 12, 1997 to December 31, 1997, the financial
impact of the outstanding swaps was to decrease net interest income by
approximately $109,000. As of December 31, 1997, the estimated fair value of the
swaps was approximately $(152,000). The financial impact of a swap is dependent
upon market interest rates, which cannot be predicted with any certainty.
47
<PAGE> 48
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The following table sets forth information concerning interest rate
sensitivity of the Company's consolidated assets and liabilities as of December
31, 1997. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first.
INTEREST SENSITIVITY GAP ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
NON-RATE
4-12 SENSITIVE AND
0-3 MONTHS MONTHS 1-5 YEARS OVER 5 YEARS TOTAL
---------- --------- --------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash equivalents.................. $ 12,406 $ -- $ -- $ -- $ 12,406
Investment securities(1).......... 24,926 115,268 270,621 71,581 482,396
Total loans(1).................... 670,305 101,480 333,179 99,473 1,204,437
--------- --------- -------- -------- ----------
TOTAL EARNING ASSETS.............. $ 707,637 $ 216,748 $603,800 $171,054 $1,699,239
========= ========= ======== ======== ==========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest-bearing demand
deposits..................... $ 340,603 $ -- $ -- $ -- $ 340,603
Savings deposits................ 112,978 -- -- -- 112,978
Time deposits................... 223,882 294,646 65,352 77 583,957
--------- --------- -------- -------- ----------
Total interest-bearing
deposits................... 677,463 294,646 65,352 77 1,037,538
--------- --------- -------- -------- ----------
Short-term borrowings............. 186,053 -- -- -- 186,053
Nonrecourse borrowings............ -- -- -- 18,757 18,757
Notes payable..................... 92,000 20,000 -- -- 112,000
--------- --------- -------- -------- ----------
Total borrowings............. 278,053 20,000 -- 18,757 316,810
--------- --------- -------- -------- ----------
TOTAL INTEREST-BEARING
LIABILITIES..................... $ 955,516 $ 314,646 $ 65,352 $ 18,834 $1,354,348
========= ========= ======== ======== ==========
Interest sensitivity gap.......... $(247,879) $ (97,898) $538,448 $152,220 $ 344,891
Derivatives affecting interest
rate sensitivity:
Pay floating interest rate
swaps........................ (25,000)
Receive fixed interest rate
swaps........................ 25,000
Pay fixed interest rate swaps...
Receive floating interest rate
swaps........................
Interest sensitivity gap.......... $(272,879) $ (72,898) $538,448 $152,220 $ 344,891
Cumulative gap.................... (272,879) (345,777) 192,671 344,891 344,891
Interest sensitivity gap to total
assets.......................... (14.70)% (3.93)% 29.02% 8.20% 18.59%
Cumulative sensitivity gap to
total assets.................... (14.70) (18.63) 10.38 18.59 18.59
</TABLE>
- ---------------
(1) Callable investment securities are generally reported at the maturity date.
Loans are placed in the earliest time frame in which maturity or repricing
may occur, except for mortgage-backed securities and real estate loan
maturities which are based on historical and published industry prepayment
estimates. Such estimates are for loans and mortgage-backed securities with
comparable weighted average interest rates and contractual maturities.
Loans are stated gross of the allowance for loan losses.
48
<PAGE> 49
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The Gap table assumes that all savings deposits and NOW accounts reprice in
the earliest period presented; however, the Company believes a significant
portion of these accounts constitute a core component of total deposits and are
generally not rate sensitive. The Company believes that its aggressive lowering
of interest rates paid on savings accounts and certain NOW accounts has
significantly reduced the volatility of the balances in these accounts.
The table does not necessarily indicate the future impact of general
interest rate movements on the Company's net interest income because the
repricing of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, assets and liabilities indicated
as repricing within the same period may in fact reprice at different times and
at different rate levels.
YEAR 2000
The Company is continuing to evaluate the impact of the Year 2000 issue. A
comprehensive project plan has been prepared and is being diligently refined as
the assessment and implementation stages of the project progress. The plan
identifies both internal systems and those provided by third-party data
processors that require modification or replacement. Because the Company's
primary "mission-critical" systems are provided by third-party processors, the
assessment phase includes working closely with those vendors to ensure effective
compliant systems before the year 2000. The impact of ensuring all Company
systems are year 2000 compliant is expected to be significant in terms of
utilization of existing resources. However, the estimated incremental cost
associated with implementing Year 2000 compliance is not, at this time, expected
to be material. Regardless of the Year 2000 compliance of the Company's systems,
there can be no assurance that the Company will not be adversely affected by the
failure of others to become Year 2000 compliant. Such risk may include potential
losses related to major loan customers, vendors or other counterparties.
LITIGATION
The Company has been named as a defendant in a number of lawsuits relating
to either or both (1) the Split-Off Transactions which resulted in the Company
being split-off from CTFG (now Reliance Acceptance Group, Inc., hereinafter
referred to as "Reliance") in February, 1997, and (2) the financial and public
reporting of Reliance. The lawsuits name Reliance and/or current or former
officers, directors and stockholders of the Company and Reliance as additional
defendants. Included amongst the defendants are Jeffrey W. Taylor, Chairman of
the Board and Chief Executive Officer of the Company, and Bruce W. Taylor,
President of the Company. One case also names the Bank as a defendant. All of
the lawsuits have been brought as purported class actions on behalf of current
and former stockholders of Reliance.
Four of these actions are pending in Delaware Chancery Court. These cases
allege that the defendants breached their fiduciary duties in connection with
disclosures made to the stockholders prior to the vote which approved the
Split-Off Transactions. These cases seek relief in the form of unspecified
damages, attorneys' fees and rescission of the Split-Off Transactions. Two other
cases are pending in the United States District Court for the Western District
of Texas and one case is pending in the Northern District of Illinois. These
cases allege that the defendants violated the federal securities laws, and the
Illinois action also alleges that the defendants breached common law fiduciary
duties. In addition, the Illinois case alleges that the defendants violated
ERISA and breached duties owed to a subclass consisting of participants in
Reliance's ESOP and 401(k) Profit Sharing Plan. The Texas and Illinois cases
seek unspecified damages, attorneys' fees and rescission of the Split-Off
Transactions.
Seven other similar lawsuits are pending. Although the Company has not been
named as a defendant in those suits, certain directors, officers and
stockholders of the Company, including Jeffrey W. Taylor, Bruce W. Taylor and J.
Christopher Alstrin, Chief Financial Officer of the Company, have been named.
Pursuant to the Share Exchange Agreement in which Jeffrey W. Taylor, Bruce
W. Taylor, Iris A. Taylor, Sidney J. Taylor, Cindy Taylor Bleil, related trusts
and a related partnership (collectively, the "Taylor
49
<PAGE> 50
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Family"), agreed to acquire the Company from Reliance, the Taylor Family may be
obligated to indemnify Reliance for 25% of any losses (net of any insurance
proceeds paid to, or for the benefit of Reliance or members of its Board of
Directors), including without limitation, any costs or expenses of defense or
settlement of any suits, actions or proceedings initiated by third-parties and
any judgments in such suits, actions or proceedings relating to the Split-Off
Transactions (the "Transaction Indemnification Obligation"). Subsequently, the
Company agreed to indemnify and hold harmless the Taylor Family from and against
any and all liabilities of the Taylor Family arising under the Transaction
Indemnification Obligation. On February 9, 1998, Reliance filed a voluntary
petition under Chapter 11 of the Bankruptcy Code, and all of the aforementioned
cases in which Reliance had been named as a defendant are now stayed as to
Reliance. The Company is unable at this time to predict the extent to which it
might be called upon to fulfill its indemnification obligations to the Taylor
Family with respect to the Transaction Indemnification Obligation.
All of these cases are in their early stages. The Company believes that it
has meritorious defenses to all of the actions against the Company, and the
Company intends to defend itself vigorously. In addition, the Company has agreed
to advance defense costs that are not otherwise advanced by insurance carriers
on behalf of members of the Taylor Family and directors and officers of the
Company who are defendants in these cases. Such costs will be expensed as
incurred. The Company is unable at this time to predict the potential impact of
the litigation on the financial condition of the Company.
The Company is from time to time a party to various other legal actions
arising in the normal course of its business. Management knows of no such other
legal actions threatened or pending against the Company that are likely to have
a material adverse impact on the financial condition of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS No. 128"), is effective for fiscal years ending after December 15, 1997.
SFAS No. 128 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.
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS No. 130") was issued in June 1997, and is effective
for fiscal years beginning after December 15, 1997. SFAS No. 130 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
No. 130, these unrealized gains and losses would be reported in comprehensive
income.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS No. 131"), was issued
in June 1997 and is effective for fiscal years beginning after December 15,
1997. 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.
Management is currently assessing what segment information may be appropriate
and informative to financial statement readers.
50
<PAGE> 51
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited financial data regarding the
Company's operations for each of the four quarters of 1997 and the Bank's
operations for each of the four quarters of 1996. This information, in the
opinion of management, includes all adjustments necessary to present fairly the
Company's and the Bank's results of operations for such periods, consisting only
of normal recurring adjustments for the periods indicated. The operating results
for any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- TAYLOR CAPITAL
GROUP, INC. -- CONSOLIDATED PREDECESSOR BASIS -- COLE TAYLOR BANK
------------------------------------------ -----------------------------------------------------
FOR THE FOR THE
PERIOD OF PERIOD OF
THREE MONTHS ENDED FEB. 12, JAN. 1, THREE MONTHS ENDED
------------------------------ 1997 TO 1997 TO -----------------------------------------
DEC. 31, SEP. 30, JUN. 30, MAR. 31, FEB. 11, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1997 1997 1997 1997 1997 1996 1996 1996 1996
-------- -------- -------- --------- --------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income........ $34,370 $35,801 $34,639 $17,804 $15,642 35,708 $35,104 $34,362 $33,723
Interest expense....... 16,742 17,978 17,095 8,643 7,076 16,884 17,001 16,396 16,096
------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income.... 17,628 17,823 17,544 9,161 8,566 18,824 18,103 17,966 17,627
Provision for loan
losses............... 904 1,769 904 484 420 302 953 1,053 999
Noninterest income..... 4,472 6,084 4,566 2,350 1,930 4,076 4,084 3,963 3,701
Securities gains,
net.................. 72 329 -- -- -- -- -- -- --
Noninterest expense.... 17,180 17,230 16,940 8,184 6,466 14,574 13,574 13,288 13,937
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes................ 4,088 5,237 4,266 2,843 3,610 8,024 7,660 7,588 6,392
Income taxes........... 1,505 2,128 1,853 835 1,328 2,683 2,623 2,603 2,062
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income............. $ 2,583 $ 3,109 $ 2,413 $ 2,008 $ 2,282 $ 5,341 $ 5,037 $ 4,985 $ 4,330
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis -- Financial Condition -- Market
Risk
51
<PAGE> 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
of Taylor Capital Group, Inc.:
We have audited the accompanying consolidated balance sheet of Taylor
Capital Group, Inc. and subsidiaries (Successor) as of December 31, 1997 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the period from February 12, 1997 to December 31, 1997 (Successor period).
We have also audited the accompanying balance sheet of Cole Taylor Bank
(Predecessor) as of December 31, 1996 and the related statements of income,
stockholder's equity, and cash flows for the period from January 1, 1997 to
February 11, 1997 and for the years ended December 31, 1996 and 1995
(Predecessor periods). These financial statements are the responsibility of the
Successor's and Predecessor's managements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We have 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 aforementioned Successor's consolidated financial
statements present fairly, in all material respects, the financial position of
Taylor Capital Group, Inc. and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the Successor period in
conformity with generally accepted accounting principles. Furthermore, in our
opinion, the aforementioned Predecessor's financial statements present fairly,
in all material respects, the financial position of Cole Taylor Bank as of
December 31, 1996, and the results of its operations and its cash flows for the
Predecessor periods in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective February 12,
1997, certain members of Predecessor's management and related investors acquired
Taylor Capital Group, Inc. and subsidiaries in a business combination accounted
for as a purchase and, accordingly, the assets and liabilities of Taylor Capital
Group, Inc. and subsidiaries were revalued. Consequently, the consolidated
financial information for the period after the acquisition is presented on a
different cost basis than that for the periods before the acquisition and,
therefore, is not comparable.
Chicago, Illinois KPMG PEAT MARWICK LLP
March 19, 1998
52
<PAGE> 53
TAYLOR CAPITAL GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL PREDECESSOR
GROUP, INC. -- BASIS -- COLE
CONSOLIDATED TAYLOR BANK --
DECEMBER 31, DECEMBER 31,
------------------ --------------
1997 1996
------------------ --------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 72,210 $ 67,021
Interest-bearing deposits with banks........................ 12,131 14,564
Federal funds sold.......................................... 275 5,675
Investment securities:
Available-for-sale, at fair value......................... 399,145 328,817
Held-to-maturity, at amortized cost (fair value of $84,581
and $77,758 at December 31, 1997 and 1996,
respectively).......................................... 83,251 74,972
Loans held for sale, net, at lower of cost or market........ 31,771 25,153
Loans, net of allowance for loan losses of $25,813 and
$24,184 at December 31, 1997 and 1996, respectively....... 1,146,853 1,175,657
Premises, leasehold improvements and equipment, net......... 22,713 15,247
Other real estate and repossessed assets, net............... 1,463 1,119
Auto loan sale proceeds receivable.......................... -- 66,570
Goodwill and other intangibles, net of amortization of
$2,235 and $2,193 at December 31, 1997 and 1996,
respectively.............................................. 34,356 2,478
Other assets................................................ 51,543 35,232
---------- ----------
Total assets........................................... $1,855,711 $1,812,505
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing....................................... $ 340,419 $ 334,068
Interest-bearing.......................................... 1,037,538 1,072,832
---------- ----------
Total deposits......................................... 1,377,957 1,406,900
Short-term borrowings....................................... 186,053 162,182
Accrued interest, taxes and other liabilities............... 19,874 16,788
Nonrecourse borrowings...................................... 18,757 --
Notes payable............................................... 112,000 85,000
---------- ----------
Total liabilities.................................... 1,714,641 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 and
redemption 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................................................... 99,371 52,028
Unearned compensation -- stock grants..................... (2,656) --
Retained earnings......................................... 5,278 76,586
Unrealized holding gain (loss) on securities
available-for-sale, net of income taxes................ 781 (1,979)
---------- ----------
Total stockholders' equity............................. 141,070 141,635
---------- ----------
Total liabilities and stockholders' equity........... $1,855,711 $1,812,505
========== ==========
</TABLE>
See accompanying notes to financial statements.
53
<PAGE> 54
TAYLOR CAPITAL GROUP, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS -- COLE TAYLOR BANK
CONSOLIDATED ----------------------------------------
FOR THE PERIOD OF FOR THE PERIOD FOR THE YEARS
FEBRUARY 12, 1997 OF JANUARY 1, 1997 ENDED
TO DECEMBER 31, TO FEBRUARY 11, DECEMBER 31,
------------------ ------------------ -------------------
1997 1997 1996 1995
------------------ ------------------ -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans............................... $ 95,356 $12,481 $110,582 $103,654
Interest and dividends on investment securities:
Taxable................................................ 23,086 2,606 22,987 25,382
Tax-exempt............................................. 2,628 431 3,839 3,976
Interest on cash equivalents............................. 1,544 124 1,489 672
-------- ------- -------- --------
Total interest income................................ 122,614 15,642 138,897 133,684
-------- ------- -------- --------
Interest expense:
Deposits................................................. 45,275 5,614 53,518 47,034
Short-term borrowings.................................... 8,870 1,026 8,719 13,584
Notes payable............................................ 6,313 436 4,140 3,748
-------- ------- -------- --------
Total interest expense............................... 60,458 7,076 66,377 64,366
-------- ------- -------- --------
Net interest income........................................ 62,156 8,566 72,520 69,318
Provision for loan losses.................................. 4,061 420 3,307 4,056
-------- ------- -------- --------
Net interest income after provision for loan
losses............................................. 58,095 8,146 69,213 65,262
-------- ------- -------- --------
Noninterest income:
Service charges.......................................... 8,279 1,122 8,682 7,452
Trust fees............................................... 3,331 359 3,635 3,539
Gain on sales of loans................................... 2,598 169 983 563
Investment securities gains.............................. 401 -- -- --
Other noninterest income................................. 3,264 280 2,524 2,673
-------- ------- -------- --------
Total noninterest income............................. 17,873 1,930 15,824 14,227
-------- ------- -------- --------
Noninterest expense:
Salaries and employee benefits........................... 31,683 3,645 30,171 28,973
Occupancy of premises, net............................... 5,298 656 5,198 4,880
Furniture and equipment.................................. 3,262 322 3,017 2,651
Computer processing...................................... 2,004 222 2,033 1,676
Legal fees............................................... 2,227 194 1,473 1,655
Advertising and public relations......................... 1,713 157 1,764 1,582
Goodwill and other intangible amortization............... 2,253 20 199 196
Other real estate and repossessed asset expense.......... 551 31 695 1,169
Other noninterest expense................................ 10,543 1,219 10,823 10,767
-------- ------- -------- --------
Total noninterest expense............................ 59,534 6,466 55,373 53,549
-------- ------- -------- --------
Income before income taxes................................. 16,434 3,610 29,664 25,940
Income taxes............................................... 6,321 1,328 9,971 7,774
-------- ------- -------- --------
Net income................................................. $ 10,113 $ 2,282 $ 19,693 $ 18,166
======== ======= ======== ========
Preferred dividend requirements............................ (3,052) -- -- --
--------
Net income applicable to common stockholders............... $ 7,061 -- -- --
========
</TABLE>
See accompanying notes to financial statements.
54
<PAGE> 55
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SUCCESSOR BASIS
FOR THE PERIOD OF FEBRUARY 12, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A 9% UNREALIZED
NONCUMULATIVE HOLDING
PERPETUAL UNEARNED GAIN ON
PREFERRED COMMON COMPENSATION -- RETAINED AVAILABLE-FOR-
STOCK STOCK SURPLUS STOCK GRANTS EARNINGS SALE SECURITIES TOTAL
------------- ------ ------- --------------- -------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
February 12, 1997 initial
capitalization............... $ -- $45 $98,288 $ -- $ -- $ -- $ 98,333
Issuance of preferred
stock...................... 38,250 (2,144) 36,106
Amortization of preferred
stock issuance costs....... 138 (138) --
Issuance of stock grants..... 1 3,089 (3,090) --
Amortization of stock
grants..................... 434 434
Unrealized holding gain on
investment securities, net
of income taxes............ 781 781
Dividends:
Preferred -- $1.994 per
share.................... (3,052) (3,052)
Common -- $0.36 per
share.................... (1,645) (1,645)
Net income................... 10,113 10,113
------- --- ------- ------- ------- ---- --------
Balance at December 31, 1997... $38,250 $46 $99,371 $(2,656) $ 5,278 $781 $141,070
======= === ======= ======= ======= ==== ========
</TABLE>
See accompanying notes to financial statements.
55
<PAGE> 56
TAYLOR CAPITAL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
PREDECESSOR BASIS -- COLE TAYLOR BANK
FOR THE PERIOD OF JANUARY 1, 1997 TO FEBRUARY 11, 1997
AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAIN (LOSS) ON
SECURITIES
COMMON RETAINED AVAILABLE-
STOCK SURPLUS EARNINGS FOR-SALE TOTAL
------- ------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995........... $15,000 $50,826 $ 56,777 $(3,606) $118,997
Change in unrealized holding gain
on investment securities, net of
income taxes.................... 3,528 3,528
Dividends on common stock -- $5.30
per share....................... (7,950) (7,950)
Net income......................... 18,166 18,166
------- ------- -------- ------- --------
Balance at December 31, 1995......... 15,000 50,826 66,993 (78) 132,741
Change in unrealized holding loss
on investment securities, net of
income taxes.................... (1,901) (1,901)
Tax benefit associated with
exercise of common stock
options......................... 1,202 1,202
Dividends on common stock -- $6.733
per share....................... (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
Change in unrealized holding loss
on investment securities, net of
income taxes.................... (1,140) (1,140)
Net income......................... 2,282 2,282
------- ------- -------- ------- --------
Balance at February 11, 1997......... $15,000 $52,028 $ 78,868 $(3,119) $142,777
======= ======= ======== ======= ========
</TABLE>
See accompanying notes to financial statements.
56
<PAGE> 57
TAYLOR CAPITAL GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL PREDECESSOR BASIS -- COLE TAYLOR BANK
GROUP, INC. -- --------------------------------------------
CONSOLIDATED FOR THE PERIOD
ON FEBRUARY 12, 1997 OF JANUARY 1, 1997 FOR THE YEARS ENDED
TO DECEMBER 31, TO FEBRUARY 11, DECEMBER 31,
-------------------- ------------------ ----------------------
1997 1997 1996 1995
-------------------- ------------------ --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 10,113 $ 2,282 $ 19,693 $ 18,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment securities gains.................. (401) -- -- --
Amortization of premiums and discounts,
net........................................ 787 6 769 1,024
Deferred loan fee amortization............... (1,594) (411) (2,486) (2,515)
Provision for loan losses.................... 4,061 420 3,307 4,056
Gain on sales of loans originated for sale... (3,663) (137) (1,628) (150)
Loss on sale of indirect auto loans.......... -- -- 767 --
Loans originated and held for sale........... (218,778) (12,852) (235,470) (87,250)
Proceeds from sales of loans originated for
sale....................................... 212,425 23,724 227,531 73,368
Depreciation and amortization................ 3,578 238 3,021 2,534
Amortization of intangible assets............ 2,253 20 199 196
Charge in lieu of taxes resulting from
recognition of acquired tax benefits....... 634 -- -- --
Deferred income taxes........................ (589) (325) 249 16
Provision for other real estate.............. 252 -- 72 243
Other, net................................... 1,190 65 (799) 75
Changes in assets and liabilities
Accrued interest receivable................ (2,628) 2,534 465 (251)
Other assets............................... (4,907) 4,675 (1,453) 1,940
Accrued interest, taxes and other
liabilities.............................. 839 761 3,810 (1,204)
---------- -------- --------- ---------
Net cash provided by (used in) operating
activities............................... 3,572 21,000 18,047 10,248
---------- -------- --------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities... (184,670) (43,533) (200,051) (27,228)
Purchases of held-to-maturity securities..... (14,233) -- (3,568) (4,744)
Proceeds from principal payments and
maturities of available-for-sale
securities................................. 104,498 2,000 229,038 29,130
Proceeds from principal payments and
maturities of held-to-maturity
securities................................. 5,758 1,209 5,150 33,317
Proceeds from sales of available-for-sale
securities................................. 52,821 -- -- --
Proceeds from sales of held-to-maturity
securities................................. 333 -- -- --
Net cash of Bank and Mortgage Company
acquired in Split-Off Transactions......... 62,503 -- -- --
Proceeds from sale of loans.................. -- -- -- 28,924
Proceeds from sale of new indirect auto
loans...................................... -- 66,570 -- --
Net increase in loans........................ (6,339) (11,687) (74,089) (100,743)
Proceeds from sale of CT Mortgage assets..... 8,703 -- -- --
Net additions to premises, leasehold
improvements and equipment................. (4,000) (87) (1,340) (5,502)
Acquisition of land trust customer base...... -- -- -- (204)
Acquisition of reverse exchange assets....... (18,757) -- -- --
Proceeds from sale of other real estate...... 408 36 3,569 2,145
---------- -------- --------- ---------
Net cash provided by (used in) investing
activities............................... 7,025 14,508 (41,291) (44,905)
---------- -------- --------- ---------
</TABLE>
57
<PAGE> 58
TAYLOR CAPITAL GROUP, INC.
STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL PREDECESSOR BASIS -- COLE TAYLOR BANK
GROUP, INC. -- --------------------------------------------
CONSOLIDATED FOR THE PERIOD
ON FEBRUARY 12, 1997 OF JANUARY 1, 1997 FOR THE YEARS ENDED
TO DECEMBER 31, TO FEBRUARY 11, DECEMBER 31,
-------------------- ------------------ ----------------------
1997 1997 1996 1995
-------------------- ------------------ --------- ---------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits.......... 27,151 (56,094) 42,825 70,664
Net (decrease) increase in short-term
borrowings................................. (56,576) 80,447 (39,851) (41,964)
Increase in nonrecourse borrowings........... 18,757 -- -- --
Repayments of notes payable.................. (40,600) (25,201) (50,167) (37,111)
Proceeds from notes payable.................. 92,600 -- 75,250 50,250
Net proceeds from issuance of preferred
stock...................................... 36,106 -- -- --
Dividends paid............................... (3,419) -- (10,100) (7,950)
---------- -------- --------- ---------
Net cash provided by (used in) financing
activities............................... 74,019 (848) 17,957 33,889
---------- -------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... 84,616 34,660 (5,287) (768)
Cash and cash equivalents, beginning of period... -- 87,260 92,547 93,315
---------- -------- --------- ---------
Cash and cash equivalents, end of period......... $ 84,616 $121,920 $ 87,260 $ 92,547
========== ======== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest..................................... $ 60,188 $ 7,303 $ 65,462 $ 63,339
Income taxes................................. 7,171 997 8,299 7,448
Supplemental disclosures of noncash investing and
financing activities:
Unrealized holding gain (loss) on investment
securities, net of income taxes.............. 781 (1,140) (1,901) 3,528
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........... 622 127 1,697 962
Loans transferred to other real estate......... 1,188 138 734 2,465
Tax benefit associated with exercise of common
stock options................................ -- -- 1,202 --
Fair value of Bank and Mortgage Company assets
acquired..................................... $1,775,581 $ -- $ -- $ --
Fair value of CTFG stock exchanged............. 98,333 -- -- --
---------- -------- --------- ---------
Bank and Mortgage Company liabilities
assumed...................................... $1,677,248 $ -- $ -- $ --
========== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
58
<PAGE> 59
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 of February 12, 1997 to December 31, 1997 include the
accounts of Taylor Capital Group, Inc. (the "Parent Company") and its wholly
owned subsidiaries (the "Company"), Cole Taylor Bank (the "Bank"), CT Mortgage
Company, Inc. (the "Mortgage Company") and CTRE, Inc. Taylor Capital Group, Inc.
is a bank holding company which was formed by certain members of the Bank's
management and related investors 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. As a result of the Split-Off Transactions, the
consolidated financial information of the Company and its subsidiaries for the
period from February 12, 1997 through December 31, 1997 is presented on a
different cost basis than that for the periods before the acquisition and,
therefore, is not comparable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
The accounting and reporting policies of the Taylor Capital Group, Inc. and
Subsidiaries conform to generally accepted accounting principles and general
reporting practices within the financial services 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:
CONSOLIDATION:
The successor basis Taylor Capital Group, Inc. consolidated financial
statements include the accounts of Taylor Capital Group, Inc. and its
wholly-owned subsidiaries, Cole Taylor Bank, CT Mortgage Company, Inc. and
CTRE, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
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 stockholders' 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. A decline
in market value of any security below cost that is deemed other than
temporary is charged to earnings. Realized gains and losses on the sales of
all securities are reported in income and computed using the specific
identification method. The Company and the Bank did not maintain a trading
portfolio during the periods presented.
59
<PAGE> 60
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES: -- (CONTINUED)
LOANS HELD FOR SALE:
Mortgage loans held for sale are stated at the lower of aggregate cost
or aggregate fair value as determined by outstanding commitments from
investors or current market prices for loans with no sale commitments.
Forward commitments to sell mortgage loans are used to manage the interest
rate risk exposure of the mortgage banking activities.
LOANS:
Loans are stated at the principal amount outstanding, net of unearned
discount. Unearned discount on consumer loans is recognized as income over
the terms of the loans using the sum-of-the-months-digits method, which
approximates the interest method. Interest on other loans is accrued on the
principal amount outstanding during the period. Loan origination and
commitment fees and certain direct loan origination costs are deferred and
the net amount amortized as an adjustment of the related loans' yields.
ALLOWANCE FOR LOAN LOSSES:
An allowance for loan losses has been established to provide for those
loans which may not be repaid in their entirety. The allowance is increased
by provisions for loan losses charged to expense and decreased by
charge-offs, net of recoveries. Although a loan is charged off by
management when deemed uncollectible, collection efforts may 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 portion of the total allowance for loan losses is related to
impaired loans. A loan is considered impaired, based on current information
and events, if it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Certain homogenous loans,
including residential mortgage and consumer loans, are collectively
evaluated for impairment and, therefore, excluded from impaired loans.
Commercial loans exceeding size thresholds established by management are
individually evaluated for impairment. The amount in the allowance for loan
losses for impaired loans is based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that
collateral-dependent loans may be measured for impairment based on the fair
value of the collateral.
INCOME RECOGNITION ON IMPAIRED LOANS AND NONACCRUAL LOANS:
Loans, including impaired loans, are generally placed on a nonaccrual
basis for recognition of interest income when, in the opinion of
management, uncertainty exists as to the ultimate collection of principal
or interest. The nonrecognition of interest income on an accrual basis does
not constitute forgiveness of the interest. While a loan is classified as
nonaccrual, collections of interest and principal are generally applied as
a reduction to principal outstanding. Loans may be returned to accrual
status when all principal and interest amounts contractually due are
reasonably assured of repayment within an acceptable period of time, and
there is a sustained period of repayment performance by the borrower, in
accordance with the contractual terms of interest and principal.
60
<PAGE> 61
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES: -- (CONTINUED)
PREMISES, LEASEHOLD IMPROVEMENTS, EQUIPMENT AND SOFTWARE:
Premises, leasehold improvements, equipment and software are reported
at cost less accumulated depreciation and amortization. Depreciation and
amortization is charged to operating expense using the straight-line method
for financial reporting purposes over a three to twenty-five year period,
representing the estimated useful lives of the assets. Leasehold
improvements are amortized over a one to twenty 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. At foreclosure, the other real
estate is recorded at the lower of the amount of the loan balance or the
fair value of the real estate, through a charge to the allowance for loan
losses, if necessary. Subsequent write-downs required by changes in
estimated fair value or disposal expenses are provided through a valuation
allowance and the provision for losses is charged to operating expense.
Carrying costs of these properties, net of related income, and gains or
losses on the sale on their disposition are included in current operations
as other real estate expense.
MORTGAGE SERVICING RIGHTS:
Mortgage servicing rights represent the servicing assets retained in
the sale or securitization of mortgage loans originated by the Company. The
cost of the mortgage is allocated between the loan and the related
servicing rights based on their relative fair values at the date of sale or
securitization. The fair value of the servicing rights is estimated using
the present value of expected future cash flows based upon assumptions on
interest, default and prepayment rates which are consistent with
assumptions that market participants would utilize. The Company stratifies
the 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. Mortgage servicing rights
are amortized in proportion to, and over the period of, estimated net
servicing income and the amortization reflected in the income statement as
a reduction to mortgage servicing fee income.
GOODWILL:
Goodwill represents the excess of purchase price over the fair value
of net assets acquired for the Bank. Under purchase accounting, the price
is allocated to the respective assets acquired and liabilities assumed
based on their estimated fair values, net of applicable income tax effects.
The goodwill is being amortized using the straight-line method over fifteen
years.
OTHER ASSETS:
Included in other assets at December 31, 1997 are assets related to
reverse exchange transactions executed in connection with the Company's
real estate trust services business. The Company acts as a "parking
intermediary", temporarily acquiring certain assets until their sale to the
ultimate owner. The acquisitions are funded entirely with nonrecourse
borrowings. During the holding period the customers lease the assets at
rentals approximating the debt service payments on the borrowings. The
assets are not used in the operations of the Company and are carried at the
lower of the acquisition price or estimated fair value. Assets related to
the reverse exchange program comprise approximately $18.8 million of other
assets at December 31, 1997 and collateralize nonrecourse borrowings of the
same amount. Income and expense for these assets and borrowings are netted
for purposes of the consolidated statement of operations and are included
in trust fees. On March 19, 1998, the Company sold the subsidiary (CTRE,
Inc.) within which the reverse exchange business was conducted. All assets
and borrowings of the subsidiary were sold with the subsidiary. No
significant gain or loss was realized as a result of the sale.
61
<PAGE> 62
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES: -- (CONTINUED)
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.
STOCK OPTION PLAN:
The Company applies the intrinsic value method of accounting
promulgated under Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, no compensation cost
is recognized in connection with the granting of stock options with an
exercise price equal to the fair market value of the stock on the date of
the grant. Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), establishes a fair value method of
accounting for stock based compensation, but it allows entities to continue
to apply the intrinsic value method in accordance with the provisions of
APB Opinion No. 25 and provide certain pro forma net income disclosures
determined as if the fair value method defined in SFAS No. 123 had been
applied.
FINANCIAL INSTRUMENTS:
In the ordinary course of business the Company enters 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.
INTEREST RATE CONTRACTS:
The Company uses interest-rate exchange agreements (swaps) to manage
interest rate risk. These contracts are designated as hedges of specific
existing assets and liabilities. The Company's asset and liability
management and investment policies do not allow the use of derivative
financial instruments for trading purposes. Net interest income (expense)
resulting from the differential between exchanging floating and fixed rate
interest payments is accrued and recognized as an adjustment to the
interest income or expense of the hedged asset or liability. The fair value
of the swap agreement and changes in the fair value as a result of changes
in market interest rates are not recognized in the financial statements.
Gains or losses on termination of a swap agreement prior to maturity would
be deferred and amortized as an adjustment to interest income or expense of
the hedged assets or liability over the remaining term of the original
contract life of the terminated swap agreement.
In connection with the application of the purchase method of
accounting for the Split-Off Transactions, the 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 accrued and 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 6, 1998.
STATEMENTS OF CASH FLOWS:
For the purpose of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, interest-bearing deposits
with banks and federal funds sold. All Federal funds are sold overnight
with daily settlement required.
62
<PAGE> 63
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES: -- (CONTINUED)
RECLASSIFICATIONS:
Amounts in the prior years' predecessor basis financial statements are
reclassified whenever necessary to conform with the current year's
presentation.
3. 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 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 acquisition was accounted for using purchase accounting in accordance
with Accounting Principal Board Opinion No. 16, "Business Combinations" (APB No.
16). Under this method of accounting, the purchase price is allocated to the
respective assets acquired and liabilities assumed based on their estimated fair
values, net of applicable income tax effects. Goodwill, representing the excess
cost over net assets acquired of the Bank, was $37.8 million and is reflected as
goodwill in the consolidated financial statements at December 31, 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
earnings, 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 $10,000.
4. 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, 1997 and 1996
was approximately $17 million and $4.6 million, respectively.
63
<PAGE> 64
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT SECURITIES:
The amortized cost and estimated fair value of investment securities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- TAYLOR CAPITAL GROUP, INC. --
CONSOLIDATED DECEMBER 31, 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.................... $205,007 $ 797 $ (20) $205,784
U.S. government agency securities........... 13,261 125 (41) 13,345
Collateralized mortgage obligations......... 84,330 61 (374) 84,017
Mortgage-backed securities.................. 95,364 645 (10) 95,999
-------- ------ ----- --------
Total available-for-sale................. 397,962 1,628 (445) 399,145
-------- ------ ----- --------
Held-to-maturity:
State and municipal obligations............. 65,034 1,364 (79) 66,319
Federal Reserve Bank and Federal Home Loan
Bank equity securities................... 17,392 -- -- 17,392
Other debt securities....................... 825 46 (1) 870
-------- ------ ----- --------
Total held-to-maturity................... 83,251 1,410 (80) 84,581
-------- ------ ----- --------
Total.................................. $481,213 $3,038 $(525) $483,726
======== ====== ===== ========
</TABLE>
<TABLE>
<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
Collateralized mortgage obligations......... 240 -- (7) 233
Mortgage-backed securities.................. 163,239 668 (4,136) 159,771
-------- ------ ------- --------
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
Federal Reserve Bank and Federal Home Loan
Bank equity securities................... 11,449 -- -- 11,449
Other debt securities....................... 575 4 -- 579
-------- ------ ------- --------
Total held-to-maturity................... 74,972 2,802 (16) 77,758
-------- ------ ------- --------
Total.................................. $407,130 $3,993 $(4,548) $406,575
======== ====== ======= ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1997, 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.
64
<PAGE> 65
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT SECURITIES: -- (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Available-for-sale:
Due in one year or less................................... $ 98,113 $ 98,179
Due after one year through five years..................... 120,155 120,950
Collateralized mortgage obligations....................... 84,330 84,017
Mortgage-backed obligations............................... 95,364 95,999
-------- --------
Totals................................................. $397,962 $399,145
======== ========
Held-to-maturity:
Due in one year or less................................... $ 8,868 $ 8,482
Due after one year through five years..................... 29,147 29,557
Due after five years through ten years.................... 25,683 26,928
Due after ten years....................................... 2,161 2,222
-------- --------
Totals................................................. $ 65,859 $ 67,189
======== ========
</TABLE>
Proceeds from the sales of investment securities available-for-sale and the
related gross realized gains for the Company for 1997 were $52.8 million and
$388,000 respectively. There were no sales of investment securities
available-for-sale during 1996 or 1995.
During 1997, a held-to-maturity investment security with an amortized cost
of $320,000 was sold resulting in a gain of $13,000. The investment security was
sold due to a down grading of its credit quality.
Investment securities with an approximate book value of $298 million at
December 31, 1997 were pledged to collateralize certain deposits, securities
sold under agreements to repurchase and for other purposes as required or
permitted by law.
6. LOANS:
Loans classified by type at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS --
CONSOLIDATED COLE TAYLOR BANK
------------------ --------------------
1997 1996
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
Commercial and industrial............................... $ 671,506 $ 655,919
Real estate-construction................................ 179,855 192,759
Residential real estate-mortgages....................... 165,258 176,819
Home equity lines of credit............................. 104,287 86,648
Consumer................................................ 50,391 84,622
Other loans............................................. 2,448 4,622
---------- ----------
Gross loans........................................ 1,173,745 1,201,389
Less: Unearned discount................................. (1,079) (1,548)
---------- ----------
Total loans........................................ 1,172,666 1,199,841
Less: Allowance for loan losses......................... (25,813) (24,184)
---------- ----------
Loans, net......................................... $1,146,853 $1,175,657
========== ==========
</TABLE>
65
<PAGE> 66
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LOANS -- (CONTINUED):
Information about the Company's loans on a nonaccrual basis for the periods
indicated is as follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- PREDECESSOR BASIS --
TAYLOR CAPITAL COLE TAYLOR BANK
GROUP, INC. -- -------------------------------------
CONSOLIDATED AT AT AND FOR
AND FOR THE PERIOD THE PERIOD OF AT AND FOR THE
OF FEBRUARY 12, 1997 JANUARY 1, 1997 YEARS ENDED
TO DECEMBER 31, TO FEBRUARY 11, DECEMBER 31,
-------------------- --------------- ------------------
1997 1997 1996 1995
-------------------- --------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Recorded balance of nonaccrual loans, at end of
period:............................................. $11,624 $11,162 $10,898 $ 9,921
Interest included in income........................... 73 12 72 240
Interest which would have been recognized under the
original terms of the loans......................... 967 197 1,015 936
</TABLE>
Information about the Company's impaired loans for the periods indicated is
as follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS -- PREDECESSOR BASIS --
TAYLOR CAPITAL COLE TAYLOR BANK
GROUP, INC. -- -------------------------------------
CONSOLIDATED AT AT AND FOR
AND FOR THE PERIOD THE PERIOD OF AT AND FOR THE
OF FEBRUARY 12, 1997 JANUARY 1, 1997 YEARS ENDED
TO DECEMBER 31, TO FEBRUARY 11, DECEMBER 31,
-------------------- --------------- ------------------
1997 1997 1996 1995
-------------------- --------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Recorded balance of impaired loans, at end of period:
With related allowance for loan loss................ $ 5,901 $ 3,557 $ 3,697 $ 5,710
With no related allowance for loan loss............. 8,011 7,708 7,646 3,871
------- ------- ------- -------
Total............................................. $13,912 $11,265 $11,343 $ 9,581
======= ======= ======= =======
Average balance of impaired loans for the period...... $11,258 $11,304 $11,026 $ 7,834
======= ======= ======= =======
Allowance for loan loss related to impaired loans..... $ 2,582 $ 1,711 $ 2,062 $ 604
======= ======= ======= =======
Interest income recognized on impaired loans.......... $ 217 $ -- $ 115 $ 39
</TABLE>
The Company 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 Company does not
have a concentration of loans in any specific industry. Credit risks tend to be
geographically concentrated in that the majority of the Company's customer base
lies within the Chicago metropolitan area.
66
<PAGE> 67
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LOANS -- (CONTINUED):
Activity in the allowance for loan losses for the periods indicated
consisted of the following:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS -- COLE TAYLOR BANK
CONSOLIDATED ------------------------------------------
FOR THE PERIOD OF FOR THE PERIOD OF
FEBRUARY 12, 1997 TO JANUARY 1, 1997 TO FOR THE YEARS ENDED
DECEMBER 31, FEBRUARY 11, DECEMBER 31,
-------------------- ------------------ --------------------
1997 1997 1996 1995
-------------------- ------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period......... $24,607 $24,184 $23,869 $22,833
Provision for loan losses.............. 4,061 420 3,307 4,056
Loans charged-off...................... (3,530) (275) (3,829) (4,901)
Recoveries on loans previously
charged-off.......................... 675 243 837 1,881
------- ------- ------- -------
Net charge-offs........................ (2,855) (32) (2,992) (3,020)
------- ------- ------- -------
Balance at end of period............... $25,813 $24,572 $24,184 $23,869
======= ======= ======= =======
</TABLE>
The Company has extended loans to directors and executive officers of the
Bank, the Parent and their related interests. The aggregate loans outstanding to
the directors and executive officers of the Company and their related interests,
which individually exceeded $60,000, totaled $18.9 at December 31, 1997. During
1997, new loans totaled $2.6 million and repayments totaled $3.1 million. For
the Bank's predecessor basis at December 31, 1996, aggregate loans outstanding
to the predecessor's directors and executive officers was $21.6 million. During
1996, new loans totaled $8.8 million and repayments totaled $7.5 million. 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.
7. PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Premises, leasehold improvements and equipment at December 31, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL PREDECESSOR
GROUP, INC. -- BASIS -- COLE
CONSOLIDATED TAYLOR BANK
------------------ -------------
1997 1996
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements....................................... $ 3,316 $ 3,724
Buildings and improvements.................................. 8,385 7,605
Leasehold improvements...................................... 4,493 3,298
Furniture, fixtures and equipment........................... 10,070 13,049
------- --------
Total cost............................................. 26,264 27,676
Less accumulated depreciation and amortization.............. (3,551) (12,429)
------- --------
Net book value......................................... $22,713 $ 15,247
======= ========
</TABLE>
67
<PAGE> 68
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. OTHER REAL ESTATE AND REPOSSESSED ASSETS:
Activity in the allowance for other real estate for the periods indicated
are as follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS -- COLE TAYLOR BANK
CONSOLIDATED ---------------------------------------
FOR THE PERIOD OF FOR THE PERIOD OF FOR THE YEARS
FEBRUARY 12, 1997 TO JANUARY 1, 1997 TO ENDED
DECEMBER 31, FEBRUARY 11, DECEMBER 31,
-------------------- ------------------- ----------------
1997 1997 1996 1995
-------------------- ------------------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period............ $ 99 $104 $ 587 $ 795
Provision for other real estate........... 252 -- 72 243
Charge-offs............................... (65) (5) (555) (451)
---- ---- ----- -----
Balance at end of period.................. $286 $ 99 $ 104 $ 587
==== ==== ===== =====
</TABLE>
9. AUTO LOAN SALE PROCEEDS RECEIVABLE:
In anticipation of the Split-Off Transactions 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 in 1996. Proceeds related to the
sale were received January 2, 1997.
10. MORTGAGE SERVICING RIGHTS:
At December 31, 1997 and 1996 mortgage loans serviced for others totaled
$311 million and $283 million, respectively. A summary of the activity related
to mortgage servicing rights is as follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS -- COLE TAYLOR BANK
CONSOLIDATED ---------------------------------------
FOR THE PERIOD OF FOR THE PERIOD OF FOR THE YEARS
FEBRUARY 12 1997 TO JANUARY 1, 1997 TO ENDED
DECEMBER 31, FEBRUARY 11, DECEMBER 31,
-------------------- ------------------- ----------------
1997 1997 1996 1995
-------------------- ------------------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Book value, at beginning of period..... $2,414 $2,344 $ 895 $ --
Originated mortgage servicing rights
capitalized.......................... 622 127 1,697 962
Amortization of mortgage servicing
rights............................... (565) (57) (248) (67)
------ ------ ------ ----
Book value, at end of period........... $2,471 $2,414 $2,344 $895
====== ====== ====== ====
Impairment valuation allowance, at
beginning of period.................. $ 66 $ 66 $ -- $ --
Additions charged to operations........ 53 -- 66 --
Direct write downs..................... -- -- -- --
------ ------ ------ ----
Impairment valuation allowance, at end
of period............................ $ 119 $ 66 $ 66 $ --
====== ====== ====== ====
Carrying value, at end of period....... $2,352 $2,348 $2,278 $895
====== ====== ====== ====
Fair value, at end of period........... $2,451 $2,350 $2,280 $895
====== ====== ====== ====
</TABLE>
On January 30, 1998, the Bank contracted to sell the servicing for
approximately $270 million of mortgage loans serviced for others. The mortgage
servicing rights were obtained through loan origination by
68
<PAGE> 69
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. MORTGAGE SERVICING RIGHTS: -- (CONTINUED)
the Bank where the loan was subsequently sold. Management estimates that the
proceeds from the sale, after all related expenses, will result in a gain of
approximately $1.4 million in 1998.
11. INTEREST-BEARING DEPOSITS:
Interest-bearing deposits at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS --
CONSOLIDATED COLE TAYLOR BANK
------------------ --------------------
1997 1996
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
NOW accounts............................................ $ 100,309 $ 77,693
Savings accounts........................................ 112,978 118,056
Money market deposits................................... 240,294 244,302
Certificates of deposit, less than $100,000............. 288,168 299,544
Certificates of deposit, $100,000 or more............... 129,062 109,137
Public time deposits.................................... 96,844 143,415
Brokered certificates of deposit........................ 69,883 80,685
---------- ----------
Total.............................................. $1,037,538 $1,072,832
========== ==========
</TABLE>
Interest expense on certificates of deposit, $100,000 or more, was $5.3
million, $566,400, $4.3 million and $3.4 million for the period of February 12,
1997 to December 31, 1997, the period of January 1, 1997 to February 11, 1997
and for the years ended December 31, 1996 and 1995, respectively.
At December 31, 1997 the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------------
(IN THOUSANDS)
<S> <C>
1998...................................................... $518,037
1999...................................................... 48,721
2000...................................................... 13,104
2001...................................................... 2,659
2002...................................................... 1,358
and thereafter............................................ 78
--------
Total................................................ $583,957
========
</TABLE>
12. SHORT-TERM BORROWINGS:
Short-term borrowings at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS --
CONSOLIDATED COLE TAYLOR BANK
------------------ --------------------
1997 1996
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
Securities sold under agreements to repurchase.......... $169,550 $126,173
Federal funds purchased................................. 11,450 26,040
U.S. Treasury tax and loan note option.................. 5,053 9,969
-------- --------
Total.............................................. $186,053 $162,182
======== ========
</TABLE>
69
<PAGE> 70
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SHORT-TERM BORROWINGS: -- (CONTINUED)
Securities sold under agreements to repurchase generally mature within 1 to
60 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>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS -- COLE TAYLOR BANK
CONSOLIDATED ------------------------------------------
FOR THE PERIOD OF FOR THE PERIOD OF
FEBRUARY 12, 1997 TO JANUARY 1, 1997 TO FOR THE YEARS ENDED
DECEMBER 31, FEBRUARY 11, DECEMBER 31,
-------------------- ------------------ --------------------
1997 1997 1996 1995
-------------------- ------------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Daily average balance during the
period............................. $165,321 $150,478 $126,484 $196,728
Daily average rate during the
period............................. 5.11% 5.19% 5.46% 5.81%
Maximum amount outstanding at any
month end.......................... $203,898 $147,082 $144,825 $224,907
</TABLE>
Under the treasury tax and loan note option, the Company 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, 1997, the Company had outstanding and unused lines of
credit for short-term borrowings with various entities totaling $435 million.
13. INCOME TAXES:
The components of the income tax expense (benefit) for the periods
indicated are as follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC., -- PREDECESSOR BASIS -- COLE TAYLOR BANK
CONSOLIDATED ------------------------------------------
FOR THE PERIOD OF FOR THE PERIOD OF
FEBRUARY 12, 1997 TO JANUARY 1, 1997 TO FOR THE YEARS ENDED
DECEMBER 31, FEBRUARY 11, DECEMBER 31,
-------------------- ------------------ --------------------
1997 1997 1996 1995
-------------------- ------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current tax expense:
Federal................................ $6,241 $1,353 $8,863 $7,758
State.................................. 35 300 859 --
------ ------ ------ ------
Total............................. 6,276 1,653 9,722 7,758
------ ------ ------ ------
Deferred tax expense (benefit):
Federal................................ (589) (325) 249 16
Charge in lieu of taxes resulting from
recognition of acquired tax benefits... 634 -- -- --
------ ------ ------ ------
Applicable income taxes............. $6,321 $1,328 $9,971 $7,774
====== ====== ====== ======
</TABLE>
In connection with the acquisition of the Bank, the Company acquired state
net operating loss carryforwards and deductible temporary differences
approximating $34 million and $26 million respectively. The tax benefits of
these acquired items are applied against goodwill when recognized.
70
<PAGE> 71
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES -- (CONTINUED):
Income tax expense was different from the amounts computed by applying the
federal statutory rate of 35% in 1997, 1996 and 1995 to income before income
taxes because of the following:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS -- COLE TAYLOR BANK
CONSOLIDATED -----------------------------------------
FOR THE PERIOD OF FOR THE PERIOD OF
FEBRUARY 12, 1997 TO JANUARY 1, 1997 TO FOR THE YEARS ENDED
DECEMBER 31, FEBRUARY 11, DECEMBER 31,
-------------------- ------------------ --------------------
1997 1997 1996 1995
-------------------- ------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal income tax expense at statutory
rate.................................. $ 5,752 $1,264 $10,382 $ 9,079
Increase (decrease) in taxes resulting
from:
Tax-exempt interest income, net of
disallowed interest deduction...... (1,130) (162) (1,372) (1,423)
Goodwill amortization................. 787 -- -- --
State taxes, net................... 23 195 558 --
Charge in lieu of state taxes, net.... 634 -- -- --
Other, net......................... 255 31 403 118
------- ------ ------- -------
Total............................ $ 6,321 $1,328 $ 9,971 $ 7,774
======= ====== ======= =======
</TABLE>
71
<PAGE> 72
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. 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,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS --
CONSOLIDATED COLE TAYLOR BANK
------------------ --------------------
1997 1996
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Fixed assets, principally due to differences in
depreciation....................................... $ 1,068 $ 634
Loans, principally due to allowance for loan losses... 10,372 8,464
State net operating loss carryforwards................ 1,203 --
Deferred income, principally net loan origination
fees............................................... 1,116 1,234
Employee benefits..................................... 634 --
Other real estate..................................... 113 36
Other accruals........................................ 524 559
------- -------
Gross deferred tax assets.......................... 15,030 10,927
Less valuation allowance.............................. (1,788) --
------- -------
Gross deferred tax assets, net of valuation
allowance........................................ 13,242 10,927
------- -------
DEFERRED TAX LIABILITIES:
Discount accretion.................................... (104) (233)
Business combination.................................. (2,295) --
Mortgage servicing rights............................. (933) (797)
------- -------
Gross deferred tax liabilities..................... (3,332) (1,030)
------- -------
Subtotal......................................... 9,910 9,897
------- -------
Tax effect of unrealized holding losses on investment
securities......................................... (402) 1,362
------- -------
Net deferred tax assets.......................... $ 9,508 $11,259
======= =======
</TABLE>
The Company has net operating loss carryforwards for Illinois state income
tax purposes of approximately $26 million at December 31, 1997, expiring 2004
through 2005. A valuation allowance was established for the acquired state tax
benefits at the acquisition date to reduce the deferred tax asset to an amount
which is more likely than not to be realized. At December 31, 1997, $1.5 million
of the valuation allowance relates to the acquired state tax benefits. Future
reductions in that portion of the valuation allowance, if appropriate, would
reduce the goodwill recognized in connection with the acquisition of the Bank.
72
<PAGE> 73
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. NONRECOURSE BORROWINGS:
Nonrecourse borrowings consist of the following at December 31, 1997:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. --
CONSOLIDATED
------------------
1997
------------------
(IN THOUSANDS)
<S> <C>
BALLOON LOANS WITH FLOATING RATES:
Various borrowings with principal ranging from $330,000 to
$3.7 million; weighted average interest rate at December
31, 1997 was 7.72%........................................ $ 5,819
BALLOON LOANS WITH FIXED RATES:
Various borrowings with principal ranging from $73,000 to
$6.0 million; weighted average interest rate at December
31, 1997 was 6.26%........................................ 9,345
MONTHLY AMORTIZING LOANS WITH FIXED RATES:
Various borrowings with principal ranging from $30,000 to
$1.8 million, monthly principal and interest payments of
$34,000; weighted average interest rate at December 31,
1997 was 8.39%............................................ 3,593
-------
Total.................................................. $18,757
=======
</TABLE>
Nonrecourse borrowings consist of debt incurred or assumed in connection
with the acquisition of certain other assets related to the Company's reverse
exchange program. Funds are used to acquire assets where the Company acts as a
"parking intermediary", temporarily holding the property until sale to its
ultimate owner. The borrowings are obtained from banks and the customers
initiating the transactions and are collateralized by the assets acquired. The
sole remedy of the third-party lender in event of nonpayment of the loan is the
asset pledged as collateral. During the holding period, the customers lease the
assets at rentals approximating the debt service payments on the nonrecourse
borrowings. Income and expense for these assets and borrowings are netted for
purposes of the consolidated statement of operations and are included in trust
fees. On March 19, 1998, the Company sold the subsidiary (CTRE, Inc.) within
which the reverse exchange business was conducted. All assets and borrowings of
the subsidiary were sold with the subsidiary. No significant gain or loss was
realized as a result of the sale.
Following are the scheduled maturities of nonrecourse borrowings at
December 31, 1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1998...................................................... $ 6,204
1999...................................................... 51
2000...................................................... 6,455
2001...................................................... 60
2002...................................................... 4,306
Thereafter................................................ 1,681
-------
Total................................................ $18,757
=======
</TABLE>
73
<PAGE> 74
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. NOTES PAYABLE:
Notes payable consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS --
CONSOLIDATED COLE TAYLOR BANK
------------------ --------------------
1997 1996
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
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 December 31, 1997 was 7.12%......... $ 25,000 $ --
Unsecured $7 million revolving credit facility bearing
interest at prime rate or LIBOR plus 1.25%, maturing
May 1, 1998; interest rate at December 31, 1997 was
7.02%................................................ 2,000 --
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 totaling approximately $219.3 million and $12.7
million respectively; weighted average interest rates
at December 31, 1997 and December 31, 1996 were 6.04%
and 6.00%, respectively.............................. 85,000 85,000
-------- -------
Total............................................. $112,000 $85,000
======== =======
</TABLE>
In February 1997, the Parent Company executed a loan agreement with an
unaffiliated bank for a $25 million term loan and a $7 million revolving credit
facility. The loan agreement requires compliance with certain defined financial
covenants relating to the Bank including covenants related 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 a
custodian bank and, in the event of default under the loan agreement, the
Company must pledge the Bank's stock to the lender. As of December 31, 1997, the
Company is not aware of any instances of non-compliance.
Following are the scheduled maturities of notes payable at December 31,
1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1998...................................................... $ 87,000
1999...................................................... 1,000
2000...................................................... 1,000
2001...................................................... 1,000
2002...................................................... 22,000
Thereafter................................................ --
--------
Total................................................ $112,000
========
</TABLE>
16. EMPLOYEE BENEFIT PLANS:
The employees of the Company participate in employee benefit plans
consisting of a 401(k)/profit-sharing and Employee Stock Ownership Plan (the
"Plan"). Company contributions are at the discretion of the Board of Directors,
with the exception of certain matching of employee contributions. For the period
of
74
<PAGE> 75
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
16. EMPLOYEE BENEFIT PLANS: -- (CONTINUED)
February 12, 1997 to December 31, 1997 contributions paid to the Plan were $1.5
million. Contributions paid to the Plan by the predecessor Bank during the years
ended December 31, 1996 and 1995 were $1.2 million and $1.5 million,
respectively. At December 31, 1997 the ESOP owned 344,024 shares of the
Company's common stock. These shares are held in trust for the participants by
the Plan's trustee (Cole Taylor Bank).
The Company acts as a self-insurer for employee's medical insurance whereby
it assumes limited liabilities with the excess liability assumed by
underwriters. Claims for employees are charged to operations during the year.
For the period of February 12, 1997 to December 31, 1997, employee claims
totaled $1.1 million. Employee claims for the predecessor Bank totaled $1.0
million and $1.3 million for the years ended December 31, 1996 and 1995,
respectively.
17. INCENTIVE COMPENSATION PLAN:
The Company has an Incentive Compensation Plan (the "Plan") that allows for
the granting of stock options and stock awards. Under the Plan, 563,066 shares
of common stock have been reserved.
STOCK OPTIONS:
During the period February 12, 1997 to December 31, 1997, stock
options were granted under stock option agreements for 163,889 shares of
common stock effective as of June 30, 1997. Forfeitures of stock options
during the period February 12, 1997 to December 31, 1997 were 13,499. Stock
options outstanding at December 31, 1997 were 150,390 shares. 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.
The grant date fair value of stock options granted to employees during
the year, the significant assumptions used to determine those fair values,
using a modified Black-Sholes option pricing model, and the pro forma
effect of the fair value accounting for stock options under SFAS No. 123
are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD OF
FEBRUARY 12, 1997 TO
DECEMBER 31, 1997
--------------------
<S> <C>
Grant date fair value per share............................. $ 7.39
Significant assumptions:
Risk-free interest rate at grant date..................... 6.00%
Expected stock price volatility........................... 25.00%
Expected dividend payout.................................. 1.64%
Expected option life...................................... 7 years
Net income (in thousands):
As reported............................................... $ 10,113
Pro forma................................................. $ 10,044
</TABLE>
RESTRICTED STOCK AWARDS:
At the date of grant, September 30, 1997, 140,453 shares of common
stock were awarded under restricted stock agreements. 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 death, disability, retirement or change of control of the
Company. If a participant
75
<PAGE> 76
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
17. INCENTIVE COMPENSATION PLAN: -- (CONTINUED)
terminates employment prior to the end of the continuous service period,
the entire stock award is forfeited. The unearned compensation related to
the restricted stock grants is reported in stockholders' equity.
Compensation expense equal to the fair market value at the date of grant is
being recognized over the vesting period. For the period of February 12,
1997 to December 31, 1997, compensation expense related to the stock awards
totaled $434,000.
In connection with the granting of the stock options and awards, stock
transfer agreements are entered into 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.
18. STOCKHOLDERS' EQUITY:
The authorized capital stock of the Company consists of 10 million shares,
of which 7 million shares are common stock, par value $.01 per share, and 3
million shares are preferred stock, par value $.01 per share.
COMMON STOCK:
The holders of outstanding shares of common stock are entitled to
receive dividends out of assets legally available therefor at such times
and in such amounts as the Board of Directors may from time to time
determine. The shares of common stock are neither redeemable nor
convertible, and the holders thereof have no preemptive or subscription
rights to purchase any securities of the Company. Upon liquidation,
dissolution or winding up of the Company, the holders of common stock are
entitled to receive, pro rata, the assets of the Company which are legally
available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of preferred
stock then outstanding. Each outstanding share of common stock is entitled
to one vote on all matters submitted to a vote of stockholders.
PREFERRED STOCK:
The shares of preferred stock are not convertible into, or
exchangeable for, shares of common stock, any other class or classes of
capital stock of the Company and have no preemptive rights. Holders of
shares of preferred stock are entitled to receive noncumulative cash
dividends payable quarterly in arrears for each quarter when, as and if
declared by the Board of Directors. Shares of preferred stock are not
redeemable prior to January 15, 2002. On or after such date, they are
redeemable at the option of the Company.
The holders of the preferred stock have no voting rights, except for
the election of one director of the Company. The holders vote separately as
a class and are entitled to cast one vote (or fraction thereof) for each
$25.00 of liquidation preference to which such preferred stock is entitled.
In the event of any liquidation, dissolution or winding up of the
Company, the holders of shares of preferred stock are entitled to receive
out of the assets of the Company available for distribution to
stockholders, before any distribution of the assets is made to the holders
of shares of the common stock or on any other class or series of stock of
the Company ranking junior to the shares of preferred stock as to such a
distribution, an amount equal to $25.00 per share, plus an amount equal to
dividends declared and unpaid for the then-current dividend period.
The costs related to the issuance of the preferred stock is being
amortized over 5 years using the straight line method.
76
<PAGE> 77
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
19. COMMITMENTS AND FINANCIAL INSTRUMENTS:
COMMITMENTS:
The Company is obligated in accordance with the terms of various
long-term noncancelable operating leases for certain 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 Company 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 for the Company in
connection with these leases for the period of February 12, 1997 to
December 31, 1997 was approximately $2.4 million. The predecessor Bank's
total rental expense for the period of January 1, 1997 to February 11, 1997
and the years ended December 31, 1996 and 1995 was approximately $290,000,
$2.3 million and $2.0 million, respectively.
Estimated future minimum rental commitments under these operating
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1998...................................................... $ 2,292
1999...................................................... 1,591
2000...................................................... 1,563
2001...................................................... 1,523
2002...................................................... 1,426
Thereafter................................................ 14,373
-------
Total................................................ $22,768
=======
</TABLE>
FINANCIAL INSTRUMENTS:
The Company is 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. 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 Company 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
Company 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 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 Company'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
77
<PAGE> 78
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
19. COMMITMENTS AND FINANCIAL INSTRUMENTS: -- (CONTINUED)
interest-rate exchange contracts (swaps) and forward commitments to sell
loans the contract or notional amounts substantially exceed actual exposure
to credit loss.
At December 31, 1997 and 1996, the contractual or notional amounts were as
follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL
GROUP, INC. -- PREDECESSOR BASIS --
CONSOLIDATED COLE TAYLOR BANK
------------------ --------------------
1997 1996
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments wherein contract amounts represent
credit risk:
Commitments to extend credit.............................. $613,095 $551,097
Standby letters of credit................................. 63,800 55,154
Financial instruments wherein notional amounts exceed the
amount of credit risk:
Interest rate exchange agreements (swaps)................. $ 25,000 $ 75,000
Forward commitments to sell loans......................... 14,000 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 Company
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 Company'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 term of this agreement 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 approximately 5.94% as of December 31, 1997. The
agreement matures December 6, 1998.
The Company 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 Company from a risk that the market value of mortgage loans
intended to be sold will be adversely affected by changes in interest rates. At
December 31, 1997, the Company's forward commitments to sell loans had delivery
commitments expiring within three months. Gross unrealized losses on forward
sale commitments, based on dealer-quoted prices, approximated $63,000 at
December 31, 1997.
20. 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 Company, a
significant portion of its assets and liabilities are considered financial
instruments as defined in SFAS No. 107. Many of the Company's financial
instruments, however, lack an available, or readily determinable, 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 Company for the purposes
78
<PAGE> 79
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED):
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, interest-bearing deposits with banks and federal
funds sold are reported at amounts which approximate fair value in the
balance sheet.
INTEREST BEARING DEPOSITS WITH BANKS:
The carrying amounts reported for interest bearing deposits
approximate the assets' fair values.
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 5.
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.
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 deposits without
stated maturities equal the respective amounts due on demand.
SHORT-TERM AND NONRECOURSE BORROWINGS AND NOTES PAYABLE:
Short-term borrowings and notes payable have been valued at present
values of future cash flows using rates which approximate current market
rates for similar instruments. The carrying amounts reported for
nonrecourse borrowings approximate those borrowings' fair values.
OFF-BALANCE SHEET 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.
79
<PAGE> 80
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED):
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
SUCCESSOR BASIS --
TAYLOR CAPITAL GROUP, INC. -- PREDECESSOR BASIS --
CONSOLIDATED COLE TAYLOR BANK
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents............. $ 84,616 $ 84,616 $ 87,260 $ 87,260
Investment securities................. 482,396 483,726 403,789 406,575
Loans, net of allowance............... 1,178,624 1,177,267 1,224,994 1,219,205
---------- ---------- ---------- ----------
Total financial assets............. $1,745,636 $1,745,609 $1,716,043 $1,713,040
========== ========== ========== ==========
Financial Liabilities:
Deposits without stated maturities.... $ 794,000 $ 794,000 $ 774,119 $ 774,119
Deposits with stated maturities....... 583,957 584,311 632,782 634,642
Short-term borrowings................. 186,053 186,053 162,182 162,182
Nonrecourse borrowings................ 18,757..... 18,757 -- --
Notes payable......................... 112,000 111,981 85,000 85,000
---------- ---------- ---------- ----------
Total financial liabilities........ $1,694,767 $1,695,102 $1,654,083 $1,655,943
========== ========== ========== ==========
Off-Balance-Sheet Financial Instruments:
Interest rate swap agreements(1)...... $ (218) $ (152) -- $ (456)
Commitments to extend credit.......... -- -- -- --
Letters of credit..................... -- -- -- --
---------- ---------- ---------- ----------
Total off-balance-sheet financial
instruments...................... $ (218) $ (152) $ -- $ (456)
========== ========== ========== ==========
</TABLE>
- ---------------
(1) Carrying value reflects purchase accounting adjustment.
The remaining balance sheet assets and liabilities of the Company are not
considered financial instruments and have not been valued differently than is
customary under historical cost accounting. Since assets and liabilities that
are not financial instruments are excluded above, the difference between total
financial assets and financial liabilities does not, nor is it intended to,
represent the market value of the Company. Furthermore, the estimated fair value
information may not be comparable between financial institutions due to the wide
range of valuation techniques permitted, and assumptions necessitated, in the
absence of an available trading market.
21. REGULATORY DISCLOSURES:
The Parent Company and the Bank are 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Parent
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the entity's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
entity's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
80
<PAGE> 81
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
21. REGULATORY DISCLOSURES -- (CONTINUED):
Quantitative measures established by regulation to ensure capital adequacy
require the Parent Company and 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 average assets (as defined). Based on these quantitative measures,
as of December 31, 1997, the Parent Company is categorized as
"adequately-capitalized" and the Bank is categorized as "well-capitalized".
As of December 31, 1997, 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 Company's and the Bank's actual capital amounts and ratios as of
December 31, 1997 and 1996 are 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
-------- ----- ---------- ------ ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets)
Successor Basis -- Taylor Capital
Group, Inc. -- Consolidated..... $122,432 9.21% >$ 106,370 >8.00% NA
Cole Taylor Bank................... 148,043 11.16 > 106,135 >8.00 > 132,669 >10.00%
Tier I Capital (to Risk Weighted
Assets)
Successor Basis -- Taylor Capital
Group, Inc. -- Consolidated..... 105,698 7.95% > 53,185 >4.00 NA
Cole Taylor Bank................... 131,348 9.90 > 53,068 >4.00 > 79,601 > 6.00
Leverage (to Average Assets)
Successor Basis -- Taylor Capital
Group, Inc. -- Consolidated..... 105,698 5.85% > 72,318 >4.00 NA
Cole Taylor Bank................... 131,348 7.26 > 72,319 >4.00 90,399 > 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 (to Average Assets)
Predecessor Basis -- Cole Taylor
Bank............................ 141,492 7.63 > 74,158 >4.00 > 92,698 > 5.00
</TABLE>
81
<PAGE> 82
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
22. PARENT COMPANY ONLY:
Summarized unconsolidated financial information of Taylor Capital Group,
Inc. is as follows:
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Noninterest-bearing deposits with subsidiary Bank........... $ 1,612
Investment in subsidiaries.................................. 167,461
Advances to Bank............................................ 21
Other assets................................................ 1,594
--------
Total assets........................................... $170,688
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest, taxes and other liabilities............... $ 2,618
Notes payable............................................... 27,000
Stockholders' equity........................................ 141,070
--------
Total liabilities and stockholders' equity............. $170,688
========
</TABLE>
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD OF
FEBRUARY 12, 1997
TO DECEMBER 31,
1997
-----------------
<S> <C>
Income:
Dividends from subsidiary Bank............................ $ 8,000
Interest.................................................. 140
-------
Total income........................................... 8,140
-------
Expenses:
Interest.................................................. 1,898
Salaries and employee benefits............................ 2,141
Other..................................................... 1,804
-------
Total expenses......................................... 5,843
-------
Income before income taxes and equity in undistributed net
income of subsidiaries.................................... 2,297
Income tax benefit.......................................... 1,946
Equity in undistributed net income of subsidiaries.......... 5,870
-------
Net income............................................. $10,113
=======
</TABLE>
82
<PAGE> 83
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
22. PARENT COMPANY ONLY -- (CONTINUED):
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD OF
FEBRUARY 12, 1997
TO DECEMBER 31,
1997
-----------------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 10,113
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of other assets........................... 327
Amortization of unearned compensation.................. 58
Equity in undistributed net income of subsidiaries..... (5,870)
Other, net............................................. 21
Changes in assets and liabilities:
Other assets......................................... (1,602)
Other liabilities.................................... 1,340
--------
Net cash provided by operating activities............ 4,387
--------
Cash flows from investing activities:
Purchase of Bank and Mortgage Company..................... (62,101)
Advances to subsidiaries.................................. (14,600)
Repayments of advances to subsidiaries.................... 14,600
Other, net................................................ (361)
--------
Net cash used in investing activities................ (62,462)
--------
Cash flows from financing activities:
Dividends paid............................................ (3,419)
Repayments of notes payable............................... (5,600)
Proceeds from notes payable............................... 32,600
Net proceeds from issuance of preferred stock............. 36,106
--------
Net cash provided by financing activities:........... 59,687
--------
Net increase in cash and cash equivalents................... 1,612
Cash and cash equivalents, beginning of period.............. --
--------
Cash and cash equivalents, end of period.................... $ 1,612
========
</TABLE>
The Bank is subject to dividend restrictions set forth by regulatory
authorities. Under such restrictions, the Bank may not, without prior approval
of regulatory authorities, declare dividends in excess of the sum of the current
year's earnings (as defined) plus the retained earnings (as defined) from the
prior two years. The dividends, as of December 31, 1997, that the Bank could
declare and pay to the Company, without the approval of regulatory authorities,
amounted to approximately $5.9 million. However, payment of such dividends is
also subject to the Bank remaining in compliance with all applicable capital
ratios.
83
<PAGE> 84
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
23. LITIGATION:
The Company has been named as a defendant in a number of lawsuits relating
to either or both (1) the Split-Off Transactions which resulted in the Company
being split-off from CTFG (now Reliance Acceptance Group, Inc., hereinafter
referred to as "Reliance") in February, 1997, and (2) the financial and public
reporting of Reliance. The lawsuits name Reliance and/or current or former
officers, directors and stockholders of the Company and Reliance as additional
defendants. Included amongst the defendants are Jeffrey W. Taylor, Chairman of
the Board and Chief Executive Officer of the Company, and Bruce W. Taylor,
President of the Company. One case also names the Bank as a defendant. All of
the lawsuits have been brought as purported class actions on behalf of current
and former stockholders of Reliance.
Four of these actions are pending in Delaware Chancery Court. These cases
allege that the defendants breached their fiduciary duties in connection with
disclosures made to the stockholders prior to the vote which approved the
Split-Off Transactions. These cases seek relief in the form of unspecified
damages, attorneys' fees and rescission of the Split-Off Transactions. Two other
cases are pending in the United States District Court for the Western District
of Texas and one case is pending in the Northern District of Illinois. These
cases allege that the defendants violated the federal securities laws, and the
Illinois action also alleges that the defendants breached common law fiduciary
duties. In addition, the Illinois case alleges that the defendants violated
ERISA and breached duties owed to a subclass consisting of participants in
Reliance's ESOP and 401(k) Profit Sharing Plan. The Texas and Illinois cases
seek unspecified damages, attorneys' fees and rescission of the Split-Off
Transactions.
Seven other similar lawsuits are pending. Although the Company has not been
named as a defendant in those suits, certain directors, officers and
stockholders of the Company, including Jeffrey W. Taylor, Bruce W. Taylor and J.
Christopher Alstrin, Chief Financial Officer of the Company, have been named.
Pursuant to the Share Exchange Agreement in which Jeffrey W. Taylor, Bruce
W. Taylor, Iris A. Taylor, Sidney J. Taylor, Cindy Taylor Bleil, related trusts
and a related partnership (collectively, the "Taylor Family") agreed to acquire
the Company from Reliance, the Taylor Family may be obligated to indemnify
Reliance for 25% of any losses (net of any insurance proceeds paid to, or for
the benefit of Reliance or members of its Board of Directors), including without
limitation, any costs or expenses of defense or settlement of any suits, actions
or proceedings initiated by third-parties and any judgments in such suits,
actions or proceedings relating to the Split-Off Transactions (the "Transaction
Indemnification Obligation"). Subsequently, the Company agreed to indemnify and
hold harmless the Taylor Family from and against any and all liabilities of the
Taylor Family arising under the Transaction Indemnification Obligation. On
February 9, 1998, Reliance filed a voluntary petition under Chapter 11 of the
Bankruptcy Code, and all of the aforementioned cases in which Reliance had been
named as a defendant are now stayed as to Reliance. The Company is unable at
this time to predict the extent to which it might be called upon to fulfill its
indemnification obligations to the Taylor Family with respect to the Transaction
Indemnification Obligation.
All of these cases are in their early stages. The Company believes that it
has meritorious defenses to all of the actions against the Company, and the
Company intends to defend itself vigorously. In addition, the Company has agreed
to advance defense costs that are not otherwise advanced by insurance carriers
on behalf of members of the Taylor Family and directors and officers of the
Company who are defendants in these cases. The Company is unable at this time to
predict the potential impact of the litigation on the financial condition of the
Company.
The Company is from time to time a party to various other legal actions
arising in the normal course of its business. Management knows of no such other
legal actions threatened or pending against the Company that are likely to have
a material adverse impact on the financial condition of the Company.
84
<PAGE> 85
TAYLOR CAPITAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is selected data summarizing the results of operation for
each quarter in the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
PREDECESSOR
BASIS -- COLE
TAYLOR BANK SUCCESSOR BASIS -- TAYLOR CAPITAL GROUP, INC. --
1997 CONSOLIDATED -- 1997 QUARTER ENDED
--------------------- -----------------------------------------------------------
JANUARY 1-FEBRUARY 11 FEBRUARY 12-MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------- -------------------- ------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income............. $15,642 $17,804 $34,639 $35,801 $34,370
Interest expense............ 7,076 8,643 17,095 17,978 16,742
------- ------- ------- ------- -------
Net interest income.... 8,566 9,161 17,544 17,823 17,628
Provision for loan losses... 420 484 904 1,769 904
Investment securities
gains..................... -- -- -- 329 72
Non interest income......... 1,930 2,350 4,566 6,084 4,472
Non interest expense........ 6,466 8,184 16,940 17,230 17,180
------- ------- ------- ------- -------
Income before income
taxes................ 3,610 2,843 4,266 5,237 4,088
Income taxes........... 1,328 835 1,853 2,128 1,505
------- ------- ------- ------- -------
Net income.................. $ 2,282 $ 2,008 $ 2,413 3,109 $ 2,583
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR BASIS -- COLE TAYLOR BANK
1996 QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income..................................... $33,723 $34,362 $35,104 $35,708
Interest expense.................................... 16,096 16,396 17,001 16,884
------- ------- ------- -------
Net interest income............................ 17,627 17,966 18,103 18,824
Provision for loan losses........................... 999 1,053 953 302
Non interest income................................. 3,701 3,963 4,084 4,076
Non interest expense................................ 13,937 13,288 13,574 14,574
------- ------- ------- -------
Income before income taxes..................... 6,392 7,588 7,660 8,024
Income taxes................................... 2,062 2,603 2,623 2,683
------- ------- ------- -------
Net income $ 4,330 $ 4,985 $ 5,037 $ 5,341
======= ======= ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
85
<PAGE> 86
TAYLOR CAPITAL GROUP, INC.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey W. Taylor(1)................. 45 Chairman of the Board, Chief Executive Officer and
Director of the Company, Chairman of the Board and
Director of the Bank and Director of the Mortgage
Company.
Bruce W. Taylor(1)................... 42 President and Director of the Company, President,
Director and Chief Executive Officer of the Bank and
Director of the Mortgage Company
John Christopher Alstrin(1).......... 52 Chief Financial Officer and Director of the Company, the
Bank and the Mortgage Company
Sidney J. Taylor(1).................. 75 Chairman of the Executive Committee and Director of the
Company and Director of the Bank
Adelyn Dougherty(2).................. 67 Director of the Company
Ronald Emanuel(3).................... 52 Director of the Company
Edward T. McGowan(3)................. 62 Director of the Company
Melvin E. Pearl(2)................... 62 Director of the Company
Richard W. Tinberg(2)(3)............. 47 Director of the Company
Mark L. Yeager....................... 48 Director of the Company
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee
JEFFREY W. TAYLOR is Chairman of the Board, Chief Executive Officer and a
Director of the Company and Chairman of the Board and a Director of both the
Bank and the Mortgage Company. Mr. Taylor was formerly a Director of CTFG from
its inception in 1984 until the closing of the Split-Off Transactions. From
February 1994 until prior to the Split-Off Transactions, Mr. Taylor served as
Chairman and Chief Executive Officer of CTFG and Chairman and Chief Executive
Officer of the Bank. Mr. Taylor served as Vice President of Banking Strategy
from April 1990 until the end of 1990. Mr. Taylor began his career with the Bank
in 1978 as associate General Counsel and has held several management positions
with the Bank since that time. Mr. Taylor is the son of Sidney J. Taylor and the
brother of Bruce W. Taylor.
BRUCE W. TAYLOR is President and a Director of the Company and President
and Chief Executive Officer of the Bank and a Director of the Mortgage Company.
Mr. Taylor was formerly a Director of CTFG from its inception in 1984 until the
closing of the Split-Off Transactions. From February 1994 until prior to the
Split-Off Transactions, Mr. Taylor served as President of CTFG in addition to
President and Chief Executive Officer of the Bank. From 1991 to February 1994
Mr. Taylor served as Vice Chairman of CTFG and President and Chief Operating
Officer of the Bank. Mr. Taylor began working for Cole Taylor Bank in 1979 and
has held several management positions with the Bank since that time. Mr. Taylor
is the son of Sidney J. Taylor and the brother of Jeffrey W. Taylor.
JOHN CHRISTOPHER ALSTRIN is a Director and the Chief Financial Officer of
the Company. Mr. Alstrin was formerly the Chief Financial Officer of CTFG from
August 1995 until the closing of the Split-Off Transactions. Mr. Alstrin also
has been Chief Financial Officer of the Bank since August 1995 and has served as
a director of the Mortgage Company since its inception. From March 1989 to June
1994, Mr. Alstrin was the Chief Financial Officer and the Chief Investment
Officer of the Farm & Home Financial Corp., a multi-state financial services
corporation.
SIDNEY J. TAYLOR is Chairman of the Executive Committee and a Director of
the Company and Director of the Bank and was formerly a Director of CTFG from
its inception in 1984 until the closing of the Split-Off
86
<PAGE> 87
TAYLOR CAPITAL GROUP, INC.
PART III
Transactions. From the inception of CTFG through February 1994, Mr. Taylor
served as its Chairman and Chief Executive Officer. Mr. Taylor has over 50 years
of banking experience. Mr. Taylor began his banking career in 1946 and in 1960
became the President of Main State Bank. In 1969, Mr. Taylor purchased Main
State Bank with Irwin H. Cole and became Chairman of the Board. Mr. Taylor is
the father of Jeffrey W. Taylor and Bruce W. Taylor.
ADELYN DOUGHERTY is a Director of the Company and was formerly a Director
of CTFG from August 1995 until the closing of the Split-Off Transactions. Ms.
Dougherty retired in August 1996 as the President of the Institute of European
and Asian Studies. From 1988 to 1992, Ms. Dougherty was Senior Vice President
and Director of Human Resources for First Colonial Bankshares Corporation, a
holding company for sixteen banks and three non-bank subsidiaries located in the
greater metropolitan Chicago area.
RONALD EMANUEL is a Director of the Company. Since 1979, Mr. Emanuel has
been President and Majority Stockholder of ATI Carriage House, Inc., a retail
furniture distributor.
EDWARD MCGOWAN is a Director of the Company. Since 1973, Mr. McGowan has
been President of Edon Construction Co., Inc., a carpentry contractor. He is
also Secretary/Treasurer of Dremco, Inc., a real estate developer.
RICHARD W. TINBERG is a Director of the Company and was formerly a Director
of CTFG from 1995 until the closing of the Split-Off Transactions. Since 1985,
Mr. Tinberg has been the President and Chief Executive Officer of The Bradford
Group, a group of organizations engaged in the development and marketing of
collectibles and Chief Executive Officer of Hammacher Schlemmer & Company, which
specializes in the marketing of innovative products and gifts.
MELVIN E. PEARL is a Director of the Company and was formerly a Director of
CTFG from its inception in 1984 until the closing of the Split-Off Transactions.
Mr. Pearl has been a Partner with the law firm of Katten, Muchin & Zavis since
1977.
MARK L. YEAGER is a Director of the Company. Since 1981, Mr. Yeager has
been a Partner with the law firm of McDermott, Will & Emery.
TERMS OF OFFICE
Each member of the Board of Directors of the Company is elected annually.
All officers of the Company serve at the pleasure of the Board of Directors.
87
<PAGE> 88
TAYLOR CAPITAL GROUP, INC.
PART III
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Chief Executive
Officer and the three other executive officers of the Company (collectively, the
"Named Officers") in 1997. The Company was incorporated on October 9, 1996 and
commenced operations in February 1997. Therefore, the requirement for prior
years' compensation information is not applicable.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------- -------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK AWARDS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (#)(1) OPTIONS(#) COMPENSATION
- --------------------------- -------- -------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
JEFFREY W. TAYLOR,.......... $358,623 $240,255 -- -- -- $43,265(2)
Chairman of the Board and
Chief Executive Officer of
the Company
BRUCE W. TAYLOR,............ 350,063 237,875 -- -- -- 37,782(3)
President of the Company
SIDNEY J. TAYLOR,........... 264,808 16,560 -- -- -- 171,674(4)
Chairman of the Executive
Committee of the Company
J. CHRISTOPHER ALSTRIN,..... 196,615 67,500 $45,700(5) 18,182 6,200 31,245(5)
Chief Financial Officer of
the Company
</TABLE>
- ---------------
(1) As of December 31, 1997, Mr. Alstrin was the only Named Officer that held
any restricted common stock of the Company. Mr. Alstrin's 18,182 shares of
restricted stock had an aggregate fair value of $454,550 at December 31,
1997. This fair value was calculated by using a per share value of $25, as
determined by a third party appraisal. Dividends on the restricted shares
will be paid to Mr. Alstrin as they are declared.
(2) Includes $23,386 for contributions to the deferred compensation plan,
$11,584 in contributions by the Company to the 401(k)/Profit Sharing and
ESOP Plan, $853 for reimbursement of premiums paid by Mr. Taylor for
split-dollar life insurance and $7,442 representing the full dollar value
of all premiums paid by the Company for split-dollar life insurance for Mr.
Taylor.
(3) Includes $18,855 for contributions to the deferred compensation plan,
$11,584 in contributions by the Company to the 401(k)/Profit Sharing and
ESOP Plan, $684 for reimbursement of premiums paid by Mr. Taylor for
split-dollar life insurance and $6,659 representing the full dollar value of
all premiums paid by the Company for split-dollar life insurance for Mr.
Taylor.
(4) Includes $11,584 in contributions by the Company to the 401(k)/Profit
Sharing and ESOP Plan, $77,670 for reimbursement of premiums paid by Mr.
Taylor for split-dollar life insurance and $82,420 representing the full
dollar value of all premiums paid by the Company for split-dollar life
insurance for Mr. Taylor.
(5) "Other Annual Compensation" includes the following amounts: $30,904 for
expenses relating to the sale of Mr. Alstrin's principal residence when
relocating to accept his position with the Company and $13,018 in
reimbursement for country club dues. "All Other Compensation" includes:
$9,308 for contributions to the deferred compensation plan, $11,584 in
contributions by the Company to the 401(k)/Profit Sharing and ESOP Plan,
$1,058 for reimbursement of premiums paid by Mr. Alstrin for split-dollar
life insurance and $9,295 representing the full dollar value of all premiums
paid by the Company for split-dollar life insurance for Mr. Alstrin. In
addition, Mr. Alstrin was awarded 18,182 shares of restricted common stock
of the Company on September 30, 1997. The stock award had a total value of
$400,000 at the grant date
88
<PAGE> 89
TAYLOR CAPITAL GROUP, INC.
PART III
and requires continuous service by Mr. Alstrin through each relevant
vesting date. The vesting rate is 50% on June 30, 2000, 75% on June 30,
2001 and 100% on June 30, 2002.
The following table provides information on grants of stock options in 1997
to the Named Officers pursuant to the Company's 1997 Incentive Compensation
Plan.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERMS(1)
OPTIONS GRANTED EMPLOYEES IN EXERCISE EXPIRATION ----------------------
NAME (#)(2) 1997 PRICE ($/SH) DATE 5% ($) 10% ($)
---- --------------- ------------ ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey W. Taylor..... -- -- -- -- -- --
Bruce W. Taylor....... -- -- -- -- -- --
Sidney J. Taylor...... -- -- -- -- -- --
J. Christopher
Alstrin............. 6,200 3.8% $ 22 6/30/07 $85,781 $217,386
</TABLE>
- ---------------
(1) Potential realizable value is presented net of the option exercise price.
These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, are dependent on the future performance of the Common Stock
and the option holder's continued employment throughout the vesting period.
(2) These non-qualified options were granted under the Company's Incentive
Compensation Plan, effective June 30, 1997. The stock options vest over a
five year period at 20% per year. Upon death, disability, retirement or
change of control of the Company (as defined) vesting is accelerated to
100%.
The following table provides information on the unexercised options of the
Named Officers outstanding as of December 31, 1997. None of the Named Officers
exercised any options during 1997.
YEAR END 1997 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(#) DECEMBER 31, 1997(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey W. Taylor........................ -- -- -- --
Bruce W. Taylor.......................... -- -- -- --
Sidney J. Taylor......................... -- -- -- --
J. Christopher Alstrin................... -- 6,200 -- $18,600
</TABLE>
- ---------------
(1) This value is calculated by subtracting the exercise price per share from
the fair value at December 31, 1997, of the Company's common stock of $25,
as determined by a third party appraisal.
LONG-TERM INCENTIVE PLAN
During 1997, the Company created a long-term incentive plan which is
intended to attract and retain highly competent persons as officers and key
employees. This compensation is in addition to the annual bonuses each of Named
Officers may receive. Each participant has been awarded units of ownership of
the total bonus pool. The Company contributes to the bonus pool each year based
on a formula relative to budgeted net income. Distributions to the participants
begin after the third performance measured year. Annual distributions will be
equal to 30% of the participants accumulated balance. The following table
89
<PAGE> 90
TAYLOR CAPITAL GROUP, INC.
PART III
provides information on long-term incentive plan awards in 1997 to the Named
Officers pursuant to the Company's 1997 Long-Term Incentive Plan.
LONG-TERM INCENTIVE PLANS -- AWARDS IN 1997
<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS
OTHER PERIOD UNDER NON-STOCK
NUMBER OF UNTIL MATURATION PRICE-BASED PLANS
NAME UNITS(#) OR PAYOUT TARGET($)(1)
---- --------- ---------------- ------------------------
<S> <C> <C> <C>
Jeffrey W. Taylor......................... 7,500 3 years $86,170
Bruce W. Taylor........................... 7,500 3 years $86,170
Sidney J. Taylor.......................... -- -- --
J. Christopher Alstrin.................... 4,500 3 years $51,702
</TABLE>
- ---------------
(1) Target payout is the 30% annual distribution estimated to be paid out in
March 2000 based on the assumption that measured performance contribution
computed for 1997 is equaled in 1998 and 1999. The distribution is computed
by multiplying 30% of the estimated accumulated balance that will be
available at the end of the third measurement year (December 1999). Actual
distributions, if any, are dependent on the future performance of the
Company and the participant's continued employment throughout the
measurement period. The accumulated amounts in an individual participant's
account are "at risk". If Company performance falls below an established
benchmark, funds could be deducted from the participant's balance prior to
distribution. The long-term incentive plan does not provide for annual
minimum or maximum payments.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive an annual fee of
$10,000 and an attendance fee of $750 for each Board meeting attended and $650
for each committee meeting attended. The Chairman of each committee receives an
additional $250 per committee meeting attended. In addition, all directors may
be reimbursed for certain expenses in connection with attendance at Board and
committee meetings. Other than with respect to reimbursement of expenses,
directors who are employees or officers of the Company do not receive additional
compensation for service as a director.
SEVERANCE AGREEMENTS
Subject to the approval of the Compensation Committee, the Company intends
to enter into severance agreements with Jeffrey Taylor, Bruce Taylor, J.
Christopher Alstrin, Richard Keneman and certain other officers (collectively,
the "Senior Managers"). Although terms of the agreements have not been
finalized, it is anticipated that upon termination other than for cause, each
Senior Manager will be entitled to severance payments which will range from the
amount of such Senior Manager's base salary to one and one half times such
Senior Manager's base salary plus an amount equal to the performance bonus
payable to such Senior Manager in the year immediately preceding termination
(the "Past Performance Amount"). The Senior Manager will also receive medical
benefits and outplacement assistance for a defined period following termination.
CHANGE OF CONTROL AGREEMENTS
Subject to the approval of the Compensation Committee, the Company intends
to enter into change of control agreements with J. Christopher Alstrin and
certain other Senior Managers. Although the terms of the agreements have not
been finalized, it is anticipated that upon termination due to a change of
control of the Company, any stock options held by the Senior Manager will be
fully exercisable and any contributions to the Company's deferred compensation
plan will become fully vested. In addition, each Senior Manager will receive a
change of control severance payment in an amount which will range from one and
one half times
90
<PAGE> 91
TAYLOR CAPITAL GROUP, INC.
PART III
such Senior Manager's base salary plus the Past Performance Amount to two and
one half times base salary plus the Past Performance Amount.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Common
Stock of the Company beneficially owned as of December 31, 1997 by (i) each
stockholder known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of the Common Stock, (ii) each director of the
Company, (iii) each Named Officer and (iv) all directors and executive officers
of the Company as a group. Collectively, such stockholders set forth below,
together with Cindy Taylor Bleil, who beneficially owns 126,880 shares,
constitute the "Taylor Group". Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information provided by such owners, will have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable. Except as set forth below, the address of each of the stockholders
named below is the Company's principal executive and administrative office.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED COMMON STOCK(1)
- ---- ------------------ ----------------
<S> <C> <C>
Iris A. Taylor(2)........................................ 2,775,006 59.8%
Sidney J. Taylor(3)...................................... 685,490 14.8
Jeffrey W. Taylor(4)..................................... 267,850 5.8
Bruce W. Taylor.......................................... 267,150 5.8
J. Christopher Alstrin................................... 18,182 *
Company's 401(K)/Profit Sharing and Employee Stock
Ownership Plan......................................... 344,024 7.4
Melvin E. Pearl(5)(6).................................... -- --
Adelyn Dougherty(6)...................................... -- --
Ronald Emanuel(6)........................................ -- --
Edward McGowan(6)........................................ -- --
Richard Tinberg(6)....................................... -- --
Mark L. Yeager(6)........................................ -- --
All directors and executive officers as a group (11
persons)............................................... 1,256,854 27.1
</TABLE>
- ---------------
* Less than 1%.
(1) Percentage of beneficial ownership is based on 4.6 million shares of common
stock of the Company outstanding as of December 31, 1997.
(2) Excludes 685,490 shares beneficially owned by Iris A. Taylor's husband,
Sidney J. Taylor, of which shares Iris Taylor disclaims beneficial
ownership. Includes an aggregate 1,781,000 shares held by various Taylor
Family Trusts, including 633,960 shares held by the Shirley Tark
Grandchildren Trust dated January 20, 1978; 783,960 shares held by the
Shirley Tark Great Grandchildren Trust dated January 20, 1978; 152,200
shares held by the Lillian M. Tark Trust dated October 26, 1971 and 210,880
shares held by the Annual Gift Trusts dated December 14, 1982 July 10, 1983,
November 10, 1985, November 18, 1985, December 15, 1987 and August 1, 1988;
over all of which Iris A. Taylor has sole voting and investment power. Also
includes 974,006 shares held by the Taylor Family Partnership, L.P. (the
"Taylor Family Partnership"), over which Iris Taylor has sole voting and
investment power.
(3) Excludes 2,755,006 shares beneficially owned by Sidney J. Taylor's wife,
Iris A. Taylor, of which shares Sidney J. Taylor disclaims beneficial
ownership. Includes 626,840 shares held by various Taylor Family Trusts
including 547,320 shares held in the Sidney J. Taylor Trust dated September
17, 1976, over which Sidney J. Taylor has sole voting and investment power.
(4) Includes 40,000 shares held in trust for the benefit of Mr. Taylor's spouse
and 700 shares held by Mr. Taylor's children.
91
<PAGE> 92
TAYLOR CAPITAL GROUP, INC.
PART III
(5) Mr. Pearl disclaims beneficial ownership of 53,600 shares which are held by
the 12/17/92 Gift Trust of which Mr. Pearl serves as a Trustee. Mr. Pearl's
address is c/o Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600,
Chicago, Illinois 60661.
(6) Effective March 6, 1998, the six Directors who are not employees of the
Company were each awarded 2,000 shares of restricted common stock of the
Company. The stock award requires continuous service as a Director through
each relevant vesting date. The vesting rate is 50% on June 30, 2000, 75%
on June 30, 2001 and 100% on June 30, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the directors and officers of the Company and of the Bank and
members of their immediate families, and firms and corporations with which they
are associated, have had transactions with the Bank, including borrowings and
investments in certificates of deposit. Management believes that all such loans
and investments have been and will continue to be made in the ordinary course of
business of the Bank on substantially the same terms, including interest rates
paid and collateral required, as those prevailing at the time for comparable
transactions with unaffiliated persons, and did not involve more than the normal
risk of collectibility or present other unfavorable features. All future
material transactions and loans, and any forgiveness of loans, will be approved
by a majority of the independent outside members of the Company's Board of
Directors who do not have an interest in the transactions. As of December 31,
1997, the aggregate outstanding amount of all loans which individually exceed
$60,000 to officers and directors of the Company, and members of their immediate
families and firms and corporations in which they have at least a 10% beneficial
interest was approximately $18.9 million. The Company relies on its directors
and executive officers for identification of loans to their related interests.
The Company's primary insurance brokers are Dann Brothers, Inc., which
provides property and casualty insurance brokerage services. Each of Russell
Dann and Scott Dann, the brothers-in-law of Jeffrey W. Taylor, beneficially owns
approximately 25% of the capital stock of Dann Brothers, Inc. During the period
February 12, 1997 to December 31, 1997, the Company paid total premiums of
approximately $816,000 to Dann Brothers, Inc. in connection with various
insurance policies.
Two of the Company's primary legal counsel are Katten, Muchin & Zavis and
McDermott, Will & Emery. Mr. Melvin E. Pearl, a Director of the Company, is a
Partner with the law firm of Katten, Muchin & Zavis and Mr. Mark L. Yeager, a
Director of the Company, is a Partner with the law firm of McDermott, Will &
Emery.
92
<PAGE> 93
TAYLOR CAPITAL GROUP, INC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
DOCUMENTS FILED AS PART OF THIS FORM 10-K
<TABLE>
<S> <C>
(a)(1) THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED ON PAGES 52
THROUGH 85 OF THIS REPORT:
Balance Sheets -- Successor Basis -- Taylor Capital Group,
Inc. -- Consolidated December 31, 1997; Predecessor Basis --
Cole Taylor Bank -- December 31, 1996
Statements of Income -- Successor Basis -- Taylor Capital
Group, Inc. -- Consolidated for the Period of February 12,
1997 to December 31, 1997; Predecessor Basis -- Cole Taylor
Bank -- For the Period of January 1, 1997 to February 11,
1997, and for the Years ended December 31, 1996 and 1995
Statement of Changes in Stockholders' Equity -- Successor
Basis -- Taylor Capital Group, Inc. -- Consolidated For the
Period of February 12, 1997 to December 31, 1997:
Predecessor Basis -- Cole Taylor Bank -- For the Period
January 1, 1995 to February 11, 1997
Statements of Cash Flows -- Successor Basis -- Taylor
Capital Group, Inc. -- Consolidated for the Period of
February 12, 1997 to December 31, 1997; Predecessor Basis --
Cole Taylor Bank -- For the Period of January 1, 1997 to
February 11, 1997, and for the Years ended December 31, 1996
and 1995
Notes to Financial Statements
Independent Auditors' Report -- KPMG Peat Marwick LLP
(a)(2) NO FINANCIAL STATEMENT SCHEDULES ARE INCLUDED BECAUSE SUCH
SCHEDULES ARE NOT REQUIRED OR THE INFORMATION REQUIRED HAS
BEEN PRESENTED IN THE AFOREMENTIONED FINANCIAL STATEMENTS.
(a)(3) EXHIBITS:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated by reference to Exhibit
Registrant 3.1.1 to the Registration Statement on
Form S-1 (No.333-14713)
3.2 Certificate of Designation of the Incorporated by reference to Exhibit
Preferred Stock 3.1.2 to the Registration Statement on
Form S-1 (No.333-14713)
3.3 Bylaws of the Registrant Incorporated by reference to Exhibit 3.2
to the Registration Statement on Form
S-1 (No.333-14713)
4.1 Specimen of Certificate for the 9% Incorporated by reference to Exhibit 4
Noncumulative Perpetual Preferred Stock, to the Registration Statement on Form
Series A S-1 (No.333-14713)
10.1 Loan Agreement Between LaSalle National Incorporated by reference to Exhibit
Bank and Taylor Capital Group, Inc. 10.1 to the Registration Statement on
Form S-1 (No.333-14713)
10.2 Safekeeping Agreement Between LaSalle Incorporated by reference to Exhibit
National Bank and Taylor Capital Group, 10.1(a) to the Registration Statement on
Inc. Form S-1 (No.333-14713)
10.3 First Amendment to Loan Agreement Incorporated by reference to Exhibit
Between LaSalle National Bank and Taylor 10.1 to the March 31, 1997 Form 10-Q
Capital Group, Inc.
</TABLE>
93
<PAGE> 94
TAYLOR CAPITAL GROUP, INC.
PART IV
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<C> <S> <C>
10.4 Second Amendment to Loan Agreement Filed with this document Form 10-K
Between LaSalle National Bank and Taylor
Capital Group, Inc.
10.5 Taylor Capital Group, Inc. Deferred Incorporated by reference to Exhibit
Compensation Plan* 10.7 to the Registration Statement on
Form S-1 (No.333-14713)
10.6 Agreement among Taylor Capital Group, Incorporated by reference to Exhibit
Inc., Cole Taylor Financial Group, Inc. 10.4 to the Registration Statement on
and the Taylor Family Form S-1 (No.333-14713)
10.7 Indemnity Agreement by and among Taylor Incorporated by reference to Exhibit
Capital Group, Inc. and The Taylor 10.5 to Registration Statement on Form
Family S-1 (No.333-14713)
10.8 Taylor Capital Group, Inc. 401(k)/Profit Filed with this document Form 10-K
Sharing and Employee Stock Ownership
Plan*
10.9 Taylor Capital Group, Inc. Incentive Filed with this document Form 10-K
Compensation Plan*
10.10 Form of Non-Qualified Stock Option Filed with this document Form 10-K
agreement with employees*
10.11 Form of Stock Transfer Agreement for Filed with this document Form 10-K
Stock Option Grants*
10.12 Form of Restricted Stock Award agreement Filed with this document Form 10-K
with recipients*
10.13 Form of Stock Transfer Agreement for Filed with this document Form 10-K
Restricted Stock Awards*
10.14 Taylor Capital Group, Inc. 1997 Filed with this document Form 10-K
Long-Term Incentive Plan*
10.15 Servicing Rights Sale Agreement Between Filed with this document Form 10-K
Cole Taylor Bank and First Nationwide
Mortgage Corporation
12 Statement Regarding Computation of Ratio Filed with this document Form 10-K
of Earnings to Fixed Charges
21 List of Subsidiaries Filed with this document Form 10-K
27 Financial Data Schedule Filed with this document Form 10-K
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K.
The Company will furnish to any stockholder, upon written request, any
exhibit listed above upon payment by such stockholder of the Company's
reasonable expenses in furnishing any such exhibit.
(b) REPORTS ON FORM 8-K:
The Company did not file any reports on Form 8-K during the fourth quarter
of 1997
94
<PAGE> 95
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 13th day of
April, 1998.
TAYLOR CAPITAL GROUP, INC.
By: /s/ JEFFREY W. TAYLOR
--------------------------------------
Jeffrey W. Taylor
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange 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
--------- ----- ----
<C> <S> <C>
/s/ JEFFREY W. TAYLOR Chairman and Chief Executive April 13, 1998
- --------------------------------------------- Officer (principal executive
Jeffrey W. Taylor officer)
/s/ BRUCE W. TAYLOR President and Director April 13, 1998
- ---------------------------------------------
Bruce W. Taylor
/s/ SIDNEY J. TAYLOR Director April 13, 1998
- ---------------------------------------------
Sidney J. Taylor
/s/ J. CHRISTOPHER ALSTRIN Chief Financial Officer and April 13, 1998
- --------------------------------------------- Director (principal financial and
J. Christopher Alstrin accounting officer)
/s/ ADELYN DOUGHERTY Director April 13, 1998
- ---------------------------------------------
Adelyn Dougherty
/s/ RONALD EMANUEL Director April 13, 1998
- ---------------------------------------------
Ronald Emanuel
/s/ EDWARD T. MCGOWAN Director April 13, 1998
- ---------------------------------------------
Edward T. McGowan
/s/ MELVIN E. PEARL Director April 13, 1998
- ---------------------------------------------
Melvin E. Pearl
/s/ RICHARD TINBERG Director April 13, 1998
- ---------------------------------------------
Richard Tinberg
/s/ MARK L. YEAGER Director April 13, 1998
- ---------------------------------------------
Mark L. Yeager
</TABLE>
95
<PAGE> 96
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.4 Second Amendment to Loan Agreement Between LaSalle National
Bank and Taylor Capital Group, Inc.
10.8 Taylor Capital Group, Inc. 401(K)/Profit Sharing and
Employee Stock Ownership Plan
10.9 Taylor Capital Group, Inc. Incentive Compensation Plan
10.10 Form of Non-Qualified Stock Option Agreement
10.11 Form of Stock Transfer Agreement for Stock Option Grants
10.12 Form of Restricted Stock Award agreement with recipients
10.13 Form of Stock Transfer Agreement for Restricted Stock Awards
10.14 Taylor Capital Group, Inc. 1997 Long-Term Incentive Plan
10.15 Servicing Rights Sale Agreement Between Cole Taylor Bank and
First Nationwide Mortgage Corporation
12 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges
21 List of Subsidiaries
27 Financial Data Schedule
</TABLE>
96
<PAGE> 1
EXHIBIT 10.4
SECOND AMENDMENT TO
REVOLVING LOAN AGREEMENT
THIS SECOND AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT dated as of
November 1, 1997 (this "Amendment"), is between TAYLOR CAPITAL GROUP, INC., an
Delaware corporation (the "Borrower"), and LASALLE NATIONAL BANK, a national
banking association (the "Bank").
WITNESSETH:
WHEREAS, the Borrower and the Bank entered into a Loan Agreement dated as
of February 12, 1997, as amended by a first Amendment dated February 27, 1997
(as so amended, the "Agreement"); and
WHEREAS, the Borrower and the Bank have agreed to amend the Agreement as
more fully described herein,
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used herein without definition shall
have the respective meanings set forth in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
2.1 Amendments to Section 1.1. The following definitions set forth in
Section 1.1 of the Agreement are hereby amended and restated in their
entireties as follows:
"Revolving Credit Maturity Date" means May 1, 1998.
"Revolving Note" means a promissory note in the form of Exhibit 3.1
attached hereto, as amended or replaced from time to time, duly executed
by the Borrower.
2.2 Amendment to Section 3.1. The first sentence of Section 3.1 of the
Agreement is hereby amended and restated in its entirety as follows:
"The Revolving Loans shall be evidenced by the Revolving Note."
2.3 Replacement of Exhibit 3.1. Exhibit 3.1 attached to and made a part
of the Agreement is hereby deleted in its entirety and Exhibit 3.1 attached
hereto is hereby substituted therefor.
3. WARRANTIES. To induce the Bank to enter into this Amendment, the
Borrower warrants that:
<PAGE> 2
3.1 Authorization. The Borrower is duly authorized to execute and
deliver this Amendment and is and will continue to be duly authorized to
borrow monies under the Agreement, as amended hereby, and to perform its
obligations under the Agreement, as amended hereby.
3.2 No Conflicts. The execution and delivery of this Amendment and the
performance by the Borrower of its obligations under the Agreement, as amended
hereby, do not and will not conflict with any provision of law or of the
charter or by-laws of the Borrower or of any agreement binding upon the
Borrower.
3.3 Validitv and Binding Effect. The Agreement, as amended hereby, is a
legal, valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency or other similar laws of general application
affecting the enforcement of creditors' rights or by general principles of
equity limiting the availability of equitable remedies.
3.4 No Default. As of the date hereof, no Event of Default under
Section 8 of the Agreement, as amended by this Amendment, or event or condition
which, with the giving of notice or the passage of time, shall constitute an
Event of Default, has occurred or is continuing.
3.5 Warranties. As of the date hereof, the representations and
warranties in Section 7 of the Agreement are true and correct as though made on
such date, except for such changes as are specifically permitted under the
Agreement.
4. CONDITIONS PRECEDENT. This Amendment shall become effective as of the
date above first written after receipt by the Bank of the following documents:
(a) This Amendment duly executed by the Borrower;
(b) Substitute Revolving Note in the form of Exhibit 3.1 attached
hereto duly executed by the Borrower;
(c) Such other documents and instruments as the Bank reasonably
requests.
5. GENERAL.
5.1 Law. This Amendment shall be construed in accordance with and
governed by the laws of the State of Illinois.
5.2 Successors. This Amendment shall be binding upon the Borrower and
the Bank and their respective successors and assigns, and shall inure to the
benefit of the Borrower and the Bank and their respective successors and
assigns.
2
<PAGE> 3
5.3 Confirmation of the Agreement. Except as amended hereby, the
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects.
LASALLE NATIONAL BANK TAYLOR CAPITAL GROUP, INC.
By: /s/
------------------------------- By: /s/
Its: Vice President -------------------------------
------------------------------ Its: CEO
------------------------------
3
<PAGE> 1
EXHIBIT 10.8
TAYLOR CAPITAL GROUP, INC.
401(k)/PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
(Effective as of October 1, 1996)
McDermott, Will & Emery
Chicago
<PAGE> 2
CERTIFICATE
I, ________________________, Secretary of TAYLOR CAPITAL
GROUP, INC., hereby certify that the attached document is a correct copy of the
TAYLOR CAPITAL GROUP, INC. 401(k)/PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP
PLAN (Effective as of October 1, 1996).
Dated this__________day of ____________, 1997.
_________________________
Secretary as Aforesaid
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 1
Background of Plan 1
Purpose of Plan; Applicable Requirements 1
History of Plan 1
Effective Date; Plan Year; Spin-off Date 2
Trustee; Trust Agreement 2
Plan Administration 2
Employers 2
Predecessor Plans 3
Plan Supplements 3
SECTION 2 4
Eligibility and Participation 4
Eligibility to Participate 4
Notice of Participation and Election to Contribute 5
Period of Participation 5
Leave of Absence 5
Leased Employees 5
Military Service 6
SECTION 3 7
Participant Contributions 7
Income Deferral Contributions 7
Change, Discontinuance, or Resumption of Income Deferral
Contributions 7
Rollover Contributions 7
Earnings 8
SECTION 4 10
Employer Contributions 10
Employer Contributions of Income Deferral Contributions 10
Employer Matching Contributions 10
Employer Discretionary Contributions 10
Payment of Acquisition Loans; Employer Loan Contributions 11
Individual Employer's Share of Employer Contributions;
Limitations on Employers' Contributions 12
Form of Payment of Employer Contributions 12
</TABLE>
-i-
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SECTION 5 13
Company Stock; Acquisition Loans 13
Company Stock 13
Acquisition Loans 13
SECTION 6 14
Investment of Participant and Employer Contributions 14
Investment Options 14
ESOP Stock Account Investments in Company Stock 14
Participants' Investment Elections 15
Diversification of Investments in Company Stock 15
SECTION 7 17
Accounting 17
Participants' Accounts 17
Trust Accounts 19
Accounting Dates; Accounting Periods; Quarterly Accounting
Period 19
Adjustment of Accounts in Investment Funds 20
Crediting of Shares Related to the Spin-Off 20
Transfer of Shares From Unreleased Share Account to
Participants' ESOP Stock Accounts 20
Adjustment of ESOP Cash and Stock Accounts 21
Dividends on Company Stock 22
Temporary Investment of Cash in Trust 23
Fair Market Value of Company Stock 23
Stock Dividends, Stock Splits and Capital Reorganizations
Affecting ESOP Shares 23
ESOP Share Records 23
Statement of Accounts 24
Multiple Acquisition Loans 24
SECTION 8 25
Contribution and Benefit Limitations 25
Contribution Limitations 25
Combined Contribution Limitations 26
Combining of Plans 26
Dollar Limitation on Income Deferral Contributions 26
Percentage Limitation on Income Deferral Contributions 27
Percentage Limitation on Employer Matching Contributions 28
</TABLE>
-ii-
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SECTION 8 (continued)
Highly Compensated Participant 29
Multiple Use of Alternative Limitations 31
Calculating Income Allocable to Excess Deferrals, Excess
Aggregate Contributions, and Excess Income Deferral
Contributions 31
Special Testing Rules 31
SECTION 9 33
Period of Participation 33
Settlement Date 33
Restricted Participation 33
SECTION 10 35
In-Service Withdrawals and Participant Loans 35
Hardship Withdrawals 35
In-Service Withdrawal 36
Loans to Participants 36
SECTION 11 40
Vesting 40
Retirement 40
Resignation or Dismissal 40
Death of Participant 42
Forfeitures 42
SECTION 12 43
Distributions Following Settlement Date 43
Manner of Distribution 43
Determination of Account Balances 43
Distribution of Company Stock 44
Timing of Distributions 44
Direct Rollovers 46
Immediate Distributions to Alternate Payees 47
Designation of Beneficiary 48
Missing Participants or Beneficiaries 49
Facility of Payment 50
</TABLE>
-iii-
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 13 51
Rights, Restrictions, and Options on Company Stock 51
Right of First Refusal 51
Put Option 51
Share Legend 52
Nonterminable Rights 52
SECTION 14 53
Reemployment 53
Commencement or Resumption of Participation 53
Credited Service for Vesting 53
Reinstatement of Forfeitures 53
SECTION 15 55
Voting and Tendering of Company Stock 55
SECTION 16 56
General Provisions 56
Interests Not Transferable 56
Absence of Guaranty 56
Employment Rights 56
Litigation by Participants or other Persons 56
Evidence 56
Waiver of Notice 56
Controlling Law 56
Statutory References 56
Severability 57
Additional Employers 57
Action By Employers 57
Gender and Number 57
Examination of Documents 57
Fiduciary Responsibilities 57
Indemnification 57
SECTION 17 58
Restrictions as to Reversion of Trust Assets to the Employers 58
</TABLE>
-iv-
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 18 59
Amendment and Termination 59
Amendment 59
Termination 59
Nonforfeitability and Distribution on Termination 60
Notice of Termination 60
Plan Merger, Consolidation, Etc. 60
SECTION 19 61
The Committee 61
The Committee 61
The Committee's General Powers, Rights, and Duties 61
Manner of Action of the Committee 62
Interested Committee Member 63
Resignation or Removal of Committee Members 63
Committee Expenses 63
Uniform Rules 63
Information Required by the Committee 63
Review of Benefit Determinations 63
Committee's Decision Final 63
Denial Procedure and Appeal Process 64
SECTION 20 65
Special Rules Applicable When Plan is Top-Heavy 65
Purpose and Effect 65
Top-Heavy Plan 65
Key Employee 66
Aggregated Plans 66
Minimum Employer Contribution 66
Coordination of Benefits 67
Adjustment of Combined Benefit Limitations 67
SUPPLEMENT AA-1
</TABLE>
-v-
<PAGE> 8
TAYLOR CAPITAL GROUP, INC.
401(k)/PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
(Effective as of October 1, 1996)
SECTION 1
Background of Plan
1.1. Purpose of Plan; Applicable Requirements. Effective as of October 1, 1996,
Taylor Capital Group, Inc. (the "Company") establishes the Taylor Capital Group,
Inc. 401(k)/Profit Sharing and Employee Stock Ownership Plan (the "Plan") for
the following purposes:
(i) to receive a transfer of the accounts under the Cole Taylor
Financial Group, Inc. 401(k)/Profit Sharing Plan (as Amended
and Restated effective as of January 1, 1993) (the "CTFG
Profit Sharing Plan") and the Cole Taylor Financial Group,
Inc. Employee Stock Ownership Plan (as Amended and Restated
effective as of January 1, 1994) (the "CTFG ESOP") of those
employees and former employees of employers who become
participants in the Plan; and
(ii) to enable eligible employees of the Company and its affiliates
to acquire stock ownership interests in the Company; and
(iii) to permit eligible employees to accumulate funds for their
future security by electing to make income deferral
contributions and sharing in employer contributions to the
Plan.
The Plan is a profit sharing plan intended to meet the applicable requirements
of Section 401(a) of the Internal Revenue Code of 1986 (the "Code") and contains
a cash or deferred arrangement intended to qualify under Section 401(k) of the
Code. A portion of the Plan also constitutes an employee stock ownership plan
that is designed to invest primarily in stock of the Company and that is
intended to meet the applicable requirements of Sections 401(a), 409, and
4975(e)(7) of the Code and Section 407(d)(6) of the Employee Retirement Income
Security Act of 1974 ("ERISA").
1.2. History of Plan. Prior to the effective date, eligible employees of the
Company and its subsidiaries were eligible to participate in the CTFG Profit
Sharing Plan and the CTFG ESOP. The CTFG Profit Sharing Plan was originally
established by CTFG effective January 1, 1984 as a merger of various plans, and
was amended and restated from time-to-time thereafter, most recently effective
as of January 1, 1993. The CTFG ESOP was originally established by CTFG
effective as of January 1, 1984 and was amended from time to time thereafter,
and was amended and restated most recently effective as of January 1, 1994.
1
<PAGE> 9
In connection with the spin-off of the Company (and its subsidiaries)
from the controlled group of corporations that includes Reliance Acceptance
Group, Inc. f/k/a Cole Taylor Financial Group, Inc. ("CTFG"), the account
balances of the CTFG Profit Sharing Plan and the CTFG ESOP attributable to the
employees and former employees of the Company and its subsidiaries were spun-off
and then merged to form the Plan.
1.3. Effective Date; Plan Year; Spin-off Date. The "effective date" of the Plan
as set forth herein is October 1, 1996. The Plan will be administered on the
basis of a "plan year." The "plan year" means the three month period from
October 1, 1996 through December 31, 1996, and thereafter the twelve-month
period beginning each January 1 and ending the following December 31. The date
of the spin-off of the Company (and its subsidiaries) from CTFG is referred to
herein as the "spin-off date."
1.4. Trustee; Trust Agreement. Amounts contributed under the Plan are held and
invested, until distributed, by a Trustee appointed by the Company (the
"Trustee"). The Trustee acts in accordance with the terms of a trust agreement
between the Company and the Trustee, which trust agreement is known as the
"Taylor Capital Group, Inc. 401(k)/Profit Sharing and Employee Stock Ownership
Trust" (the "Trust"). The Trust implements and forms a part of the Plan. The
provisions of and benefits under the Plan are subject to the terms and
provisions of the Trust.
1.5. Plan Administration. The Plan is administered by a Committee (the
"Committee") as described in Section 19. Any notice or document required to be
given to or filed with the Committee will be properly given or filed if
delivered or mailed, by registered or certified mail, postage prepaid, to the
Committee, in care of the Company at 350 East Dundee Road, Suite 201, Wheeling
IL 60090. Each participant in the Plan shall be a "named fiduciary" within the
meaning of Section 402 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") with respect to the investment direction of their account
balances, and the voting direction of the shares of Company stock in their ESOP
stock accounts, as described in Section 6. The Committee and the Company are
"named fiduciaries," but solely to the extent that they have any fiduciary
responsibilities under the Plan and related Trust.
1.6. Employers. Any Controlled Group Member described in paragraph (a) or (b) of
this subsection with respect to the Company may adopt the Plan with the
Company's consent, as described in subsection 16.10. The Company and any such
Controlled Group Members that adopt the Plan are referred to below collectively
as the "Employers" and sometimes individually as an "Employer." A "Controlled
Group Member" means:
(a) any corporation that is a member of a controlled group of
corporations (within the meaning of Section 1563(a) of the
Code, determined without regard to Sections 1563(a)(4) and
1563(e)(3)(C) thereof) that contains the Company;
2
<PAGE> 10
(b) any trade or business (whether or not incorporated) that is
under common control with the Company (within the meaning of
Section 414(c) of the Code); or
(c) any entity that is affiliated with the Company under Section
414(m) of the Code.
As of the effective date, the following Employers have adopted the Plan: Cole
Taylor Bank and CT Mortgage Company .
1.7. Predecessor Plans. Any other qualified profit sharing, stock bonus, or
money purchase pension plan qualified under Section 401(a) of the Code and
maintained by an Employer may, with the consent of the Company, be merged into,
and continued in the form of, the Plan. Any such plan merged into, and continued
in the form of, this Plan shall be referred to as a "predecessor plan." Special
provisions relating to participants in the Plan who were participants in a
predecessor plan shall be set forth in one or more supplements to the Plan.
1.8. Plan Supplements. The provisions of the Plan may be modified by supplements
to the Plan. The terms and provisions of each supplement are a part of the Plan
and supersede the provisions of the Plan to the extent necessary to eliminate
inconsistencies between the Plan and such supplement.
3
<PAGE> 11
SECTION 2
Eligibility and Participation
2.1. Eligibility to Participate.
(a) Subject to the conditions and limitations of the Plan, each
employee who was employed by an Employer and who was a participant in the CTFG
Profit Sharing Plan or CTFG ESOP immediately before the effective date shall
automatically be a participant in the Plan on the effective date.
(b) Subject to the conditions and limitations of the Plan, each other
employee of an Employer will become a participant in the Plan as of the January
1st, April 1st, July 1st, or October 1st coincident with or next following the
date he satisfies the following requirements:
(i) he has attained age 21;
(ii) (A) he has completed six months of continuous service
in which he is credited with at least 500 hours of
service or,
(B) if he fails to satisfy paragraph (A) above, he
has completed 1,000 hours of service (as defined
below) during the 12-month period commencing on his
date of hire, or if he has not completed 1,000 hours
of service during such 12-month period, he has
completed 1,000 hours of service during a Plan Year
ending before such January 1, April 1, July 1, or
October 1; and
(iii) he is employed as a member of a group of employees to
which the Plan has been extended, either by
unilateral action of an Employer in the case of an
employee who is not represented by a collective
bargaining representative or, if he is a member of a
group of employees represented by a collective
bargaining representative, through a currently
effective collective bargaining agreement between his
Employer and the collective bargaining representative
of the group of employees of which he is a member.
(iv) Notwithstanding any other provision of the Plan to
the contrary, an employee who is not yet a
participant but who is eligible to become a
participant may make a rollover contribution to the
Plan (in accordance with subsection 3.3) prior to the
employee's entry date, at the discretion of the
Committee. Any eligible employee who makes a rollover
contribution to the Plan will be treated as a
participant, except that such employee shall not be
eligible, until he becomes a participant, to make
income deferral contributions pursuant to subsection
3.1 or to share in any employer contributions made
pursuant to subsections 4.2, 4.3, and 4.4.
4
<PAGE> 12
For the purposes of the Plan, an "hour of service" means each hour for which an
employee is directly or indirectly paid or entitled to payment by an Employer or
a Controlled Group Member for the performance of duties and for reasons other
than the performance of duties, including each hour for which back pay,
irrespective of mitigation of damages, has been either awarded or agreed to by
an Employer or a Controlled Group Member, as determined and credited in
accordance with Department of Labor Reg. Sec. 2530.200b-2. Notwithstanding any
other provision of the Plan to the contrary, an hour of service includes service
prior to the effective date with CTFG or an affiliate of CTFG.
2.2. Notice of Participation and Election to Contribute. The Committee will
notify each employee of the date the employee becomes a participant. Such
notification will be in writing and will include a form or forms on which the
participant may elect to make participant contributions in accordance with
Section 3.
2.3. Period of Participation. Subject to the provisions of subsections 9.2 and
14.1, relating to restricted participation and resumption of participation,
respectively, an employee who becomes a participant will continue as a
participant until the later to occur of the date of his termination of
employment with the Employers or the date on which all assets in his accounts
under the Plan to which he is entitled hereunder have been distributed.
2.4. Leave of Absence. A leave of absence will not interrupt continuity of
service or participation in the Plan. A "leave of absence" for purposes of the
Plan means an absence from work that is not treated by an Employer as a
termination of employment or that is required by law to be treated as a leave of
absence. Leaves of absence will be granted under rules established by an
Employer and applied uniformly to all similarly situated employees.
2.5. Leased Employees. Only common-law employees of the Employers are eligible
to participate in the Plan. If a leased employee (as defined below) subsequently
becomes a common-law employee of an Employer, the period during which the leased
employee performed services for the Employer shall be taken into account for
purposes of subsections 2.1 and 11.2 of the Plan; unless (i) such leased
employee was a participant in a money purchase pension plan maintained by the
leasing organization that provides a non-integrated employer contribution rate
of at least 15 percent of earnings, immediate participation for all employees
and full and immediate vesting, and (ii) leased employees do not constitute more
than twenty percent of the Employer's nonhighly compensated workforce. A "leased
employee" means any person who is not a common-law employee of an Employer, but
who has provided services to an Employer under the Employer's primary direction
and control, on a substantially full-time basis for a period of at least one
year, pursuant to an agreement between an Employer and a leasing organization.
5
<PAGE> 13
2.6. Military Service. Notwithstanding any provision of this Plan to the
contrary, contributions, benefits, and service credit with respect to qualified
military service will be provided in accordance with Code Section 414(u). A
participant returning from employment after serving in the uniformed services is
treated as not having incurred a break in service during the period of qualified
military service, as defined herein. Each period of qualified military service
is considered under the plan to be service with the Employer for the purposes
of:
(a) determining the nonforfeitability of the participant's account
balances, in accordance with the provisions of Section 11 of the
plan; and
(b) determining the participant's benefit allocations under subsections
4.2 and 4.3 of the plan.
6
<PAGE> 14
SECTION 3
Participant Contributions
3.1. Income Deferral Contributions. References in the Plan to participants'
"income deferral contributions" mean deferrals made by participants' from their
earnings (as defined in subsection 3.4) before the imposition of Federal income
taxes, irrespective of whether the income deferral contributions made from such
earnings are either before or after the imposition of state, local or other
taxes. An employee is not required to make income deferral contributions in
order to participate in the Plan. Subject to the conditions and limitations of
the Plan, a participant may elect to make income deferral contributions for any
plan year of a percentage (in increments of one percent) of the participant's
earnings for such plan year at a rate of not less than one percent and not
greater than fifteen percent of such earnings. The amount to be deferred will be
withheld from the participant's earnings and contributed to the Plan on the
participant's behalf by the participant's Employer. A participant's election
under this subsection may be made effective as of the participant's entry date
or as of any January 1, April 1, July 1, or October 1 following the
participant's entry date. A participant's election to make income deferral
contributions must be made in writing on a form furnished by the Committee and
filed with the Committee at such time and in such manner as the Committee shall
determine. Subject to the limitations of Section 8, a participant's deferral
authorization made pursuant to this subsection shall remain in effect until any
change or suspension properly elected by the participant under subsection 3.2
becomes effective.
3.2. Change, Discontinuance, or Resumption of Income Deferral Contributions. A
participant may elect, within the limits described in subsection 3.1, to change
the rate of the participant's income deferral contributions as of any January 1,
April 1, July 1, or October 1. A participant may elect to discontinue making
income deferral contributions as of the first day of any month. If a participant
elects to discontinue making income deferral contributions, the participant may
elect to make or to resume making income deferral contributions as of any
following January 1, April 1, July 1, or October 1. Each election under this
subsection shall be made by completing the form designated by the Committee and
filing such form with the Committee at such time and in such manner as the
Committee shall determine.
3.3. Rollover Contributions. On behalf of a participant, the Committee may
direct the Trustee to receive a "rollover contribution" of all or any portion of
an eligible rollover distribution (as described in paragraph 12.5(a)) or a
rollover amount described in Section 408(d)(3) of the Code (an "IRA rollover"),
subject to the following:
(a) The Trustee may accept an eligible rollover distribution in the form
of a direct rollover (as described in Section 401(a)(31) of the Code)
or an indirect rollover (as described in Section 402(c) of the Code).
The Committee shall establish such rules and procedures as it deems
necessary regarding the acceptance of rollover contributions,
including the methods by which direct rollovers, indirect rollovers,
and IRA rollovers may be made to the Plan.
7
<PAGE> 15
(b) Any rollover contributions received by the Trustee on behalf of a
participant (or an eligible employee) shall be credited to the
rollover account of the participant (or the eligible employee) in
accordance with subsection 7.4. A participant (or an eligible
employee) shall at all times have a nonforfeitable right to the net
credit balance in the participant's rollover account.
(c) If after a rollover contribution has been received by the Trustee on
behalf of a participant (or an eligible employee) the Committee
learns that all or part of such rollover contribution did not meet
the requirements of the Code and the regulations and rulings
thereunder, the Committee may direct the Trustee to make a
distribution to the participant (or eligible employee) of the
nonqualified portion of such rollover contribution (and earnings
thereon) that were credited to the rollover account of the
participant (or eligible employee).
3.4. Earnings. Except as otherwise provided below, a participant's "earnings"
for a plan year means all compensation paid to the participant for services
rendered to an Employer as an employee as reported on the participant's Federal
wage and tax statement (Form W-2), but including for such plan year all of a
participant's income deferral contributions under this Plan and all salary
reductions made pursuant to an arrangement maintained by an Employer under
Section 125 of the Code during the plan year. A participant's earnings shall not
include any of the following (to the extent applicable):
(a) Income from bonuses paid under stock purchase agreements;
(b) Employer contributions under this or any retirement plan;
(c) Amounts realized from the exercise of non-qualified stock options;
and
(d) Amounts realized from the sale, exchange or disposition of stock
acquired under a qualified stock option.
For purposes of subsection 4.3, a participant's earnings for the 1996 plan year
shall include earnings for the entire 1996 calendar year, and for the purposes
of subsections 4.2 and 4.3 a participant's earnings for the 1997 plan year shall
include amounts paid to the participant for the period beginning January 1,
1997, and ending immediately prior to the spin-off date by members of the CTFG,
as determined in accordance with this subsection. In no event shall the amount
of a participant's earnings taken into account for purposes of the Plan for any
plan year exceed the dollar limitation in effect under Code Section 401(a)(17)
(as that limitation is adjusted from time to time by the Secretary of the
Treasury pursuant to Code Section 401(a)(17)). For plan years prior to January
1, 1997, in determining the earnings of a participant for a plan year, the rules
of Section 414(q)(6) of the Code shall apply, except that in applying such
rules, the term "family" shall include only the spouse of the participant and
any lineal descendants of the participant who have not attained age 19 before
the close of the plan year. If, as a result of the application of the
8
<PAGE> 16
provisions of the preceding sentence, the dollar limitation in effect under Code
Section 401(a)(17) (as adjusted) is exceeded, the adjusted limitation shall be
prorated among the affected participant's family members in proportion to each
affected member's earnings as determined under this subsection prior to the
application of the dollar limitation in effect under Code Section 401(a)(17).
9
<PAGE> 17
SECTION 4
Employer Contributions
4.1. Employer Contributions of Income Deferral Contributions. Subject to the
conditions and limitations of the Plan, each Employer will make a contribution
under the Plan on behalf of each participant employed by the Employer of the
amount of the participant's income deferral contributions. Income deferral
contributions shall be paid to the Trustee in cash as soon as practicable (but
not later than the 15th business day of the month following the month in which
such contribution are withheld) after the end of the payroll period for which
the reduction in earnings is made.
4.2. Employer Matching Contributions. Subject to the conditions and limitations
of the Plan, each Employer will make a contribution to the Plan ("employer
matching contributions") for each quarterly accounting period on behalf of each
participant who makes income deferral contributions during that quarterly
accounting period and is employed on the last day of that period or terminated
employment with the Employers during such plan quarter under subsections 9.1(a),
(b), or (c). The "base matching contribution" shall be 100 percent (100%) of the
participant's income deferral contribution, not to exceed one percent (1%) of
his compensation; and the "excess matching contribution" shall be fifty percent
(50%) of the participant's income deferral contribution in excess of one percent
(1%) of his compensation, not to exceed six percent (6%) of his compensation.
The Board of Directors of the Company may, in its discretion, prospectively
increase, decrease or discontinue the employer matching contribution.
Notwithstanding the foregoing, a participant who has elected to make income
deferral contributions during a plan year shall receive an employer matching
contribution for each quarterly accounting period during that plan year in which
such participant is unable to make income deferral contributions due solely to
the limitation contained in subsection 8.4, provided that (i) the participant
has not discontinued his election to make income deferral contributions as of
the last day of such quarterly accounting period, and (ii) the employer matching
contribution allocated to such participant for the plan year shall not exceed
the base matching contribution and excess matching contribution, as defined
above, based on earnings for the plan year. Employer matching contributions for
a quarterly accounting period shall be paid to the Trustee on the last day of
such quarterly accounting period or as soon as practicable thereafter.
4.3. Employer Discretionary Contributions. Subject to the conditions and
limitations of the Plan, the Company, in its sole discretion, may direct the
Employers to make a discretionary contribution to the Plan for any plan year.
Any such Employer discretionary contribution for a plan year shall be determined
and allocated to participants in accordance with paragraph (a) or (b) below, as
determined by the Company at or before the time the Company decides to direct
the Employers to make an employer discretionary contribution for the plan year:
(a) A discretionary matching contribution to be made for a plan year in
such amount, if any, as shall be determined by the Company. Any
discretionary matching contribution for a plan year shall be allocated
on the basis of that portion of the participants' income deferral
contributions for that plan year as shall be determined by the Company
prior to the end of the plan year or within a
10
<PAGE> 18
reasonable period of time after the end of the plan year. Any
discretionary matching contribution for a plan year shall be allocated
only to participants who (i) made income deferral contributions during
such plan year and (ii) either completed at least 1,000 hours of
service in such plan year and are employed by the Employers on the last
day of such plan year or terminated employment with the Employers
during such plan year under paragraph 9.1(a), (b), or (c).
(b) A discretionary contribution to be made for a plan year in such amount,
if any, as determined by the Company prior to the end of the plan year
or within a reasonable period of time after the end of the plan year.
Any discretionary contribution for a plan year shall be allocated pro
rata on the basis of participants' earnings for such plan year. Any
discretionary contribution for a plan year shall be allocated only to
participants who either (i) completed at least 1,000 hours of service
in such plan year and are employed by the Employers on the last day of
such plan year or (ii) terminated employment with the Employers during
such plan year under paragraph 9.1(a), (b), or (c).
For purposes of this subsection, "hours of service" shall mean hours of service
as described in subsection 2.1. Any employer discretionary contributions for a
plan year shall be due on the last day of the plan year and, if not paid by the
end of that plan year, shall be payable to the Trustee as soon as practicable
thereafter, without interest, but not later than the time prescribed by law for
filing the Company's Federal income tax return for such plan year, including
extensions thereof.
4.4. Payment of Acquisition Loans; Employer Loan Contributions. For each
quarterly accounting period during which an acquisition loan is outstanding, the
Trustee shall use any contributions made for such quarterly accounting period
pursuant to subsections 4.2 and 4.3 to make principal and interest payments then
due on the acquisition loan or loans outstanding at the end of such quarterly
accounting period. Each such payment by the Trustee will release shares of
Company stock from the unreleased share account to the released share account of
the Trust (such terms are defined in subsection 7.2). Company stock that is so
released will be allocated to participants' ESOP stock accounts as provided in
subsection 7.7.
Subject to the conditions and limitations of the Plan, if, as of any
regular accounting date, (a) an acquisition loan remains outstanding and (b) the
contributions described above that are made for the quarterly accounting period,
after taking into account the use of dividends and earnings in accordance with
subsection 7.8(c), are insufficient to enable the Trustee to pay the principal
and interest due under such acquisition loan for such quarterly accounting
period, then the Employers shall make an additional "employer loan contribution"
to the Trustee for that quarterly accounting period, in an aggregate amount
equal to the amount of the insufficiency described herein. Any such employer
loan contribution shall be allocated in the manner described in paragraph 4.3(a)
or (b), as determined by the Company prior to the time such contribution is made
to the Trustee, but considering only income deferral contributions or earnings
for that plan year through the applicable regular accounting date. Any employer
loan contribution under the Plan for any quarterly accounting period shall be
paid to the Trustee in cash on the last day of the applicable quarterly
accounting period or as soon as practicable after the end of such quarterly
accounting period.
11
<PAGE> 19
If no acquisition loan is outstanding at the end of a quarterly
accounting period, the Trustee shall invest the contributions made for such
accounting period as directed by the Committee in accordance with Section 6 and
the terms of the trust.
4.5. Individual Employer's Share of Employer Contributions; Limitations on
Employers' Contributions. The Company shall determine each Employer's share of
employer contributions to be made pursuant to subsections 4.2, 4.3 and 4.4. The
certificate of an independent certified public accountant selected by the
Company as to the correctness of any amounts or calculations relating to the
employers' contributions under the Plan shall be conclusive on all persons. In
no event will an Employer's share of the employers' contributions described in
this Section 4 for any plan year cause the Employer's share of the employers'
contributions for that plan year to exceed an amount equal to the maximum amount
deductible on account thereof by that Employer for that year for purposes of
Federal taxes on income.
4.6. Form of Payment of Employer Contributions. Subject to the conditions and
limitations of the Plan, any employer matching contribution or employer
discretionary contribution shall be made in the form of cash or shares of
Company stock (as defined in subsection 5.1), as determined by the board of
directors of the Company in its sole discretion prior to the end of the plan
year or within a reasonable period of time after the end of the plan year. Any
such matching contribution or employer discretionary contribution that is made
in the form of cash, and designated as a cash contribution, shall be allocated
to the participants' employer matching contribution account or employer
discretionary contribution account, as applicable. Any such matching
contribution and discretionary contribution that is made in the form of Company
stock, or made in the form of cash and designated as a cash contribution to be
invested in Company stock, shall be allocated to the participants' ESOP stock
accounts or ESOP cash accounts to be invested in Company stock, as applicable.
Any shares of Company stock contributed to the Plan as an employer matching
contribution or employer discretionary contribution shall be valued at the fair
market value thereof as of the date or dates on which the contribution is made.
12
<PAGE> 20
SECTION 5
Company Stock; Acquisition Loans
5.1. Company Stock. For purposes of the Plan, the term "Company stock" shall
mean common stock issued by the Company that is readily tradable on an
established securities market; provided, however, if the Company's common stock
is not readily tradable on an established securities market, the term "Company
stock" shall mean common stock issued by the Company having a combination of
voting power and dividend rates equal to or in excess of (a) that class of
common stock of the Company having the greatest voting power and (b) that class
of common stock of the Company having the greatest dividend rights. Non-callable
preferred stock shall be treated as Company stock for purposes of the Plan if
such stock is convertible at any time into stock that is readily tradable on an
established securities market (or, if applicable, that meets the requirements of
(a) and (b) next above) and if such conversion is at a conversion price that, as
of the date of the acquisition by the Plan, is reasonable. For purposes of the
immediately preceding sentence, preferred stock shall be treated as non-callable
if, after the call, there will be a reasonable opportunity for a conversion that
meets the requirements of the immediately preceding sentence. Company stock
shall be held under the Trust only if such stock satisfies the requirements of
Section 407(d)(5) of ERISA.
5.2. Acquisition Loans. An "acquisition loan" means the issuance of notes, a
series of notes or other installment obligations incurred by the Trustee, in
accordance with the trust, in connection with the purchase of Company stock. The
term "financed shares" means shares of Company stock acquired by the Trustee
with the proceeds of an acquisition loan. The terms of each acquisition loan
shall meet the applicable requirements of Treasury Regulations Section
54.4975-7(b), including the requirements (a) that the loan bear a reasonable
rate of interest, be for a definite period (rather than payable on demand), and
be without recourse against the Plan and (b) that the only assets of the Plan
that may be given as collateral are financed shares purchased with the proceeds
of that loan or with the proceeds of a prior acquisition loan. The release of
financed shares is described in subsection 7.6.
13
<PAGE> 21
SECTION 6
Investment of Participant and Employer Contributions
6.1. Investment Options.
(a) The Committee may designate, in its sole discretion, one or more
funds under the Trust for the investment of participants' account balances not
otherwise invested in Company stock. The Committee, in its discretion, may from
time to time designate or establish new investment funds or eliminate existing
investment funds. The funds designated by the Committee for this purpose
(including the CTFG stock fund, described below) shall be referred to herein as
the "investment funds."
(b) The Committee shall maintain a "CTFG stock fund" until December 15,
1998, which fund shall hold the participants' investments transferred to the
Plan from the "Company Stock Fund" under the CTFG Profit Sharing Plan. The
Committee shall maintain the CTFG stock fund solely for the purpose of
permitting participants to hold their shares of CTFG stock and no future
contributions or investment transfers may be made to the CTFG stock fund. On or
before December 15, 1998, the participants will be required to redirect the
investment of their CTFG stock fund into one or more of the other investment
funds, in accordance with the procedures determined by the Committee.
(c) Subject to the provisions of Section 19.2(g), the Committee shall
have the authority to direct the investment of the assets held in the employer
discretionary contribution account and the ESOP cash account.
(d) The assets held in the Drovers transfer account shall be invested
in a commingled fund of certificates of deposit issued by one or more of the
Employers. Each such certificate of deposit will provide a rate of return equal
to the greater of (1) nine and one-half percent (9-1/2%) per annum, or (2) the
floating average of 18-month Treasury bill rates. The certificates of deposit
mature on each participant's 65th birthday, at which time the assets are
invested in the discretion of the Committee.
6.2. ESOP Stock Account Investments in Company Stock. On or prior to the
spin-off date, the Trustee of the CTFG ESOP will transfer to the Plan from the
CTFG ESOP shares of CTFG common stock, which will be held in the participants'
ESOP stock accounts. On the spin-off date, the Trustee will have the right to
exchange the shares of CTFG common stock held in the participants' ESOP stock
accounts for shares of Company stock. (The shares of Company stock received by
the Trustee in exchange for the shares of CTFG common stock on the spin-off date
are referred to herein as the "Spin-Off Shares.")
Employer contributions under subsections 4.2, 4.3, or 4.4, made on or
after the spin-off date that are used to repay an acquisition loan shall be
invested in Company stock through the release of financed shares and the
crediting of such shares to participants' accounts (as described in subsections
7.6 and 7.7). If an acquisition loan is not outstanding, the Committee may
direct
14
<PAGE> 22
the Trustee to invest the contributions made under subsections 4.2 and
4.3 in Company stock, in accordance with the provisions of subsection 4.6.
6.3. Participants' Investment Elections. Participants' investment elections with
respect to the investment funds and Company stock shall be made as follows:
(a) Participant contributions. Participants may elect to invest their
existing account balances (other than their ESOP stock and cash
accounts and employer discretionary accounts) and future income
deferral contributions, rollover contributions, and loan repayments in
one or more of the investment funds (other than the CTFG stock fund).
Subject to the provisions of this subparagraph (a), the participant's
investment elections in effect under the CTFG Profit Sharing will
remain in effect under the Plan on and after the effective date until
changed by the participant in accordance with the provisions of the
Plan. Effective October 31, 1996, each participant's election to invest
in the CTFG stock fund in effect on that date will be deemed to be an
election under the Plan to invest in the Money Market Fund. Except as
provided in subsection 6.4, participants shall not be entitled to
transfer their account balances in their ESOP stock accounts to the
investment funds. If no investment election is in effect with respect
to a participant, the participant's contributions made pursuant to
Section 3 and loan repayments will be invested in the investment fund
that is designated by the Committee for that purpose.
(b) Committee procedures; election method. Each investment election made by
a participant pursuant to this subsection shall be made in accordance
with rules established by the Committee and shall be effective as
determined by the Committee. Each election made pursuant to this
subsection shall be in such dollar or percentage increments as shall be
determined by the Committee. As determined by the Committee,
participants may make investment or transfer elections under this
subsection by the following methods: (i) by filing written elections on
forms furnished by the Committee, (ii) by telephone through the
telephone system established for such purpose, or (iii) by such other
method as may be designated by the Committee.
6.4. Diversification of Investments in Company Stock. Pursuant to rules
established by the Committee, participants (including inactive participants) may
elect to diversify portions of their ESOP stock accounts, subject to the
following:
(a) Each participant who has attained age 55 years and has at least ten
years of participation in the Plan, including for such purposes, his
years of participation in the CTFG ESOP, (a "qualified participant")
may elect during each of the participant's qualified election periods
(as defined in paragraph (c) below) to transfer to one or more of the
investment funds up to twenty-five percent (fifty percent in the case
of the participant's last qualified election period) of the qualified
participant's ESOP stock account balance eligible for diversification
(as described in paragraph (b) next below).
15
<PAGE> 23
(b) The portion of a qualified participant's ESOP stock account balance
subject to diversification shall equal twenty-five percent (fifty
percent in the case of the qualified participant's last qualified
election period) of the total number of shares of Company stock
allocated to the participant's ESOP stock account (including shares
that the participant previously elected to diversify pursuant to this
subsection), less the number of such shares previously diversified
pursuant to the qualified participant's election under this subsection.
In any one election, a qualified participant may diversify the entire
remaining portion of his ESOP stock account balance eligible for
diversification or a part of such diversifiable portion equal to any
whole percentage of five percent or more of the applicable ESOP stock
account balance.
(c) For purposes of this subsection, a "qualified election period" means
(i) the ninety-day period immediately following the last day of the
first plan year in which the participant becomes a qualified
participant and (ii) the ninety-day period immediately following the
last day of each of the five plan years immediately following the first
plan year in which the participant becomes a qualified participant. Any
election made in accordance with the provisions of paragraph (a) next
above with respect to any qualified election period shall be given
effect as of the regular accounting date occurring ninety days after
the end of that qualified election period.
(d) The provisions of this subsection shall not apply to any participant if
the value of the participant's ESOP stock balance (determined as of the
regular accounting date immediately preceding the first day on which
the participant would otherwise be entitled to make an election under
this subsection) is $500 or less.
(e) Any amounts transferred from Company stock to one or more of the
investment funds under this subsection shall not be available for
distribution in the form of Company stock (as otherwise allowed under
subsection 12.3).
16
<PAGE> 24
SECTION 7
Accounting
7.1. Participants' Accounts. The Committee shall maintain or cause to be
maintained under the Plan the following accounts in the name of each participant
(to the extent applicable):
(a) Income deferral contribution account. An "income deferral contribution
account" to reflect the participant's income deferral contributions
made under the Plan, the participant's pre-tax contributions (if any)
made under the CTFG Profit Sharing Plan or a predecessor plan (and
earnings thereon) that have been transferred to this Plan, Benefit
Credit Contributions made under the CTFG Profit Sharing Plan that have
been transferred to this Plan, and the income, losses, appreciation,
and depreciation attributable thereto (other than amounts invested in
Company stock in accordance with Section 6). A participant shall be
fully vested in his income deferral contribution account at all times.
(b) Employer matching contribution account. An "employer matching
contribution account" to reflect employer matching contributions made
to the Plan on behalf of the participant (other than amounts invested
in Company stock in accordance with Section 6) and the income, losses,
appreciation, and depreciation attributable thereto. The employer
matching contribution account shall be separated into: (i) the "vested
employer matching contribution subaccount," which shall reflect the
participant's base matching contributions, if any, and the base
matching contributions and the excess matching contributions
transferred from the CTFG Profit Sharing Plan, which shall become fully
vested as of the spin-off date, and (ii) the "excess matching
contribution subaccount," which shall reflect the participant's excess
matching contributions, if any, made under this Plan.
(c) Employer discretionary contribution account. An "employer discretionary
contribution account" to reflect employer discretionary contributions
made to the Plan on behalf of the participant (other than amounts
invested in Company stock in accordance with Section 6) and the income,
losses, appreciation and depreciation attributable thereto. The
employer discretionary contribution account shall be separated into (i)
the "vested employer discretionary contribution subaccount," which
shall reflect the participant's employer base contributions transferred
from the CTFG Profit Sharing Plan, if any, which shall be fully vested
at all times, and employer excess contributions transferred from the
CTFG Profit Sharing Plan, if any, which shall become fully vested as of
the spin-off date, and (ii) the "employer discretionary contribution
subaccount," which shall reflect the participant's employer
discretionary contribution, if any, made under this Plan.
(d) Supplemental contribution account. A "supplemental contribution
account" to reflect the participant's supplemental contributions, if
any, made under the CTFG Profit Sharing Plan prior to January 1, 1987.
A participant shall be fully vested in his supplemental contribution
account at all times.
17
<PAGE> 25
(e) Drovers transfer account. A "Drovers transfer account" to
reflect the amount, if any, transferred from the Drovers Plan
(as defined in the CTFG Profit Sharing Plan) on behalf of the
electing participants. A participant shall be fully vested in
his Drovers transfer account at all times.
(f) Loan repayment account. A "loan repayment account" to reflect
the amounts repaid by the participant under a loan to the
participant from this Plan or a predecessor plan and the
income, losses, appreciation, and depreciation attributable
thereto.
(g) Rollover account. A "rollover account" to reflect any rollover
contributions credited to the participant's account and the
income, losses, appreciation, and depreciation attributable
thereto (other than amounts invested in Company stock in
accordance with Section 6).
(h) Vested transfer account. A "vested transfer account" to
reflect the participant's vested transfer contributions, if
any, and any income, losses, appreciation and depreciation
attributable thereto. The term "vested transfer" means an
amount directly transferred from the Trustee of another
tax-qualified retirement plan to this Plan to be held for the
benefit of a participant, except that the Committee will in no
event accept such a transfer from a tax-qualified retirement
plan to which section 401(a)(11)(B) of the Code is applicable.
(i) ESOP stock account. An "ESOP stock account" to reflect shares
of Company stock invested in accordance with Section 6 or
transferred from the unreleased share account and allocated to
the participant as a result of repayment of an acquisition
loan and to reflect any employer contributions under
subsections 4.2, 4.3, and 4.4 made in the form of Company
stock. The ESOP Stock Account shall be separated into: (i) the
"vested ESOP stock subaccount," which shall reflect the
participant's account balances transferred from the CTFG ESOP,
which shall be fully vested as of the spin-off date; and (ii)
the "regular ESOP stock subaccount," which shall reflect the
shares of Company stock transferred from the unreleased share
account and any employer contributions under subsections 4.2,
4.3 and 4.4 made in the form of Company stock.
(j) ESOP cash account. An "ESOP cash account" to reflect any
amounts to be invested in Company stock pursuant to Section 6,
employer cash contributions under subsection 4.4 and
subsections 4.2 or 4.3 that are designated to be invested in
Company stock in accordance with subsection 4.6, any cash
dividends on Company stock allocated and credited to the
participant's ESOP stock account (other than currently
distributable dividends), and any income, losses,
appreciation, or depreciation attributable thereto.
Each account described in paragraphs (a) through (h) above shall be divided into
separate subaccounts reflecting the portions of such accounts that are invested
in the investment funds described in subsection 6.1. In addition to the accounts
described above, the Committee may
18
<PAGE> 26
maintain such other accounts and subaccounts in the names of participants or
otherwise as the Committee may consider necessary or advisable. Except as
expressly modified, all accounts and subaccounts maintained for a participant
are referred to collectively as the participant's "accounts." The Committee may
establish such nondiscriminatory rules and procedures relating to the
maintenance, adjustment and liquidation of participants' accounts as the
Committee may consider necessary or advisable.
7.2. Trust Accounts. The Committee shall maintain or cause to be maintained in
the Trust the following fund accounts:
(a) Unreleased share account. An "unreleased share account" to reflect the
financed shares acquired by the Trustee with the proceeds of an
acquisition loan prior to the transfer of such financed shares to the
participants' ESOP stock accounts, any cash dividends attributable to
such shares or transferred to the unreleased share account pursuant to
subsection 7.6, and any temporary investment income attributable to
such dividends.
(b) Investment fund accounts. An "investment fund account" in the name of
each investment fund to reflect the property held in such fund.
(c) ESOP stock account and ESOP cash account. An "ESOP stock account" and
an "ESOP cash account," as provided in subsection 7.1.
In addition to the unreleased share accounts and participants' accounts
described in subsection 7.1, the Committee may maintain or cause to be
maintained such other trust accounts and subaccounts as it considers advisable.
7.3. Accounting Dates; Accounting Periods; Quarterly Accounting Period. Each
June 30 and December 31 is a "semi-annual accounting date." Participants' ESOP
stock accounts and ESOP cash accounts (collectively "ESOP portion") shall be
adjusted on semi-annual accounting dates. Each March 31, June 30, September 30,
and December 31 is a "quarterly accounting date." Participants accounts that are
not part of the ESOP portion of the Plan shall be adjusted on quarterly
accounting dates. A "special accounting date" is any date designated as such by
the Committee and a special accounting date occurring under subsection 18.3. The
term "accounting date" includes a semi-annual accounting date, a quarterly
accounting date, a special accounting date, and, with respect to investment
funds adjusted more frequently than each quarterly accounting date, each date
such an investment fund is adjusted. The term "regular accounting date" means
the quarterly accounting dates. Any references to an "accounting period" ending
on a regular accounting date shall mean the period since the next preceding
regular accounting date. Any references to a "quarterly accounting period"
ending on a quarterly accounting date shall mean the period since the next
preceding quarterly accounting date.
7.4. Adjustment of Accounts in Investment Funds. Participants' accounts invested
in the various investment funds shall be maintained on the basis of dollar
values or units that may be converted to dollar values. Pursuant to rules
established by the Committee and applied on a uniform and nondiscriminatory
basis, participants' subaccounts in an investment fund will be adjusted not less
frequently than each regular accounting date to reflect the adjusted net worth
(as
19
<PAGE> 27
described below) of that fund as of such regular accounting date, including
adjustments to reflect any distributions, contributions, income, losses,
appreciation, or depreciation with respect to such subaccounts since the
previous accounting date on which such subaccounts were adjusted, provided any
income, losses, appreciation or depreciation shall be allocated after adjusting
for distributions and before adjusting for contributions since the last
accounting date. The "adjusted net worth" of an investment fund (other than a
mutual fund) as at any accounting date means the then net worth of that fund
(that is, the fair market value of the fund, less its liabilities other than
liabilities to persons entitled to benefits under the Plan) as reported to the
Trustee.
Notwithstanding the foregoing, participants' subaccounts in an
investment fund may be adjusted more frequently than each regular accounting
date if such investment fund provides for more frequent adjustment of
participants' subaccounts. In that case, participants' subaccounts in that
investment fund will be adjusted at the times provided by the investment fund to
reflect any distributions, contributions, income, losses, appreciation, or
depreciation with respect to such subaccounts since the previous accounting
date. It is anticipated the participants' subaccount balances in an investment
fund composed only of a mutual fund will be adjusted as of the end of each
quarter.
As of each accounting date, each participant's income deferral
contributions (if any) since the preceding accounting date (other than income
deferral contributions that a participant elects to invest in Company stock
after the date designated by the Company for such investments) shall be credited
to the participant's income deferral contribution account. A participant's
rollover contribution (if any) shall be credited to the participant's rollover
account as of the accounting date coincident with or immediately following the
date such rollover contribution is accepted by the Trustee. As of each
accounting date, the amount of a participant's repayment on a participant loan
for that accounting period will be credited to the participant's loan repayment
account. Contributions so credited shall be further credited to separate
subaccounts reflecting the participant's current election as to investment of
his participant contributions in one or more of the investment funds described
in subsection 6.1.
7.5. Crediting of Shares Related to the Spin-Off. On the spin-off date, the
shares of CTFG common stock held in the participants' ESOP stock accounts that
are exchanged for shares of Company stock in accordance with the first paragraph
of subsection 6.2 shall be credited to participant's ESOP stock accounts as of
the December 31, 1996 accounting date.
7.6. Transfer of Shares From Unreleased Share Account to Participants' ESOP
Stock Accounts. At the direction of the Committee, the Trustee shall use the
following to repay an acquisition loan:
(a) Employer contributions under subsections 4.2, 4.3 and 4.4 made on or
after the spin-off date and any investment income attributable to such
contributions; and
(b) Cash dividends paid on shares of Company stock, as provided in
subsections 7.7 and 7.8, and any investment income attributable to such
dividends.
The repayment of a acquisition loan shall cause a transfer of shares of Company
stock from the unreleased share account to the participants' ESOP stock accounts
in accordance with subsections 7.7 and 7.8 of each applicable accounting date.
The number of shares to be transferred shall be
20
<PAGE> 28
determined by multiplying the number of shares in the unreleased share account
by a fraction, the numerator of which is the principal and interest payments
during the applicable accounting period and the denominator of which is the sum
of the numerator plus the total projected principal and interest payments during
the remainder of the term of the acquisition loan. If the requirements of
Treasury Regulations Section 54.4975-7(b)(8)(ii) are satisfied, the phrase
"principal and interest" in the preceding sentence shall be replaced by the word
"principal."
7.7. Adjustment of ESOP Cash and Stock Accounts. Participants' ESOP cash
accounts and ESOP stock accounts shall be adjusted as follows:
(a) Repayments of acquisition loans and purchase of Company stock. (i) For
each quarterly accounting period, employer cash contributions under
subsections 4.2, 4.3 and 4.4 that are used to repay an acquisition loan
and release shares of Company stock from the unreleased share account
in accordance with subsection 7.6 shall be credited as of the
applicable accounting date to the participants' ESOP stock accounts in
accordance with the provisions of subsection 4.2 or 4.3, as applicable;
(ii) For each quarterly accounting period, employer cash contribution
under subsections 4.2 and 4.3 that are designated to be invested in
shares of Company stock shall be credited as of the applicable
accounting date to the participants' ESOP cash accounts in accordance
with the provisions of subsection 4.2 or 4.3, as applicable. Upon the
purchase of Company stock with such cash, an appropriate number of
shares of Company stock shall be credited to the participants' ESOP
stock accounts, and the participants' ESOP cash accounts shall be
charged by the amount of the cash used to buy such Company stock.
(b) Dividends. (i) Subject to the provisions of subsection 7.8, cash
dividends on shares of Company stock in the unreleased stock account
shall be used to repay the outstanding acquisition loan and the
released shares shall be credited to the participants' ESOP stock
accounts in accordance with the provisions of subsection 4.2 or 4.3, as
determined by the Company in its sole discretion. (ii) Subject to the
provisions of subsection 7.8, the Committee shall credit to the
participants' ESOP cash accounts any cash dividends paid to the Trustee
on shares of Company stock held in the participants' ESOP stock
accounts as of the record date. Such cash dividends credited to the
participants' ESOP cash accounts shall be applied as soon as
practicable first to the repayment of any amount due during or prior to
that accounting period on an acquisition loan. If no amount is due on
an acquisition loan, such cash dividends may, as determined in the
discretion of the Committee, be used to either prepay any acquisition
loan, purchase shares of Company stock, or be paid to the participants
as described in paragraph 7.8(b). The Committee shall credit an
appropriate number of shares of Company stock to the ESOP stock account
of such participant, and the participant's ESOP cash account shall then
be charged by the amount of cash used to repay an acquisition loan or
used to purchase such Company stock for the participant's ESOP stock
account or as applicable.
(c) Employer contributions in shares of Company stock. For any quarterly
accounting period in which the employer contributions under subsection
4.2 or 4.3 is made in
21
<PAGE> 29
the form of shares of Company stock, such stock shall be credited to
the participants' ESOP stock accounts as of the applicable accounting
date, in accordance with the provisions of subsection 4.2 or 4.3, as
applicable.
(d) Appreciation, depreciation, etc. As of each accounting date, before the
allocation of any employer contributions under subsections 4.2, 4.3, or
4.4 made in cash, any appreciation, depreciation, income, gains or
losses in the fair market value of the participants' ESOP cash accounts
shall be allocated among and credited to the ESOP cash accounts of
participants, pro rata, according to the balance of each ESOP cash
account as of the immediately preceding accounting date, reduced in
each case by the amount of any charge to such ESOP cash account since
the next preceding accounting date. Any gain or loss realized by the
Trustee on the sale of Company stock will be allocated to the ESOP cash
accounts of participants, pro rata, according to the balance of
participants' ESOP stock accounts, as of the next preceding accounting
date.
7.8. Dividends on Company Stock. The following shall apply with respect to
dividends on Company stock:
(a) Dividends credited to ESOP cash accounts. Any cash dividends paid with
respect to shares of Company stock allocated to participants' ESOP
stock accounts or held in the unreleased share account may, as
determined by the Committee, be allocated among and credited to
participants' ESOP cash accounts in accordance with paragraph 7.7(b).
(b) Dividends paid to participants. Any cash dividends paid with respect to
shares of Company stock allocated to participants' ESOP stock accounts
may, as determined by the Committee, be either paid by the Company
directly in cash to participants on a non-discriminatory basis or paid
to the Trustee and distributed by the Trustee to the participants no
later than ninety days after the end of the plan year in which paid to
the Trustee.
(c) Dividends used to repay acquisition loan. To the extent permitted by
applicable law, any cash dividends paid with respect to shares of
Company stock allocated to participants' ESOP stock accounts or held in
the unreleased share account may (as required by applicable acquisition
loan documentation or, if not so required, as determined in the sole
discretion of the Committee) be used to repay the principal balance of
an outstanding acquisition loan or interest thereon in whole or in
part, or to purchase additional shares of Company stock as provided in
paragraph 7.7(b). Financed shares released from the unreleased stock
account by reason of dividends paid with respect to such Company stock
shall be allocated to participants' ESOP stock accounts as follows:
(i) First, financed shares with a fair market value at least equal to
the dividends paid with respect to the Company stock allocated to
participants' ESOP stock accounts shall be allocated among and
credited to the ESOP stock accounts of such participants, pro
rata,
22
<PAGE> 30
according to the number of shares of Company stock held in
such accounts on the dividend declaration date; and
(ii) Next, any remaining financed shares released from the unreleased
share account shall be allocated among and credited to the ESOP
stock accounts of all participants, pro rata, according to each
participant's earnings.
7.9. Temporary Investment of Cash in Trust. At the direction of the Committee,
cash held in the unreleased share account or participants' ESOP cash accounts
under the Trust will be invested by the Trustee, to the extent practicable, in
short term securities or cash equivalents having ready marketability or as
otherwise provided in the trust agreement. Temporary investment income resulting
from such investments shall be credited to the account to which it pertains. The
term "temporary investment income" means income resulting from the temporary
investment of, income deferral contributions, employer contributions, cash
dividends and any other amounts.
7.10. Fair Market Value of Company Stock. For purposes of the Plan and trust,
the fair market value of Company stock shall be determined, at least once each
plan year, by an independent appraiser, as defined in Section 401(a)(28) of the
Code, in accordance with the terms of the Trust and the provisions of Section
3(18) of ERISA; provided, however, that the Spin-Off Shares, as defined in
subsection 6.2, shall be valued in accordance with the methodology used by the
independent appraiser to value the Spin-Off Shares for the purpose of the
exchange including the application of the enterprise value of the Company.
7.11. Stock Dividends, Stock Splits and Capital Reorganizations Affecting ESOP
Shares. Shares of Company stock received by the Trustee that are attributable to
stock dividends, stock splits or to any reorganization or recapitalization of
the Company shall be credited to the unreleased share account, if attributable
to shares held in that account, or shall be credited to the released share
account (including participants' ESOP stock accounts) if attributable to shares
held in the released share account, so that the interests of participants
immediately after any such stock dividend, split, reorganization or
recapitalization are the same as such interests immediately before such event.
7.12. ESOP Share Records. The Committee shall maintain or cause to be maintained
records as to the number and cost of shares of Company stock acquired or
transferred by or within the Trust in accordance with the applicable provisions
of this Section 7.
7.13. Statement of Accounts. The Committee will provide each participant with a
statement reflecting the balances in the participant's accounts under the Plan
at such times as are established by the Committee. No participant, except a
person authorized by the Company or the Committee, shall have the right to
inspect the records reflecting the accounts of any other participant.
7.14. Multiple Acquisition Loans. If more than one acquisition loan to the
Trustee becomes outstanding at any time, the foregoing provisions of this
Section 7 and other provisions of the Plan shall be modified by the Committee to
the extent it deems necessary or appropriate to reflect such additional
acquisition loan or loans.
23
<PAGE> 31
SECTION 8
Contribution and Benefit Limitations
8.1. Contribution Limitations. For each limitation year, the "annual addition"
(as defined below) to a participant's accounts shall not exceed the lesser of
$30,000 (or, if greater, 1/4 of the dollar limitation in effect under Section
415(b)(1)(A) of the Code for that limitation year) or twenty-five percent of the
participant's compensation (as defined in Treasury Regulations Section
1.415-2(d)) during that limitation year. Effective January 1, 1998, for purposes
of this subsection, the term "compensation" shall include any elective deferrals
(as defined in Code Section 402(g)(3)) made by the participant and any amount
which is contributed or deferred by the Employer at the election of the
participant and which is not includible in the gross income of the participant
by reason of Code Section 125. Reference herein to a "limitation year" means the
plan year (or, with respect to the 1996 plan year, the period commencing on
January 1, 1996 and ending on December 31, 1996). The term "annual addition" for
any limitation year means the sum of the participant contributions (other than
rollover contributions) under Section 3, employer contributions under
subsections 4.2, 4.3, and 4.4, corrective deferral contributions described in
subsection 8.5, and corrective matching contributions described in subsection
8.6 that are credited to a participant's accounts for that limitation year. As
determined by the Committee on a uniform basis for all participants for a
limitation year, each participant's annual addition for a limitation year shall
be calculated either (i) on the amount of contributions credited to the
participant's accounts and not on the basis of the fair market value of Company
stock or other property credited to the participant's accounts by reason of such
contributions or (ii) on the amount of contributions credited to the
participant's accounts with respect to amounts invested in the investment funds
and on the basis of the fair market value of Company stock credited to the
participant's accounts with respect to contributions invested or to be invested
in Company stock. If it is anticipated that a participant's annual addition may
exceed the limitations of this subsection, the Committee shall reduce a
participant's annual addition to the extent necessary in accordance with the
following:
(a) First, reduce the participant's income deferral contributions in
excess of the percentage matched by the Employer pursuant to
subsection 4.2 to the extent necessary to meet the above
limitations. The Committee may suspend a participant's income
deferral contributions for the limitation year or direct the
Trustee to distribute to the participant the amount of income
deferral contributions that cannot be allocated to the
participant's income deferral contribution account for the
limitation year. If any income deferral contributions are
distributed to the participant, such distribution shall include
any earnings attributable to such income deferral contributions.
(b) Next, reduce, in proportion, the income deferral contributions
made by the participant that are matched by the Employer pursuant
to subsection 4.2 and the employer matching contributions
attributable to such income deferral contributions. The Committee
may suspend a participant's income deferral contributions for the
limitation year or direct the Trustee to distribute to the
participant the amount of income deferral contributions that
cannot be allocated to
24
<PAGE> 32
the participant's income deferral contribution account for the
limitation year. If any income deferral contributions are distributed
to the participant, such distribution shall include any earnings
attributable to such income deferral contributions. The amount of
employer matching contributions that cannot be allocated to the
participant's accounts shall be applied to reduce employer matching or
discretionary contributions in succeeding limitation years in order of
time.
(c) Finally, in accordance with procedures established by the Committee,
reduce such participant's share for that limitation year of the
employer matching contributions, employer discretionary contributions,
employer loan contributions, corrective deferral contributions, or
corrective matching contributions to the extent necessary to meet the
above limitations. The amount of any employer contributions that cannot
be allocated to a participant's accounts shall be applied to reduce
employer matching or discretionary contributions in succeeding
limitation years in order of time.
8.2. Combined Contribution Limitations. If a participant in this Plan also is a
participant in a defined benefit plan maintained by an Employer or a Controlled
Group Member, the aggregate benefits payable to, or on account of, the
participant under both plans will be determined in a manner consistent with
Section 415 of the Code and Section 1106 of the Tax Reform Act of 1986.
Accordingly, there will be determined with respect to the participant a defined
contribution plan fraction and a defined benefit plan fraction in accordance
with such Sections 415 and 1106. The benefits provided for the participant under
this Plan and the defined benefit plan will be adjusted to the extent necessary
so that the sum of such fractions determined with respect to the participant
does not exceed 1.0. Effective January 1, 2000, this subsection 8.2 will have no
effect.
8.3. Combining of Plans. In applying the limitations set forth in subsections
8.1 and 8.2, reference to this Plan shall mean this Plan and all other defined
contribution plans (whether or not terminated) ever maintained by the Employers
and the Controlled Group Members, and reference to a defined benefit plan
maintained by an Employer shall include all defined benefit plans (whether or
not terminated) ever maintained by the Employers and the Controlled Group
Members. It is intended that in complying with the requirements of subsections
8.1 and 8.2, a participant's benefits under this Plan shall be limited after the
participant's benefits under any other defined contribution plan maintained by
the Employers are limited and after the participant's benefits under any defined
benefit plan maintained by the Employers are limited, unless such other plan
provides otherwise.
8.4. Dollar Limitation on Income Deferral Contributions. In no event shall the
participant's income deferral contributions for any calendar year exceed $9,500
(or such greater amount as the Secretary of the Treasury shall specify from time
to time pursuant to Code Section 402(g)(5)). As of each December 31, the
Committee shall determine the total income deferral contributions made by each
participant during the calendar year ending on that December 31. In the event
that such total for a participant exceeds the amount specified pursuant to Code
Section 402(g)(5), such excess income deferral contributions ("excess
deferrals") (and any income thereon
25
<PAGE> 33
determined in accordance with subsection 8.9) shall be paid to the participant
by the following April 15.
8.5. Percentage Limitation on Income Deferral Contributions. In no event shall
the average deferral percentage (as defined below) of the highly compensated
participants (as defined in subsection 8.7) for any plan year exceed the greater
of:
(a) the average deferral percentage of all other eligible employees for the
preceding plan year multiplied by 1.25; or
(b) the average deferral percentage of all other eligible employees for the
preceding plan year multiplied by 2.0; provided that the average
deferral percentage of the highly compensated participants does not
exceed that of all other eligible employees by more than two percentage
points.
The "average deferral percentage" of a group of eligible employees for a plan
year means the average of the ratios (determined separately for each eligible
employee in such group) of A to B where A equals the sum of the income deferral
contributions actually paid to the Trust on behalf of such eligible employee for
such plan year, and B equals the eligible employee's testing compensation (as
described below) received by the employee for the portion of such plan year
during which the employee participated in the Plan or was eligible to
participate in the Plan. For purposes of this subsection, the Committee shall
determine the testing compensation of each and every eligible employee for a
plan year under any definition of compensation that satisfies the requirements
of Section 414(s) of the Code and the regulations thereunder. The Committee
shall determine whether the foregoing limitation will be satisfied and, to the
extent necessary to ensure compliance with such limitation, shall reduce the
income deferral contributions of highly compensated participants. If for a plan
year the income deferral contributions made on behalf of highly compensated
participants exceed the foregoing limitation ("excess income deferral
contributions"), such excess income deferral contributions shall be corrected by
using one or both of the following measures:
(c) The Company may, in its sole discretion, direct the Employers to make
contributions on behalf of participants who are not highly compensated
participants in such an amount as will satisfy the foregoing limitation
("corrective deferral contributions"). The corrective deferral
contributions, if any, made by the Employers pursuant to this paragraph
shall be allocated to all participants (i) who are not highly
compensated participants for such plan year, (ii) made income deferral
contributions during such plan year, and (iii) either completed at
least 1,000 hours of service in such plan year and are employed by the
Employers on the last day of such plan year or terminated employment
with the Employers during such plan year under paragraph -- 9.1(a),
(b), or (c). The Employers' corrective deferral contributions for a
plan year shall be allocated to eligible participants in proportion to
such participants' income deferral contributions for the plan year. Any
corrective deferral contributions shall be credited to eligible
participants' income deferral contribution accounts and invested in
accordance with each such participant's election in effect for the
participant's income deferral contributions.
26
<PAGE> 34
(d) Excess income deferral contributions (and any income thereon determined
in accordance with subsection 8.9) will be refunded to the highly
compensated participants (in the order of their average deferral
amount, beginning with the highest amount) to the extent necessary to
meet such limitation, generally within two and one-half months after
the end of that plan year but in no event later than the last day of
the first plan year beginning after that plan year. Employer matching
contributions attributable to excess income deferral contributions
distributed to a highly compensated participant will be forfeited.
Employer matching contributions forfeited under this subparagraph will
be reallocated to eligible participants described in subparagraphs
(c)(i), (ii) and (iii) above, in proportion to their income deferral
contributions for the plan year.
8.6. Percentage Limitation on Employer Matching Contributions. In no event shall
the contribution percentage (as defined below) of the highly compensated
participants (as defined in subsection 8.7) for any plan year exceed the greater
of:
(a) the contribution percentage of all other eligible employees for the
preceding plan year multiplied by 1.25; or
(b) the contribution percentage of all other eligible employees for the
preceding plan year multiplied by 2.0; provided that the contribution
percentage of the highly compensated participants does not exceed that
of all other eligible employees by more than 2 percentage points.
The "contribution percentage" of a group of eligible employees for a plan year
means the average of the ratios (determined separately for each eligible
employee in such group) of A to B where A equals the employer matching
contributions (including discretionary matching contributions allocated under
paragraph 4.3(a)) made on behalf of such eligible employee for such plan year,
and B equals the eligible employee's testing compensation (as described below)
received by the employee for the portion of such plan year during which the
employee participated in the Plan or was eligible to participate in the Plan.
For purposes of this subsection, the Committee shall determine the testing
compensation of each and every eligible employee for a plan year under any
definition of compensation that satisfies the requirements of Section 414(s) of
the Code and the regulations thereunder. If for a plan year the employer
matching contributions made by or on behalf of highly compensated participants
exceed the foregoing limitation ("excess aggregate contributions"), such excess
aggregate contributions shall be corrected by using one or both of the following
measures:
(c) The Company may, in its sole discretion, direct the Employers to make
contributions on behalf of participants who are not highly compensated
participants in such an amount as will satisfy the foregoing limitation
("corrective matching contributions"). The corrective matching
contributions, if any, made by the Employers pursuant to this paragraph
shall be allocated to all participants who meet the requirements
described in subparagraphs 8.5(c)(i), (ii), and (iii) for the plan
year, in proportion to such participants' income deferral contributions
for the plan year. Any corrective matching contributions shall be
credited to participants'
27
<PAGE> 35
accounts and invested in accordance with the provisions of Section 6
relating to employer matching contributions. Notwithstanding subsection
11.2 to the contrary, any corrective matching contributions allocated
to a participant's accounts will be fully vested and nonforfeitable at
all times.
(d) The Committee may direct that such excess aggregate contributions, and
any income thereon determined in accordance with subsection 8.9, be
distributed to the highly compensated participants to the extent vested
(in the order of their contribution amounts beginning with the highest
amounts), or if not vested shall be forfeited, to the extent necessary
to meet the limitation of this subsection. (Forfeitures under this
subparagraph will be reallocated to eligible participants described in
subparagraphs 8.5(c)(i), (ii) and (iii), in proportion to their income
deferral contributions for the plan year.) If excess aggregate
contributions made by or on behalf of a highly compensated participant
(and any income thereon determined in accordance with subsection 8.9)
are to be distributed to the participant, such distribution generally
will be made within two and one-half months after the end of that plan
year but in no event later than the last day of the first plan year
beginning after that plan year.
8.7. Highly Compensated Participant. A "highly compensated participant" means an
eligible employee who is a "highly compensated participant" as defined in
Section 414(q) of the Code. A highly compensated participant shall be any
eligible employee who during the applicable plan year:
(a) was a 5 percent owner of an Employer or a Controlled Group Member;
(b) received compensation from an Employer or a Controlled Group Member of
more than $75,000 (or such greater amount as may be determined by the
Commissioner of Internal Revenue);
(c) received compensation from an Employer or a Controlled Group Member of
more than $50,000 (or such greater amount as may be determined by the
Commissioner of Internal Revenue) and was in the top-paid twenty
percent of employees; or
(d) was an officer of an Employer or a Controlled Group Member (or both)
receiving compensation greater than fifty percent of the limitation in
effect under Section 415(b)(1)(A) of the Code; provided, that for
purposes of this paragraph, no more than fifty employees of the
Employers and the Controlled Group Members (or, if lesser, the greater
of three employees or ten percent of employees) shall be treated as
officers.
Effective January 1, 1997, the term "highly compensated employee" means any
employee defined in Code Section 414(q), which includes any employee who:
28
<PAGE> 36
(a) was at any time a 5% owner (as defined in Section 416(i) of the Code)
of any Employer or any Controlled Group Member during the year or the
preceding year, or;
(b) for the preceding year:
(i) received compensation from an Employer or any Controlled Group
Member in excess of $80,000, and
(ii) if the Company elects, was in the top-paid group of employees for
such preceding year.
For purposes of this subsection, an employee's compensation for a plan year
shall be the employee's compensation for such plan year for services rendered to
the Employers and the Controlled Group Members as reported on the employee's
Federal wage and tax statement (Form W-2), but including the employee's elective
deferral contributions made pursuant to Sections 125 and 401(k) of the Code
(including income deferral contributions made under this Plan). For purposes of
paragraph (c) next above, the term "top-paid twenty percent of employees" means
the top-paid twenty percent of the employees of the Employers and the Controlled
Group Members, exclusive of (i) employees who have not completed six months of
service with the Employers or the Controlled Group Members, (ii) employees who
normally work less than seventeen and one-half hours per week, (iii) employees
who normally work not more than six months during any plan year, (iv) employees
who have not attained age twenty-one years, (v) except to the extent provided in
applicable Treasury Regulations, employees who are included in a unit of
employees covered by an agreement that the Secretary of Labor finds to be a
collective bargaining agreement between employee representatives and an
Employer, and (vi) employees who are nonresident aliens and who receive no
earned income (within the meaning of Section 911(d)(2) of the Code) from the
Employers that constitutes income from sources within the United States (within
the meaning of Section 861(a)(3) of the Code). A former employee shall be
treated as a highly compensated participant if such employee was a highly
compensated participant when such employee separated from service or such
employee was a highly compensated participant at any time after attaining age 55
years.
Prior to January 1, 1997, for purposes of this subsection, if any eligible
employee is a member of the family of a five percent owner of an Employer or a
highly compensated participant who is in the group consisting of the ten highly
compensated participants of an Employer paid the greatest compensation during
the calendar year, such individual shall not be considered a separate employee
and any compensation of such individual shall be treated as if it were paid to
the five percent owner or the highly compensated participant. The term "family"
shall mean with respect to any employee, such employee's spouse and lineal
ascendants and descendants and the spouses of such lineal ascendants and
descendants.
8.8. Multiple Use of Alternative Limitations. Multiple use of the alternative
limitations described in paragraph 8.5(b) and paragraph 8.6(b) shall be tested
in accordance with Treasury Regulations Section 1.401(m)-2. If multiple use
occurs for any plan year, such multiple use will be corrected in the manner
described in Treasury Regulations Section 1.401(m)-1(e).
29
<PAGE> 37
8.9. Calculating Income Allocable to Excess Deferrals, Excess Aggregate
Contributions, and Excess Income Deferral Contributions. The income allocable to
a distribution to a participant of excess deferrals, excess income deferral
contributions, or excess aggregate contributions (as required under subsection
8.4, 8.5, 8.6, or 8.8, respectively) shall be determined as follows:
(a) Income for the plan year. The income allocable to a participant's
excess deferrals, excess income deferral contributions, or excess
aggregate contributions, as the case may be, for the plan year in
which such excess amount arose shall be determined by multiplying
the income allocable for that plan year to the participant's income
deferral contribution account or employer matching contribution
account, as applicable, by a fraction. The numerator of the
fraction is the excess amount to be distributed. The denominator of
the fraction is the total balance in the applicable account of the
participant, as determined as of the end of that plan year, to
which such excess amount was credited. Such account balance shall
be reduced by the gain and increased by the loss allocable to such
account balance for that plan year.
(b) Income for the gap period. No income will be allocated to any
excess deferrals, excess income deferral contributions, or excess
aggregate contributions to be distributed to a participant for the
period between the end of the plan year in which such excess amount
arose and the date of distribution of such excess amount.
8.10. Special Testing Rules.
(a) Family aggregation. For the period prior to January 1, 1997, for
purposes of nondiscrimination testing under subsections 8.5 and
8.6, as well as for purposes of required correction of excess
amounts determined as a result of such testing, family members (as
defined in subsection 8.7) of a highly compensated participant who
is either a five percent owner of an Employer or a Controlled Group
Member or one of the ten most highly compensated participants of
the Employers and the Controlled Group Members for any plan year
shall not be treated as separate participants. Such family members,
together with such highly compensated participant, shall be
considered a "family group" and shall be treated as follows:
(i) Family group ratio. For purposes of determining deferral
ratios under subsection 8.5 and contribution ratios under
subsection 8.6, the family group shall be treated as a single
highly compensated participant having a ratio for a plan year
equal to the greater of: (A) the ratio determined for all
members of the family group who are highly compensated
participants and (B) the ratio determined for all members of
the family group.
(ii) Correction of excess amounts attributable to a family group.
For purposes of correcting excess amounts determined under
subsections 8.5 and 8.6, if a family group has excess income
deferral contributions or excess aggregate contributions, the
excess income deferral contributions or excess aggregate
contributions resulting from the required reduction in the
ratio
30
<PAGE> 38
of the family group shall be allocated among all
members of the family group in proportion to their
income deferral contributions or their employer
matching contributions, whichever are applicable.
(b) Disaggregation of Plan. For purposes of subsections 8.5, 8.6,
and 8.8, the Plan shall be disaggregated in accordance with
Treasury Regulations Section 1.410(b)-7(c)(2).
31
<PAGE> 39
SECTION 9
Period of Participation
9.1. Settlement Date. A participant's "settlement date" will be the date on
which his employment with the Employers and the related companies is terminated
because of the first to occur of the following events:
(a) Normal Retirement. The participant retires or is retired from the
employ of the Employers and the related companies on or after the date
on which he attains age 65 years.
(b) Disability Retirement. The participant is retired on account of
permanent disability when the Company determines, based upon an
independent doctor's examination and certificate, that a participant is
under such physical or mental disability that he is no longer capable
of rendering satisfactory service to the Company. This determination
will be made in a nondiscriminatory manner to all participants.
(c) Death. The participant's death.
(d) Resignation or Dismissal. The participant resigns or is dismissed from
the employ of the Employers and the related companies before retirement
in accordance with paragraph (a) or (b) next above.
If a participant is transferred from employment with an Employer to employment
with a Controlled Group Member that is not an Employer, then for purposes of
determining when the participant's settlement date occurs under this subsection,
the participant's employment with such Controlled Group Member (or any
Controlled Group Member to which the participant is subsequently transferred)
shall be considered as employment with the Employers.
9.2. Restricted Participation. If (i) a participant's settlement date has
occurred but full payment of all of the participant's account balances has not
yet been made, or (ii) a participant transfers to a Controlled Group Member that
is not an Employer under the Plan, the participant or the participant's
beneficiary will be treated as a participant for purposes of the Plan, except as
follows:
(a) The participant (or beneficiary) may not make any income deferral
contributions or rollover contributions and may not share in any
Employer contributions, except as specifically provided in subsections
4.2, 4.3, 8.5, and 8.6.
(b) The participant's beneficiary cannot designate a beneficiary under
subsection 12.7 and may not obtain a loan under subsection 10.3.
If a participant subsequently again satisfies the requirements for participation
in the Plan, the participant will become an active participant in the Plan on
the date the participant satisfies such requirements.
32
<PAGE> 40
SECTION 10
In-Service Withdrawals and Participant Loans
10.1. Hardship Withdrawals. Subject to the limitations set forth below, a
participant whose settlement date has not occurred may request a hardship
withdrawal from the participant's income deferral contribution account by filing
a written request with the Committee to make such a withdrawal. A participant's
request for a hardship withdrawal must include such evidence as may be deemed
necessary by the Committee. Such request shall be filed with the Committee at
such time and in such manner as the Committee may determine. A hardship
withdrawal made under this subsection shall be subject to the following terms
and conditions:
(a) A participant may withdraw all or any portion of the income deferral
contributions (including any pre-tax contributions under a predecessor
plan) credited to the participant's income deferral contribution
account (but not any earnings thereon that were credited after December
31, 1988, to the participant's account under the Plan or under a
predecessor plan).
(b) A hardship withdrawal may be made only on account of one of the
following immediate and heavy financial needs of a participant:
(i) Payment of unreimbursed medical expenses described in Section
213(d) of the Code previously incurred by the participant, the
participant's spouse, or any dependents of the participant (as
defined in Section 152 of the Code) or payment of unreimbursed
expenses necessary for these persons to obtain medical care
described in Section 213(d);
(ii) Purchase (excluding mortgage payments) of the principal
residence of the participant;
(iii) Payment of post-secondary tuition expenses and room and board
expenses for the participant, the participant's spouse, or the
participant's dependents;
(iv) Prevention of the eviction of the participant from the
participant's principal residence or prevention of the
foreclosure on the mortgage on the participant's principal
residence;
(c) A hardship withdrawal shall not be in excess of the amount
necessary to satisfy the immediate and heavy financial need of
the participant. In accordance with such rules and procedures
as the Committee may establish, the amount of a hardship
withdrawal may include the amount necessary to pay any
Federal, state, or local income taxes or penalties reasonably
anticipated to result from the withdrawal. A hardship
withdrawal will not be permitted if the participant's
immediate and heavy financial need could be satisfied from
other sources reasonably available to the participant.
33
<PAGE> 41
(d) If (i) a participant elects to withdraw an amount pursuant to this
subsection and (ii) the participant's income deferral contribution
account is invested in more than one investment fund, the amount to be
withdrawn shall be withdrawn from the investment funds in the order
determined by the Committee for withdrawals from the Plan.
(e) If a participant elects to withdraw an amount pursuant to this
subsection, his ability to make income deferral contributions will be
suspended for a period of 12 months following the date of the
withdrawal.
The Committee may rely on a participant's written representation as to the
satisfaction of the requirements of paragraphs (b) and (c).
10.2. In-Service Withdrawal. A participant who has attained age 65 may receive a
distribution of all or a portion (in increments of 10 percent) from vested
amounts credited to the participant's accounts (other than the participant's
ESOP stock account and ESOP cash account) by filing a request in writing with
the Committee in accordance with procedures established by the Committee, in its
sole discretion. A request for withdrawal shall be effective as of the
accounting date coincident with or next following the date the request is
delivered to the Committee and the distribution shall be made as soon as
practical thereafter. A participant shall be limited to two (2) in-service
withdrawals in any twelve month period.
10.3. Loans to Participants. Although the primary purpose of the Plan is to
allow participants to accumulate funds for retirement, it is recognized that
under some circumstances it would be in the best interest of participants to
permit loans to be made to them from certain of their accounts under the Plan.
Accordingly, the Committee may (pursuant to such nondiscriminatory rules as the
Committee may from time to time establish and uniformly apply, which rules are
hereby incorporated into and made a part of the Plan), approve a loan to a
participant, subject to the following:
(a) Terms and conditions of loans. All loans shall be subject to the
following terms and conditions:
(i) A loan will be made to a participant only for the purposes
described in paragraph 10.1(b). A participant shall provide the
Committee with such evidence as the Committee may require to
determine the loan is for such purpose. Each request for a loan
must be made on a form furnished by the Committee and filed
with the Committee at such time and in such manner as the
Committee may determine. The spouse of a participant must
consent to a loan if required under Treasury Regulations
1.401(a)-20 with respect to amounts transferred to this Plan
from a predecessor plan.
(ii) A loan may not be made to a participant after the participant's
settlement date or after the participant transfers employment
to a Controlled Group Member. If a participant's settlement
date or transfer to a Controlled Group Member should occur
after the participant has requested a loan but before
34
<PAGE> 42
the loan is actually made to the participant, the participant's
request for a loan automatically will be cancelled.
(iii) Each loan shall be evidenced by a note in a form furnished by
the Committee and shall bear interest at the rate that is in
effect on the date of the loan. The interest rate for loans
shall be determined by the Committee no less frequently than
quarterly based on appropriate factors in accordance with
Department of Labor regulations.
(iv) Each participant may have no more than one loan outstanding at
any time.
(v) Each loan to a participant shall be secured by a pledge of a
portion of the participant's vested account balances under the
Plan. As of the effective date of a loan, no more than fifty
percent of the participant's vested account balances (other
than ESOP account balances) may be pledged as security for that
loan.
(vi) The making of a loan shall be deemed to be consent by the
participant to charging the participant's accounts if any
portion of the loan (and any accrued interest thereon) has not
been paid as of the participant's settlement date or such
earlier date after the participant's loan is suspended under
paragraph (e) next below as provided under rules established by
the Committee pursuant to that paragraph.
(vii) Loan repayments will be suspended under the Plan as permitted
under Code Section 414(u)(4).
(b) Amount of loans. The principal amount of any loan (when added to the
outstanding balance of any prior loans) made to a participant shall not
exceed the lesser of (i) or (ii) below:
(i) $50,000, reduced by the excess (if any) of:
(A) the highest outstanding balance of all loans under the
Plan during the one-year period ending immediately
preceding the date of the loan, over
(B) the outstanding balance on the date of the loan of all
loans under the Plan.
(ii) Fifty percent of the amount of the participant's vested account
balances under the Plan (other than the ESOP account balances)
as of the date of the loan.
The principal amount of any loan made to a participant shall not be
less than $1,000.
35
<PAGE> 43
(c) Sources for loans. A loan to a participant shall be made solely from
vested amounts credited to the participant's accounts (other than the
participant's ESOP stock account and ESOP cash account). A loan granted
under this subsection to a participant shall be made by liquidating and
converting to cash the participant's accounts (and the participant's
interest in the investment funds) in the order specified by the
Committee for loans to participants.
(d) Repayment of loans. Each loan shall specify a payment period of from
one to five years. Payments must be made by payroll deduction, except
that a participant on an authorized paid leave of absence may make loan
payments by check. Loan payments made by a participant who is not
actively at work due to a leave of absence or a disability may be
suspended during the period the participant is not actively at work but
for a period not to exceed one year. Suspension of payments will not be
permitted if the participant is collecting disability payments or other
payments from an Employer and these payments exceed the amount of the
loan payments scheduled during the participant's leave of absence or
disability. As repayments are made with respect to a loan, the unpaid
balance of such loan shall be reduced. Payments of principal and
interest shall be credited to the participant's loan repayment account.
Payments credited to a participant's loan repayment account may not be
invested in Company stock; pursuant to subsection 6.3, a participant
must elect how loan repayments will be invested. Participants may pay
the entire outstanding balance of a loan and accrued interest thereon
after the first month of a loan period; partial prepayments may not be
made.
(e) Unpaid loans. If a participant fails to make scheduled loan payments or
reaches his settlement date with an outstanding loan balance, the
following shall apply:
(i) If a participant whose settlement date has not occurred (and
who is not on an authorized unpaid leave of absence) fails for
three consecutive months to pay any portion of a loan made to
the participant under the Plan and accrued interest thereon in
accordance with the terms of the loan, the participant will
have thirty days to pay the amount then owing. If such payment
is not made, the loan will be considered in default. A
participant who has a loan in default shall not be eligible to
obtain further loans. Loans in default shall be further handled
under uniform rules established by the Committee in accordance
with Internal Revenue Service and Department of Labor rules and
regulations.
(ii) If immediately prior to a participant's settlement date any
loan or portion of a loan made to the participant under the
Plan remains outstanding, the participant may repay an amount
equal to the unpaid balance of such loan, provided such
repayment is made (A) within thirty days following the
participant's termination date if the participant will not be
receiving an immediate distribution of the
36
<PAGE> 44
participant's benefits under the Plan or (B) prior to the time
distribution of the participant's Plan benefits will be made if
the participant will receive an immediate distribution of the
participant's Plan benefits. If a participant does not repay
the entire balance of the loan within the time period specified
above, the balance of the loan shall be considered in default
as of the participant's settlement date. On the date that a
loan is considered in default, the promissory note shall
immediately become due and payable and an amount equal to such
loan or any part thereof, together with the accrued interest
thereon, shall be deemed distributed to the participant and
shall be charged to the participant's accounts after all other
adjustments required under the Plan have been made, but before
any other distribution.
37
<PAGE> 45
SECTION 11
Vesting
11.1. Retirement. A participant shall have a nonforfeitable right to all of the
participant's account balances on and after attaining normal retirement age. A
participant's right to all of the participant's account balances shall be
nonforfeitable on and after the participant becomes eligible for disability
retirement. If a participant's employment with the Employers and the Controlled
Group Members is terminated because of retirement under paragraph 9.1(a) or (b),
the balances in the participant's accounts shall be distributable to the
participant under Section 12.
11.2. Resignation or Dismissal. If a participant resigns or is dismissed from
the employ of the Employers and the Controlled Group Members before retirement
under paragraph 9.1(a) or (b), the balances in the participant's accounts shall
be treated as follows:
(a) The balances in the participant's income deferral contribution account,
vested employer matching contribution subaccount, vested employer
discretionary contribution subaccount, vested ESOP stock subaccount,
supplemental contribution account, Drovers transfer account, rollover,
vested transfer, and loan repayment accounts shall be nonforfeitable
and shall be distributable to the participant under Section 12.
(b) The balances in the participant's employer discretionary contribution
subaccount, excess employer matching contribution subaccount, regular
ESOP stock subaccount and ESOP cash account (referred to collectively
for the purposes of this subsection 11.2 and subsection 14.2 as the
"forfeitable accounts") shall be subject to the following:
(i) If the participant has completed five or more years of vesting
service (as defined in subparagraph (iii) below) as of his
settlement date, the balances in his forfeitable accounts shall
be nonforfeitable and shall be distributable to the participant
under Section 12.
(ii) If the participant has not completed five years of vesting
service as of the participant's settlement date, the
participant shall receive the vested portion of the balances in
his forfeitable accounts. The participant shall forfeit the
nonvested portion of such account balances. The vested portion
of the balances in the participant's forfeitable accounts shall
be distributable to the participant under Section 12. Except as
provided below, the vested portion of such balances shall be
determined under the following schedule:
Number of Completed
Vested
38
<PAGE> 46
<TABLE>
<CAPTION>
Years of Service
----------------
Percentage
----------
<S> <C>
0% Less than 1 year
20% 1 year but less than 2 years
40% 2 years but less than 3 years
60% 3 years but less than 4 years
80% 4 years but less than 5 years
5 years or more 100%
</TABLE>
Notwithstanding any other provision of this
subsection 11.2 to the contrary, a participant who
has less than five years of vesting service and has
not yet attained normal retirement age may be deemed
to have no vested interest in his employer
discretionary contribution account, employer matching
contribution account, and ESOP accounts, and his
entire balance in such accounts may be forfeitable,
if he is discharged by an Employer due to theft,
fraud, embezzlement, other criminal acts or willful
misconduct causing either significant loss or
property damage to an Employer or personal injury to
any other employee of an Employer.
(iii) A participant's "vesting service" means any plan year
in which the participant has completed at least 1,000
hours of service with the Employers and the
Controlled Group Members (including service prior to
the effective date) measured from the date the
participant first performs an hour of service (as
defined in subsection 2.1) with the Employers or the
Controlled Group Members, or, prior to the effective
date, CTFG or an affiliate of CTFG.
(iv) Non-vested amounts shall be forfeited under this
subsection on the earlier of (i) the date the
participant's vested benefits are distributed, or
(ii) the date that the participant incurs five
consecutive one year breaks in service (as defined in
subsection 14.2). Forfeitures shall be drawn from a
participant's accounts in accordance with Treasury
Regulations Section 54.4975-11(d)(4).
39
<PAGE> 47
11.3. Death of Participant. If a participant's settlement date occurs under
paragraph 9.1(c), the balances in the participant's accounts will be
nonforfeitable and distributable to the participant's beneficiary in accordance
with Section 12. If a participant dies after the participant's settlement date
but before all of the participant's account balances have been paid to the
participant in full pursuant to the provisions of Section 12, the vested portion
of the participant's account balances (as determined under subsection 11.1 or
11.2, whichever is applicable) will be distributable to the participant's
beneficiary in accordance with Section 12.
11.4. Forfeitures. The amount of a participant's accounts forfeited under
subsection 11.2 shall be a "forfeiture." As determined by the Committee, and
except as otherwise provided in subsection 7.5, forfeitures shall be (1) applied
to reduce employer matching or discretionary contributions otherwise required
under the Plan, (2) allocated to participants' accounts in accordance with
subsection 4.3, or (3) used to pay proper expenses of the Plan and trust. If a
participant is reemployed by the Employers before he incurs five consecutive
one-year breaks in service, subsection 14.3 shall apply.
40
<PAGE> 48
SECTION 12
Distributions Following Settlement Date
12.1. Manner of Distribution. Subject to the conditions set forth below,
distribution of the balances in a participant's accounts (with the exception of
the balance in his Drovers transfer account, which shall be distributed in
accordance with the provisions of Supplement A) will be made to, or for the
benefit of, the participant or, in the case of the participant's death, to or
for the benefit of the participant's beneficiary, by payment in a lump sum.
However, the period over which distribution of a participant's ESOP stock
account and ESOP cash account may be made shall be increased by one year, up to
five additional years, for each $132,000 (or fraction thereof) by which the
total balance of the participant's ESOP stock account and ESOP cash account
exceeds $670,000. The aforementioned dollar amounts shall be subject to
cost-of-living adjustments prescribed by the Secretary of the Treasury.
In accordance with subsection 12.5, a participant may elect a direct
rollover of any payment that constitutes an eligible rollover distribution.
Notwithstanding any other provision of this Section 12, if a participant's
vested account balances equal $3,500 or less at or after the participant's
settlement date, the participant (or the participant's beneficiary) shall
receive a lump sum payment of such amount in accordance with paragraph 12.4(c).
In accordance with such rules and procedures as the Committee shall establish,
the amount to be paid to a participant who elects to receive a distribution that
is less than the total vested balance in the participant's accounts shall be
drawn from the participant's accounts in the order specified by the Committee
for distributions from participants' accounts. The life expectancy of a
participant, the participant's spouse or the participant's designated
beneficiary shall be determined at the time benefit payments commence by use of
the expected return multiples contained in the regulations under Section 72 of
the Code. Life expectancies determined in accordance with the foregoing shall
not be recalculated. A participant may select, in accordance with such rules as
the Committee may establish, the method of distributing the participant's
benefits to him; a participant, if the participant so desires, may direct how
the participant's benefits are to be paid to the participant's beneficiary; and
the Committee shall select the method of distributing the participant's benefits
to the participant's beneficiary if the participant has not filed a direction
with the Committee.
12.2. Determination of Account Balances. After a participant's settlement date
has occurred and pending complete distribution of the participant's account
balances, the participant's accounts will be held under the Plan and will be
subject to adjustment under Section 7. For purposes of subsection 12.1, a
participant's account balances will be determined as of the applicable
accounting date coincident with or immediately preceding the date of
distribution of the participant's account.
41
<PAGE> 49
12.3. Distribution of Company Stock. Subject to rules established by the
Committee, with respect to a distribution under subsection 12.1, subject to
subsection 12.4, a participant (or the participant's beneficiary) will receive
an in-kind distribution of the shares of Company stock allocated to the
participant's ESOP stock account, except that any fractional shares in the
participant's ESOP stock account shall be paid in cash. Any amounts transferred
from Company stock to one or more of the investment funds under subsection 6.4
may not be available for distribution in the form of Company stock. Company
stock distributed pursuant to this subsection shall be subject to the provisions
of Section 13.
12.4. Timing of Distributions. Distribution of the balance of a participant's
accounts shall be made or shall commence as follows:
(a) Interests other than Company stock. Payment of a participant's account
balances (other than the participant's ESOP stock account) will be made
within a reasonable time after the date on which the participant's
account balances have been determined pursuant to subsection 12.2, but
not later than sixty days after (a) the end of the plan year in which
his settlement date occurs or (b) such later date on which the amount
of payment can be ascertained by the Committee.
(b) Company stock. The distribution of amounts representing the shares of
Company stock allocated to a participant's ESOP stock account will be
made as follows:
(i) Distribution upon retirement or death. Unless an earlier date
is required by paragraph (c) or (d) below, or the participant
elects a later date if a participant terminates employment
under paragraph 9.1(a) or (b), if a participant retires or dies
while in the employ of an Employer or a Controlled Group
Member, distribution of the participant's ESOP stock account
(including amounts invested in Company stock pursuant to
subsection 6.2) will be made or will commence no later than one
year following the close of the plan year during which the
participant's settlement date occurs.
(ii) Distribution upon resignation or dismissal. Unless an earlier
date is required by paragraph (c) or (d), if a participant's
settlement date occurs under paragraph 9.1(d), distribution of
the participant's ESOP stock account (including amounts
invested in Company stock pursuant to subsection 6.2) will be
made or will commence by the later of (A) or (B):
(A) one year following the close of the plan year which is
the fifth plan year following the plan year in which the
participant's settlement date has occurred, unless the
participant is reemployed by an Employer or a Controlled
Group Member before such year; or
(B) the earlier of:
42
<PAGE> 50
(1) one year following the close of the plan year in which an
acquisition loan is fully repaid with respect to in-kind
distributions of Company stock; or
(2) one year following the close of the plan year in which
the participant attains normal retirement age.
(iii) Distributions to beneficiary upon death. Notwithstanding the
provisions of subparagraphs (i) and (ii) above, distributions
upon the death of a participant shall be made in accordance
with the requirements of paragraph (d) below and shall
otherwise comply with Section 401(a)(9) of the Code and any
regulations issued thereunder.
(c) Mandatory cash-outs; consent. Notwithstanding any other provision of
this Section 12, if a participant's vested account balances equal
$3,500 or less at any time at or after his settlement date, the
participant (or the participant's beneficiary) shall receive an
immediate lump sum payment of such amount. Such distribution shall be
made as soon as practicable after the regular accounting date next
following the participant's settlement date. If the present value of a
participant's entire vested benefit under the Plan is zero, the
participant shall be deemed to have received a distribution of such
vested benefit. Notwithstanding any provision of the Plan to the
contrary, if a participant's vested account balances exceed or have
ever exceeded $3,500 at any time at or after the participant's
settlement date, distributions may not be made to the participant
before age 65 without the participant's consent.
(d) Required commencement date. Irrespective of any contrary provision of
the Plan, distribution of the account balance of a participant who has
attained age 70-1/2 and is a 5 percent owner of an Employer or a
Controlled Group Member shall be made or shall commence on the April 1
of the calendar year next following the calendar year in which the
participant attains age 70-1/2 (his "required commencement date").
Effective January 1, 1997, irrespective of any contrary provision of
the Plan, distribution of the account balance of a participant shall be
made or shall commence by April 1 of the calendar year next following
the latter of (A) the calendar year on which the participant attains
age 70p or (B) the calendar year in which the participant's settlement
date occurs ("required commencement date"); provided, however, that the
required commencement date of a participant who is a five-percent owner
(as defined in Code Section 416) of an Employer or Controlled Group
Member in the calendar year in which the participant attains age 70p
shall be April 1 of the calendar year next following the calendar year
which the participant attains age 70p. If a participant dies before the
participant's required commencement date, the participant's benefits
must be distributed over a period not exceeding the greater of: (i)
five years from the death of the participant; (ii) in the case of
payments to a designated beneficiary other than the participant's
spouse, the life expectancy of such beneficiary, provided payments
begin within one year
43
<PAGE> 51
of the participant's death (or such later date as may be prescribed
under Treasury Regulations); or (iii) in the case of payments to the
participant's spouse, the life expectancy of such spouse, provided
payments begin by the date the participant would have attained age
70-1/2. If a participant dies after the participant's required
commencement date, the remaining portion of the participant's benefits
will be distributed at least as rapidly as under the method of
distribution in effect at the participant's death. Notwithstanding the
foregoing, the Committee may honor a participant's written designation
made under a predecessor plan prior to January 1, 1984, to have the
participant's benefits commence at any date permitted under the terms
of such predecessor plan as in effect immediately prior to January 1,
1984.
A participant who is not a 5 percent owner and who attains age 70-1/2
while still employed by an Employer or a Controlled Group Member may
elect to receive a distribution commencing April 1 of the calendar year
next following the calendar year in which he attains age 70-1/2.
12.5. Direct Rollovers. For plan years beginning on and after January 1, 1993,
certain individuals who are to receive distributions under the Plan may elect
that such distributions be paid in the form of a direct rollover (as described
in Section 401(a)(31) of the Code and the regulations thereunder) to the Trustee
or custodian of a plan eligible to accept direct rollovers, subject to the
following:
(a) Eligible rollover distribution. A distribution may be paid in a direct
rollover under this subsection only if the distribution constitutes an
eligible rollover distribution. An "eligible rollover distribution"
means any distribution under the Plan to an eligible distributee (as
defined below) other than (i) a distribution that is one of a series of
substantially equal payments made annually or more frequently either
over the life (or life expectancy) of the participant or the joint
lives (or life expectancies) of the participant and his designated
beneficiary or over a specified period of ten years or more, (ii) a
distribution required to meet the minimum distribution requirements of
Section 401(a)(9) of the Code, or (iii) a distribution excluded from
the definition of an "eligible rollover distribution" under applicable
Treasury Regulations. Notwithstanding the immediately preceding
sentence, an eligible rollover distribution includes only those amounts
that would be includable in the gross income of the eligible
distributee if such amounts were not rolled over to another plan as
provided under Section 402(c) of the Code.
44
<PAGE> 52
(b) Eligible distributee. An "eligible distributee" is (i) a participant,
(ii) a participant's surviving spouse who is entitled to receive
payment of the participant's account balances after the participant's
death, or (iii) the spouse or former spouse of a participant who is an
alternate payee under a qualified domestic relations order (as defined
in Section 414(p) of the Code).
(c) Eligible retirement plan. A direct rollover of an eligible rollover
distribution may be made to no more than one "eligible retirement
plan." Except as otherwise provided below, an "eligible retirement
plan" is (i) an individual retirement account described in Section
408(a) of the Code, (ii) an individual retirement annuity described in
Section 408(b) of the Code (other than an endowment contract), (iii) an
annuity plan described in Section 403(a) of the Code, or (iv) a plan
qualified under Section 401(a) of the Code that by its terms permits
the acceptance of rollover contributions. With respect to the surviving
spouse of a deceased participant who is entitled to receive a
distribution of the participant's accounts, an "eligible retirement
plan" shall mean only an individual retirement account described in
Section 408(a) of the Code or an individual retirement annuity
described in Section 408(b) of the Code (other than an endowment
contract).
(d) Minimum amounts. An eligible distributee may elect a direct rollover of
all or a portion of an eligible rollover distribution only if the total
amount of the eligible rollover distributions expected to be received
by the eligible distributee during the plan year is $200 or more (or
such lesser amount as the Committee may establish). An eligible
distributee may elect payment of a portion of an eligible rollover
distribution as a direct rollover and may receive directly the
remainder of such distribution, provided that the amount paid by direct
rollover is at least $500 (or such lesser amount as the Committee may
establish).
(e) Elections. An eligible distributee's election of a direct rollover
pursuant to this subsection must be in writing on a form designated by
the Committee and must be filed with the Committee at such time and in
such manner as the Committee shall determine. The Committee shall
establish such rules and procedures as it deems necessary to provide
for distributions by means of direct rollover.
12.6. Immediate Distributions to Alternate Payees. The Committee shall direct
distribution of the amount of a participant's account balances assigned to an
alternate payee under a qualified domestic relations order (as defined in
Section 414(p) of the Code) on the earliest date specified in such qualified
domestic relations order, without regard to whether such payments commence prior
to the participant's earliest retirement age (as defined in Section 414(p)(4)(B)
of the Code).
45
<PAGE> 53
12.7. Designation of Beneficiary. Each participant may designate any person or
persons (who may be designated concurrently, contingently or successively) to
whom the participant's benefits are to be paid if the participant dies before
the participant receives all of participant's benefits. A beneficiary
designation must be made on a form furnished by the Committee for this purpose,
and such form must be signed by the participant. A beneficiary designation form
shall include any beneficiary designation forms executed in compliance with the
CTFG Profit Sharing Plan and/or CTFG ESOP. A beneficiary designation form will
be effective only when the form is filed with the Committee while the
participant is alive and will cancel all the participant's beneficiary
designation forms previously filed with the Committee. Notwithstanding the
foregoing provisions of this subsection and any beneficiary designation filed
with the Committee in accordance with this subsection, if a participant dies and
has a surviving spouse at the participant's date of death, the account balances
described in the preceding sentence shall be payable in full to the
participant's surviving spouse in accordance with this Section 12 (treating such
surviving spouse as the participant's beneficiary), unless prior to the
participant's death the following requirements were met:
(a) The participant elected that the participant's benefits under the Plan
be paid to a person other than the participant's surviving spouse;
(b) The participant's spouse consented in writing to such election;
(c) The spouse's consent acknowledged the effect of such election and was
witnessed by a notary public; and
(d) Such election designates a beneficiary that may not be changed without
further spousal consent, unless the spouse executed a general written
consent expressly permitting changes of the beneficiary without any
requirement of further consent of the spouse.
For purposes of the Plan, and subject to the provisions of any qualified
domestic relations order (as defined in Section 414(p) of the Code), a
participant's "spouse" means the person to whom the participant is legally
married at the earlier of the date of the participant's death or the date
payment of the participant's benefits commenced and who is living at the date of
the participant's death. If a deceased participant failed to designate a
beneficiary as provided above, or if the designated beneficiary dies before the
participant or before complete payment of the participant's benefits, the
participant's benefits shall be distributed to the participant's spouse, or if
there is none, the Committee, in its discretion, may direct the Trustee to pay
the participant's benefits as follows:
(e) To or for the benefit of any one or more of the participant's relatives
by blood, adoption or marriage and in such proportions as the Committee
determines; or
(f) To the legal representative or representatives of the estate of the
last to die of the participant and the participant's designated
beneficiary.
46
<PAGE> 54
The term "designated beneficiary" or "beneficiary" as used in the Plan means the
natural or legal person or persons designated by a participant as the
participant's beneficiary under the last effective beneficiary designation form
filed with the Committee under this subsection and to whom the participant's
benefits would be payable under this subsection.
12.8. Missing Participants or Beneficiaries. Each participant and each
designated beneficiary must file with the Committee from time to time in writing
his post office address and each change of post office address. If a participant
dies before the participant receives all of the participant's vested account
balances, the participant's beneficiary must file any change in his post office
address with the Committee. Any communication, statement or notice addressed to
a participant or beneficiary at the last post office address filed with the
Committee, or if no address is filed with the Committee then, in the case of a
participant, at the participant's last post office address as shown on the
Employers' records, will be binding on the participant and the participant's
beneficiary for all purposes of the Plan. The Employers, the Trustee, and the
Committee shall not be required to search for or locate a participant or
beneficiary. If the Committee notifies a participant or beneficiary that the
participant or beneficiary is entitled to a payment and also notifies the
participant or beneficiary of the provisions of this subsection, and the
participant or beneficiary fails to claim his benefits or make his whereabouts
known to the Committee within three years after the notification, the benefits
of the participant or beneficiary may be disposed of, to the extent permitted by
applicable law, as follows:
(a) If the whereabouts of the participant then are unknown to the Committee
but the whereabouts of the participant's spouse then are known to the
Committee, payment may be made to the spouse;
(b) If the whereabouts of the participant and the participant's spouse, if
any, then are unknown to the Committee but the whereabouts of the
participant's designated beneficiary then are known to the Committee,
payment may be made to the designated beneficiary;
(c) If the whereabouts of the participant, the participant's spouse and the
participant's designated beneficiary then are unknown to the Committee
but the whereabouts of one or more relatives by blood, adoption or
marriage of the participant are known to the Committee, the Committee
may direct the Trustee to pay the participant's benefits to one or more
of such relatives and in such proportions as the Committee decides; or
(d) If the whereabouts of such relatives and the participant's designated
beneficiary then are unknown to the Committee, the benefits of such
participant or beneficiary may be disposed of in an equitable manner
permitted by law under rules adopted by the Committee.
47
<PAGE> 55
12.9. Facility of Payment. When a person entitled to benefits under the Plan is
under legal disability, or, in the Committee's opinion, is in any way
incapacitated so as to be unable to manage the person's financial affairs, the
Committee may direct the Trustee to pay the benefits to such person's legal
representative, or to a relative or friend of such person for such person's
benefit, or the Committee may direct the application of such benefits for the
benefit of such person. Any payment made in accordance with the preceding
sentence shall be a full and complete discharge of any liability for such
payment under the Plan.
48
<PAGE> 56
SECTION 13
Rights, Restrictions, and Options on Company Stock
13.1. Right of First Refusal. Subject to the provisions of the last sentence of
this subsection, shares of Company stock distributed to participants pursuant to
subsection 12.3 shall be subject to a "right of first refusal." The right of
first refusal shall provide that, prior to any subsequent transfer, the
participant (or the participant's beneficiary) must first make a written offer
of such Company stock to the Trust and to the Company at the then fair market
value of such Company stock, as determined by an "independent appraiser" (as
defined in Section 401(a)(28) of the Code). The Trust shall have the first
priority to exercise the right to purchase the Company stock, and then the
Company shall have second priority to exercise the right. A bona fide written
offer from an independent prospective buyer shall be deemed to be the fair
market value of such Company stock for this purpose, unless the value per share,
as determined by the independent appraiser as of the December 31 accounting date
of the immediately preceding plan year, is greater. The Company and the Trust
shall have a total of 14 days (from the date the offer is first received by the
Company or the trust) to exercise the right of first refusal on the same terms
offered by the prospective buyer. A participant (or the participant's
beneficiary) entitled to a distribution of Company stock may be required to
execute an appropriate stock transfer agreement (evidencing the right of first
refusal) prior to receiving a certificate for Company stock. No right of first
refusal shall be exercisable by reason of any of the following transfers:
(a) The transfer upon disposition of any such shares by any legal
representative, heir or legatee, but the shares shall remain subject to
the right of first refusal;
(b) The transfer by a participant or a participant's beneficiary in
accordance with the put option pursuant to subsection 13.2; or
(c) The transfer while Company stock is listed on a national securities
exchange registered under Section 6 of the Securities Exchange Act of
1934 or quoted on a system sponsored by a national securities
association registered under Section 15A(b) of the Securities Exchange
Act of 1934.
13.2. Put Option. The Company shall issue a "put option" to each participant (or
each participant's beneficiary) who receives a distribution of Company stock if,
at the time of such distribution, Company stock is not then readily tradable on
an established market, as defined in Section 409(h) of the Code and the
regulations thereunder. The put option shall permit the participant (or the
participant's beneficiary) to sell such Company stock at its then fair market
value, as determined by an independent appraiser in accordance with the
provisions of subsection 7.10, to the Company at any time during the sixty-day
period commencing on the date the Company stock was distributed to the
participant (or the participant's beneficiary), and, if not exercised within
that period, the put option will temporarily lapse. The Company, in its sole
discretion, may extend the sixty-day period referred to in the immediately
preceding sentence if such an extension is necessary in order for the Company
stock to be valued by an independent appraiser as of the applicable accounting
date coincident with or immediately preceding the date the Company stock was
distributed to the recipient. As of the semi-annual valuation date in the
49
<PAGE> 57
plan year following the plan year in which such temporary lapse of the put
option occurs, the independent appraiser shall determine the value of the
Company stock in accordance with the provisions of subsection 7.10, and the
Committee shall notify each distributee who did not exercise the initial put
option prior to its temporary lapse in the preceding plan year of the revised
value of the Company stock. The time during which the put option may be
exercised shall recommence on the date such notice or revaluation is given and
shall permanently terminate sixty days thereafter. The Trustee may be permitted
by the Company to purchase Company stock put to the Company under a put option.
At the option of the Company or the Trustee, as the case may be, the payment for
Company stock sold pursuant to a put option shall be made, as determined in the
discretion of the Company or the Trustee, as the case may be, in the following
forms:
(a) If a participant's ESOP stock account is distributed in a total
distribution (that is, a distribution within one taxable year
of the balance to the credit of the participant's ESOP stock
account), then payment for such Company stock may be made with
a promissory note that provides for substantially equal annual
installments commencing within thirty days from the date of the
exercise of the put option and over a period not exceeding five
years, with interest payable at a reasonable rate (as
determined by the Company) on any unpaid installment balance,
with adequate security provided, and without penalty for any
prepayment of such installments; or
(b) In a lump sum no later than thirty days after such participant
exercises the put option.
At the direction of the Committee, the Trustee on behalf of the Trust may offer
to purchase any shares of Company stock (which are not sold pursuant to a put
option) from any former participant or beneficiary at any time in the future, at
their then fair market value.
13.3. Share Legend. Shares of Company stock held or distributed by the Trustee
may include such legend restrictions on transferability as the Company may
reasonably require in order to assure compliance with applicable Federal and
state securities laws.
13.4. Nonterminable Rights. The provisions of this Section 13 shall continue to
be applicable to shares of Company stock even if the applicable portion of the
Plan ceases to be an employee stock ownership plan within the meaning of Section
4975(e)(7) of the Code.
50
<PAGE> 58
SECTION 14
Reemployment
14.1. Commencement or Resumption of Participation. If a participant should
terminate employment with the Employers and subsequently be reemployed by an
Employer, the participant shall again become a participant as of the day of the
participant's reemployment with the Employer. If an employee who has not become
a participant terminates employment with the Employers and subsequently is
reemployed by an Employer, the employee shall become a participant on the entry
date immediately following the employees's date of hire if the employee then
meets the requirements of subsection 2.1.
14.2. Credited Service for Vesting. The years of vesting service accrued prior
to termination of employment by a non-vested participant or employee shall be
disregarded for purposes of subsection 11.2 only if his number of consecutive
one-year breaks in vesting service occurring after his termination equal or
exceed the greater of (i) five or (ii) his years of vesting service prior to his
termination. The years of vesting service of any vested participant shall be
reinstated upon reemployment. However, in no event shall years of vesting
service occurring after a participant incurs five consecutive one-year breaks in
vesting service be used to determine the nonforfeitable amount of the
participant's forfeitable accounts as of a prior settlement date.
A "one-year break in vesting service" means any plan year during which a
terminated employee or participant does not complete 500 hours of service (as
defined in subsection 2.1). In the case of a maternity or paternity absence (as
defined below), an employee shall be credited, for the first plan year in which
he otherwise would have incurred a one-year break in service (and solely for
purposes of determining whether such a break in service has occurred), with the
hours of service which normally would have been credited to him but for such
absence (or, if the Committee is unable to determine hours which would have been
so credited, 8 hours for each day of such absence), but in no event more than
501 hours for any one absence. A "maternity or paternity absence" means an
employee's absence from work because of the pregnancy of the employee or birth
of a child of the employee, the placement of a child with the employee in
connection with the adoption of such child by the employee, or for purposes of
caring for a child immediately following such birth or placement. The Committee
may require an employee to furnish such information as the Committee considers
necessary to establish that the employee's absence was for one of the reasons
specified above.
14.3. Reinstatement of Forfeitures. If a participant whose employment had
terminated with the Employers because of resignation or dismissal before the
participant was entitled to the full balance in the participant's employer
matching contribution account, employer discretionary contribution account,
regular ESOP stock subaccount and ESOP cash account is reemployed by the
Employers before incurring five consecutive one-year breaks in credited service,
the following shall apply:
51
<PAGE> 59
(a) If the participant did not receive distribution of any part of
the vested portion of the participant's account, the amount of
the participant's account previously forfeited pursuant to
subsection 11.2 will be credited to the participant's account
as of the regular accounting date immediately following the
date the participant is reemployed by the Employers.
(b) If the participant received distribution of any part of the
vested portion of the participant's account, the participant
may repay to the Trustee the total amount distributed to the
participant from the participant's employer matching
contribution account, employer discretionary contribution
account, and ESOP employer subaccount as a result of such
earlier termination of employment. However, such repayment must
be made before the earlier of (i) the fifth anniversary of the
participant's date of reemployment by the Employers or (ii) the
date the participant incurs five consecutive one-year breaks in
credited service commencing after the distribution. If a
participant makes such a repayment to the Trustee, the amount
of the repayment shall be credited to the participant's
accounts, and the previously forfeited amounts that resulted
from the participant's earlier termination of employment
(unadjusted for subsequent gains or losses) shall be credited
to the participant's accounts as of the regular accounting date
coincident with or next following the date of repayment.
Forfeitures that are to be credited to participants' accounts as of an
accounting date under this subsection shall be drawn first from outstanding
forfeitures and then, if necessary, from special employer contributions made for
this purpose.
52
<PAGE> 60
SECTION 15
Voting and Tendering of Company Stock
The voting of Company stock held in the trust, and if a tender offer is made for
Company stock, the tendering of such shares, shall be subject to the provisions
of ERISA and the following provisions, to the extent such provisions are not
inconsistent with ERISA:
(a) Allocated shares. For purposes of this Section, shares of
Company stock shall be deemed to be allocated and credited to a
participant's ESOP stock account in an amount to be determined
based on the balance in such account on the accounting date
coincident with or next preceding the record date of any vote
or tender offer.
(b) Voting of Company stock. With respect to any corporate matter
which involves the voting of Company stock with respect to the
approval or disapproval of any corporate merger or
consolidation, recapitalization, reclassification, liquidation,
dissolution, sale of substantially all of the assets of a trade
or business, or such other transactions which may be prescribed
by regulation, each participant may be entitled to direct the
Trustee as to the exercise of any voting rights attributable to
shares of Company stock then allocated to his ESOP stock
account, but only to the extent required by Sections 401(a)(22)
and 409(e)(3) of the Code and the regulations thereunder. The
Committee shall have the sole responsibility for determining
when a corporate matter has arisen that involves the voting of
Company stock under this provision. If a participant is
entitled to so direct the Trustee, all allocated Company stock
as to which such instructions have been received (which may
include an instruction to abstain) shall be voted by the
Trustee in accordance with such instructions, provided that the
Trustee may vote the shares as it determines is necessary to
fulfill their fiduciary duties under ERISA. The Trustee shall
vote any shares of Company stock held in the unreleased stock
account, or any allocated shares of Company stock as to which
no voting instructions have been received in accordance with
the directions of the Committee, provided, however, that the
Trustee may vote the shares as they determine is necessary to
fulfill their fiduciary duties.
(c) Tendering of Company stock. In the event of a tender offer for
shares of Company stock held by the Trust, the Trustee shall
tender the shares in their sole discretion, subject to the
fiduciary duties under ERISA.
In carrying out its responsibilities under this Section, the Trustee may rely on
information furnished to it by the Committee, including the names and current
addresses of participants, the number of shares of Company stock allocated to
their accounts, and the number of shares of Company stock held by the Trustee
that have not yet been allocated.
53
<PAGE> 61
SECTION 16
General Provisions
16.1. Interests Not Transferable. The interests of participants and their
beneficiaries under the Plan are not in any way subject to their debts or other
obligations and, except as may be required by the tax withholding provisions of
the Code or any state's income tax act, may not be voluntarily or involuntarily
sold, transferred, alienated or assigned. Notwithstanding the foregoing, the
Plan shall comply with any domestic relations order that, in accordance with
procedures established by the Committee, is determined to be a qualified
domestic relations order (as defined in Section 414(p)(1)(A) of the Code).
16.2. Absence of Guaranty. The Committee, the Employers, and the Trustee do not
in any way guarantee the Trust from loss or depreciation. The liability of the
Committee or the Trustee to make any payment under the Plan will be limited to
the assets held by the Trustee that are available for that purpose.
16.3. Employment Rights. The Plan does not constitute a contract of employment,
and participation in the Plan will not give any employee the right to be
retained in the employ of an Employer, nor any right or claim to any benefit
under the Plan, unless such right or claim has specifically accrued under the
terms of the Plan.
16.4. Litigation by Participants or other Persons. To the extent permitted by
law, if a legal action against the Trustee, an Employer, or the Committee by or
on behalf of any person results adversely to that person, or if a legal action
arises because of conflicting claims to a participant's or beneficiary's
benefits, the cost to the Trustee, an Employer, or the Committee of defending
the action will be charged to the extent possible to the sums, if any, that were
involved in the action or were payable to the participant or beneficiary
concerned.
16.5. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information that the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
16.6. Waiver of Notice. Any notice required under the Plan may be waived by the
person entitled to such notice.
16.7. Controlling Law. To the extent not superseded by the laws of the United
States, the laws of Illinois shall be controlling in all matters relating to the
Plan.
16.8. Statutory References. Any reference in the Plan to the Code means the
Internal Revenue Code of 1986, as amended. Any reference in the Plan to ERISA
means the Employee Retirement Income Security Act of 1974, as amended. Any
reference in the Plan to a section of the Code or ERISA, or to a section of any
other Federal law, shall include any comparable section or sections of any
future legislation that amends, supplements or supersedes that section.
54
<PAGE> 62
16.9. Severability. In case any provisions of the Plan shall be held illegal or
invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of the Plan, and the Plan shall be construed and enforced
as if such illegal and invalid provisions had never been set forth in the Plan.
16.10. Additional Employers. With the consent of the Company, any Controlled
Group Member described in paragraph 1.6(a) or (b) may, by filing with the
Company a written instrument to that effect, become an Employer hereunder by
adopting the Plan and becoming a party to the trust agreement.
16.11. Action By Employers. Any action authorized or required to be taken by an
Employer under the Plan shall be by resolution of its Board of Directors, by
resolution of a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolution of its Board of Directors or such
committee.
16.12. Gender and Number. Where the context admits, words in the masculine
gender include the feminine and neuter genders, the plural includes the
singular, and the singular includes the plural.
16.13. Examination of Documents. Copies of the Plan and trust agreement, and any
amendments thereto, are on file at the office of the Company where they may be
examined by any participant or other person entitled to benefits under the Plan
during normal business hours.
16.14. Fiduciary Responsibilities. It is specifically intended that all
provisions of the Plan shall be applied so that all fiduciaries with respect to
the Plan shall be required to meet the prudence and other requirements and
responsibilities of applicable law to the extent such requirements or
responsibilities apply to them. In general, a fiduciary shall discharge the
fiduciary's duties with respect to the Plan and the Trust solely in the
interests of participants and beneficiaries and with the care, skill, prudence,
and diligence under the circumstances then prevailing that a prudent man acting
in a like capacity and familiar with such matters would use in the conduct of an
enterprise of like character and with like aims.
16.15. Indemnification. To the extent permitted by law, any member or former
member of the Committee, any person who was, is or becomes an officer or
director of the Company, an Employer, or a Controlled Group Member or any
employee of an Employer to whom the Committee or any Employer has delegated any
portion of its responsibilities under the Plan, and each of them, shall be
indemnified and saved harmless by the Employers (to the extent not indemnified
or saved harmless under any liability insurance contract or other
indemnification arrangement with respect to the Plan) from and against any and
all liability to which the Committee members and such other persons may be
subject by reason of any act done or omitted to be done in good faith with
respect to the administration of the Plan and the trust, including all expenses
reasonably incurred in their defense in the event that the Employers failed to
provide such defense after having been requested in writing to do so.
55
<PAGE> 63
SECTION 17
Restrictions as to Reversion of
Trust Assets to the Employers
The Employers shall have no right, title or interest in the assets of the trust,
except as may be provided in a pledge agreement entered into between an Employer
and the Trustee in connection with an acquisition loan (a "pledge agreement").
No part of the assets of the Trust at any time will revert or will be repaid to
the Employers, directly or indirectly, except as follows:
(a) If the Internal Revenue Service initially determines that the
Plan, as applied to an Employer, does not meet the requirements
of a "qualified plan" under Section 401(a) of the Code, the
assets of the Trust attributable to contributions made by the
Employer under the Plan shall be returned to the Employer
within one year of the date of denial of qualification of the
Plan as applied to the Employer.
(b) If a contribution or a portion of a contribution is made by an
Employer as a result of a mistake of fact, such contribution or
portion of a contribution shall not be considered to have been
contributed to the Trust by the Employer and, after having been
reduced by any losses of the Trust allocable thereto, shall be
returned to the Employer within one year of the date the amount
is paid to the trust.
(c) If a contribution made by an Employer is conditioned upon the
deductibility of such contribution as an expense for Federal
income tax purposes, to the extent the deduction for the
contribution made by the Employer is disallowed, such
contribution, or portion of such contribution, after having
been reduced by any losses of the Trust allocable thereto,
shall be returned to the Employer within one year of the date
of disallowance of the deduction.
(d) If there is a default on an acquisition loan, an Employer may
exercise its rights under a pledge agreement with respect to
the shares of Company stock subject to the pledge agreement
(including, but not limited to, the sale of pledged shares, the
transfer of pledged shares to the Employer, and the
registration of pledged shares in the Employer's name).
Contributions may be returned to an Employer pursuant to paragraph (a) above
only if they are conditioned upon initial qualification of the Plan as applied
to that Employer and an application for determination was made by the time
prescribed by law for filing the Employer's Federal income tax return for the
taxable year in which the Plan was adopted (or such later date as the Secretary
of the Treasury may prescribe). In no event may the return of a contribution
pursuant to paragraph (b) or (c) above cause any participant's account balances
to be less than the amount of such balances had the contribution not been made
under the Plan.
56
<PAGE> 64
SECTION 18
Amendment and Termination
18.1. Amendment. While the Company expects and intends to continue the Plan, the
Company reserves the right to amend the Plan from time to time by action of the
Company's Board of Directors or the Executive Committee of the Board of
Directors of the Company. However, the Committee is authorized to cause to be
prepared, to approve, and to execute any amendments of the Plan that the
Committee determines are necessary to comply with applicable law, regulations,
and rulings or to reflect rules and procedures developed by the Committee;
provided, however, that any amendment (other than an amendment needed to comply
with applicable law, regulations, and rulings) that is expected to change the
level of participant or employer contributions made under the Plan or to
materially increase the cost of the Plan to the Employers shall be approved by
the Company's Board of Directors or by the Executive Committee of the Board of
Directors of the Company. Notwithstanding the foregoing:
(a) An amendment may not change the duties and liabilities of the Committee
or the Trustee without the consent of the Committee or the Trustee,
whichever is applicable;
(b) An amendment shall not reduce the value of a participant's
nonforfeitable benefits accrued prior to the later of the adoption or
the effective date of the amendment; and
(c) Except as provided in Section 17, under no condition shall any
amendment result in the return or repayment to the Employers of any
part of the Trust or the income therefrom or result in the distribution
of the Trust for the benefit of anyone other than employees and former
employees of the Employers and any other persons entitled to benefits
under the Plan.
The Committee shall notify the Trustee of any amendment of the Plan within a
reasonable period of time.
18.2. Termination. The Plan will terminate as to all Employers on any date
specified by the Company if thirty days' advance written notice of the
termination is given to the Committee, the Trustee and the other Employers. The
Plan will terminate as to an individual Employer on the first to occur of the
following:
(a) The date it is terminated by that Employer if thirty days' advance
written notice of the termination is given to the Committee, the
Trustee and the other Employers.
(b) The date that Employer is judicially declared bankrupt or insolvent.
(c) The date that Employer completely discontinues its contributions under
the Plan.
57
<PAGE> 65
(d) The dissolution, merger, consolidation or reorganization of
that Employer or the sale by that Employer of all or
substantially all of its assets, except that:
(i) in any such event arrangements may be made with the
consent of the Company whereby the Plan will be
continued by any purchaser of all or substantially all
of its assets, in which case the successor or
purchaser will be substituted for that Employer under
the Plan and the trust agreement; and
(ii) if an Employer is merged, dissolved or in any other
way reorganized into, or consolidated with, any other
Employer, the Plan as applied to the former Employer
will automatically continue in effect without a
termination thereof.
18.3. Nonforfeitability and Distribution on Termination. On termination or
partial termination of the Plan, the rights of all affected participants to
benefits accrued to the date of such termination, after all adjustments then
required have been made, shall be nonforfeitable. The Committee shall specify
the date of such termination or partial termination as a special accounting
date. As soon as practicable after all adjustments required as of that date have
been made to the account balances of participants, the Committee shall direct
the Trustee to distribute to each such affected participant his benefits under
the Plan in one lump sum provided the participant is no longer employed by an
Employer or a Controlled Group Member. All appropriate provisions of the Plan
will continue to apply until the account balances of all such participants have
been distributed under the Plan.
18.4. Notice of Termination. Participants will be notified of the termination of
the Plan within a reasonable time.
18.5. Plan Merger, Consolidation, Etc. In the case of any merger or
consolidation with, or transfer of assets or liabilities to, any other plan,
each participant's benefits (if the Plan terminated immediately after such
merger, consolidation or transfer) shall be equal to or greater than the
benefits the participant would have been entitled to receive if the Plan had
terminated immediately before the merger, consolidation or transfer.
58
<PAGE> 66
SECTION 19
The Committee
19.1. The Committee. As provided in subsection 1.5, the Plan is administered by
the Committee. The Committee shall consist of at least three persons (who may
but need not be employees of the Employers) appointed by the Company. The
Company will certify to the Trustee from time to time the names of the members
of the Committee.
19.2. The Committee's General Powers, Rights, and Duties. The Committee shall
have all the powers necessary and appropriate to discharge its duties under the
Plan, which powers shall be exercised in the sole and absolute discretion of the
Committee, including, but not limited to, the following:
(a) To construe and interpret the provisions of the Plan and to
make factual determinations thereunder, including the power to
determine the rights or eligibility under the Plan of
employees, participants, or any other persons, and the amounts
of their benefits (if any) under the Plan, and to remedy
ambiguities, inconsistencies or omissions, and such
determinations by the Committee shall be binding on all
parties.
(b) To adopt such rules of procedure and regulations as in its
opinion may be necessary for the proper and efficient
administration of the Plan and as are consistent with the Plan
and trust agreement.
(c) To enforce the Plan in accordance with the terms of the Plan
and the Trust and in accordance with the rules and regulations
the Committee has adopted.
(d) To direct the Trustee as respects payments or distributions
from the Trust in accordance with the provisions of the Plan.
(e) To furnish the Employers with such information as may be
required by them for tax or other purposes in connection with
the Plan.
(f) To employ agents, attorneys, accountants, actuaries or other
persons (who also may be employed by the Employers) and to
allocate or delegate to them such powers, rights and duties as
the Committee may consider necessary or advisable to properly
carry out administration of the Plan, provided that such
allocation or delegation and the acceptance thereof by such
agents, attorneys, accountants, actuaries or other persons,
shall be in writing.
(g) To appoint an investment manager as defined in section 3(38) of
ERISA ("investment manager") to manage (with power to acquire
and dispose of) the assets of the Plan, which investment
manager may or may not be a subsidiary of the Company, and to
delegate to any such investment manager all of the powers,
authorities and discretions granted to the Committee hereunder
or under the trust
59
<PAGE> 67
agreement (including the power to delegate and the power, with
prior notice to the Committee, to appoint an investment
manager), in which event any direction the Trustee from any
duly appointed investment manager with respect to the
acquisition, retention or disposition of Plan assets shall have
the same force and effect as if such direction had been given
by the Committee, and to remove any investment manager;
provided, however, that the power and authority to manage,
acquire, or dispose of any asset of the Plan shall not be
delegated except to an investment manager, and provided further
that the acceptance by any investment manager of such
appointment and delegation shall be in writing, and the
Committee shall give notice to the Trustee, in writing, of any
appointment of, delegation to or removal of an investment
manager.
19.3. Manner of Action of the Committee. During a period in which two or more
members of the Committee are acting, the following provisions apply where the
context admits:
(a) The members of the Committee may select a secretary, if they believe it
advisable, who may or may not be a member of the Committee.
(b) A Committee member by writing may delegate any or all of such member's
rights, powers, duties and discretions to any other member of the
Committee, with the written consent of the latter.
(c) The members of the Committee may act by meeting or by writing signed
without meeting, and such members may sign any document by signing one
document or concurrent documents.
(d) An action or a decision of a majority of the members of the Committee
as to a matter shall be as effective as if taken or made by all members
of the Committee.
(e) If, because of the number qualified to act, there is an even division
of opinion among members of the Committee as to a matter, a
disinterested party selected by the Committee shall decide the matter
and such person's decision shall control.
(f) Except as otherwise provided by law, no member of the Committee shall
be liable or responsible for an act or omission of the other members of
the Committee in which the former has not concurred.
(g) The certificate of the secretary of the Committee or of a majority of
the members of the Committee that the Committee has taken or authorized
any action shall be conclusive in favor of any person relying on the
certificate.
60
<PAGE> 68
19.4. Interested Committee Member. If a member of the Committee is also a
participant in the Plan, the Committee member may not decide or determine any
matter or question concerning distributions of any kind to be made to the
Committee member or the nature or mode of settlement of the Committee member's
benefits, unless such decision or determination could be made by the Committee
member under the Plan if the Committee member were not serving on the Committee.
19.5. Resignation or Removal of Committee Members. A member of the Committee may
be removed by the Company at any time by ten days' prior written notice to that
member and the other members of the Committee. A member of the Committee may
resign at any time by giving ten days' prior written notice to the Company and
the other members of the Committee. The Company may fill any vacancy in the
membership of the Committee; provided, however, that if a vacancy reduces the
membership of the Committee to less than three, such vacancy shall be filled as
soon as practicable. The Company shall give prompt written notice thereof to the
other members of the Committee. Until any such vacancy is filled, the remaining
members of the Committee may exercise all of the powers, rights and duties
conferred on the Committee.
19.6. Committee Expenses. All costs, charges and expenses reasonably incurred by
the Committee will be paid by the Company to the extent not paid from the assets
of the trust. No compensation will be paid to a member of the Committee as such.
19.7. Uniform Rules. The Committee shall administer the Plan on a reasonable and
nondiscriminatory basis and shall apply uniform rules to all persons similarly
situated.
19.8. Information Required by the Committee. Each person entitled to benefits
under the Plan shall furnish the Committee with such documents, evidence, data
or information as the Committee considers necessary or desirable for the purpose
of administering the Plan. The Employers shall furnish the Committee with such
data and information as the Committee may deem necessary or desirable in order
to administer the Plan. The records of the Employers as to an employee's or a
participant's period of employment, hours of service, termination of employment
and the reason therefore, leave of absence, reemployment and earnings will be
conclusive on all persons unless determined to the Committee's satisfaction to
be incorrect.
19.9. Review of Benefit Determinations. The Committee will provide notice in
writing to any participant or beneficiary whose claim for benefits under the
Plan is denied, and the Committee shall afford such participant or beneficiary a
full and fair review of its decision if so requested.
19.10. Committee's Decision Final. Subject to applicable law, any interpretation
of the provisions of the Plan and any decisions on any matter within the
discretion of the Committee made by the Committee in good faith shall be binding
on all persons. A misstatement or other mistake of fact shall be corrected when
it becomes known, and the Committee shall make such adjustment on account
thereof as it considers equitable and practicable.
61
<PAGE> 69
19.11. Denial Procedure and Appeal Process. If a participant, beneficiary or any
other person who believes he may be entitled to benefits under the Plan (a
"claimant") has an unresolved question about eligibility for benefits, the form
of benefits, or the amount of benefits to be received or being received under
the Plan after consulting with the Committee or its representatives, a formal
review of the situation may be requested in writing of the Committee within
sixty days after receiving notification of the claimant's Plan benefits or an
estimate of the claimant's Plan benefits. A review decision will be made within
sixty days after receipt of such request (one hundred twenty days in special
circumstances) and the claimant will be informed of the decision within ninety
days after receipt of such request (one hundred eighty days in special
circumstances). However, if the claimant is not informed of the decision within
the period described above, the claimant may request a further review by the
Committee as described below as if the claimant had received notice of an
adverse decision at the end of that period. The decision will be written in a
manner calculated to be understood by the claimant, setting forth the specific
reasons for any denial of a benefit or benefit option, specific reference to
pertinent Plan provisions on which such denial is based, a description of any
additional material or information necessary for the claimant to perfect the
claim and an explanation of why such material or information is necessary, and
an explanation of the Plan's claim review procedure. The claimant also shall be
advised that the claimant or the claimant's duly authorized representative may
request a further review by the Committee of the decision denying the claim by
filing with the Committee within sixty days after such notice has been received
by the claimant a written request for such review and that claimant may review
pertinent documents, and submit issues and comments in writing, within the same
sixty-day period. If such request is so filed, such review shall be made by the
Committee within sixty days after receipt of such request, unless special
circumstances require an extension of time for processing in which case the
review will be completed and decision rendered within one hundred twenty days.
The claimant shall be given written notice of the decision which shall include
specific reasons for the decision, and specific references to the pertinent Plan
provisions on which the decision is based, and such decision by the Committee
shall be final and shall terminate the review process.
62
<PAGE> 70
SECTION 20
Special Rules Applicable When Plan is Top-Heavy
20.1. Purpose and Effect. The purpose of this Section 20 is to comply with the
requirements of Section 416 of the Code. The provisions of this Section 20 are
effective for each plan year beginning on or after the effective date in which
the Plan is a "top-heavy plan" within the meaning of Section 416(g) of the Code.
20.2. Top-Heavy Plan. In general, the Plan will be a top-heavy plan for any plan
year if, as of the "determination date" (that is, the last day of the preceding
plan year), the sum of the amounts in paragraphs (a), (b) and (c) below for key
employees (as defined generally below and in Section 416(i)(1) of the Code)
exceeds sixty percent of the sum of such amounts for all employees who are
covered by this Plan or by a defined contribution plan or defined benefit plan
that is aggregated with this Plan in accordance with subsection 20.4:
(a) The aggregate account balances of participants under this Plan.
(b) The aggregate account balances of participants under any other defined
contribution plan included under subsection 20.4.
(c) The present value of the cumulative accrued benefits of participants
calculated under any defined benefit plan included in subsection 20.4.
In making the foregoing determination, (i) a participant's account balances or
cumulative accrued benefits shall be increased by the aggregate distributions,
if any, made with respect to the participant during the 5-year period ending on
the determination date, including distributions under a terminated plan that, if
it had not been terminated, would have been required to be included in the
aggregation group, (ii) the account balances or cumulative accrued benefits of a
participant who was previously a key employee, but who is no longer a key
employee, shall be disregarded, (iii) the account balances or cumulative accrued
benefits of a beneficiary of a participant shall be considered accounts or
accrued benefits of the participant, (iv) the account balances or cumulative
accrued benefits of a participant who has not performed services for an Employer
or a Controlled Group Member at any time during the 5-year period ending on the
determination date shall be disregarded and (v) any rollover contribution (or
similar transfer) from a plan maintained by a corporation other than an Employer
under this Plan initiated by a participant shall not be taken into account as
part of the participant's aggregate account balances under this Plan.
63
<PAGE> 71
20.3. Key Employee. In general, a "key employee" is an employee (or a former or
deceased employee) who, at any time during the plan year or any of the 4
preceding plan years, is or was:
(a) an officer of an Employer having annual compensation greater than fifty
percent of the amount in effect under Section 415(b)(1)(A) for any such
plan year; provided that, for purposes of this paragraph, no more than
fifty employees of the Employer (or, if lesser, the greater of three
employees or ten percent of the employees) shall be treated as
officers;
(b) one of the ten employees who have annual compensation from an Employer
of more than the limitation in effect under Section 415(c)(1)(A) of the
Code for that year and owning or considered as owning, within the
meaning of Section 318 of the Code, the largest interests in the
Employer; provided that if two employees have the same interest in the
Employer, the employee having greater annual compensation from the
Employer shall be treated as having a larger interest;
(c) a five percent or greater owner of an Employer; or
(d) a one percent or greater owner of an Employer having annual
compensation from the Employer of more than $150,000.
For purposes of this subsection the term "compensation" means compensation as
defined by Code Section 414(q)(7).
20.4. Aggregated Plans. Each other defined contribution plan and defined benefit
plan maintained by an Employer that covers a "key employee" as a participant or
that is maintained by an Employer in order for a plan covering a key employee to
satisfy Section 401(a)(4) or 410 of the Code shall be aggregated with this Plan
in determining whether this Plan is top-heavy. In addition, any other defined
contribution or defined benefit plan of an Employer may be included if all such
plans that are included, when aggregated, will not discriminate in favor of
officers, shareholders or highly compensated participants and will satisfy all
of the applicable requirements of Sections 401(a)(4) and 410 of the Code.
20.5. Minimum Employer Contribution. Subject to the following provisions of this
subsection and subsection 20.7, for any plan year in which the Plan is a
top-heavy plan, the employer contribution credited to each participant who is
not a key employee shall not be less than 3 percent of such participant's total
compensation (as defined in subsection 8.1) from the Employers for that year. In
no event, however, shall the total employer contribution credited in any year to
a participant who is not a key employee (expressed as a percentage of such
participant's total compensation from the Employer) exceed the maximum total
employer contribution credited in that year to a key employee (expressed as a
percentage of such key employee's total compensation from an Employer).
Contributions made by an Employer under the Plan pursuant to participants'
income deferral authorizations shall not be deemed employer contributions for
purposes of this subsection. The amount of minimum employer contribution
otherwise required to be allocated to any participant for any plan year under
this subsection shall be reduced by the amount of employer contributions
allocated to him for a plan year ending with
64
<PAGE> 72
or within that plan year under any other tax-qualified defined contribution plan
maintained by an Employer.
20.6. Coordination of Benefits. For any plan year in which the Plan is
top-heavy, in the case of a participant who is a non-key employee and who is a
participant in a top-heavy tax-qualified defined benefit plan that is maintained
by an Employer and that is subject to Section 416 of the Code, subsection 20.5
shall not apply, and the minimum benefit to be provided to each such participant
in accordance with this Section 20 and Section 416(c) of the Code shall be the
minimum annual retirement benefit to which he is entitled under such defined
benefit plan in accordance with such Section 416(c), reduced by the amount of
annual retirement benefit purchasable with his Plan accounts (or portions
thereof) attributable to employer contributions (as defined in subsection 20.5)
under this Plan and any other tax-qualified defined contribution plan maintained
by an Employer.
20.7. Adjustment of Combined Benefit Limitations. For any plan year in which the
Plan is a top-heavy plan, the determination of the defined contribution plan
fraction and defined benefit plan fraction under subsection 8.2 shall be
adjusted in accordance with the provisions of Section 416(h) of the Code by
substituting "1.0" for "1.25" where the latter number appears in Sections
415(e)(2)(B)(i) and 415(e)(3)(B)(i) of the Code with respect to the calculation
of those fractions; except that with respect to a participant described in
subsection 20.6, such adjustment shall not be required under this Plan for any
plan year for which such adjustment is not required under the defined benefit
plan referred to in subsection 20.6.
65
<PAGE> 73
SUPPLEMENT A
A-1. Purpose, Application and Definitions. The purpose of this
Supplement A is to modify and supplement the terms and provisions of the Plan
document as applied to Participants for whom the Committee maintains a Drovers
Transfer Account. Unless the context of the Plan document or this Supplement A
clearly implies or indicates to the contrary, a word, term or phrase used or
defined in this Plan document is similarly used or defined in this Supplement A.
A-2. Distribution of Drovers Transfer Accounts. Subject to the
provisions of subsection A-3, the balance of the Participant's Drovers Transfer
Account will be distributed by payment in a lump sum.
A-3. Revocation of Joint and Survivor Annuity Form. If a Participant is
legally married under the laws of any jurisdiction on his Termination Date, his
Account balances shall be paid in the form of a Joint and Survivor Annuity (as
defined below), subject to the following provisions of this subsection. As soon
as practicable after a married Participant's Termination Date, the Committee
will provide him with election information consisting of:
(a) a written description of the Joint and Survivor Annuity and the
relative financial effect of payment of his Account balances in
that form; and
(b) a notification of the right to waive payment in that form, the
rights of his spouse with respect to such waiver and the right
to revoke such waiver.
The Committee may make such election information available to a Participant by:
(i) personal delivery to him;
(ii) first-class mail, postage prepaid, addressed to the
Participant at his last known address as shown on his
Employer's records; or
(iii) permanent posting on a bulletin board located at the
Participant's work site.
During an election period commencing on the date the
Participant receives such election information and ending on the later of the
90th day thereafter or the date as of which his benefits are to commence, a
Participant may waive payment in the Joint and Survivor Annuity form and elect
payment in the form described in subsection A-2; provided that, the
Participant's surviving spouse, if any, has consented in writing to such waiver
and the spouse's consent acknowledges the effect of such revocation and is
witnessed by a notary public. A Participant may, at any time during his election
period revoke any prior waiver of the Joint and Survivor Annuity form. A
Participant may request, by writing filed with the Committee during his election
period, an explanation, written in nontechnical language, of the terms,
conditions and financial effect (in terms of dollars per monthly benefit
payment) of payment in the Joint and Survivor Annuity form. If not previously
provided to the Participant, the Committee shall provide him with such
explanation within 30 days of his request by one of the methods described in
paragraphs (i) or (ii) next above, and the Participant's election period will be
extended, if
<PAGE> 74
necessary, to include the 90th day next following the date on which
he receives such explanation. The term "Joint and Survivor Annuity" means an
annuity for the life of the Participant with a survivor annuity for the life of
his surviving spouse which is equal to 50 percent of the amount of the annuity
payable during the joint lives of the Participant and his spouse and which is
the actuarial equivalent of a single life annuity for the life of the
Participant. No distribution shall be made from a Participant's Drover Transfer
Account until his election period has terminated. Notwithstanding the foregoing,
if the Participant's distributable Account balances are less than $3,500, the
Committee may direct the Trustees to immediately distribute such benefits in a
lump sum without such Participant's consent.
A-4. Pre-Retirement Survivor Annuity. The term "Pre-Retirement Survivor
Annuity" means an annuity for the life of the Participant's surviving spouse,
the payments under which must be equal to the amount of benefit which can be
purchased with the balance in the Participant's Drover Transfer Account as of
the date of his death. Payment of such benefits will commence as soon as
practicable after the date of the Participant's death, unless the surviving
spouse elects a later date. Any election to waive the Pre-Retirement Survivor
Annuity must be made by the Participant in writing during the election period
described herein and shall require the spouse's consent in the same manner
provided for in subsection A-3. The election period to waive the Pre-Retirement
Survivor Annuity shall begin on the first day of the plan year in which the
Participant attains age 35 and end on the date of the Participant's death. In
the event a Participant separates from service prior to the beginning of the
election period, the election period shall begin on the date of such separation
from service. In connection with the election, the Committee shall provide each
Participant within the period beginning with the first day of the plan year in
which the Participant attains age 32 and ending with the close of the plan year
preceding the plan year in which the Participant attains age 35, a written
explanation of the Pre-Retirement Survivor Annuity containing comparable
information to that required pursuant to the provisions of paragraphs A-3(a) and
(b). If the Participant enters the Plan after the first day of the plan year in
which the Participant attained age 32, the Committee shall provide notice no
later than the close of the second plan year following the entry of the
Participant into the Plan. If the distributable balance of the Participant's
Accounts is less than $3,500, the Committee may direct the Trustees to
immediately distribute such amount to the Participant's spouse. If the value
exceeds $3,500, an immediate distribution of the entire amount may be made to
the surviving spouse, provided such surviving spouse consents in writing to such
distribution.
<PAGE> 1
EXHIBIT 10.9
12/8/97 TCG Compensation Committee
Attachment A
TAYLOR CAPITAL GROUP, INC.
INCENTIVE COMPENSATION PLAN
1. PURPOSE. The Taylor Capital Group, Inc. Incentive
Compensation Plan (the "Plan"), is intended to provide incentives which will
attract and retain highly competent persons as officers, key employees and
directors of Taylor Capital Group, Inc. ("Taylor Capital") and its designated
subsidiaries (collectively, the "Company"), by providing them opportunities to
acquire shares of Common Stock of Taylor Capital ("Common Stock") or to receive
monetary payments based on the value of such shares pursuant to the Awards
described herein.
2. PARTICIPANTS. Participants will consist of such officers,
key employees, and directors of the Company as the Compensation Committee of the
Board of Directors of Taylor Capital (the "Committee") in its sole discretion
determines to be significantly responsible for the success and future growth and
profitability of the Company. Designation of a participant in any year shall not
require the Committee to designate such person to receive an Award in any other
year or, once designated, to receive the same type or amount of Awards as
granted to the participant or any other participant in any year. The Committee
shall consider such factors as it deems pertinent in selecting participants and
in determining the amount, type and terms and conditions of their respective
Awards.
3. TYPES OF AWARDS. Awards under the Plan may be granted in
any one or a combination of (i) incentive stock options ("ISO"), within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), (ii) nonqualified stock options, (iii) stock appreciation rights, (iv)
stock awards, and (vi) performance awards, each as described below
(collectively, "Awards"). Each award shall be made pursuant to a written
agreement between the Company and the Award recipient.
4. SHARES RESERVED UNDER THE PLAN. There is hereby reserved
for issuance under the Plan an aggregate of Five Hundred Sixty Three Thousand,
and Sixty Six (563,066) shares of Common Stock, which may be authorized but
unissued or treasury shares. If there is a lapse, cancellation, expiration, or
termination of any Award prior to issuance of the shares thereunder, or if
shares are issued under an Award and thereafter are reacquired by the Company
pursuant to rights reserved by the Company upon issuance of such shares, the
shares subject to such Award may thereafter be subjected to new Awards under
this Plan.
5. STOCK OPTIONS. "Stock Options" will consist of awards from
the Company, which will enable the holder to purchase a specific number of
shares of Common Stock, at set terms and at a fixed purchase price. Subject to
the terms and conditions of the Program, the Committee shall designate the
employees to whom Stock Options are to be awarded under the Program and shall
determine the number, type, and terms of the Stock Options to be awarded to each
of them, provided, however, that no ISO shall be granted more than 10 years from
the date of the adoption of the Program by the Board of Directors of Taylor
Capital. Each Stock Option shall be subject to such terms and conditions as the
Committee determines to be appropriate at the time of grant.
<PAGE> 2
12/8/97 TCG Compensation Committee
Attachment A
6. STOCK APPRECIATION RIGHTS. "Stock Appreciation Rights" will
consist of awards from the Company, which will entitle the holder to receive the
appreciation in the Fair Market Value of the shares subject thereto up to a
specified date or dates. Payment of such appreciation shall be made in cash or
in Common Stock, or a combination thereof, as set forth in the written award.
Each Stock Appreciation Right shall be subject to such terms and conditions as
the Committee determines to be appropriate at the time of grant.
7. STOCK AWARDS. "Stock Awards" will consist of Common Stock
transferred to participants without other payment therefor as additional
compensation for services rendered or to be rendered to the Company. Stock
Awards shall be subject to such terms and conditions as the Committee determines
to be appropriate at the time of grant, including, without limitation,
restrictions on the sale or other disposition of such shares and provisions for
the forfeiture of such shares for no consideration upon termination of the
participant's employment within specified periods.
8. PERFORMANCE AWARDS. "Performance Awards" will consist of
awards from the Company, which will entitle the holder to receive a specific
number of shares of Common Stock or cash at the end of a specified Performance
Period. The Committee shall determine the duration of the period (the
"Performance Period") during which, and the conditions under which, receipt of
the shares or payment of the cash will be deferred. The Committee may condition
the grant of Performance Awards upon the attainment of specified performance
goals or such other terms and conditions as the Committee determines to be
appropriate at the time of grant, including, without limitation, provisions for
the forfeiture of such shares for no consideration upon termination of the
participant's employment prior to the end of the Performance Period.
9. SHAREHOLDER RIGHTS. The recipient of a Stock Option, Stock
Appreciation Right, or Performance Awards shall not be deemed for any purpose to
be a stockholder of the Company with respect to any of the shares subject
thereto except to the extent that a certificate shall have been issued and
delivered to the participant.
10. ADJUSTMENT PROVISIONS. If Taylor Capital shall
at any time change the number of issued shares of Common Stock without new
consideration to Taylor Capital (such as by stock dividend, stock split,
recapitalization, reorganization, exchange of shares, or other change in
corporate structure affecting the Common Stock), the total number of shares
reserved for Awards under this Plan shall be appropriately adjusted. The
Committee may provide for equitable adjustments in the terms of any Awards
granted hereunder after changes in the Common Stock resulting from any merger,
consolidation, sale of assets, acquisition of property or stock,
recapitalization, reorganization or similar occurrence upon such terms and
conditions as it may, in its sole discretion, deem equitable and appropriate.
<PAGE> 3
12/8/97 TCG Compensation Committee
Attachment A
11. NONTRANSFERABILITY. Each Award granted under the Plan to a
participant shall, unless otherwise set forth in the written Award, not be
transferable otherwise than by will or the laws of descent and distribution, and
shall be exercisable, during the participant's lifetime, only by the
participant.
12. OTHER PROVISIONS. Awards under the Plan may also be
subject to such other provisions (whether or not applicable to the Award granted
to any other participant) as the Committee determines appropriate.
13. FAIR MARKET VALUE. Except as otherwise expressly provided
in a written Award, for purposes of this Plan and any Awards hereunder, the
"Fair Market Value" of a share of Common Stock shall mean (i) prior to the date
of the registration of the Common Stock under the Securities Act of 1933 and
readily tradable on a national securities exchange ("Readily Tradable"), the
amount equal to the price of a share of Common Stock as reflected by the most
recently preceding valuation of the shares of Common Stock under the Taylor
Capital Group, Inc. 401(k)/Profit Sharing and Employee Stock Ownership Plan,
after adjusting for a nonmarketable, minority interest discount; and (ii) on an
after the date that the Common Stock is Readily Tradable, the closing price of
the Common Stock on the relevant date as reported on the national securities
exchange.
14. TENURE. A participant's right, if any, to continue to
serve the Company as an officer, employee, or otherwise, shall not be enlarged
or otherwise affected by his or her designation as a participant under the Plan,
nor shall this Plan in any way interfere with the right of the Company, subject
to the terms of any separate employment agreement to the contrary, at any time
to terminate such employment or to increase or decrease the compensation of the
participant from the rate in existence at the time of the grant of an Award.
15. ADMINISTRATION. The Plan will be administered by the
Compensation Committee. The Committee is authorized, subject to the provisions
of the Plan, to establish such rules and regulations as it deems necessary for
the proper administration of the Plan and to make such determinations and
interpretations and to take such action in connection with the Plan and any
Awards granted hereunder as it deems necessary or advisable. All determinations
and interpretations made by the Committee shall be binding and conclusive on all
participants and their legal representatives. No member of the Board, no member
of the Committee and no employee of the Company shall be liable for any act or
failure to act hereunder, by any other member or employee or by any agent to
whom duties in connection with the administration of this Plan have been
delegated or, except in circumstances involving his or her bad faith, gross
negligence or fraud, for any act or failure to act by such member of the Board
or employee.
16. AMENDMENT AND TERMINATION. The Board of Directors may
amend the Plan from time to time or terminate the Plan at any time. However, no
action authorized by this paragraph shall change the terms and conditions of any
existing Award without the participant's consent.
<PAGE> 4
12/8/97 TCG Compensation Commitee
Attachment A
17. GOVERNING LAW. This Plan and actions taken in connection
herewith shall be governed and construed in accordance with the laws of the
State of Illinois (regardless of the law that might otherwise govern under
applicable Illinois principles of conflict of laws).
18. APPROVAL. The Plan was adopted by the Board of Directors
of Taylor Capital on ____, 1997.
<PAGE> 1
Exhibit 10.10
TAYLOR CAPITAL GROUP, INC.
NON-QUALIFIED STOCK OPTION
THIS OPTION is granted this 30th day of September, 1997, by Taylor
Capital Group, Inc., a Delaware corporation ("Company") to (the "Employee");
WHEREAS, the Board of Directors of the Company is of the opinion that
the interests of the Company and its subsidiaries and affiliates will be
advanced by encouraging and enabling those officers, key employees and directors
of the Company, upon whose judgment, initiative and efforts the Company is
largely dependent for the successful conduct of the business of the Company to
acquire a proprietary interest in the Company or increase their proprietary
interest in the Company, and thus providing them with a more direct stake in the
Company's welfare and assuring a closer identification of their interests with
those of the Company during their association with the Company; and
WHEREAS, the Board believes that the acquisition of such an interest in
the Company will stimulate the efforts of such officers and key employees during
their association with the Company;
NOW, THEREFORE, in consideration of the premises and of the services
required under Section 2 in order to receive benefits hereunder, the Company
hereby grants this option to the Employee on the terms hereinafter expressed:
<PAGE> 2
1. OPTION GRANT. The Company hereby grants to the Employee a
non-qualified stock option to purchase a total of _____ shares of common stock
of Taylor Capital Group, Inc. ("Common Stock") at the option price of $22.00 per
share. This option is not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code.
2. TIME OF EXERCISE. This option may be exercised (in the manner
provided in Section 3 hereof) in whole or in part, from time to time after the
date hereof, subject to the following limitations:
(a) This option may not be exercised during the first year from June 30,
1997. Thereafter, this option may be exercised to the maximum cumulative extent
of 20% of the total shares covered by this option on and after June 30, 1998;
40% of the total shares on and after June 30, 1999; 60% of the total shares on
and after June 30, 2000; 80% of the total shares on and after June 30, 2001; and
100% of the total shares on and after June 30, 2002. Notwithstanding the
foregoing, no option may be exercised for fractional shares.
(b) Notwithstanding Section 2(a) hereof, in the event of the Optionee's
termination of employment with the Company due to retirement at age 65 or older,
permanent disability (as defined below), death, at any time following the date
of grant hereof, this option shall immediately become exercisable as to a
maximum cumulative extent of 100% of the total shares covered by this option on
the date of the Optionee's retirement, permanent disability or death. For
purposes of this option, the Employee will be considered permanently disabled if
Employee is unable to perform his or her stated duties with the Company by
reason of illness, accident or other incapacity and does not engage in any
occupation or employment for wage or
2
<PAGE> 3
profit for which Employee is reasonably qualified by education, training, or
experience, as determined by the Company in its sole discretion.
(c) This option may not be exercised (and shall then forever lapse) upon
the first to occur of the following:
(i) upon the effective date of the termination of the Employee's
employment by the Company for "cause", which for purposes of this option
means termination because of (1) an act of fraud, embezzlement or theft in
connection with the Employee's duties or in the course of the Employee's
employment, (2) unreasonable neglect or refusal by the Employee to perform
his duties (other than any such failure resulting from the Employee's
incapacity due to disability), (3) the engaging by the Employee in willful,
reckless, or grossly negligent misconduct which is or may be materially
injurious to the Company, or (4) the Employee's conviction of or plea of
guilty or nolo contendere to a felony;
(ii) more than 90 days following the termination of the Employee's
employment for any reason other than death, disability or "cause" (and then
only to the extent the Employee could have exercised this option on the date
of such termination);
(iii) more than one year following the termination of the Employee's
employment due to death or permanent disability; or
(iv) more than ten (10) years from the date hereof.
(d) This option shall not be affected by leaves of absence approved in
writing by the Company or by any change of employment so long as the Employee
continues to be an employee of the Company or one of its subsidiaries or
affiliates. Nothing in this option shall confer on the Employee any right to
continue in the employ of the Company or to interfere with
3
<PAGE> 4
the right of the Company, subject to the terms of any separate employment
contract to the contrary, to terminate Employee's employment at any time.
3. EXERCISE OF OPTION.
(a) This option may be exercised only by appropriate notice in writing
delivered to the Secretary of the Company at its corporate headquarters, and
accompanied by:
(i) The full purchase price of the shares purchased payable by (1) a
certified or cashier's check payable to the order of the Company, (2) a
promissory note, with the shares purchased as collateral, payable in the
three equal annual installments, and/or (3) certificates of Common Stock
(which have been held by the Employee for at least six months) equal in
value (based upon their Fair Market Value as defined in the Stock Transfer
Agreement attached hereto as Exhibit A) on the date of surrender) to such
purchase price, or the portion thereof so paid;
(ii) An executed Stock Transfer Agreement between the Company and the
Employee or his successor in interest, whether determined by will or the
laws of descent and distribution or otherwise, in the form attached hereto
as Exhibit A; and
(iii) Such other documents or representations (including without
limitation representations as to the intention of the Employee or his
successor, or other purchaser under Section 6, to acquire the shares for
investment) as the Company may reasonably request in order to comply with
securities, tax or other laws then applicable to the exercise of the option.
(b) The exercise of this option is conditioned upon the Employee making
arrangements satisfactory to the Company relating to any required withholding
taxes attributable
4
<PAGE> 5
to such exercise. The Company may, in its sole discretion and subject to such
rules as it may adopt, permit the Employee to satisfy any tax withholding
obligation, in whole or in part, by electing to have the Company withhold shares
of Common Stock received in connection with the option having a Fair Market
Value equal to the amount required to be withheld.
4. CHANGE OF CONTROL.
(a) Notwithstanding Section 2(a) above, this option shall become fully
and immediately exercisable upon the occurrence of a Change of Control, as
defined below. In the event of a Change of Control of the Company, the Board
may, by providing written notice to the Employee, elect to (i) cancel this
option, unless theretofore exercised, 30 days after the effective date of the
Change of Control and/or (ii) require that in lieu of the exercise of this
option, that the Employee be provided with a cash payment as set forth in
Section 4(c) hereof.
(b) For purposes of this option, a "Change of Control" shall occur:
(i) upon the vote of the shareholders of the Company approving a merger
or consolidation in which the Company's shareholders immediately prior to
the effective time of the merger or consolidation will beneficially own
immediately after the effective time of the merger or consolidation
securities of the surviving or new corporation having less than 50% of the
"voting power" of the surviving or new corporation, including "voting power"
exercisable on a contingent or deferred basis as well as immediately
exercisable "voting power"; provided, however, that no such merger or
consolidation shall constitute a "change of control" in the event that
following such transaction the Taylor Family (as defined below) owns,
directly or indirectly, 30% or more of the
5
<PAGE> 6
combined "voting power" of the surviving or new corporation's outstanding
securities, excluding "voting power" exercisable on a contingent or deferred
basis.
(ii) upon the consummation of a sale, lease, exchange or other transfer
or disposition by the Company of all or substantially all of the assets of
the Company on a consolidated basis, provided, however, that the mortgage,
pledge or hypothecation of all or substantially all of the assets of the
Company on a consolidated basis, in connection with a bona fide financing
shall not constitute a Sale of the Company; or
(iii) when any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 of the Securities Exchange Act as in effect
on date hereof, but excluding (a) any Company sponsored employee benefit
plan and (b) any member of the Taylor Family), directly or indirectly, of
shares of Company stock such that the Taylor Family owns less than 30% of
the combined "voting power" of the Company's then outstanding securities,
excluding "voting power" exercisable on a contingent or deferred basis.
For purposes of this Agreement, the Taylor Family means (i) Sidney J. Taylor and
Iris Taylor, (ii) a descendant of Sidney J. Taylor and Iris Taylor, (iii) any
estate, trust, guardianship or custodianship for the primary benefit of any
individual described in (i) or (ii) above, or (iv) a proprietorship,
partnership, limited liability company, or corporation controlled by and
substantially all the interest in which are owned, directly or indirectly, by
one or more individuals or entities described in (i), (ii), or (iii) above.
(c) Pursuant to Section 4(a) hereof, in the event of a Change of Control
of the Company, the Company may, at its option, elect to pay in cash an amount
equal to the excess, if
6
<PAGE> 7
any, of (i) the Fair Market Value of the shares of Common Stock subject to the
option on the date of exercise over (ii) the exercise price as provided herein,
multiplied by the number of shares for which the option is exercised, less any
required withholding taxes. In the event of such election, the Company will make
a payment to the Employee, his estate, the person to whom the option passes by
will or by the laws of descent or distribution or the Employee's legal
representative or guardian, not more than 30 days after the date of exercise and
the Company shall have no further liability of any kind to Employee.
5. NONTRANSFERABILITY OF OPTION. This option is not transferable by the
Employee otherwise than by will or the laws of descent and distribution, and is
exercisable, during the Employee's lifetime, only by him or her.
6. DEATH OR DISABILITY OF EMPLOYEE. If the Employee dies or becomes
disabled while in the employ of the Company, this option may be exercised in
whole or in part and from time to time, in the manner described in Section 3
hereof, in the case of death by his estate or the person to whom the option
passes by will or the laws of descent and distribution or in the case of
disability by the person's legal representative or guardian, but only to the
extent that the Employee could have exercised it on the date of his death or
disability, and only within a period of (a) twelve months next succeeding the
Employee's death or disability, or (b) ten years from the date hereof, whichever
period is shorter.
7. DELIVERY OF CERTIFICATES. If at any time during the option period the
Company shall be advised by its counsel that shares deliverable upon exercise of
the option are required to be registered under the federal Securities Act of
1933, as amended (the "1933 Act"), or that delivery of the shares must be
accompanied or preceded by a prospectus meeting the
7
<PAGE> 8
requirements of the 1933 Act, the Company, at its election, will use its best
efforts to effect such registration or provide such prospectus not later than a
reasonable time following each exercise of this option, but delivery of shares
by the Company may be deferred until registration is effected or a prospectus is
available. The Employee shall have no interest in shares covered by this option
until certificates for the shares are issued. Notwithstanding anything to the
contrary in this option, in lieu of affecting the registration statement
described in the preceding sentence, the Company may, in the alternative,
provide Employee with a cash payment in consideration of the shares subject to
such exercise in the manner described in Section 4(c) above, and the Company
shall have no further liability of any kind to Employee.
8. ADJUSTMENT PROVISIONS.
(a) If the Company shall at any time change the number of shares of its
Common Stock without new consideration to the Company (such as by stock
dividends or stock splits), the total number of shares then remaining subject to
purchase hereunder shall be changed in proportion to such change in issued
shares and the option price per share shall be adjusted so that the total
consideration payable to the Company upon the purchase of all shares not
theretofore purchased shall not be changed.
8
<PAGE> 9
(b) In the case of any merger, consolidation or combination of the
Company with or into another corporation, other than a merger, consolidation or
combination in which the Company is the continuing corporation and which does
not result in the outstanding Common Stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof (an
"Acquisition"), the Optionee shall have the right (subject to Section 4 hereof
and any other limitation applicable to this option) thereafter and during the
term of this option, to receive upon exercise hereof the Acquisition
Consideration (as defined below) receivable upon such Acquisition by a holder of
the number of shares of Common Stock which might have been obtained upon
exercise of this option or portion hereof, as the case may be, immediately prior
to such Acquisition. The term "Acquisition Consideration" shall mean the kind
and amount of shares of the surviving or new corporation, cash, securities,
evidence of indebtedness, other property or any combination thereof receivable
in respect of one share of Common Stock of the Company upon consummation of an
Acquisition.
9. APPLICABLE PLAN. This option is granted under and is subject to the
terms and conditions of the Taylor Capital Group, Inc. 1997 Incentive
Compensation Plan (the "Plan"). Any capitalized terms not defined herein shall
be subject to the definitions set forth in the Plan.
[SIGNATURE PAGE FOLLOWS]
9
<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this option to be executed on
the date first above written.
TAYLOR CAPITAL GROUP, INC.
By:
---------------------------------
Its: President
ACCEPTED:
- ------------------------------------
10
<PAGE> 11
Exhibit A
[Stock Transfer Agreement]
<PAGE> 1
STOCK TRANSFER AGREEMENT
FOR STOCK OPTION GRANTS
THIS STOCK TRANSFER RESTRICTION AGREEMENT is made as of the 30th day of
September, 1997, by and between Taylor Capital Group, Inc., a Delaware
corporation (the "Company"), and (the "Stockholder");
WITNESSETH
WHEREAS, Stockholder is an employee of the Company or one of its
subsidiaries; and
WHEREAS, Stockholder is or may become the owner of shares of Common
Stock of the Company (the "Shares") acquired by the exercise by the Stockholder
of compensatory stock options granted under the Taylor Capital Group, Inc. 1997
Incentive Compensation Plan (the "Plan"); and
WHEREAS, it is a condition to the grant of the stock options that
Stockholder and the Company enter into a stock transfer restriction agreement in
substantially the form hereof, and Stockholder agreed to enter into such an
agreement.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter contained, and in consideration of each of the parties
hereto entering into this Agreement, and intending to be legally bound hereby,
the parties agree as follows:
1. RESTRICTIONS ON TRANSFER. Except as otherwise provided in Sections 2,
3, or 10 hereof, or until this Agreement terminates under Section 9, the
Stockholder agrees not to sell,
<PAGE> 2
transfer, assign, give, pledge, or otherwise dispose of or encumber any part or
all of the Shares, whether voluntarily, by operation of law, or otherwise
without the prior written consent of the Board of Directors of the Company. Any
attempted transfer in violation of this Agreement shall be considered null and
void and the Stockholder shall continue to be treated as the owner of the Shares
for all purposes of this Agreement and shall continue to be bound by all of the
terms and provisions hereof.
2. STOCKHOLDER'S "PUT" OPTIONS.
(a) On and after the six-month anniversary of the date that the
Stockholder exercised its options to purchase the Shares, the Stockholder shall
have an option two times during any calendar year to sell to the Company,
subject to the limitations set forth in this Section 2, all or a portion of the
Shares owned by the Stockholder during the put period, as defined herein. For
the purpose of this Agreement, the "put period" shall be any time during the
calendar year other than the period from (i) June 30th through the date that the
Company receives the valuation ("ESOP Valuation Date") of the shares of Company
stock held in the Taylor Capital Group, Inc. 401(k)/Profit Sharing and Employee
Stock Ownership Plan (the "ESOP"); and (ii) December 31st through the ESOP
Valuation Date. The Stockholder's option to sell the Shares to the Company shall
be effective upon the Stockholder notifying the Company in writing. Upon the
exercise by the Stockholder of the option hereunder, the Company shall
immediately become obligated to pay to the Stockholder as the purchase price
paid for the Shares so acquired by the Company, the price established in Section
4 hereof; provided, however, that the Company's obligation to purchase all or
any portion of the Shares from the Stockholder shall be limited in any calendar
year to the purchase in aggregate of shares of Company stock having a value
equal
Page 2
<PAGE> 3
to Three Million Dollars ($3,000,000) including the value of the shares that the
Company is required to purchase under the provisions of the ESOP and shares that
are "put" for sale to the Company by other stockholders pursuant to similar
Stock Transfer Agreements. In the event that the value of shares that the
Company is obligated to purchase exceeds Three Million Dollars ($3,000,000) in
any calendar year, requests will be processed in the order of delivery to the
Company (excluding any shares that the Company is obligated to purchase under
ESOP). The closing shall take place as soon as practicable after the exercise by
the Stockholder of its option hereunder, but in no event more than sixty (60)
days after the delivery by the Stockholder of its written notice of option
exercise.
(b) To the extent the Company does not exercise its option under Section
3(a) hereof within six months following the termination of the Stockholder's
employment with the Company or one of its subsidiaries or affiliates, the
Stockholder shall thereafter have an option to sell to the Company, subject to
the limitations set forth in this Section 2(b), all or a portion of the Shares
owned by the Stockholder at the time of such option exercise. Such option shall
be exercisable during the 60-day period after the expiration of the
above-referenced six-month time period, upon the Stockholder notifying the
Company, in writing, of Stockholder's exercise of the option hereunder. Upon the
exercise by the Stockholder of the option hereunder, the Company shall
immediately become obligated to pay to the Stockholder as the purchase price
paid for the Shares so acquired by the Company, the price established in Section
4 hereof. Payment of such purchase price shall be made pursuant to the terms
specified in Section 5 hereof. The closing shall take place as soon as
practicable after the exercise by the Stockholder of its option
Page 3
<PAGE> 4
hereunder, but in no event more than sixty (60) days after the delivery by the
Stockholder of its written notice of option exercise.
3. COMPANY'S PURCHASE OPTIONS.
(a) In the event that the Stockholder should cease to be an employee of
the Company or one of its subsidiaries or affiliates, then as a result of such
termination the Company shall have an option to purchase from the Stockholder
all or any part of the Shares owned by the Stockholder at the time of such
option exercise. Such option shall be exercisable, in whole or in part, at any
time and from time to time following the Stockholder's termination of employment
upon the Company notifying the Stockholder in writing of its exercise of the
option hereunder and the number of Shares with respect to which such option is
being exercised. Upon the exercise by the Company of its option hereunder, the
Stockholder shall immediately become obligated to sell and the Company shall
immediately become obligated to pay to the Stockholder as the purchase price for
the Shares so acquired by the Company, the price established in Section 4
hereof. Payment of such purchase price shall be made pursuant to the terms
specified in Section 5 hereof. The closing shall take place as soon as
practicable after the exercise by the Company of its option hereunder, but in no
event more than sixty (60) days after the delivery by the Company of its written
notice of option exercise.
(b) If all or any part of the Shares held by the Stockholder shall be
subject to an involuntary transfer to any person or entity whether by operation
of law or otherwise (such as, without limitation, to a trustee in bankruptcy, a
purchaser in any creditor's or court sale, or conservator), or a transfer in
accordance with any divorce proceeding (collectively a "Transfer Event"), then
as a result of such event, the Company shall have an option to purchase from the
Page 4
<PAGE> 5
transferee that number of Shares which are subject to the Transfer Event. Such
option shall be exercisable for a period of sixty (60) days after the Company's
receipt of actual notice of the Transfer Event, and shall be exercised by the
delivery of written notice of option exercise by the Company to the Stockholder
and the Stockholder's transferee. Upon the exercise by the Company of its option
under this Section 3, the Company shall become obligated to pay to the
transferee, as the purchase price for the Shares so acquired by the Company, the
price established in Section 4 hereof. Payment of such purchase price shall be
on the terms set forth in Section 5 hereof. The closing shall take place as soon
as practicable after the exercise by the Company of its option hereunder, but in
no event more than thirty (30) days after the exercise by the Company of its
option.
(c) The Company may, in its discretion, assign its right to purchase the
Shares under Sections 3(a) and (b), and its obligation to purchase the Shares
under Section 2, to the ESOP.
4. PURCHASE PRICE.
(a) Except as otherwise provided in Section 4(b), the purchase price for
each Share to be purchased by the Company pursuant to this Agreement from a
Stockholder or his estate, heirs or personal representative or a transferee
(collectively referred to as the "Seller") shall equal the Fair Market Value
determined as of the date of purchase. The "Fair Market Value" shall be based
upon the fair market value of the shares of common stock of the Company held by
the ESOP, after applying the applicable discounts including a nonmarketable,
minority interest discount to the ESOP Valuation, as determined as by an
independent appraiser.
Page 5
<PAGE> 6
(b) Notwithstanding the above, if the purchase of Shares by the Company
under this Agreement is pursuant to Section 3 hereof following the Stockholder's
termination of employment for "cause" (as defined below), the purchase price per
Share shall be the lower of (i) the purchase price per share originally paid by
the Stockholder to acquire his or her Shares or (ii) the Fair Market Value per
share (determined in accordance with Section 4(a)). For purposes of this
Agreement, "cause" shall mean termination by the Company or one of its
subsidiaries or affiliates because of (i) an act of fraud, embezzlement or theft
in connection with the Stockholder's duties or in the course of the
Stockholder's employment, (ii) unreasonable neglect or refusal by Stockholder to
perform his or her duties (other than any such failure resulting from
Stockholder's incapacity due to permanent disability), (iii) the engaging by
Stockholder in willful, reckless, or grossly negligent misconduct which is or
may be materially injurious to the Company or its subsidiaries or affiliates, or
(iv) Stockholder's conviction of or plea of guilty or nolo contendere to a
felony. For purposes of this option, the Stockholder will be considered
permanently disabled if he or she is unable to perform his or her stated duties
with the Company by reason of illness, accident or other incapacity and does not
engage in any occupation or employment for wage or profit for which the
Stockholder is reasonably qualified by education, training, or experience, as
determined by the Company in its sole discretion.
5. PAYMENT FOR SHARES. Shares purchased pursuant to the provisions of
this Agreement shall be paid for in full upon the closing date. Notwithstanding
the preceding sentence, in the event the aggregate consideration to be paid to
the Seller under this Agreement exceeds $10,000.00, if the Company so elects the
purchase price may be paid for in installments and shall be evidenced by a
promissory note dated the date of the closing of the purchase. Such
Page 6
<PAGE> 7
note shall be payable in three (3) equal annual installments, with the first
installment to be due and payable upon the closing date and the remaining
installments to be due and payable on the second through and including the third
annual anniversaries, respectively, of the closing, and shall provide for
interest on the principal outstanding from time to time at a fixed rate per
annum equal to the prime rate of interest announced by Cole Taylor as its prime
rate as of the closing, or the highest lawful rate which may be charged on this
transaction, whichever is less. The Company shall, in all events, have the right
to prepay the entire principal balance of any note delivered under this Section
5 at any time or from time to time without a premium or a penalty.
6. DELIVERY OF STOCK CERTIFICATES AND OTHER DOCUMENTS UPON A REPURCHASE
OF SHARES. Simultaneously with the transfer of the purchase price by the Company
under Section 6 hereof (whether in cash or by delivery of a note) as a result of
a repurchase of Shares by the Company, the Seller of the Shares shall deliver to
the Company the certificates representing the Shares being sold, properly
endorsed for transfer, together with any other assignments and documents as may
be necessary to transfer title to the Shares.
7. NOTICE OF RESTRICTIONS. The certificates representing the Shares
affected by this Agreement shall be inscribed with the following legend:
"The shares of stock represented by this certificate are subject to, and
are transferable only in compliance with, the terms and conditions of a
certain Stock Transfer Agreement dated September 30, 1997 between the
registered holder of these shares and Taylor Capital Group, Inc., which
Agreement is on file with the Secretary of Taylor Capital Group, Inc.,
and the holder hereof accepts and holds this certificate subject to and
with notice of all of the terms, conditions and provisions of said
Agreement and agrees to be bound thereby."
Page 7
<PAGE> 8
8. DEPOSIT OF CERTIFICATES. The certificates representing the Shares,
together with applicable stock powers duly executed by the Stockholder in blank,
shall be held by the Company subject to the terms of this Agreement. The Company
agrees to release and deliver to the Stockholder any such certificates when they
are no longer subject to the terms of this Agreement or in order to facilitate
any sale or other disposition thereof permitted hereunder.
9. PUBLIC COMPANY. If shares of Common Stock of the Company are sold to
the public pursuant to a registration statement filed under the Securities Act
of 1933, as amended, or if shares of Common Stock of the Company are registered
pursuant to Section 12 or Section 15 of the Securities Exchange Act of 1934, as
amended, the Company shall be deemed a "Public Company". If the Company becomes
a Public Company at any time hereafter, unless an event which gives rise to a
purchase option or obligation in favor of the Company has already occurred, the
Shares held by the Stockholder at the time the Company becomes a Public Company
shall thereafter be free of the terms of this Agreement and the rights, options
or obligations under Sections 1, 2, 3, and 10 hereof shall terminate.
10. CHANGE OF CONTROL OF THE COMPANY. Notwithstanding anything to the
contrary in this Agreement, if the Board of Directors of the Company and the
holders of a majority of the Company's outstanding shares of Common Stock
approve a sale of the Company that constitutes a Change of Control of the
Company (as defined below), the Company will give the Stockholder thirty (30)
days' notice of the proposed transaction. The Company will, at the Stockholder's
request given by him or her within five (5) days of the receipt of notice
required under the preceding sentence, cause the buyer also to offer to purchase
all, but not less than all, of the Shares held by the Stockholder and, upon the
request of the Company within such 5-day
Page 8
<PAGE> 9
period, the Stockholder shall, upon the request of the Company, be obligated to
sell his or her Shares to the buyer, for the same price and on the same terms
and conditions as the buyer's purchase of the shares of Common Stock from the
majority shareholders of the Company. The Stockholder further agrees to take all
necessary and desirable actions in connection with the consummation of a Change
of Control of the Company. For purposes of this Agreement, a "Change of Control
of the Company" shall occur:
(i) upon the vote of the shareholders of the Company approving
a merger or consolidation in which the Company's shareholders
immediately prior to the effective time of the merger or consolidation
will beneficially own immediately after the effective time of the
merger or consolidation securities of the surviving or new corporation
having less than 50% of the "voting power" of the surviving or new
corporation, including "voting power" exercisable on a contingent or
deferred basis as well as immediately exercisable "voting power";
provided, however, that no such merger or consolidation shall
constitute a "change of control" in the event that following such
transaction the Taylor Family (as defined below) owns, directly or
indirectly, 30% or more of the combined "voting power" of the surviving
or new corporation's outstanding securities, excluding "voting power"
exercisable on a contingent or deferred basis.
(ii) upon the consummation of a sale, lease, exchange or other
transfer or disposition by the Company of all or substantially all of
the assets of the Company on a consolidated basis, provided, however,
that the mortgage, pledge or hypothecation of all or substantially all
of the assets of the Company on a consolidated basis, in connection
with a bona fide financing shall not constitute a Sale of the Company;
or
Page 9
<PAGE> 10
(iii) when any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 of the Securities
Exchange Act as in effect on date hereof, but excluding (a) any Company
sponsored employee benefit plan and (b) any member of the Taylor
Family), directly or indirectly, of shares of Company stock such that
the Taylor Family owns less than 30% of the combined "voting power" of
the Company's then outstanding securities, excluding "voting power"
exercisable on a contingent or deferred basis.
For purposes of this Agreement, the Taylor Family means (i) Sidney J. Taylor and
Iris Taylor, (ii) a descendant of Sidney J. Taylor and Iris Taylor, (iii) any
estate, trust, guardianship or custodianship for the primary benefit of any
individual described in (i) or (ii) above, or (iv) a proprietorship,
partnership, limited liability company, or corporation controlled by and
substantially all the interest in which are owned, directly or indirectly, by
one or more individuals or entities described in (i), (ii), or (iii) above.
11. COMPANY'S OBLIGATION REGARDING STOCK OPTION EXERCISES. In the event
of an exercise by Stockholder of any stock option to acquire Shares of Company
stock following his or her termination of employment with the Company or one of
its subsidiaries or affiliates, or an exercise of such a stock option by the
executor or administrator of the Stockholder's estate or the Stockholder's
personal representative following the Stockholder's death, any such shares of
common stock that are acquired pursuant to any such option exercise will be
subjected to all of the terms and conditions of this Agreement. Furthermore, the
Company shall have the right, in its sole discretion, to provide the Stockholder
(in the event of an exercise of an option by the Stockholder following
termination of employment) or the Stockholder's executor or administrator
Page 10
<PAGE> 11
(in the event of his or her death), with a payment in lieu of such option
exercise in an amount equal to the excess, if any, of the Fair Market Value per
Share (as defined in Section 4(a) hereof) over the option exercise price under
such option, multiplied by the number of Shares subjected to such exercise. In
the event the Company exercises its right to provide a payment in lieu of such
option exercise, such payment may be made by delivery of a promissory note from
the Company in accordance with the terms set forth in Section 5 hereof.
12. NOTICE. Any and all notices, designations, consents, offers,
acceptances or any other communication provided for herein shall be given in
writing and personally delivered or sent by United States certified mail, return
receipt requested, postage prepaid, which shall be addressed, in the case of the
Company, to its principal office in the State of Illinois, and in the case of
the Stockholder, to his or her last known address as reflected in the Company's
records. Notices sent by United States certified mail will be deemed received on
the second business day following mailing.
13. NECESSARY DOCUMENTS. The Stockholder and his or her administrators,
executors, heirs or personal representatives shall execute and deliver all
necessary documents required to carry out the terms of this Agreement.
14. GOVERNING LAW. This Agreement shall be subject to and governed by
the laws of the State of Illinois, irrespective of the fact that the Stockholder
is or may become a resident of a different state.
15. INVALID PROVISION. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provisions were omitted.
Page 11
<PAGE> 12
16. BINDING EFFECT. This Agreement shall be binding upon the Company,
Stockholder, and their respective heirs, legal representatives, executors,
administrators, successors and assigns. Any rights given or duties imposed upon
the estate of the Stockholder upon his or her death shall inure to the benefit
of and be binding upon the fiduciary of the decedent's estate in his or her
fiduciary capacity.
17. ENTIRE AGREEMENT.
(a) This Agreement constitutes the entire agreement among the parties
and contains all of the agreements among the parties with respect to the subject
matter hereof. This Agreement supersedes any and all other agreements or
understandings, either oral or written, among the parties hereto with respect to
the subject matter hereof. Notwithstanding anything to the contrary in this
Agreement whether expressed or implied, this Agreement shall only apply to
shares of stock of the Company acquired pursuant to the exercise of options
granted under the Plan, including any additional shares received by Stockholder
in connection with such shares pursuant to stock dividends, stock splits, or
similar transactions. This Agreement shall not apply to any shares of capital
stock of the Company which the Stockholder owns and which were acquired other
than pursuant to the exercise of such stock options.
(b) No change or modification of this Agreement shall be valid unless
the same shall be in writing and signed by the Stockholder and the Company. No
waiver of any provision of this Agreement shall be valid unless it is in
writing.
Page 12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
TAYLOR CAPITAL GROUP, INC.
By
------------------------------
Its: President
STOCKHOLDER
- --------------------------------
Page 13
<PAGE> 1
RESTRICTED STOCK AWARD
THIS RESTRICTED STOCK AWARD ("Award") is entered into as of this 30th
day of September, 1997, by and between Taylor Capital Group, Inc., a Delaware
corporation (the "Company"), and (the "Employee").
RECITALS:
The Board of Directors of the Company has determined that it is in the
best interests of the Company and its stockholders for designated officers,
employees and directors of the Company and its Subsidiaries to obtain or
increase their stock interest in the Company in order to create a greater
incentive to work for and manage the Company's affairs in such a way that its
shares may become more valuable. Employee is employed by the Company or a
Subsidiary as an officer or employee and the Company acknowledges that Employee
has rendered valuable services to the Company and has contributed to its
success.
In consideration of the premises and the mutual covenants set forth
herein, and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
Section 1. Definitions. For purposes of this Award, the following terms
shall have the following meanings:
<PAGE> 2
(a) "Cause" shall mean termination because of (1) an act of fraud,
embezzlement or theft in connection with the Employee's duties or in the course
of the Employee's employment, (2) unreasonable neglect or refusal by the
Employee to perform his duties (other than any such failure resulting from the
Employee's incapacity due to disability), (3) the engaging by the Employee in
willful, reckless, or grossly negligent misconduct which is or may be materially
injurious to the Company, or (4) the Employee's conviction of or plea of guilty
or nolo contendere to a felony.
(b) "Change of Control" shall mean, and be deemed to have occurred, on
the date of the first to occur of any of the following:
(i) upon the vote of the shareholders of the Company approving a merger
or consolidation in which the Company's shareholders immediately prior to
the effective time of the merger or consolidation will beneficially own
immediately after the effective time of the merger or consolidation
securities of the surviving or new corporation having less than 50% of the
"voting power" of the surviving or new corporation, including "voting power"
exercisable on a contingent or deferred basis as well as immediately
exercisable "voting power"; provided, however, that no such merger or
consolidation shall constitute a "change of control" in the event that
following such transaction the Taylor Family (as defined below) owns,
directly or indirectly, 30% or more of the combined "voting power" of the
surviving or new corporation's outstanding securities, excluding "voting
power" exercisable on a contingent or deferred basis.
- -2-
<PAGE> 3
(ii) upon the consummation of a sale, lease, exchange or other transfer
or disposition by the Company of all or substantially all of the assets of
the Company on a consolidated basis, provided, however, that the mortgage,
pledge or hypothecation of all or substantially all of the assets of the
Company on a consolidated basis, in connection with a bona fide financing
shall not constitute a Sale of the Company; or
(iii) when any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 of the Securities Exchange Act as in effect
on date hereof, but excluding (a) any Company sponsored employee benefit
plan and (b) any member of the Taylor Family), directly or indirectly, of
shares of Company stock such that the Taylor Family owns less than 30% of
the combined "voting power" of the Company's then outstanding securities,
excluding "voting power" exercisable on a contingent or deferred basis.
For purposes of this Agreement, the Taylor Family means (i) Sidney J. Taylor and
Iris Taylor, (ii) a descendant of Sidney J. Taylor and Iris Taylor, (iii) any
estate, trust, guardianship or custodianship for the primary benefit of any
individual described in (i) or (ii) above, or (iv) a proprietorship,
partnership, limited liability company, or corporation controlled by and
substantially all the interest in which are owned, directly or indirectly, by
one or more individuals or entities described in (i), (ii), or (iii) above.
(c) "Common Stock" shall mean a share of the common stock of the
Company.
- -3-
<PAGE> 4
(d) "Permanent Disability" shall mean Employee's inability to perform
his or her stated duties with the Company by reason of illness, accident or
other incapacity and inability to engage in any occupation or employment for
wage or profit for which he or she is reasonably qualified by education,
training, or experience, as determined by the Company in its sole discretion;
(f) "Plan" shall mean the Taylor Capital Group, Inc. Incentive
Compensation Plan;
(g) "Qualified Retirement" shall mean the termination of Employee's
employment with the Company or any Subsidiary for any reason other than for
Cause after Employee reaches age sixty-five (65).
(h) "Restricted Shares" shall have the meaning specified in Section 2.
(i) "Restrictions" shall have the meaning specified in Section 3.
(j) "Section 83(b) Election" shall mean an election made pursuant to
Section 83(b) of the Internal Revenue Code of 1986, as amended, electing to be
taxed with respect to the Restricted Shares at the time of grant rather than
upon the forfeiture of the Restrictions.
(k) "Stock Transfer Agreement" shall mean the Stock Transfer Agreement
in the form attached hereto as Exhibit A.
(l) "Subsidiary" or "Subsidiaries" shall mean any corporation, 50% or
more of whose stock is owned, directly or indirectly, by or for the Company.
(m) "Vested Shares" shall have the meaning specified in Section 4.
- -4-
<PAGE> 5
(n) "Vesting Date" shall mean the earliest to occur of (1) June 30, 2000
on which date 50 percent of the Restricted Shares shall become Vested Shares,
June 30, 2001 on which date 75 percent of the Restricted Shares shall become
Vested Shares, and June 30, 2002 on which date 100 percent of the Restricted
Shares shall become Vested Shares; (2) the date of Employee's termination of
employment with the Company or any Subsidiary by reason of Employee's death,
Permanent Disability, or Qualified Retirement on which date 100 percent of the
Restricted Shares shall become Vested Shares; or (3) the effective date of a
Change of Control of the Company on which date 100 percent of the Restricted
Shares become Vested Shares.
Section 2. Award of Shares. Subject to all of the terms and conditions
set forth below and in the Plan, the Company hereby grants to Employee a total
of ( ) shares of Common Stock (the "Restricted Shares"). The transfer of the
Restricted Shares to Employee is conditioned upon Employee, concurrently with
the execution of this Award, delivering to the Company: (1) a duly signed stock
power, endorsed in blank, relating to the Restricted Shares, (2) a duly signed
Stock Transfer Agreement in the form attached as Exhibit A, (3) a duly signed
Section 83(b) Election, only if the Employee, in his sole discretion, intends to
make such election, and (4) such other documents or agreements as the Company
may request.
Section 3. Restrictions. The Restricted Shares are being awarded to
Employee subject to the transfer and forfeiture restrictions set forth in
Sections 3(a) and (b) below (collectively, the "Restrictions").
- -5-
<PAGE> 6
(a) Transfer. Prior to the date that the Restricted Shares become Vested
Shares, Employee may not directly or indirectly, by operation of law or
otherwise, voluntarily or involuntarily, anticipate, alienate, attach, sell,
assign, pledge, encumber, charge or otherwise transfer all or any part of the
Restricted Shares without the written consent of the Company, which consent may
be withheld by the Company in its sole discretion.
(b) Forfeiture. Upon termination of Employee's employment with the
Company or any Subsidiary, all Restricted Shares which are not Vested Shares at
the effective time of such termination shall immediately thereafter be returned
to or canceled by the Company, and shall be deemed to have been forfeited by
Employee to the Company. Upon a forfeiture of Employee's Restricted Shares under
this paragraph 3(b), the Company will not be obligated to pay Employee any
consideration whatsoever for the forfeited Restricted Shares.
4. Lapse of Restrictions. The Restrictions shall lapse with respect to
the Restricted Shares awarded hereunder upon the Vesting Date of such Restricted
Shares. To the extent the Restrictions shall have lapsed under this Section 4
with respect to the Restricted Shares subject to this Award, those shares (the
"Vested Shares") will thereafter be free of the terms and conditions of this
Award; provided, however, that all Vested Shares shall at all times remain
subject to the terms and conditions set forth in the Restricted Stock Transfer
Agreement.
5. Adjustments. If there is any change in the capital stock of the
Company by reason of any stock dividend or distribution, stock split,
recapitalization, reorganization, merger, consolidation, split-up, combination
or exchange of shares, or any similar change affecting the capital stock of the
Company, which has occurred after the date hereof, the terms "Restricted Shares"
and "Vested Shares" shall include any shares, securities, or other property that
Employee
- -6-
<PAGE> 7
receives or becomes entitled to receive as a result of Employee's ownership of
the original Restricted Shares.
6. Issuance of Shares; Restrictive Legend. Stock certificates in respect
of the Restricted Shares shall be issued by the Company subject to Employee's
fulfillment of the conditions set forth in Section 2 hereof. Such certificates
shall be registered in Employee's name and shall be inscribed with a legend
evidencing the Restrictions, the Stockholders Agreement, and such additional
legend as may be required to comply with the Securities Act of 1933, as amended,
and other applicable federal or state securities laws.
7. Custody. All certificates representing the Restricted Shares (other
than Vested Shares) shall be deposited, together with stock powers executed by
Employee, in proper form for transfer, with the Company. The Company shall
provide Employee with a copy of a certificate representing the Restricted
Shares, which shall contain the legend set forth in Section 6. The Company is
hereby authorized to cause the transfer to come into its name of all
certificates representing the Restricted Shares which are forfeited to the
Company pursuant to Section 3 hereof. At the request of Employee, certificates
representing Vested Shares shall, subject to any applicable securities law
restrictions or any restrictions imposed by the Stockholders Agreement, be
delivered by the Company to Employee or Employee's personal representative.
Certificates representing shares that have become Vested Shares in accordance
with Section 4 shall be issued without the legend evidencing the Restrictions,
other than those transfer restrictions provided in the Stock Transfer Agreement.
- -7-
<PAGE> 8
8. Voting and Other Rights. Upon Employee's timely compliance with each
of the conditions set forth in Section 2 hereof, Employee shall have all of the
rights and status as a shareholder of the Company in respect of the Restricted
Shares, including the right to vote such shares and to receive dividends or
other distributions thereon.
9. Miscellaneous.
(a) Entire Agreement. Subject to the terms and conditions set forth in
the Plan, this Award contains the entire understanding and agreement between the
parties and cannot be amended, modified or supplemented in any respect, except
as permitted under the Plan or by a subsequent written agreement entered into by
both parties.
(b) Successors. This Award is binding upon and will inure to the benefit
of any successor to the Company whether by way of a merger, purchase,
consolidation or otherwise.
(c) Applicable Law. This Award shall be construed in accordance with and
governed by the substantive laws of the State of Illinois (regardless of the law
that might otherwise govern under applicable New York principles of conflicts of
laws).
[Signature page follows]
- -8-
<PAGE> 9
IN WITNESS WHEREOF, the parties have caused this Award to be effective
as of the day and year first above written.
TAYLOR CAPITAL GROUP, INC.
By:
---------------------------
Its: President
EMPLOYEE
- ------------------------------
- -9-
<PAGE> 1
Exhibit A
[Copy of Stock Transfer Agreement]
<PAGE> 2
STOCK TRANSFER AGREEMENT
FOR RESTRICTED STOCK AWARDS
THIS STOCK TRANSFER RESTRICTION AGREEMENT is made as of the 30th day of
September, 1997, by and between Taylor Capital Group, Inc., a Delaware
corporation (the "Company"), and (the "Stockholder");
WITNESSETH
WHEREAS, Stockholder is a Director of the Company or one of its
subsidiaries; and WHEREAS, Stockholder is or may become the owner of shares of
Common Stock of the Company (the "Shares") acquired following the Vesting Date
(as defined in the Restricted Stock Agreement (the "Restricted Stock Agreement")
between the Company and the Stockholder issued under the Taylor Capital Group,
Inc. 1997 Incentive Compensation Plan (the "Plan") of Restricted Shares granted
by the Company to Stockholder; and
WHEREAS, it is a condition to the grant of such Restricted Shares that
Stockholder and the Company enter into a stock transfer restriction agreement in
substantially the form hereof, and Stockholder agreed to enter into such an
agreement.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter contained, and in consideration of each of the parties
hereto entering into this Agreement, and intending to be legally bound hereby,
the parties agree as follows:
Page 1
<PAGE> 3
1. RESTRICTIONS ON TRANSFER. Except as otherwise provided in Sections 2,
3, or 10 hereof, or until this Agreement terminates under Section 9, the
Stockholder agrees not to sell, transfer, assign, give, pledge, or otherwise
dispose of or encumber any part or all of the Shares, whether voluntarily, by
operation of law, or otherwise without the prior written consent of the Board of
Directors of the Company. Any attempted transfer in violation of this Agreement
shall be considered null and void and the Stockholder shall continue to be
treated as the owner of the Shares for all purposes of this Agreement and shall
continue to be bound by all of the terms and provisions hereof.
2. STOCKHOLDER'S "PUT" OPTION.
(a) During the put period, as defined herein, the Stockholder shall have
an option to sell to the Company, a number of Vested Shares (as defined in the
Restricted Stock Agreement) limited to the number that is sufficient to satisfy
the Stockholder's Federal and State income tax liability that results from the
vesting of the Shares. The put period shall be the 60-day period commencing on
the Vesting Date of the Shares. The Stockholder's option to sell the Shares to
the Company shall be effective upon the Stockholder notifying the Company in
writing. Upon the exercise by the Stockholder of the option hereunder, the
Company shall immediately become obligated to pay to the Stockholder as the
purchase price for the Shares so acquired by the Company, the price established
in Section 4 hereof. The closing shall take place as soon as practicable after
the exercise by the Stockholder of its option hereunder, but in no event more
than sixty (60) days after the delivery by the Stockholder of its written notice
of option exercise.
Page 2
<PAGE> 4
(b) To the extent the Company does not exercise its option under Section
3(a) hereof within six months following the termination of the Stockholder's
employment with the Company or one of its subsidiaries or affiliates, the
Stockholder shall thereafter have an option to sell to the Company, subject to
the limitations set forth in this Section 2(b), all or a portion of the Shares
owned by the Stockholder at the time of such option exercise. Such option shall
be exercisable during the 60-day period after the expiration of the
above-referenced six-month time period, upon the Stockholder notifying the
Company, in writing, of Stockholder's exercise of the option hereunder. Upon the
exercise by the Stockholder of the option hereunder, the Company shall
immediately become obligated to pay to the Stockholder as the purchase price
paid for the Shares so acquired by the Company, the price established in Section
4 hereof. Payment of such purchase price shall be made pursuant to the terms
specified in Section 5 hereof. The closing shall take place as soon as
practicable after the exercise by the Stockholder of its option hereunder, but
in no event more than sixty (60) days after the delivery by the Stockholder of
its written notice of option exercise.
3. COMPANY'S PURCHASE OPTIONS.
(a) In the event that the Stockholder should cease to be a Director of
the Company or one of its subsidiaries or affiliates, then as a result the
Company shall have an option to purchase from the Stockholder all or any part of
the Shares owned by the Stockholder at the time of such option exercise. Such
option shall be exercisable, in whole or in part, at any time and from time to
time following the Stockholder's end of service as a Director under
circumstances described in the preceding sentence, upon the Company notifying
the Stockholder
Page 3
<PAGE> 5
in writing, of its exercise of the option hereunder and the number of Shares
with respect to which such option is being exercised. Upon the exercise by the
Company of its option hereunder, the Stockholder shall immediately become
obligated to sell and the Company shall immediately become obligated to pay to
the Stockholder as the purchase price for the Shares so acquired by the Company,
the price established in Section 4 hereof. Payment of such purchase price shall
be made pursuant to the terms specified in Section 5 hereof. The closing shall
take place as soon as practicable after the exercise by the Company of its
option hereunder, but in no event more than sixty (60) days after the delivery
by the Company of its written notice of option exercise.
(b) If all or any part of the Shares held by the Stockholder shall be
subject to an involuntary transfer to any person or entity whether by operation
of law or otherwise (such as, without limitation, to a trustee in bankruptcy, a
purchaser in any creditor's or court sale, or conservator), or a transfer in
accordance with any divorce proceeding (collectively a "Transfer Event"), then
as a result of such event, the Company shall have an option to purchase from the
transferee that number of Shares which are subject to the Transfer Event. Such
option shall be exercisable for a period of sixty (60) days after the Company's
receipt of actual notice of the Transfer Event, and shall be exercised by the
delivery of written notice of option exercise by the Company to the Stockholder
and the Stockholder's transferee. Upon the exercise by the Company of its option
hereunder, the Company shall become obligated to pay to the transferee, as the
purchase price for the Shares so acquired by the Company, the price established
in Section 4 hereof. Payment of such purchase price shall be on the terms set
forth in Section 5 hereof. The closing shall take place as soon as practicable
after the exercise by the Company of its option
Page 4
<PAGE> 6
hereunder, but in no event more than thirty (30) days after the exercise by the
Company of its option.
(c) The Company may, in its discretion, assign its right to purchase the
Shares under Sections 3(a) and (b) and its obligation to purchase the Shares
under Section 2 to the ESOP.
4. PURCHASE PRICE.
(a) Except as otherwise provided in Section 4(b), the purchase price for
each Share to be purchased by the Company pursuant to this Agreement from a
Stockholder or his estate, heirs or personal representative or a transferee
(collectively referred to as the "Seller") shall equal the Fair Market Value
determined as of the date of purchase. The "Fair Market Value" shall be based
upon the fair market value of the shares of stock of the Company held by the
Taylor Capital Group, Inc. 401(k)/Profit Sharing and Employee Stock Ownership
Trust (the "ESOP Valuation"), after applying a nonmarketable minority interest
discount to the ESOP Valuation, as determined as by an independent appraiser.
(b) Notwithstanding the above, if the purchase of Shares by the Company
under this Agreement is pursuant to Section 3(a) hereof following the
Stockholder's end of service as a Director for "cause" (as defined below), the
purchase price per Share shall be the lower of (i) the purchase price per share
originally paid by the Stockholder to acquire his or her Shares or (ii) the Fair
Market Value per share (determined in accordance with Section 4(a). For purposes
of this Agreement, "cause" shall mean release from duties as a Director by the
Company or one of its subsidiaries or affiliates because of (i) an act of fraud,
embezzlement or theft in connection with the Stockholder's duties or in the
course of the Stockholder's service period as Director, (ii)
Page 5
<PAGE> 7
unreasonable neglect or refusal by Stockholder to perform his or her duties
(other than any such failure resulting from Stockholder's incapacity due to
permanent disability), (iii) the engaging by Stockholder in willful, reckless,
or grossly negligent misconduct which is or may be materially injurious to the
Company or its subsidiaries or affiliates, or (iv) Stockholder's conviction of
or plea of guilty or nolo contendere to a felony. For purposes of this option,
the Stockholder will be considered permanently disabled if he or she is unable
to perform his or her stated duties with the Company by reason of illness,
accident or other incapacity and does not engage in any occupation or employment
for wage or profit for which the Stockholder is reasonably qualified by
education, training, or experience, as determined by the Company in its sole
discretion.
5. PAYMENT FOR SHARES. Shares purchased pursuant to the provisions of
this Agreement shall be paid for in full upon the closing date. Notwithstanding
the preceding sentence, in the event the aggregate consideration to be paid to
the Seller under this Agreement exceeds $10,000.00, if the Company so elects the
purchase price may be paid for in installments and shall be evidenced by a
promissory note dated the date of the closing of the purchase. Such note shall
be payable in three (3) equal annual installments, with the first installment to
be due and payable upon the closing date and the remaining installments to be
due and payable on the second through and including the third annual
anniversaries, respectively, of the closing, and shall provide for interest on
the principal outstanding from time to time at a fixed rate per annum equal to
the prime rate of interest announced by Cole Taylor as its prime rate as of the
closing, or the highest lawful rate which may be charged on this transaction,
whichever is less. The Company shall, in all events, have the right to prepay
the entire principal balance of any note delivered under this Section 5 at any
time or from time to time without a premium or a penalty.
Page 6
<PAGE> 8
Shares purchased pursuant to the provisions of this Agreement shall be paid for
in full upon the closing date.
6. DELIVERY OF STOCK CERTIFICATES AND OTHER DOCUMENTS UPON A REPURCHASE
OF SHARES. Simultaneously with the transfer of the purchase price by the Company
under Section 6 hereof (whether in cash or by delivery of a note) as a result of
a repurchase of Shares by the Company, the Seller of the Shares shall deliver to
the Company the certificates representing the Shares being sold, properly
endorsed for transfer, together with any other assignments and documents as may
be necessary to transfer title to the Shares.
7. NOTICE OF RESTRICTIONS. The certificates representing the Shares
affected by this Agreement shall be inscribed with the following legend:
"The shares of stock represented by this certificate are subject to, and
are transferable only in compliance with, the terms and conditions of a
certain Stock Transfer Agreement dated February 9, 1998 between the
registered holder of these shares and Taylor Capital Group, Inc., which
Agreement is on file with the Secretary of Taylor Capital Group, Inc.,
and the holder hereof accepts and holds this certificate subject to and
with notice of all of the terms, conditions and provisions of said
Agreement and agrees to be bound thereby."
8. DEPOSIT OF CERTIFICATES. The certificates representing the Shares,
together with applicable stock powers duly executed by the Stockholder in blank,
shall be held by the Company subject to the terms of this Agreement. The Company
agrees to release and deliver to the Stockholder any such certificates when they
are no longer subject to the terms of this Agreement or in order to facilitate
any sale or other disposition thereof permitted hereunder.
9. PUBLIC COMPANY. If shares of Common Stock of the Company are sold to
the public pursuant to a registration statement filed under the Securities Act
of 1933, as amended,
Page 7
<PAGE> 9
or if shares of Common Stock of the Company are registered pursuant to Section
12 or Section 15 of the Securities Exchange Act of 1934, as amended, the Company
shall be deemed a "Public Company". If the Company becomes a Public Company at
any time hereafter, unless an event which gives rise to a purchase option or
obligation in favor of the Company has already occurred, the Shares held by the
Stockholder at the time the Company becomes a Public Company shall thereafter be
free of the terms of this Agreement and the rights, options or obligations under
Sections 1, 2, 3, and 10 hereof shall terminate.
10. CHANGE OF CONTROL OF THE COMPANY. Notwithstanding anything to the
contrary in this Agreement, if the Board of Directors of the Company and the
holders of a majority of the Company's outstanding shares of Common Stock
approve a sale of the Company that constitutes a Change of Control of the
Company (as defined below), the Company will give the Stockholder thirty (30)
days' notice of the proposed transaction. The Company will, at the Stockholder's
request given by him or her within five (5) days of the receipt of notice
required under the preceding sentence, cause the buyer also to offer to purchase
all, but not less than all, of the Shares held by the Stockholder and, upon the
request of the Company within such 5-day period, the Stockholder shall, upon the
request of the Company, be obligated to sell his or her Shares to the buyer, for
the same price and on the same terms and conditions as the buyer's purchase of
the shares of Common Stock from the majority shareholders of the Company. The
Stockholder further agrees to take all necessary and desirable actions in
connection with the consummation of a Change of Control of the Company. For
purposes of this Agreement, a "Change of Control of the Company" shall occur:
Page 8
<PAGE> 10
(i) upon the vote of the shareholders of the Company approving a merger
or consolidation in which the Company's shareholders immediately prior to
the effective time of the merger or consolidation will beneficially own
immediately after the effective time of the merger or consolidation
securities of the surviving or new corporation having less than 50% of the
"voting power" of the surviving or new corporation, including "voting power"
exercisable on a contingent or deferred basis as well as immediately
exercisable "voting power"; provided, however, that no such merger or
consolidation shall constitute a "change of control" in the event that
following such transaction the Taylor Family (as defined below) owns,
directly or indirectly, 30% or more of the combined "voting power" of the
surviving or new corporation's outstanding securities, excluding "voting
power" exercisable on a contingent or deferred basis.
(ii) upon the consummation of a sale, lease, exchange or other transfer
or disposition by the Company of all or substantially all of the assets of
the Company on a consolidated basis, provided, however, that the mortgage,
pledge or hypothecation of all or substantially all of the assets of the
Company on a consolidated basis, in connection with a bona fide financing
shall not constitute a Sale of the Company; or
(iii) when any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 of the Securities Exchange Act as in effect
on date hereof, but excluding (a) any Company sponsored employee benefit
plan and (b) any member of the Taylor Family), directly or indirectly, of
shares of Company stock such that the Taylor Family
Page 9
<PAGE> 11
owns less than 30% of the combined "voting power" of the Company's then
outstanding securities, excluding "voting power" exercisable on a contingent
or deferred basis.
For purposes of this Agreement, the Taylor Family means (i) Sidney J. Taylor and
Iris Taylor, (ii) a descendant of Sidney J. Taylor and Iris Taylor, (iii) any
estate, trust, guardianship or custodianship for the primary benefit of any
individual described in (i) or (ii) above, or (iv) a proprietorship,
partnership, limited liability company, or corporation controlled by and
substantially all the interest in which are owned, directly or indirectly, by
one or more individuals or entities described in (i), (ii), or (iii) above.
11. COMPANY'S OBLIGATION REGARDING CERTAIN RESTRICTED SHARES. In the
case of Restricted Shares that become Vested Shares (as defined in the
Restricted Stock Agreement) upon the Stockholder's death, any such shares of
common stock that become Vested Shares pursuant to the Restricted Stock
Agreement will be subjected to all of the terms and conditions of this
Agreement.
12. NOTICE. Any and all notices, designations, consents, offers,
acceptances or any other communication provided for herein shall be given in
writing and personally delivered or sent by United States certified mail, return
receipt requested, postage prepaid, which shall be addressed, in the case of the
Company, to its principal office in the State of Illinois, and in the case of
the Stockholder, to his or her last known address as reflected in the Company's
records. Notices sent by United States certified mail will be deemed received on
the second business day following mailing.
Page 10
<PAGE> 12
13. NECESSARY DOCUMENTS. The Stockholder and his or her administrators,
executors, heirs or personal representatives shall execute and deliver all
necessary documents required to carry out the terms of this Agreement.
14. GOVERNING LAW. This Agreement shall be subject to and governed by
the laws of the State of Illinois, irrespective of the fact that the Stockholder
is or may become a resident of a different state.
15. INVALID PROVISION. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provisions were omitted.
Page 11
<PAGE> 13
16. BINDING EFFECT. This Agreement shall be binding upon the Company,
Stockholder, and their respective heirs, legal representatives, executors,
administrators, successors and assigns. Any rights given or duties imposed upon
the estate of the Stockholder upon his or her death shall inure to the benefit
of and be binding upon the fiduciary of the decedent's estate in his or her
fiduciary capacity.
17. ENTIRE AGREEMENT.
(a) This Agreement constitutes the entire agreement among the parties
and contains all of the agreements among the parties with respect to the subject
matter hereof. This Agreement supersedes any and all other agreements or
understandings, either oral or written, among the parties hereto with respect to
the subject matter hereof. Notwithstanding anything to the contrary in this
Agreement whether expressed or implied, this Agreement shall only apply to
shares of stock of the Company acquired pursuant to the grant under the Plan,
including any additional shares received by Stockholder in connection with such
shares pursuant to stock dividends, stock splits, or similar transactions. This
Agreement shall not apply to any shares of capital stock of the Company which
the Stockholder owns and which were acquired other than pursuant to grants under
the Plan.
(b) No change or modification of this Agreement shall be valid unless
the same shall be in writing and signed by the Stockholder and the Company. No
waiver of any provision of this Agreement shall be valid unless it is in
writing.
[SIGNATURE PAGE FOLLOWS]
Page 12
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
TAYLOR CAPITAL GROUP, INC.
By
-----------------------------
Its: President
STOCKHOLDER
- -------------------------------
Page 13
<PAGE> 1
EXHIBIT 10.14
TAYLOR CAPITAL GROUP, INC.
1997 LONG-TERM INCENTIVE PLAN
1. PURPOSE. The Taylor Capital Group, Inc. Long Term Incentive Plan
(the "1997 LTIP"), is intended to provide incentives which will attract and
retain highly competent persons as officers and key employees of Taylor Capital
Group, Inc. ("Taylor Capital") and it's designated subsidiaries (collectively,
the "Company"), by providing them long-term opportunities for wealth
accumulation pursuant to the plan described related to cumulative long-term
performance.
2. PARTICIPANTS. Participants will consist of such officers and key
employees of the Company as the Compensation Committee of the Board of Directors
of Taylor Capital (the "Committee") in it's sole discretion determines to be
significantly responsible for the success and future growth and profitability of
the Company. Designation of a participant in any year shall not require the
Committee to designate such person to participate in any other year or, once
designated, to receive the same targeted level of participation as any other
participant or as in any other year. The Committee shall consider such factors
as it deems pertinent in selecting participants and in determining the amount,
type and terms and conditions of their respective Awards.
3. PERFORMANCE MEASUREMENT. On an annual basis, the performance
measurement(s) and the corresponding accrued contribution schedule/formula for
each Measurement Period (fiscal year of the company) will be reviewed and
approved by the Committee. This should occur by March 31 of each Measurement
Period. The accrued contribution schedule/formula for the 1997 Measurement
Period will be based upon the attached matrix (Appendix 1).
4. ANNUAL CONTRIBUTION. Annually, after taking into account the
provisions listed below, an accrued contribution will be made to the Plan. The
accrued contribution will be based upon the achievement of performance
measurement(s), as discussed in section 3.
4.1 The actual results of the established performance
measurement(s) in any given performance Measurement Period may result
in an accrued contribution to the Plan or an accrued reduction from the
Plan. As of 1/1/97, the beginning accrued balance under the 1997 LTIP
is $0 dollars.
4.2 All forfeited Account Balances, as described in section 7
herein, will be added to the accrued contribution amount for the
Measurement Period in which they are forfeited.
5. PARTICIPANT ACCOUNTING Each participant will be awarded a number of units
("Plan Units") which represent the participant's interest in the 1997 LTIP.
5.1 The number of units awarded to an individual will
typically not change from year to year. With the approval of the TCG
Compensation Committee, additional units can be issued to current and
new participants.
<PAGE> 2
TAYLOR CAPITAL GROUP, INC.
1997 LONG-TERM INCENTIVE PLAN
5.2 Plan Units will be the basis for the annual allocation of
the accrued contribution made to the Plan, as provided in section 4
above. At the end of each Measurement Period and after the completion
of the calculations outlined in section 4, the total accrued
contribution will be used to calculate the change in Plan Unit value
for the Measurement Period.
(a) The change in Plan Unit value of the annual
accrued contribution will be calculated as follows:
Total Annual Accrued Contribution / Total Plan Units
(b) Persons who become participants and receive Plan
Units during a Measurement Period will have their Plan Units
included in the calculation of the change in Plan Unit value
for the accrued contribution only if they enter the plan on or
before September 30 of the Measurement Period. Participant
Plan Units included in the calculation will be pro-rata based
on months of participation.
(c) Except as noted in 5.2 (d) below, participants
must be an active employee of the Company as of December 31 of
the measurement year to have their Plan Units included in the
calculation of the change in Plan Unit value for accrued
contribution.
(d) Participants who retire, become disabled or die
during any Measurement Period will have their Plan Units
included in the calculation of the change in Plan Unit value
for the accrued contribution for the Measurement Period in
which the event occurs. Participant Plan Units included in the
calculation will be pro-rata based on months of participation.
5.3 Each participant will have an Account Balance which will
be updated annually. The Account Balance will be updated after the
accrued contribution amount is calculated, per section 4, and after the
calculation of the change in Plan Unit value for is performed per
section 5.2.
(a) If the accrued contribution results in a Plan
Unit value increase, the participant's Plan Units will be
multiplied by the dollar change in Plan Unit value and the
resulting amount will be added to the participant's Account
Balance.
(b) If the accrued contribution results in a in a
Plan Unit value decrease, participant's Plan Units will be
multiplied by the dollar change in Plan Unit value and the
resulting amount will be subtracted from the participant's
Account Balance. A participant's Account Balance can be
negative.
2
<PAGE> 3
TAYLOR CAPITAL GROUP, INC.
1997 LONG-TERM INCENTIVE PLAN
(c) In order to have his/her Account Balance updated,
a participant must satisfy the same rules as discussed in
section 5.2 (b), (c), & (d), regarding the Plan Unit value
calculation.
6. DISTRIBUTIONS. Distributions will be processed by March 31 of each
year (i.e. March 31, 2000 for the 1999 Measurement Period). Distributions will
be processed in a manner described below.
6.1 Payments made will be 30% of the participant's Account
Balance after subtracting all previous distributions.
6.2 Distributions will begin after the participant is has been
a Plan participant for three (3) Measurement Periods.
6.3 Distributions will be not be processed if the value of the
participant's Account Balance, including changes as described section 4
and 5, is less than $1,000 as of the end of the Measurement Period.
7. PARTICIPANT TERMINATION. A participant who terminates employment or
is terminated by the Company will forfeit all Account Balances except as
outlined in 7.1 and 7.2 below.
7.1 In the event of the participant's termination of
employment with the Company due to retirement at age 65 or older,
permanent disability (as defined below), or death, at any time
following the effective date of the 1997 LTIP, 100% of Account Balances
outstanding on December 31 of the year in which such event occurs,
after application of provisions in section 4 and 5, shall be paid at
the subsequent and normal annual payment date as outlined in section 6
herein.
"Permanent Disability" shall mean Employee's inability to
perform his or her stated duties with the Company by reason of illness,
accident or other incapacity and inability to engage in any occupation
or employment for wage or profit for which he or she is reasonably
qualified by education, training, or experience, as determined by the
Company in its sole discretion.
7.2 In the event of the participant's termination of
employment with the Company due to a position elimination, the
participant will receive 0% of Account Balance value if termination
occurs in the first year of plan participation, 25% of Account Balance
value if termination occurs in the second year of plan participation,
50% of Account Balance value balances if termination occurs in the
third year of plan participation and 75% of Account Balance value if
termination occurs in the fourth year of plan participation or
thereafter. Payments will be based on Account Balance value outstanding
on December 31 of the year in which such event occurs and shall be paid
at the subsequent and normal annual payment date as established by the
Committee.
3
<PAGE> 4
TAYLOR CAPITAL GROUP, INC.
1997 LONG-TERM INCENTIVE PLAN
8. EARNINGS ON ACCRUED FUNDS. Account Balances will be credited with
interest using an interest rate index. The interest rate credited is the
preceding calendar year average composite yield on Corporate Bonds, an index
published by Moody's Investors Service. Earnings will be accrued at the end of
the fourth year of participation. The rate of return for this accrual will be
the average composite yield on Corporate Bonds for the calendar year (i.e. the
rate for the year 2000 for accrued earnings for the same year).
The rate of return will be applied to Account Balances outstanding at
the end of the applicable Measurement Period, including allocated changes, as
outlined in section 4 and 5, for the period then ended.
9. CHANGE OF CONTROL. In the event of a change of control, 100% of
Account Balances, as of the date of the event, will be paid to participants
within 30 days thereof. "Change of Control" shall mean, and be deemed to have
occurred, on the date of the first to occur of any of the following:
(i) upon the vote of the shareholders of the Company approving
a merger or consolidation in which the Company's shareholders
immediately prior to the effective time of the merger or consolidation
will beneficially own immediately after the effective time of the
merger or consolidation securities of the surviving or new corporation
having less than 50% of the "voting power" of the surviving or new
corporation, including "voting power" exercisable on a contingent or
deferred basis as well as immediately exercisable "voting power";
provided, however, that no such merger or consolidation shall
constitute a "change of control" in the event that following such
transaction the Taylor Family (as defined below) owns, directly or
indirectly, 30% or more of the combined "voting power" of the surviving
or new corporation's outstanding securities, excluding "voting power"
exercisable on a contingent or deferred basis.
(ii) upon the consummation of a sale, lease, exchange or other
transfer or disposition by the Company of all or substantially all of
the assets of the Company on a consolidated basis, provided, however,
that the mortgage, pledge or hypothecation of all or substantially all
of the assets of the Company on a consolidated basis, in connection
with a bona fide financing shall not constitute a Sale of the Company;
or
(iii) when any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 of the Securities
Exchange Act as in effect on date hereof, but excluding (a) any Company
sponsored employee benefit plan and (b) any member of the Taylor
Family), directly or indirectly, of shares of Company stock such that
the Taylor Family owns less than 30% of the combined "voting power" of
the Company's then outstanding securities, excluding "voting power"
exercisable on a contingent or deferred basis.
4
<PAGE> 5
TAYLOR CAPITAL GROUP, INC.
1997 LONG-TERM INCENTIVE PLAN
For purposes of this Agreement, the Taylor Family means (i) Sidney J. Taylor and
Iris Taylor, (ii) a descendant of Sidney J. Taylor and Iris Taylor, (iii) any
estate, trust, guardianship or custodianship for the primary benefit of any
individual described in (i) or (ii) above, or (iv) a proprietorship,
partnership, limited liability company, or corporation controlled by and
substantially all the interest in which are owned, directly or indirectly, by
one or more individuals or entities described in (i), (ii), or (iii) above.
10. OTHER PROVISIONS. Awards under the Plan may also be subject to such
other provisions (whether or not applicable to the Award granted to any other
participant) as the Committee determines appropriate. The participant shall have
no rights to any accrued Account Balances outside of the provisions of this
plan.
11. TENURE. A participant's right, if any, to continue to serve the
Company as an officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a participant under the 1997
LTIP, nor shall this 1997 LTIP in any way interfere with the right of the
Company, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such employment or to increase or decrease
the compensation of the participant from the rate in existence at the time of
the grant of an Award.
12. ADMINISTRATION. The 1997 LTIP will be administered by the Taylor
Capital Group, Inc. Compensation Committee. The Committee is authorized,
subject to the provisions of the 1997 Incentive Compensation Plan and the 1997
LTIP, to establish such rules and regulations as it deems necessary for the
proper administration of the 1997 LTIP and to make such determinations and
interpretations and to take such action in connection with the 1997 LTIP and any
Awards granted hereunder as it deems necessary or advisable. All determinations
and interpretations made by the Committee shall be binding and conclusive on all
participants and their legal representatives. No member of the Board, no member
of the Committee and no employee of the Company shall be liable for any act or
failure to act hereunder, by any other member or employee or by any agent to
whom duties in connection with the administration of this 1997 LTIP have been
delegated or, except in circumstances involving his or her bad faith, gross
negligence or fraud, for any act or failure to act by such member of the Board
or employee.
13. AMENDMENT AND TERMINATION. The 1997 LTIP is intended to continue
until terminated by the TCG Compensation Committee. The TCG Compensation
Committee may amend the 1997 LTIP from time to time or terminate the Plan at any
time. Upon termination, Account Balances may continue to be distributed as
outlined in section 7 or, at the discretion of the Company, be paid in a lump
sum at an earlier date.
14. GOVERNING LAW. This 1997 LTIP and actions taken in connection
herewith shall be governed and construed in accordance with the laws of the
State of Illinois (regardless of the law that might otherwise govern under
applicable Illinois principles of conflict of laws).
15. APPROVAL. The 1997 LTIP was adopted by the Taylor Capital Group,
Inc. Compensation Committee on December 8, 1997.1997 LTIP Contribution Matrix
<PAGE> 6
TAYLOR CAPITAL GROUP, INC.
1997 LONG-TERM INCENTIVE PLAN
APPENDIX 1
1997 LTIP CONTRIBUTION MATRIX
For the 1997 Measurement Period
<TABLE>
<CAPTION>
-1.00 1.00 2.00 3.00 4.00 5.00 6.00
------- ------- ------ ------ ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (000) $10,956 $12,521 $14,086 $15,651 $17,217 $18,782 $20,347
Percent to Pool -2.85% 0.00% 2.22% 3.75% 5.45% 6.66% 7.68%
LTIP Contribution ($313) $0 $313 $625 $938 $1,250 $1,563
(000)
Estimated Change $-4 to $-6 $-1 to $1 $4 to $6 $9 to $11 $14 to $16 $18 to $22 $23 to $27
in Unit Value
</TABLE>
NOTES:
20% of any amount of Net Income in excess of the numbers noted in each column
will be added to the contribution from the prior column. For example; NI of
$16,000,000 will result in a $695,000 contribution ($625,000 at column three
plus 20% of $349,000, which is the amount of NI above $15,651,000 )
<PAGE> 1
EXHIBIT 10.15
SERVICING RIGHTS PURCHASE AND SALE AGREEMENT
SERVICING RIGHTS PURCHASE AND SALE AGREEMENT, dated the 30th day of
January, 1998 (the "Agreement"), by and between FIRST NATIONWIDE MORTGAGE
CORPORATION (the "Purchaser") and COLE TAYLOR BANK (the "Seller").
W1TNESSETH:
WHEREAS, Seller owns the right to service certain one-to-four family
residential mortgage loans with an aggregate outstanding principal balance, as
of October 31, 1997, of approximately $310,000,000, each of which loans is
identified on Exhibit A attached hereto (the "Mortgage Loans");
WHEREAS, on the terms and subject to the conditions set forth herein,
Seller desires to sell, transfer and assign to Purchaser all of Seller's right,
title and interest to service the Mortgage Loans (the "Servicing Rights"), and
Purchaser desires to purchase and assume all right, title and interest in and
to the Servicing Rights.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and upon the terms and subject to
the conditions set forth herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms shall have
the meanings specified below.
"Advances": The moneys that have been advanced by Seller from its funds in
connection with its servicing of the Mortgage Loans in accordance with the
Applicable Requirements (including, without limitation, advances for principal,
interest, taxes, ground rents, assessments, insurance premiums and other costs,
fees and expenses pertaining to the acquisition of title to and preservation
and repair of Mortgaged Properties) and for which Seller has a right of
reimbursement from Mortgagors, Agencies, Insurers, Investors or otherwise.
"Agencies": FHLMC, FNMA, IHDA, FHA, VA and State Agencies, as applicable.
"Agreement": This Servicing Rights Purchase and Sale Agreement, including
all amendments hereof and supplements hereto, and all Exhibits and Schedules
attached hereto or delivered pursuant hereto.
"Ancillary Fees": Charges for late Mortgage Loan Payments, charges for
dishonored checks, pay-off fees, assumption fees, commissions and
administrative fees on insurance, all income earned or that could be earned in
connection with the solicitation of Mortgagors, and similar fees and charges
collected from or assessed against the Mortgagor, other than those charges
payable to an Agency or Investor under the terms of the Servicing Agreements.
1
<PAGE> 2
"Applicable Percentage": One hundred thirty-eight basis points (1.38%).
"Applicable Requirements": As of the time of reference, (i) all
contractual obligations of Seller and any Originators or Prior Services with
respect to the Servicing Rights, including without limitation those contractual
obligations contained in the Servicing Agreements, in any agreement with any
Agency, Insurer, Investor or other Person or in the Mortgage Loan Documents for
which Seller, or any Originator or Prior Servicer, is responsible or at any
time was responsible; (ii) all federal, state and local laws, statutes, rules,
regulations and ordinances applicable to Seller, any Originators or Prior
Servicers, or to the Servicing Rights or the origination, purchase, sale,
enforcement and insuring or guaranty of, or filing of claims in connection
with, the Mortgage Loans, including without limitation the applicable
requirements and guidelines of any Agency, Investor or Insurer, or any other
governmental agency, board, commission, instrumentality or other governmental
or quasi-governmental body or office; (iii) all other judicial and
administrative judgments, orders, stipulations, awards, writs and injunctions
applicable to Seller, any Originators or Prior Servicers, the Servicing Rights
or the Mortgage Loans; and (iv) all Investor and Agency guides, manuals,
handbooks, bulletins, circulars, announcements, issuances, releases, letters,
correspondence and other instructions applicable to the Servicing Rights.
"Assignments of Mortgage Instruments": A written instrument that, when
recorded in the appropriate office of the local jurisdiction in which the
related Mortgaged Property is located, will reflect the transfer of the
Mortgage Instrument identified therein from the transferor to the transferee
named therein.
"Bankruptcy Loan": A Mortgage Loan with respect to which, as of the Sale
Date, the Mortgagor thereof has sought relief under or has otherwise been
subjected to the federal bankruptcy laws (including, without limitation,
chapter 7) or any other similar federal or state laws of general application
for the relief of debtors, through the institution of appropriate proceedings,
and such proceedings are continuing.
"Business Day": Any day other than a Saturday, Sunday, legal holiday or
other day on which banking institutions in the State of Maryland are required
by law or executive order to be closed.
"Buydown": The waiver by Purchaser (or by Seller during the Interim
Period) of a portion of the indebtedness of a Mortgage Loan, which can take the
form of a reduction of the principal, a credit to escrow or unapplied funds
accounts, the forgiveness of accrued interest or any combination of the
foregoing, and which causes the VA to pay off the remaining amount of the
indebtedness owed and acquire the Mortgaged Property.
"Buydown Loss": The portion, if any, of the indebtedness waived by
Purchaser (or by Seller during the Interim Period) in order to effect a Buydown.
"Claim": Any claim, demand or litigation related to the Mortgage Loans or
this Agreement.
"Custodial Accounts": The accounts in which Custodial Funds are deposited
and held by Servicer.
"Custodial Funds": All funds held by Seller with respect to the Mortgage
Loans, including, but not limited to, all principal and interest funds and any
other funds due Investors, buydown funds, funds for the payment of taxes,
assessments, insurance premiums, ground rents and similar charges, funds from
hazard insurance loss drafts and other mortgage escrow and impound amounts
(including interest
2
<PAGE> 3
accrued thereon for the benefit of the Mortgagors under the Mortgage Loans, if
required by law or contract) maintained by Seller relating to the Mortgage
Loans.
"Delinquent Loan": A Mortgage Loan that as of a specified date is ninety
(90) days or more past due. A Mortgage Loan is ninety (90) days or more past
due if a Mortgage Loan Payment due on the first day of a month is not paid by
the last calendar day of the second succeeding month.
"Effective Date": The date set forth in the introductory phrase of this
Agreement.
"Excluded Loan": Any Mortgage Loan that, as of the Sale Date, is a
Bankruptcy Loan, Delinquent Loan, Forbearance Loan, Foreclosure Loan or
Litigation Loan.
"Federal Funds Rate": The "high" interest rate for reserves traded among
commercial banks for overnight use in amounts of one million dollars ($1
million) or more, as reported by The Wall Street Journal under "Federal Funds"
rates as of the first Business Day of each month.
"FHA": The Federal Housing Administration of the United States Department
of Housing and Urban Development, or any successor thereto.
"FHLMC": The Federal Home Loan Mortgage Corporation, or any successor
thereto.
"FNMA": The Federal National Mortgage Association, or any successor
thereto.
"Forbearance Loan": A Mortgage Loan with respect to which, as of the Sale
Date, a written agreement is in effect pursuant to which the Mortgagor pays
less than the monthly payment provided for in the original Mortgage Loan
Documents.
"Foreclosure": The procedure pursuant to which a lienholder acquires title
to a Mortgaged Property in a foreclosure sale, or a sale under power of sale,
or other acquisition of title to the Mortgaged Property based upon a default by
the Mortgagor under the Mortgage Loan Documents, under the law of the state
wherein the Mortgaged Property is located.
"Foreclosure Loan": A Mortgage Loan with respect to which, as of the Sale
Date, the first action necessary to be taken to commence proceedings in
Foreclosure has been taken or may be taken under the terms of the applicable
Mortgage Loan Documents and Servicing Agreement at the election of the
mortgagee or Servicer.
"IHDA": The Illinois Housing Development Authority, or any successor
thereto.
"Insurer" or "Insurers": FHA, VA or any private mortgage insurer and any
insurer or guarantor under any standard hazard insurance policy, any federal
flood insurance policy, any title insurance policy, any earthquake insurance
policy or other insurance policy, and any successor thereto, with respect to
the Mortgage Loan or the Mortgaged Property.
"Interim Period": The period of time between the Sale Date and the
applicable Transfer Date.
"Interim Servicing Agreement": That certain Interim Servicing Agreement of
even date herewith by and between Seller and Purchaser and attached hereto as
Exhibit B.
"Investor" or "Investors": FHLMC, FNMA and/or IHDA, as applicable.
3
<PAGE> 4
"Investor Consent": The written consent of FHLMC, FNMA or IHDA to the
transfer of the applicable Servicing Rights from Seller to Purchaser, without
adverse modification to the rights of the Servicer with respect thereto.
"Litigation Loan": A Mortgage Loan with respect to which, as of the Sale
Date, a Claim is pending or threatened relating to the Mortgage Loan the
adverse outcome of which could have a material adverse effect on the Servicing
Rights to such Mortgage Loan.
"Loss" or "Losses": Any and all losses, damages, deficiencies, claims,
costs or expenses, including without limitation costs of investigation,
attorneys' fees and disbursements, and internal and administrative costs and
expenses.
"Mortgage Escrow Payments": The portion, if any, of the Mortgage Loan
Payment in connection with a Mortgage Loan that relates to funds for the
payment of taxes, assessments, insurance premiums, ground rents and similar
charges, and other mortgage escrow amounts.
"Mortgage File": Those documents (which, to the extent required by the
Applicable Requirements, shall include original documents) related to the
origination and servicing of the Mortgage Loans; the Mortgage Loan Documents
with respect to each Mortgage Loan; the related credit and closing packages;
all disclosures; all custodial documents; all documents required to be
delivered to Purchaser pursuant to the Servicing Transfer Instructions; and all
other files, books, records and documents necessary to (i) establish the
eligibility of the Mortgage Loans for insurance by an Insurer or sale to or
pooling by the Investor; (ii) service the Mortgage Loans in accordance with
Applicable Requirements; and (iii) otherwise comply with Applicable
Requirements regarding the Mortgage Loan documentation to be maintained by the
Servicer of the Mortgage Loans or its document custodian.
"Mortgage Instrument": Any deed of trust, security deed, mortgage,
security agreement or any other instrument which constitutes a first-lien on
real estate (or shares of stock in the case of cooperatives) securing payment
by a Mortgagor of a Mortgage Note.
"Mortgage Loan Documents": The Mortgage Instruments and Mortgage Notes.
"Mortgage Loan Payment": With respect to a Mortgage Loan, the amount of
each monthly installment on such Mortgage Loan, whether principal and interest
or interest alone or escrow or other payment, required or permitted to be paid
by the Mortgagor in accordance with the terms of the Mortgage Loan Documents.
"Mortgage Loans": The one-to-four family residential mortgage loans as to
which Seller is the owner of the Servicing Rights, detailed and included on
Exhibit A attached hereto. Mortgage Loans shall not include (i) any loan which
has been bought out of a Pool, or (ii) any real property owned by Seller
(whether for its own account or on behalf of an Investor, FHA or VA) as a
result of Foreclosure.
"Mortgage Note": The promissory note executed by a Mortgagor and secured
by a Mortgage Instrument evidencing the indebtedness of the Mortgagor under a
Mortgage Loan.
"Mortgaged Property": The one- to four-family residential real property
that is encumbered by a Mortgage Instrument, including all buildings and
fixtures thereon.
4
<PAGE> 5
"Mortgagor": Any obligor under a Mortgage Note and Mortgage Instrument.
No Bid": A delinquent Mortgage Loan with respect to which the VA has
notified Purchaser or Seller that the VA intends to exercise its option to pay
the amount guaranteed by the VA (and relinquish all rights with respect to the
Mortgaged Property to Purchaser or Seller, as the case may be).
"Originator": With respect to any Mortgage Loan, the Person(s) that
performed one or more of the following functions: (i) took the loan
application, (ii) processed the loan application, (iv) underwrote the loan
application, and/or (iv) closed or funded the Mortgage Loan.
"Parties": Seller and Purchaser.
"Person": An individual, a corporation, a partnership, a limited liability
company, a joint venture, a trust, an unincorporated association or
organization, a government body, agency or instrumentality or any other entity.
"Pool": One or more Mortgage Loans that have been aggregated pursuant to
the requirements of the applicable Investor, and have been pledged to secure
securities.
"Prior Servicer: Any Person that was a Servicer of any Mortgage Loan
before Seller became the Servicer of the Mortgage Loan.
"Purchase Price": The total amount to be paid by Purchaser pursuant to
Section 3.1 to acquire the Servicing Rights.
"Purchaser": As defined in the introductory phrase of this Agreement.
"Sale Date": January 30, 1998, the date on which Purchaser acquires all of
Seller's economic right, title and interest in and to the Servicing Rights.
"Seller": As defined in the introductory phrase of this Agreement.
"Servicer": The Person contractually obligated to administer the Servicing
Rights under the Servicing Agreements.
"Servicing Agreements": The contracts, and all applicable rules,
regulations, procedures, manuals and guidelines incorporated therein defining
the rights and obligations of the Investors and Servicer, with respect to the
servicing of the Mortgage Loans.
"Servicing Fee": The annual amount payable to Servicer under the
applicable Servicing Agreement related to a Mortgage Loan as consideration for
servicing the Mortgage Loan, expressed as a percentage.
"Servicing Rights": The rights and obligations of Servicer to administer,
collect the payments for the reduction of principal and application of
interest, collect payments on account of taxes and insurance, pay taxes and
insurance, remit collected payments, provide foreclosure services, provide full
escrow administration and any other obligations required by any Agency,
Investor or Insurer in, of, for or in connection with the Mortgage Loans
pursuant to the Servicing Agreements, together with the right to receive the
Servicing Fee and any Ancillary Fees arising from or connected to the Mortgage
Loans, and all rights, powers and privileges incident to any of the foregoing.
5
<PAGE> 6
"Servicing Transfer Instructions": The instructions, attached hereto as
Exhibit C, detailing the procedures pursuant to which Seller shall effect the
transfer of the Servicing Rights, the Advances, the Custodial Funds, the
Mortgage Files and the Servicing Agreements to Purchaser.
"State Agency": Any state or local agency with authority to (i) regulate
the business of Purchaser or Seller, including without limitation any state or
local agency with authority to determine the investment or servicing
requirements with regard to mortgage loans originated, purchased or serviced by
Purchaser or Seller, or (ii) originate, purchase or service mortgage loans, or
otherwise promote mortgage lending, including without limitation state and
local housing finance authorities.
"Trailing Documents": Those documents that are unavailable to Seller on
the applicable Transfer Date as a result of the transactions described herein
(but not as a result of the acts or omissions of Seller or any Originator or
Prior Servicer), such as recorded Mortgage Instruments, recorded Assignments of
Mortgage Instruments, government insurance certificates and title policies,
which have not yet been received back from the appropriate recording office or
Insurer.
"Transfer Date": The date on which, pursuant to the applicable Investor
Consent, Purchaser shall commence servicing, and acquire all of Seller's legal
right, title and interest in and to the applicable Servicing Rights.
"VA": The United States Department of Veterans Affairs or any successor
thereto.
1.2. General Interpretive Principles. For purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise
requires:
(a) Terms used in this Agreement have the meanings assigned to them in
this Agreement (as defined herein), and include the plural as well as the
singular, and the use of any gender herein shall be deemed to include the other
gender.
(b) Accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles.
(c) References herein to a "section," shall be to the specified section(s)
of this Agreement and shall include all subsections of such section(s).
(d) The words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provisions.
(e) Section headings and other similar headings are not to be considered
part of this Agreement, are solely for convenience of reference, and shall not
affect the meaning or interpretation of this Agreement or any of its
provisions.
(f) Each reference to any federal, state or local statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder.
ARTICLE II
SALE OF SERVICING RIGHTS AND RELATED MATTERS
6
<PAGE> 7
2.1 Items to be Sold. Transferred and Assigned. Upon the terms and subject
to the conditions of this Agreement, and subject to the Applicable
Requirements, Seller should on and as of the Sale Date, sell, transfer and
assign to Purchaser, and Purchaser shall purchase and assume from Seller, all
beneficial right, title, interest of Seller in and to (i) the Servicing Rights,
(ii) the Advances, (iii) the Custodial Funds and (iv) the Mortgage Files. On and
as of the applicable Transfer Date, Purchaser shall have the exclusive right to
receive all and to enter into arrangements that generate, Ancillary Fees with
respect to the Mortgage Loans.
2.2 Evidence of Sale. Prior to the applicable Transfer Date, Purchaser and
Seller shall execute and deliver the documents required by each Investor in
connection with the transfer of the Servicing Rights hereunder, in form and
substance reasonably satisfactory to Purchaser and Seller, and shall execute
and deliver such other instruments or documents as Purchaser shall reasonably
determine are necessary or appropriate to evidence the transactions
contemplated hereby.
2.3 Interim Servicing. Simultaneously with the execution of this Agreement,
Purchaser and Seller shall execute and deliver the Interim Servicing Agreement
between Purchaser and Seller, providing for the servicing of the Mortgage Loans
between the Sale Date and the applicable Transfer Date.
2.4 Servicing Transfer Instructions. In connection with the transfer of
the Servicing Rights from Seller to Purchaser pursuant to this Agreement,
Seller and Purchaser shall follow the Servicing Transfer Instructions.
ARTICLE III
PURCHASE PRICE AND RELATED MATTERS
3.1 Purchase Price. In consideration for the transfer and sale
contemplated herein of the Servicing Rights, Purchaser shall pay to Seller in
the manner, and subject to the adjustments, provided for in this Article III,
an amount equal to the Applicable Percentage multiplied by the aggregate
outstanding principal balance, as of the Sale Date, of the Mortgage Loans other
than Excluded Loans.
3.2 Verification of Purchase Price Items.
(a) Promptly following the Sale Date, but in no event after the date on
which Purchaser is required to make the initial payment of the Purchase Price
under Section 3.3(a), Seller shall provide Purchaser with a draft Schedule
3.2(a) that sets forth (i) the aggregate outstanding principal balance of all
Mortgage Loans relating to the Servicing Rights as of the Sale Date and the
aggregate outstanding principal balance of all Excluded Loans as of the Sale
Date, and (ii) each Mortgage Loan that as of the Sale Date was an Excluded
Loan, and Seller shall include appropriate supporting documentation with the
Schedule. Promptly following Purchaser's receipt of the draft Schedule 3.2(a),
but in no event after the date on which Purchaser is required to make the
initial payment of the Purchase Price under Section 3.3(a), the Parties shall
finalize such Schedule and append it hereto.
(b) Within five (5) days following each Transfer Date, Seller shall
prepare and provide Purchaser with a draft Schedule 3.2(b) that lists all
Mortgage Loans (i) for which a payoff check is received by Servicer from the
Sale Date to the Transfer Date and (ii) the principal balance of which was
included in the calculation of the Purchase Price, and Seller shall include
appropriate supporting
7
<PAGE> 8
documentation with such Schedule. Promptly following Purchaser's receipt of the
draft Schedule 3.2(b), the Parties shall finalize such Schedule and append it
hereto.
3.3 Payment of Purchase Price by Purchaser. The Purchase Price shall be
paid by Purchaser to Seller as follows:
(a) Sale Date Related Payment. Upon the finalization of Schedule 3.2(a) by
the Parties, Purchaser shall pay to Seller an amount equal to twenty percent
(20%) of the Purchase Price.
(b) Transfer Date Related Payments. By the fifth (5th) Business Day
following each applicable Transfer Date, subject to Purchaser's receipt of (i)
all Custodial Funds, and (ii) substantially all of the Mortgage Files, delivery
of which is in conformity with the Servicing Transfer Instructions and is
confirmed by Purchaser within a reasonable period of time following receipt,
Purchaser shall pay to Seller an amount equal to ninety percent (90%) of the
applicable portion of the Purchase Price less the applicable portion of the
amount paid to Seller under Section 3.3(a) above.
(c) Final Payment. Thirty (30) days following the final Transfer Date,
subject to (i) Purchaser's receipt of all Custodial Funds and Mortgage Files,
delivery of which is in conformity with the Servicing Transfer Instructions and
is confirmed by Purchaser within a reasonable period of time following receipt,
and (ii) Seller's fulfillment of all of its other obligations hereunder,
Purchaser shall pay to Seller the remaining unpaid portion of the Purchase
Price.
3.4 Escrows and Advances; Reconciliation. Unless otherwise set forth in
the Servicing Transfer Instructions, within three (3) Business Days following
each Transfer Date, (a) Seller shall remit and deliver to Purchaser, or
Purchaser's designee, the Custodial Funds and all other funds and collections
held by Seller in connection with the Mortgage Loans; and (b) Purchaser shall
remit to Seller an amount equal to the then outstanding Advances related to the
Mortgage Loans the Servicing Rights to which are being transferred on such
date. Unless otherwise set forth in the Servicing Transfer Instructions, (a)
within three (3) Business Days following the Sale Date, Seller shall provide to
Purchaser a reconciliation, as of the Sale Date, of the Custodial Funds and
Advances held as of such date; and (b) within three (3) Business Days following
each Transfer Date, Seller shall provide to Purchaser a reconciliation, as of
the respective Transfer Date, of the Custodial Funds and Advances held as of
such date. In the event of an error in the amount of Custodial Funds
transferred to Purchaser, or in the amount remitted by Purchaser to Seller for
the Advances in connection with a Transfer Date, Seller shall promptly remit
the appropriate amount to Purchaser or Purchaser shall promptly remit the
appropriate amount to Seller, as applicable. Purchaser and Seller shall perform
all of their respective obligations under this section 3.4 in accordance with
the Servicing Transfer Instructions.
3.5 Certain Adjustments and Refunds.
3.5.1 Prepayments. Upon the finalization by the Parties of Schedule
3.2(b) (regarding certain Mortgage Loans that prepay in full), Seller shall
remit to Purchaser an amount equal to the product of (i) the outstanding
principal balance, as of the Sale Date, of such prepaid Mortgage Loans required
to be listed in Schedule 3.2(b) and (ii) the Applicable Percentage. Seller
shall be obligated to pay to Purchaser the amount required under this Section
3.5.1 and Purchaser shall have no obligation to offset such amount against any
payment Purchaser is required to make to Seller under section 3.3.
8
<PAGE> 9
3.5.2 NSF Payments. If Purchaser discovers that the payment on any one
(1) or more of the Mortgage Loans for the last month preceding the Sale Date
was made by the Mortgagor by an "NSF" check, and that the return of such "NSF"
check causes such Mortgage Loan to be ninety (90) days or more past due as of
the Sale Date, such Mortgage Loan shall be treated as a Delinquent Loan as
defined herein. In each case, the Purchase Price shall be adjusted accordingly
and Seller shall promptly reimburse Purchaser.
3.5.3 Adjustments. If subsequent to the payment of any portion of the
Purchase Price, transfer of the Custodial Funds, payment for the Advances, or
payment or transfer of any other amounts due under this Agreement to either
Party, the Purchase Price or such other amounts are found to be in error,
within five (5) Business Days after the receipt of information sufficient to
provide notice that payment is due, the Party benefiting from the error shall
pay an amount sufficient to correct and reconcile the Purchase Price, Custodial
Fund, Advances or such other amounts and shall provide a reconciliation
statement and such other documentation sufficient to satisfy the other Party
(in such other Party's exercise of its reasonable discretion), concerning the
accuracy of such reconciliation.
3.6 Form of Payment to be Made. Unless otherwise agreed to by the Parties,
all payments to be made by a Party to another Party, or such other Party's
designee, shall be made by wiring immediately available funds to the accounts
designated by the Party receiving the payment.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
As an inducement to Purchaser to enter into this Agreement and to
consummate the transactions contemplated hereby, Seller represents and warrants
as follows (it being understood that, unless otherwise expressly provided
herein, each such representation and warranty is made to Purchaser as of the
Effective Date and the Sale Date, and all of the representations and warranties
of Seller contained herein shall survive the Sale Date and Transfer Date as
provided in Section 11.4):
4.1 Due Organization and Good Standing. Seller is a bank, duly organized,
validly existing, and in good standing under the laws of the United States.
Seller has, and at all relevant times has had, in full force and effect
(without notice of possible suspension, revocation or impairment) all required
qualifications, permits, approvals, licenses, and registrations to conduct all
activities in all states in which its activities with respect to the Mortgage
Loans or the Servicing Rights require it to be qualified or licensed, except
where the failure of Seller to possess such qualifications, licenses, permits,
approvals and registrations would not have a material adverse effect on the
ability of Servicer to enforce any Mortgage Loan or to realize the full
benefits of any Servicing Rights.
4.2 Authority and Capacity. Seller has all requisite corporate power,
authority and capacity to carry on its business as it is now being conducted,
to execute and deliver this Agreement and the Interim Servicing Agreement and
to perform all of its obligations hereunder and thereunder.
4.3 Effective Agreement. The execution, delivery and performance of this
Agreement and the Interim Servicing Agreement by Seller and consummation of the
transactions contemplated hereby and thereby have been or will be duly and
validly authorized by all necessary corporate or other action; this Agreement
and the Interim Servicing Agreement have been duly and validly executed and
delivered by Seller, and this Agreement and the Interim Servicing Agreement are
valid and legally
9
<PAGE> 10
binding agreements of Seller enforceable against Seller in accordance with
their respective terms, subject to bankruptcy, insolvency and similar laws
affecting generally the enforcement of creditors rights and the discretion of a
court to grant specific performance.
4.4 No Conflict. Neither the execution and delivery of this Agreement and
the Interim Servicing Agreement nor the consummation of the transactions
contemplated hereby and thereby, nor compliance with their respective terms and
conditions, shall (a) violate, conflict with, result in the breach of,
constitute a default under, be prohibited by, or require any additional
approval (except as shall have been obtained or made as of the Sale Date) under
any of the terms, conditions or provisions of (i) organizational documents of
Seller or (ii) of any mortgage, indenture, deed of trust, loan or credit
agreement or other agreement or instrument to which Seller is now a party or by
which Seller is bound, or any law, ordinance, rule or regulation of any
governmental authority applicable to Seller, or any order, judgment or decree
of any court or governmental authority applicable to Seller, except as would
not have a material adverse effect on the Mortgage Loans, taken as a whole, or
the value of the Servicing Rights, taken as a whole; or (b) result in the
creation or imposition of any lien, charge or encumbrance of any nature upon,
the Servicing Rights or any of the Mortgage Loans.
4.5 Consents. Approvals and Compliance. Except for the Investor Consents,
there is no requirement applicable to Seller to make any filing with, or to
obtain any permit, authorization, consent or approval of, any Person as a
condition to the lawful performance by Seller of its obligations hereunder.
Seller is approved and in good standing with each applicable Agency, Investor
and Insurer. Seller has complied with, and is not in default under, any law,
ordinance, requirement, regulation, rule, or order applicable to its business
or properties, the violation of which might materially and adversely affect the
operations or financial condition of Seller or its ability to perform its
obligations hereunder.
4.6 Material Adverse Change. The transfer, assignment and conveyance of
the Servicing Rights by Seller pursuant to this Agreement is not subject to the
Hart-Scott-Rodino Antitrust Improvements Act, or the bulk transfer or any
similar statutory provisions in effect in any jurisdiction, the laws of which
apply to such transfer, assignment and conveyance. Seller shall continue to act
as a Servicer of mortgage loans following the Transfer Dates. There has been no
material adverse change in the Servicing Rights or their value since October
31, 1997.
4.7 Insurance. Error and omissions and fidelity insurance coverage, in
amounts as required by the Applicable Requirements, is in effect with respect
to Seller and will be maintained until the transactions contemplated by this
Agreement and the Interim Servicing Agreement have been consummated in
accordance with terms hereof and thereof
4.8 Litigation. There is no litigation, claim, demand, proceeding or
governmental investigation existing or pending, or any order, injunction or
decree outstanding, against or relating to Seller that could materially
adversely affect the Servicing Rights being purchased by Purchaser hereunder,
the Mortgage Loans, the performance by Seller of its obligations (or by
Purchaser of its future obligations) under the Servicing Agreements or the
performance by Seller of its obligations under this Agreement.
4.9 Facts and Omissions. No representation, warranty or written statement
made by Seller in this Agreement, in any Exhibit or Schedule to this Agreement,
in the Interim Servicing Agreement, in the Magnetic Media or in any data tape
provided by Seller to Purchaser hereunder, contains or will contain any
material misstatement of fact or will omit to state a material Act necessary in
order to make the statements in light of the circumstances in which they are
made not misleading.
10
<PAGE> 11
4.10 Mortgage Loans and Servicing Rights.
4.10.1 General Compliance. Each Mortgage Loan and Servicing Rights
conforms in all material respects to the Applicable Requirements, and each
Mortgage Loan was eligible for sale to, insurance by, or pooling to back
securities issued or guaranteed by, or participation certificates issued by,
the applicable Agency, Investor or Insurer upon such sale, issuance of
insurance or pooling. There has been no improper act or omission or alleged
improper act or omission or error by Seller or any Originator or Prior Servicer
with respect to the origination underwriting or servicing of any of the
Mortgage Loans. Each Mortgage Loan has been originated, underwritten and
serviced in compliance with all Applicable Requirements. Seller is not otherwise
in default with respect to Sellers obligations under the Servicing Agreements
or Applicable Requirements.
4.10.2 Enforceability of Mortgage Loan. Each Mortgage Loan is evidenced
by a note and is duly secured by a mortgage or deed of trust, in each case, on
such forms and with such terms as comply with all Applicable Requirements. Each
Mortgage Note and the related Mortgage Instrument is genuine and each is the
legal, valid and binding obligation of the maker thereof, enforceable in
accordance with its terms, subject to bankruptcy, insolvency and similar laws
affecting generally the enforcement of creditors' rights and the discretion of
a court to grant specific performance. All parties to the Mortgage Note and the
Mortgage Instrument had legal capacity to execute the Mortgage Note and the
Mortgage Instrument and each Mortgage Note and Mortgage Instrument has been
duly and properly executed by such parties. The Mortgage Loan is not subject to
any rights of rescission set-off, counterclaim or defense, including the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage Instrument, or the exercise of any right thereunder,
render either the Mortgage Note or the Mortgage Instrument unenforceable by the
Seller or Purchaser, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim, or defense has been
asserted with respect thereto.
4.10.3 Disbursement: Future Advances. The full original principal
amount of each Mortgage Loan (net of any discounts) has been fully advanced or
disbursed to the Mortgagor named therein, there is no requirement for future
advances and any and all requirements as to completion of any on-site or
off-site improvements and as to disbursements of any escrow funds therefor have
been satisfied. AD costs, fees and expenses incurred in making, closing or
recording the Mortgage Loan were paid. There is no obligation on the part of
Seller, or of any other party, to make supplemental payments in addition to
those made by the Mortgagor. Any future advances that were made in connection
with a Mortgage Loan have been consolidated with the outstanding principal
amount secured by the Mortgage Instrument, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment term. The lien
of the Mortgage Instrument securing the consolidated principal amount is
expressly insured as having first lien priority by a title insurance policy
meeting the standards set forth in section 4.10.5. The consolidated principal
amount does not exceed the original principal amount of the Mortgage Loan.
4.10.4 Priority of Lien. Each Mortgage Instrument has been duly
acknowledged and recorded or sent for recordation and is a valid and subsisting
first lien, and the Mortgaged Property is free and clear of all encumbrances
and liens having priority over the lien of the Mortgage Instruments, except for
(i) liens for real estate taxes and special assessments not yet due and
payable, (ii) covenants, conditions and restrictions, rights of way, easements
and other matters of the public record as of the date of recording, acceptable
to mortgage lending institutions generally and (iii) other matters to which
like properties are commonly subject which do not interfere with the benefits
of the security intended to be provided by the Mortgage Instrument or the use,
enjoyment, value or marketability of the related
11
<PAGE> 12
Mortgaged Property. All tax identifications and property descriptions in the
Mortgage Instrument are legally sufficient.
4.10.5 Title Insurance. . Except for any Mortgage Loan secured by a
Mortgage Property located in Iowa, as to which an opinion of counsel of the
type customarily rendered in such state in lieu of title insurance has been
received, a valid and enforceable title policy, or a commitment to issue such a
policy (with respect to which a title policy will be received to replace such
commitment), has been issued and is in full force and effect for such Mortgage
Loan in the amount not less that the original principal amount of such Mortgage
Loan, which title policy insures that the related Mortgage Instrument is a
valid first Lien on the Mortgage Property therein described and that the
Mortgaged Property is free and clear of all Liens having priority over the Lien
of the Mortgage Instrument, subject to the exceptions set forth in this
Section.
4.10.6 No Default/No Waiver. There is no default, breach, violation or
event of acceleration existing under any Mortgage Loan, and no event has
occurred that, with the passage of time or with notice and the expiration of
any grace or cure period, would constitute a default, breach, violation or
event of acceleration. Except as permitted or required by the applicable
Investor or Insurer, neither Seller nor any Originator or Prior Servicer has
(i) agreed to any material modification, extension or forbearance in connection
with a Mortgage Note or Mortgage Instrument, (ii) released, satisfied or
canceled any Mortgage Note or Mortgage Argument in whole or in part, (iii)
subordinated any Mortgage Instrument in whole or in part, or (iv) released any
Mortgaged Property in whole or in part from the lien of any Mortgage
Instrument.
4.10.7 Application of Funds. All payments received by Seller with
respect to any Mortgage Loan have been remitted and properly accounted for as
required by Applicable Requirements.
4.10.8 Mortgage Insurance. Except as set forth in Schedule 4.10.8, each
Mortgage Loan that has FHA insurance is identified as an FHA Loan on the
Magnetic Media and, is, or is eligible in the normal course of business to be,
insured pursuant to the National Housing Act. Except as set forth in Schedule
4.10.8, each Mortgage Loan that is identified as a VA Loan on the Magnetic
Media is guaranteed by the VA and is, or is eligible in the normal course of
business to be, guaranteed under the provisions of Chapter 37 of Title 38 of
the United States Code. Except as set forth in Schedule 4.10.8, if required by
FNMA or FHLMC, each conforming conventional loan is, or prior to the Sale Date
will be, insured as to payment defaults by a policy of primary mortgage
guaranty insurance in the amount required, and by an Insurer approved, by FNMA
or FHLMC, and all provisions of such primary mortgage guaranty insurance policy
have been and are being complied with, such policy is in full force and effect
and all premiums due thereunder have been paid. As to each mortgage insurance
or guaranty certificate, the Seller and any Originator and Prior Servicer have
complied with applicable provisions of the insurance or guaranty contract and
Federal statutes and regulations, all premiums or other charges due in
connection with such insurance or guaranty have been paid, there has been no
act or omission which would or may invalidate any such insurance or guaranty
with respect to the Seller, and the insurance or guaranty is, or when issued,
will be, in full force and effect with respect to each Mortgage Loan. There are
no defenses, counterclaims, or rights of set-off against the Seller affecting
the validity or enforceability of any mortgage insurance or guaranty with
respect to a Mortgage Loan.
4.10.9 Compliance with Laws. Seller and each Originator and Prior
Servicer have complied with the Applicable Requirements pertaining to the
subject matter of this Agreement, including, without limitation, the federal
Fair Housing Act, federal Equal Credit Opportunity Act and Regulation B,
federal Fair Credit Reporting Act, federal Truth in Lending Act and Regulation
Z.
12
<PAGE> 13
National Flood Insurance Act of 1968, federal Flood Disaster Protection Act of
1973, federal Real Estate Settlement Procedures Act and Regulation X, federal
Fair Debt Collection Practices Act, federal Home Mortgage Disclosure Act, and
state consumer credit and usury codes and laws. Each Originator and Prior
Servicer was qualified to do business, and had all requisite licenses, permits
and approvals, in the jurisdictions in which the applicable Mortgaged
Properties are located, except where the failure to possess such
qualifications, licenses, permits and approvals would not materially and
adversely affect the enforceability of the Mortgage Loan Documents by
Purchaser.
4.10.10 Filing of Reports. Seller has filed or will file in a timely
manner all reports required by the Agencies, Investors and Insurers with respect
to the Mortgage Loans and the Servicing Rights. Seller has filed all IRS Forms,
including but not limited to Forms 1041 Kl, 1041, 1099 INT, 1099 MISC, 1099A
and 1098, as appropriate, which are required to be filed with respect to the
Servicing Rights for activity that occurred on or before December 31, 1996.
4.10.11 Custodial Accounts. All Custodial Accounts required to be
maintained by Seller have been established and continuously maintained in
accordance with Applicable Requirements. Custodial Funds received by Seller
have been credited to the appropriate Custodial Account, and have been retained
in and disbursed from the Custodial Accounts in accordance with the Applicable
Requirements. Seller has analyzed the payments required to be deposited into
the Custodial Accounts and adjusted the payment thereto in order to eliminate
any deficiency, except with respect to Mortgage Loans originated within the
twelve months prior to the Sale Date. With regard to Mortgage Loans that
provide for Mortgage Escrow Payments, Seller and each Originator and Prior
Servicer has (a) computed the amount of such payments in accordance with
Applicable Requirements, (b) paid on a timely basis all charges and other items
to be paid out of the Mortgage Escrow Payments, and when required by the
applicable Servicing Agreement has advanced its own funds to pay such charges
and items, and (c) delivered to the related Mortgagors the statements and
notices required by Applicable Requirements in connection with Custodial
Accounts, including without limitation statements of taxes and other items paid
out of the Mortgage Escrow Payments and notices of adjustments to the amount of
the Mortgage Escrow Payments. With respect to Mortgage Escrow Payments, there
exist no deficiencies in connection therewith for which customary arrangements
for repayment thereof have not been made in accordance with the Applicable
Requirements, and no Mortgage Escrow Payments or other charges or prepayments
due from Mortgagor have been capitalized under any Mortgage Instrument or the
related Mortgage Note. Purchaser reserves the right to independently verify the
sufficiency of the Custodial Accounts, employing such industry accepted
practices as, among other things, a test for minimum cash required. Should the
Purchaser, the Investor(s) or an auditor determine that the Custodial
Account(s) did not contain the required deposits as of the applicable Transfer
Date, then Purchaser may make claim against Seller for the amount of the
unrecoverable shortage (without interest thereon).
4.10.12 Advances. The Advances are valid and subsisting accounts owing
to Seller, are carried on the books of Seller at values determined in
accordance with generally accepted accounting principles and are not subject to
any set-off or claim that could be asserted against Seller and Seller has not
received any notice from an Investor, Insurer or other Person in which the
Investor, Insurer or Person disputes or denies a claim by Seller for
reimbursement in connection with an Advance.
4.10.13 Investor Remittances and Reporting. Seller and each Originator
and Prior Servicer have remitted or otherwise made available to each Investor
(i) all principal and interest payments received to which the Investor is
entitled under the applicable Servicing Agreements, including without
limitation any guaranty fees, and (ii) all advances of principal and interest
payments
13
<PAGE> 14
required by such Servicing Agreements. In accordance with the Applicable
Requirements, Seller has prepared and submitted to each Investor all reports in
connection with such payments required by the Applicable Requirements.
4.10.14 Taxes. All taxes, governmental assessments, insurance premiums,
water, sewer and municipal charges, leasehold payments and ground rents
relating to the Mortgage Loans have been paid by Seller to the extent such
items are required to be paid by Seller pursuant to Applicable Requirements.
Each Mortgage Loan is covered by a valid and assignable, fully paid, life of
loan tax service contract, in full force and effect, with Transamerica Real
Estate Tax Services.
4.10.15 Hazard and Related Insurance. All improvements upon the
Mortgaged Property are insured against loss by fire, hazard (and, where
required pursuant to Applicable Requirements, flood) and/or extended coverage
insurance policies, in the amount, by the Insurer and otherwise in the manner
as may be required by Applicable Requirements. All such insurance policies are
in full force and effect, and all premiums with respect to such policies have
been paid.
4.10.16 Damage. Condemnation. and Related Matters. There exists no
physical damage to any Mortgaged Property from fire, flood, windstorm,
earthquake, tornado, hurricane or any other similar casualty, which physical
damage is not adequately insured against or would materially and adversely
affect the value or marketability of any Mortgage Loan, the Servicing Rights,
the Mortgaged Property or the eligibility of the Mortgage Loan for insurance
benefits by any Insurer. There is no proceeding pending for the total or
partial condemnation of, or eminent domain with respect to, the Mortgaged
Property. All of the improvements that were included for the purpose of
determining the appraised value of the Mortgaged Property for a Mortgage Loan
lie wholly within the boundaries and building restriction lines of the
Mortgaged Property, and no improvements on adjoining properties encroach upon
the Mortgaged Property. With respect to any Mortgaged Property, the related
Mortgagor is not in and has not been in violation of, no prior owner of such
property was in violation of, and the property does not violate any standards
under, all applicable statutes, ordinances, rules, regulations, orders or
decisions relating to pollution, protection of human health or the environment
(including, without limitation, ambient air, surface water, ground water, land
surface or subsurface strata and natural resources), including, without
limitation, all applicable statutes, ordinances, rules, regulations, orders or
decisions relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products, asbestos and asbestos-containing materials, polychlorinated
biphenyls and lead and lead-containing materials, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of such items.
4.10.17 Pools. Prior to each applicable Transfer Date, all Pools have
been initially certified, finally certified and/or recertified if required by
and otherwise in accordance with the Applicable Requirements, and the securities
backed by Pools have been issued on uniform documents, as required by the
Applicable Requirements without any material deviations therefrom.
4.10.18 Mortgage File. The Mortgage File contains each of the documents
and instruments specified to be included therein and required to be maintained
under the Applicable Requirements.
4.10.19 Good Title. Seller is the sole owner and holder of all right,
title and interest in and to the Servicing Rights. The sale, transfer and
assignment by Seller to Purchaser of the Servicing Rights, and the instruments
required to be executed by Seller and delivered to Purchaser pursuant to the
Applicable Requirements, are, and will be on the Transfer Date, valid and
enforceable in
14
<PAGE> 15
accordance with their terms and win effectively vest in Purchaser good and
marketable title to the Servicing Rights, free and clear of any and all liens,
claims, or encumbrances, except for those encumbrances required by the
Applicable Requirements. Seller has full right and authority, subject to no
interest, or agreement with, any other party to sell and assign the Servicing
Rights to Purchaser pursuant to this Agreement.
4.10.20 Fraud. No fraud occurred on the part of any Person in
connection with any Mortgage Loan that could materially and adversely affect
the Servicing Rights, or result in Purchaser incurring Losses.
4.10.21 Agency and Internal Audits.
(a) Except as set forth on Schedule 4.10.21(a), since January 31, 1995,
neither Seller nor any Originator or Prior Servicer has been the subject of an
audit by any Agency, Investor or Insurer, which audit asserted a material
failure to comply with Applicable Requirements, or resulted in a repurchase of
ten or more Mortgage Loans or indemnification in connection with ten or more
Mortgage Loans in a period equal to or less than one year or resulted in
rescission of an insurance or guaranty contract or agreement applicable to ten
or more Mortgage Loans, payment of a material penalty by the Seller or
restrictions on the activities or commitment authority of the Seller that are
currently in effect.
(b) The Mortgage Loans have been subject to Seller's origination and
servicing quality control reviews and internal audits to no less a degree than
other residential mortgage loans originated or serviced by Seller. Except as
set forth on Schedule 4.10.21(b), within the three (3) years immediately
preceding the Effective Date, Seller's internal quality control reviews and
audits have not revealed a failure to comply with Applicable Requirements in
connection with the Mortgage Loans that could reasonably be expected to have an
adverse effect on all or any portion of the Servicing Rights or on Seller's
ability to perform its obligations under this Agreement.
4.10.22 Representations and Warranties to Agencies, Investors and
Insurers. All representations and warranties made by Seller to the applicable
Agencies, Investors and Insurer in connection with the Mortgage Loans and
Servicing Rights are incorporated herein by reference and inure to the benefit
of Purchaser.
4.10.23 Mortgage Loan Characteristics. All information contained on any
magnetic tape with regard to the Mortgage Loans is as of the date thereof true,
complete and correct.
4.10.24 No Recourse. None of the Servicing Agreements nor any other
agreement or understanding applicable to any of the Mortgage Loans provides for
recourse to the Servicer for losses incurred in connection with (or any
obligation to repurchase or reimburse, indemnify or hold harmless any Person
based upon) the default or foreclosure of, or acceptance of a deed in lieu of
foreclosure or other transfer or sale of the Mortgaged Property in connection
with, a Mortgage Loan, except insofar as such recourse is based upon a failure
of the Servicer to comply with the Applicable Requirements.
4.10.25 No ARMs Loans. The interest rate and Mortgage Loan Payment for
each of the Mortgage Loans may not be adjusted at any time by the borrower or
pursuant to the Mortgage Loan Documents.
4.10.26 "B and C" Loans. None of the Mortgage Loans were originated or
sold to
15
<PAGE> 16
any investor pursuant to a loan program involving subprime lending, or pursuant
to any loan program not typically identified as "A paper" lending.
4.10.27 Non-Amortizing Loans. All Mortgage Loans are self-amortizing
and will have no principal amount due to be paid to any Investor
notwithstanding payment by the Mortgagor of the full amount scheduled to be
paid to retire the indebtedness of the Mortgage Loan.
4.10.28 Temporary Buydowns. Other than loan numbers 290018036,
290026669, 290028215, and 290016164 (expires February 1, 1998), none of the
Mortgage Loans have temporary buydowns in effect.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
As an inducement to Seller to enter into this Agreement and to consummate
the transactions contemplated hereby, Purchaser represents and warrants as
follows (it being understood that, unless otherwise expressly provided herein,
each such representation and warranty is made to Seller as of the Effective
Date and the Sale Date, and all of the representations and warranties of
Purchaser contained herein shall survive the Sale Date and Transfer Date as
provided in Section 11.4):
Due Incorporation and Good Standing. Purchaser is a corporation, duly
organized, validly existing, and in good standing under the laws of the State
of Delaware. Purchaser has in full force and effect (without notice of possible
suspension, revocation or impairment) all required qualifications, permits,
approvals, licenses, and registrations to conduct all activities in all states
in which its activities with respect to the Mortgage Loans or the Servicing
Rights require it to be qualified or licensed, except where the failure of
Purchaser to possess such qualifications, licenses, permits, approvals and
registrations would not have a material adverse effect on Seller.
5.2 Authority and Capacity. Purchaser has all requisite corporate power,
authority and capacity, to execute and deliver this Agreement and the Interim
Servicing Agreement and to perform all of its obligations hereunder and
thereunder. Purchaser does not believe, nor does it have any cause or reason to
believe, that it cannot perform each and every covenant required of it
contained in this Agreement and the Interim Servicing Agreement.
5.3 Effective Agreement. The execution, delivery and performance of this
Agreement and the Interim Servicing Agreement by Purchaser and consummation of
the transactions contemplated hereby and thereby have been or will be duly and
validly authorized by all necessary corporate, shareholder or other action by
Purchaser; and this Agreement and the Interim Servicing Agreement have been or
will be duly and validly executed and delivered by Purchaser, and this
Agreement and the Interim Servicing Agreement are valid and legally binding
agreements of Purchaser and enforceable against Purchaser in accordance with
their respective terms, subject to bankruptcy, insolvency and similar laws
affecting generally the enforcement of creditor's rights and the discretion of
a court to grant specific performance.
5.4 No Conflict. Neither the execution and delivery of this Agreement and
the Interim Servicing Agreement nor the consummation of the transactions
contemplated hereby and thereby, nor compliance with their respective terms and
conditions, shall (a) violate, conflict with, result in the breach of, or
constitute a default under, be prohibited by, or require any additional
approval under any
16
<PAGE> 17
of the terms, conditions or provisions of Purchaser's Articles of Incorporation
or By-Laws, or of any mortgage, indenture, deed of trust, loan or credit
agreement or instrument to which Purchaser is now a party or by which it is
bound, or of any order, judgment or decree of any court or governmental
authority applicable to Purchaser, or (b). result in the creation or imposition
of any lien, charge or encumbrance of any material nature upon any of the
properties or assets of Purchaser.
5.5 Consents. Approvals and Compliance. Except for the Investor Consents,
there is no requirement applicable to Purchaser to make any filing with, or to
obtain any permit, authorization, consent or approval of, any Person as a
condition to the lawful performance by Purchaser of its obligations hereunder.
Purchaser is approved by and in good standing with each Agency, Investor or
Insurer, as necessary, in order to purchase and assume responsibility for the
Servicing Rights. Purchaser has complied with, and is not in default under, any
law, ordinance, requirement, regulation, rule, or order applicable to its
business or properties, the violation of which might materially and adversely
affect the operations or financial condition of Purchaser or its ability to
perform its obligations hereunder.
5.6 Litigation. There is no litigation, claim, demand, proceeding or
governmental investigation existing or pending, or to Purchaser's knowledge,
threatened, or any order, injunction or decree outstanding, against or relating
to Purchaser that could materially and adversely effect or delay the
performance by Purchaser of its obligations under this Agreement.
5.7 Facts and Omissions. No representation, warranty or written statement
made by Purchaser in this Agreement, in any Exhibit or Schedule to this
Agreement, or in the Interim Servicing Agreement contains or will contain any
material misstatement of fact or will omit to state a material fact necessary
in order to make the statements not misleading in light of the circumstances in
which they are made.
ARTICLE VI
COVENANTS
6.1 Investor Consent. The purchase and sale of the Servicing Rights are
subject to approval by the applicable Investors. In accordance with the
Applicable Requirements, Seller shall submit to the Investors all materials
necessary to obtain the Investor Consents in a timely manner with respect to
the transfer of the Servicing Rights from Seller to Purchaser. Seller shall use
its best efforts to obtain Investor Consents promptly, and Purchaser shall
cooperate with Seller in obtaining the Investor Consents. Seller shall pay any
and all costs of securing Investor Consents for the transactions contemplated
in this Agreement, including, without limitation, fees to the Investors for the
transfer of the Servicing Rights in accordance with the Applicable
Requirements.
6.2 FNMA Transfer Date. Subject to the following, the Transfer Date for
the FNMA Mortgage Loans shall be April 1, 1998. Seller shall promptly notify
Purchaser in writing if (i) FNMA advises Seller that the applicable Transfer
Date, for all or any portion of the Servicing Rights, will be a date other than
April 1, 1998, or (ii) FNMA advises Seller that all or any portion of the
Servicing Rights may not be transferred to Purchaser. The Transfer Date for the
FNMA Mortgage Loans may be changed upon the written agreement of the Parties.
6.3 FHLMC and IHDA Transfer Dates. Subject to the following, the Transfer
Date for the FHLMA and IHDA Mortgage Loans shall be April 16, 1998. Seller
shall promptly notify
17
<PAGE> 18
Purchaser in writing if (i) FHLMC or IHDA advises Seller that the Transfer Date
for all or any portion of the FHLMC or IHDA Servicing Rights will be any other
date, or (ii) FHLMC or IHDA advises Seller that all or any portion of the
FHLMC or IHDA Servicing Rights may not be transferred to Purchaser. The FHLMC
and IHDA Transfer Date may be changed upon the written agreement of the
Parties.
6.4 Mortgage Loan Files and Related Materials.
6.4.1 Conversion Data Tape. In accordance with the dates and format
specified in the Servicing Transfer Instructions, Seller shall provide
Purchaser with a data tape or tapes containing the information necessary to
service the Mortgage Loans in accordance with the Applicable Requirements so as
to permit Purchaser to test the conversion of Seller's records to Purchaser's
data processing system. Seller shall be responsible for all costs with respect
to the conversion or modification of Seller's data tapes to Purchaser's format
if the tapes cannot be properly read or do not contain the information
necessary to service the Mortgage Loans in accordance with the Applicable
Requirements. In addition, Seller shall provide master file data tape(s) to
Purchaser on or within three (3) Business Days of the Effective Date to support
Purchaser's conversion pre-planning activities. On or before the Transfer Date,
Seller shall cause its servicing system, and all data tapes provided by Seller
to Purchaser related to the Servicing Rights, to accurately reflect the
Mortgage Loans and Servicing Rights, including without limitation the
information contained in the Mortgage Loan Documents and all tax and insurance
records. All such data tapes shall be in such format as to allow their transfer
and conversion to Purchaser's servicing system without modification.
6.4.2 Packaging and Shipment of Mortgage Files. At Seller's sole
expense, Seller shall (or shall cause its document custodian to) package and
ship to Purchaser, or Purchaser's designee, on the Transfer Date, all Mortgage
Files pertaining to the Mortgage Loans. Seller shall provide Purchaser with
prior written notice of the carrier, shipping arrangements and insurance
arrangements with respect to the delivery of the Mortgage Files. In the event
that any document required to be delivered to Purchaser hereunder is missing,
defective, not in accordance with Applicable Requirements or otherwise not
delivered, Seller shall obtain and/or cure all such documents at Seller's sole
cost and expense. Each Mortgage File shall clearly indicate the Purchaser's,
Seller's and Investor's loan numbers and the related Pool numbers.
6.4.3 Assignments and Related Matters. Seller shall, in accordance with
all Applicable Requirements, utilize MERS in order to assign nominal title to
the Mortgage Instruments to Purchaser; to prepare and record or cause to be
prepared and recorded, as required by the applicable Investor, all prior
intervening Assignments of Mortgage Instruments and all Assignments of Mortgage
Instruments from Seller to Purchaser and from Purchaser to the applicable
Investor; and to endorse or cause to be endorsed, as appropriate, the Mortgage
Notes to Purchaser without recourse. In connection with the foregoing, Seller
shall reimburse Purchaser for the cost of registering each Mortgage Loan with
MERS at a rate of $3.00 per Mortgage Loan. Seller shall deliver to Purchaser
certified copies of all recorded Assignments of Mortgage Instruments promptly
upon receipt of same from the applicable recording offices or otherwise.
6.5 Remittances. Seller shall take appropriate steps to make the first
payment of principal and interest due following each applicable Transfer Date
to the appropriate parties, and shall pay all related guaranty fees for the
applicable month, from payments received by Seller with respect to such
Mortgage Loans pursuant to the Interim Servicing Agreement. In the event the
payments so received by Seller are insufficient to pay these amounts by wiring
immediately available funds to Seller no later than twenty-four (24) hours
prior to the required remittance date.
18
<PAGE> 19
6.6 Undertakings by Seller.
6.6.1 Forwarding of Pavements and Other Items. All bills (including,
without limitation, tax and insurance bills) pertaining to the Mortgage Loans
which are due and payable on or before the applicable Transfer Date or with
respect to which the earlier of the payment deadline to take advantage of a
discount or the payment deadline to avoid a penalty is before, on or within
thirty (30) days after the applicable Transfer Date shall be paid by Seller,
and Seller shall pay such bills in accordance with the Applicable Requirements.
All Mortgage Loan Payments and other funds or payments, all other bills, and all
transmittal lists or any other information used to pay bills pertaining to the
Mortgage Loans, and all documents, notices, correspondence and other
documentation related to the Mortgage Loans, that are received by Seller after
the applicable Transfer Date shall be forwarded by Seller to Purchaser, at
Seller's expense, by overnight delivery within one (1) Business Day following
Seller's receipt thereof for the first two (2) months after the applicable
Transfer Date, and thereafter by first class mail within one (1) Business Day
following Seller's receipt thereof. All penalties and interest due on any
Mortgage Loan resulting from Seller's failure to pay a bill or to forward bills
or other items to Purchaser as provided above shall be borne by Seller. Seller
shall cooperate with Purchaser to obtain tax bills with respect to which the
earlier of the payment deadline to take advantage of a discount or the payment
deadline to avoid a penalty is between the thirty first (31st) and sixtieth
(60th) day after the applicable Transfer Date. All documents, notices,
correspondence and other documentation related to the Mortgage Loans that are
received by Seller after the applicable Transfer Date shall clearly indicate
the Purchaser's, Seller's and Investor's loan numbers and the related Pool
numbers.
6.6.2 Assignment or Termination of Certain Contracts. Purchaser elects
to utilize the services of First American Real Estate Information Services,
Inc. ("First American") for life of loan tax service. Accordingly, Seller will
cancel tax service with Transamerica Real Estate Tax Service and any other tax
service provider other than First American as of the applicable Transfer Date
with respect to all Mortgage Loans. Thirty (30) days prior to the applicable
Transfer Date, Seller will provide a data tape to First American, which contains
information that First American requires to execute a "verified takeover" in
favor of Purchaser. It is anticipated that such data tape shall be in the
standard "AB38A3" format. If a data tape cannot be produced by Seller in the
required format, the Seller shall, with respect to each Mortgage Loan, provide
a hard copy of legal descriptions, identifying the parcels subject to tax.
Seller also shall assign to Purchaser, effective as of the applicable Transfer
Date, fully paid, transferable, life of the loan flood zone certification
contracts issued by First American Flood Data Services, Inc. related to all
Mortgage Loans, or Seller shall reimburse Purchaser for the cost of securing
such certifications; provided that Seller's liability in connection with
securing such certifications shall in no event be greater than $18.00 per
Mortgage Loan. Seller shall obtain, at its expense, the required consents, if
any, to assign such flood zone certification contracts to Purchaser.
6.6.3 Custodial Fund Interest and Reporting. Seller shall pay interest
on Custodial Funds accrued through the applicable Transfer Date to the extent
interest with respect to Custodial Funds is required to be paid under the
Applicable Requirements for the benefit of Mortgagors under the Mortgage Loans.
Seller shall either credit such interest to the related Custodial Account
before the Custodial Funds are transferred to Purchaser or forward such
interest to Purchaser or Purchaser's designee within three (3) Business Days
after the applicable Transfer Date, with appropriate information regarding the
proper crediting of the interest.
6.6.4 IRS Reporting. Seller shall, at its sole cost and expense,
prepare and file with the Internal Revenue Service all reports, forms, notices
and filings required by the Internal Revenue Code and rules, regulations and
interpretations thereunder in connection with the Servicing Rights and
19
<PAGE> 20
Mortgage Loans with respect to events that occurred prior to the applicable
Transfer Date thereof, including without limitation, the reporting of all
interest paid by Seller for the account of Mortgagors under the Mortgage Loans.
6.7 Final Certification and Recertification.
6.7.1 Transfer Date Deadline. Seller shall use its best efforts to
obtain the final certification or recertification, as applicable, of any Pool
with respect to which the deadline for final certification or recertification
is a date that occurs on or before the applicable Transfer Date. If it appears
that a Pool required to be finally certified or recertified on or before the
scheduled Transfer Date will not be so certified or recertified, then, subject
to any necessary approval of the Investor, Seller shall, as directed by
Purchaser, (i) request that the Transfer Date with respect to such Pool be
delayed until the Pool is so certified or recertified, or (ii) if permitted by
the applicable Investor, repurchase any Mortgage Loan that is preventing the
Pool from being finally certified or recertified in time to permit the Pool to
be so certified or recertified by the scheduled Transfer Date. As a condition
to the transfer of the Servicing Rights to a Pool that is required to be, but
is not, finally certified or recertified on the applicable Transfer Date,
Seller shall pay the cost of posting any letter of credit or performance bond
required by the applicable Investor with respect to the Pool and reimburse
Purchaser for any Losses resulting from, arising out of or relating to the Pool
not being finally certified or recertified by the deadline.
6.7.2 Post Transfer Date Deadline. Seller shall cooperate with the
Purchaser to obtain by the appropriate deadline the final certification or
recertification, as applicable, of any Pool with respect to which the deadline
for final certification or recertification is after the applicable Transfer
Date, including the recertification of Pools in connection with the transfer of
Servicing Rights to Purchaser hereunder. On and after the applicable Transfer
Date, Seller shall use its reasonable and timely best efforts to cause to be
delivered by Seller to Purchaser, at Purchaser's sole cost and expense, all
documents (including without limitation all missing documents and all documents
referred to in section 6.4.3 herein) necessary for the final certification or
recertification of a Pool.
6.8 Notification of Mortgagors, Insurance Companies, etc. By no later
than thirty (30) days prior to the applicable Transfer Date, Seller shall
deliver to Purchaser for approval a form of Mortgagor notification letter in
connection with the transfer of the Servicing Rights. Fifteen (15) days prior
to the applicable Transfer Date and otherwise in accordance with Applicable
Requirements, Seller, at its expense, shall mail the approved form of
notification to the Mortgagors of the transfer of the Servicing Rights and
instruct the Mortgagors to deliver all Mortgage Loan Payments and all tax and
insurance notices to Purchaser after the applicable Transfer Date. Seller also
shall, at its expense, notify any applicable taxing authority, the custodian of
the Mortgage Files, the Purchaser's and Seller's electronic data processing
servicing bureau, and Insurers that the Servicing Rights are being transferred
and instruct such entities to deliver all tax bills, payments, notices and
insurance statements to Purchaser after the applicable Transfer Date.
Purchaser, at its expense, shall prepare and mail notification to the
Mortgagors of the transfer of the Servicing Rights after the applicable
Transfer Date in accordance with Applicable Requirements.
6.9 Non-Solicitation. As part of the sale and transfer contemplated
hereunder, Seller shall sell, transfer, assign and convey to Purchaser all
intangible rights related to the Mortgage Loans and Servicing Rights, including
without limitation the exclusive right to receive all, and to enter into
arrangements that generate, Ancillary Fees with respect to the Mortgage Loans.
From and after the Effective Date, Seller shall not, and shall cause its
affiliates, officers, directors, shareholders,
20
<PAGE> 21
managers, employees and agents not to, directly or indirectly, during the
remaining term of any of the Mortgage Loans, by telephone, by mail, by personal
solicitation or otherwise, (a) take any action to solicit the Mortgagors (i)
for refinance or prepayment of the Mortgage Loans, in whole or in part, (ii)
for mortgage-related products (including without limitation optional insurance
products), (iii) for any other products or services for which a Servicer or its
contractors or agents may solicit the Mortgagors or (iv) for any other purpose,
(b) take any action to facilitate or encourage any Person to solicit the
Mortgagors for any matter or item enumerated in clause (a) above, or (c)
disseminate to any third party, for compensation or otherwise, any complete or
partial list of the Mortgagors. Nothing in this Section shall prohibit Seller
from taking applications from those Mortgagors who initiate refinance action on
their own, or from engaging in a mass advertising program to the general public
at large such as mass mailings based on commercially acquired, non-targeted
mailing lists or newspaper, radio or television advertisements.
6.10 Dispute Resolution. Purchaser and Seller agree to attempt in good
faith to resolve any dispute between or among them hereunder. If,
notwithstanding such efforts, within thirty (30) days after one party gives
another party notice of the dispute, which notice shall contain a reasonable
description of the dispute, the parties cannot resolve such dispute, the matter
shall be submitted to an independent consulting, accounting or brokerage firm
(or, in the case of disputes of legal issues, an arbitrator) reasonably
acceptable to the applicable parties that is knowledgeable in the area in which
the dispute arises (the "Firm") whose determination shall be final and binding
on all of the parties. The Firm's determination may be entered as a judgment in
any court having jurisdiction, subject only to challenges on the grounds set
forth in the appropriate jurisdiction's statutes relating to the enforceability
or appealability of binding arbitration, or the Firm's incorrect application of
the substantive laws of the state where the Firm conducts its hearing on the
dispute. If the Firm is at any time unable or unwilling to serve in such
capacity, the parties shall in good faith select another firm which the parties
reasonably agree is knowledgeable and independent to serve as the "Firm"
hereunder. The fees of the Firm shall be paid by the party determined by the
Firm to be the non-prevailing party with respect to such dispute, and in the
event that the Firm determines that the non-prevailing party had no reasonable
basis to raise such dispute or that the dispute was not raised in good faith,
the non-prevailing party also shall pay all costs and expenses (including all
attorney and other professional fees) of the other party in connection with
such dispute. The Firm shall be chosen within fifteen (15) Business Days after
written notice by a party to the other parties that a Firm be chosen to resolve
the dispute. If the parties cannot agree on the Firm, then the Firm shall be
selected by the appropriate court of law having jurisdiction over the dispute
by filing an application with the presiding judge of that court for the
selection of the Firm. Each party shall present to the Firm its position, in
the form of a proposed monetary settlement, with regard to the dispute. The
Firm shall render its decision, which shall be one of the parties' positions,
within sixty (60) days after the Firm has had a hearing with the parties. All
discovery issues shall be resolved by the Firm and shall be final. The parties
may use consultants and advisors to assist them and participate in the hearing.
The parties shall indemnify the Firm in connection with its services as long as
the Firm acts in good faith and without negligence. The parties shall enter
into any retention and indemnification agreements as may be reasonably required
by the Firm in connection with the performance of its duties under this section
6.10 which are not inconsistent with the provisions of this section 6.10.
6.11 Payment of Costs. Except as otherwise provided herein (a) Seller
shall be responsible for all fees, costs and expenses with respect to (i) the
transfer of the Servicing Rights, (ii) the delivery of the Mortgage Files and
related documents, (iii) the remittance of the Custodial Funds, and (iv) all
other fees, costs and expenses incurred by Seller in its performance of its
obligations under this Agreement, including without limitation the fees of
Seller's document custodian, attorneys and
21
<PAGE> 22
accountants, and (b) Purchaser shall be responsible for the fees, costs and
expenses of Purchaser in its performance of its obligations under this
Agreement, including without limitation the fees of Purchaser's document
custodian, attorneys and accountants.
6.12 Access to Information. Prior to each Transfer Date, Seller shall
allow Purchaser and its counsel accountants, and other representatives,
reasonable access, during normal business hours, to all of Seller's files,
books and records directly relating to the Servicing Rights, the Mortgage
Loans, Custodial Accounts and Advances. Purchaser (or a contractor of
Purchaser) shall have the right, among other things, to inventory the Mortgage
Files during the Interim Period if it wishes. Each Party shall, except in the
event one Party has brought an action against the other Party, allow the other
Party and their respective counsel, accountants, and other representatives,
reasonable access, during normal business hours following each Transfer Date,
to all of such Party's files, books and records directly relating to the
Servicing Rights, the Mortgage Loans, Custodial Accounts and Advances. Each
Party and its representatives and affiliates shall treat all information so
obtained, not otherwise in the public domain, as confidential and shall not use
any such information for its own benefit.
6.13 Cooperation. To the extent reasonably possible, the Parties shall
cooperate with and assist each other, as requested, in carrying out the
purposes of this Agreement. Without limiting the foregoing, Seller shall
cooperate with Purchaser in connection with, among other things, the
preparation and recordation of all Assignments of Mortgage Instruments and all
prior intervening Assignments of Mortgage Instruments, the endorsement of all
Mortgage Notes, the execution of appropriate powers of attorney, and the
delivery of all documents, and the final certification and recertification of
all Pools (including, without limitation, the correction, completion and
preparation of appropriate Mortgage File documents).
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction in all material respects, at or prior to the Sale Date and, solely
with respect to section 7.4, at or prior to the initial Transfer Date, of each
of the following conditions, any or all of which may be waived in writing by
Purchaser:
7.1 Correctness of Representations and Warranties. The representations and
warranties made by Seller in this Agreement are true and correct in all
material respects as of the Sale Date.
7.2 Compliance with Covenants. All terms and covenants contained in this
Agreement and the Interim Servicing Agreement required to be complied with and
performed by Seller at or prior to the Sale Date shall have been duly complied
with and performed by Seller in all material respects as of the Sale Date.
7.3 Corporate Resolution or Other Approval. Purchaser shall have received
from Seller a duly executed Certificate of its Secretary or Assistant Secretary
reciting the approval of the Board of Directors of Seller of the transfer and
sale of the Servicing Rights to Purchaser and authorizing the officers of
Seller to execute such documents as may be necessary to accomplish the
transactions contemplated hereby.
7.4 Investor Approval. At or prior to the initial Transfer Date, the
Investor Consents shall
22
<PAGE> 23
have been issued by all of FHLMC, FNMA and IHDA and delivered to Purchaser and
shall not contain any term or condition that could adversely affect the value
of the Servicing Rights to Purchaser or impose any cost or obligation on
Purchaser not normally imposed in the ordinary course of a transfer of
servicing rights.
7.5 Litigation. No court order shall have been entered in any action or
proceeding instituted by any Person which enjoins, restrains or prohibits or
seeks to enjoin, restrain or prohibit this Agreement or consummation of the
transactions contemplated by this Agreement.
7.6 Financial Condition of Seller. On or before the Sale Date, Seller
shall have provided to Purchaser information reasonably satisfactory to
Purchaser to evidence that the financial condition of Seller is adequate to
support the performance by Seller on a timely basis of Seller's potential
indemnification and other obligations hereunder.
7.7 No Material Adverse Change. Prior to the Sale Date, there shall have
been no material adverse change (or pending adverse change) in the
characteristics of the Mortgage Loans, Servicing Rights or Advances (including
without limitation delinquency rates, escrow balances, average weighted
servicing spread, interest rates, outstanding principal balances and loan
modifications) since October 31, 1997.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under this Agreement are subject to the
satisfaction in all material respects, at or prior to the Sale Date and, solely
with respect to section 8.3, at or prior to the initial Transfer Date, of each
of the following conditions, any or all of which may be waived in writing by
Seller:
8.1 Correctness of Representations and Warranties. The representations and
warranties made by Purchaser in this Agreement are true and correct in all
material respects as of the Sale Date.
8.2 Compliance with Covenants. All terms and covenants in the Agreement
required to be complied with and performed by Purchaser at or prior to the Sale
Date shall have been duly complied with and performed by Purchaser in all
material respects as of the Sale Date.
8.3 Investor Consents. Seller shall have received the Investor Consents of
FHLMC, FNMA and IHDA.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification of Purchaser. Subject to Section 9.5 below, Seller
shall indemnify and hold Purchaser harmless from, and will reimburse Purchaser
for, any and all Losses incurred by Purchaser to the extent that such Losses
arise out of, relate to, or result from:
(a) the inaccuracy of any representation or warranty made by Seller in
this
23
<PAGE> 24
Agreement;
(b) the failure by Seller to perform or observe any term or provision
of this Agreement;
(c) any Claim pending or arising out of events occurring in whole or
in part before each transfer Date in connection with the Servicing Rights
transferred to Purchaser on such Transfer Date;
(d) any missing documents that are required to be delivered to
Purchaser hereunder;
(e) any and all items listed on any disclosure schedule hereto or
stated as an exception to Seller's representations and warranties in this
Agreement;
(f) any Excluded Loan, the Servicing Rights to which are transferred
to Purchaser hereunder;
(g) Seller's escrow, forced placement and other servicing practices in
connection with the Servicing Rights and any such practices of Seller different
from Purchaser's practices that Purchaser continues in connection with the
Servicing Rights until the first anniversary of the Transfer Date or, with
respect to escrow practices, Purchaser's earlier completion of its annual
escrow analysis of the Servicing Rights;
(b) No Bids, and Buydowns resulting from or made to avoid a No Bid, in
connection with any VA Mortgage Loan for which Foreclosure proceedings have
been initiated prior to the third anniversary of the Sale Date.
For purposes of establishing whether any matter is indemnifiable under
Section 9.1, the accuracy of the representations and warranties of Seller
contained herein shall be determined without giving effect to the
qualifications to such representations and warranties concerning knowledge or
materiality (including, without limitation, any reference to "material adverse
effect" or any other terms similar thereto).
9.2 Repurchase of Mortgage Loans and Servicing Rights. In the event
Purchaser discovers that any of the representations and warranties made in this
Agreement by Seller were not accurate at or as of the time they were made by
Seller, or if there exists a basis to demand indemnification under Section 9.1
hereof, or if Purchaser repurchases a Mortgage Loan or indemnifies an Investor
or Agency with respect to a Mortgage Loan as a result of any event arising in
whole or in part before the applicable Transfer Date, Purchaser, subject to any
limitations of the applicable Investor, may demand that Seller (i) repurchase
from Purchaser the Servicing Rights to the affected Mortgage Loans, or (ii)
provide Purchaser with the amount of funds necessary to repurchase such
Mortgage Loans and repurchase from Purchaser the Mortgage Loans and related
Servicing Rights. To the extent permitted by the applicable Investor, Purchaser
shall provide Seller with the opportunity, at Seller's sole cost and expense,
to cure any defects in the affected Servicing Rights and Mortgage Loans. The
purchase price under this Section for any repurchased Servicing Rights shall
equal the sum of (i) the Applicable Percentage multiplied by the then
outstanding principal balance for the related Mortgage Loan, (ii) all other
sums paid by Purchaser to Seller for such Servicing Rights and for the related
Advances to the extent Purchaser has not been reimbursed for such Advances,
(iii) all other documented unreimbursed Losses incurred by
24
<PAGE> 25
Purchaser in connection with such Mortgage Loans and Servicing Rights, except
to the extent that such Losses are attributable to Purchaser's failure to
service the related Mortgage Loans in accordance with Applicable Requirements;
and (iv) the carrying costs incurred by Purchaser, calculated at the Federal
Funds Rate, with respect to the funds that Purchaser is or was required to
provide to the applicable Agency or Investor to effect the repurchase or
indemnity. In connection with the repurchase of a Mortgage Loan, the amount of
funds that Seller shall provide to Purchaser shall equal the amount of funds
that Purchaser must pay to buy the Mortgage Loan out of a Pool and to otherwise
effect the repurchase. Subject to Applicable Requirements, when Seller is
required to repurchase a Mortgage Loan or Servicing Rights from Purchaser, such
repurchase shall be accomplished by Seller within fifteen (15) Business Days
following receipt of written demand from Purchaser pursuant hereto. Purchaser
shall sub-service such repurchased Mortgage Loan for such period of time that
will enable the Parties to provide proper transfer notices to be given to the
Mortgagor in accordance with the Applicable Requirements, but in no event for
longer than thirty (30) days, and Purchaser shall be entitled to all Servicing
Fees and Ancillary Fees as consideration for sub-servicing the Mortgage Loan.
Upon completion of such repurchase by Seller, Purchaser shall forward to Seller
all servicing records and all documents relating to such Mortgage Loans and\or
Servicing Rights, as applicable.
9.3 Indemnification of Seller. Subject to Section 9.5 below, Purchaser
shall indemnify and hold Seller harmless from, and will reimburse Seller for,
any and all Losses incurred by Seller after the applicable Transfer Date to the
extent that such Losses result from:
(a) the inaccuracy of any representation or warranty made by Purchaser
in this Agreement;
(b) the failure by Purchaser to perform or observe any term of
provision of this Agreement; or
(c) the failure by Purchaser following the applicable Transfer Date to
service the Mortgage Loans with respect to which the Servicing Rights are
transferred to Purchaser hereunder in accordance with the Applicable
Requirements.
9.4 Notice and Settlement of Claims.
(a) Each Party to this Agreement shall promptly notify the other Party
in writing of the existence of any material fact known to it giving rise to any
obligations of any Party under Article 9 and, in the case of any Claim brought
by a third party, which may give rise to any such obligations, each Party shall
promptly notify the other Party of the making of such Claim or the commencement
of such action by a third party as and when same becomes known to it. The
failure to provide notice in such manner shall not relieve the Party receiving
such notice of any obligation to indemnify or reimburse any other Party
hereunder unless such failure materially prejudices the rights or increases the
liability of the Party receiving such notice with respect to the matter as to
which such notice relates, and then such Party's obligation to indemnify or
reimburse hereunder shall be reduced only by the amount that it actually has
been damaged thereby. The indemnifying Party (the "Indemnifying Party") may, at
its own cost and expenses, assume and control defense of any Claim, including,
without limitation, the right to designate counsel and to control, all
negotiations, litigation, settlements, compromises and appeals of any such
Claim or potential Claim; provided that such counsel shall be satisfactory to
the indemnified Party ("Indemnified Party") in the exercise of its reasonable
discretion. The Party not controlling the defense or prosecution of any such
Claim may participate at its own costs and expense. Notwithstanding the
foregoing, if Purchaser is the Indemnified Party and
25
<PAGE> 26
Purchaser reasonably believes that the assumption of the defense or prosecution
of all or a portion of such Claim is necessary to assure that its right or
ability to enforce a material portion of its other Mortgage Loans or Servicing
Rights or to assure that its method of doing business or its authority and
approvals to service are not materially impaired, then, upon notice to Seller
from Purchaser, Seller shall permit such assumption by Purchaser. Neither the
Indemnifying Party nor the Indemnified Party shall be entitled to settle,
compromise, decline to appeal, or otherwise dispose of any Claim, without the
written consent of the other Party, which consent shall not be unreasonably
withheld or delayed; provided, however, such consent shall not be required for a
Claim involving less than Ten Thousand Dollars ($10,000), unless the other
Party reasonably believes that the settlement, compromise, declination to appeal
or other disposition may (a) prejudice the Party in connection with other
Claims or potential Claims, or (b) result in injunctive or other relief
(excepting the payment of monetary damages) against the Party that could
materially interfere with the business or operations of the Party. Following
the discharge of the Indemnifying Party's obligations with respect to any Claim
under Article 9, the Indemnified Party shall, subject to Applicable
Requirements, assign to the Indemnifying Party any and all related Claims
against third parties. Within fifteen (15) days after receipt, the Indemnified
Party shall refund to the Indemnifying Party the amounts of all recoveries
received by the Indemnified Party with respect to any claim with respect to
which it is reimbursed for Losses. The obligations of the Indemnifying Party
under this section 9.4(a) shall include Losses for Claims that are settled
(with the Indemnifying Party's prior written consent) whether or not such
settlement includes any acknowledgment or admission of fault, liability or
breach by the Indemnifying Party.
(b) Following the receipt of written notice from the Indemnified Party
of a demand for indemnification, the Indemnifying Party shall seek to cure the
problem giving rise to the demand, if possible, and pay the amount for which it
is liable, or otherwise take the actions which it is required to take within
thirty (30) days or such lesser time as may be required by the applicable
Investor, Insurer or third party claimant. As to any Claim for indemnity for
which notice is given as hereinbefore provided, the corresponding obligation of
indemnity shall continue to survive, subject to Section 11.4, until whichever
of the following events first occurs: (1) the Indemnifying Party shall have
discharged its obligation of indemnity to the Indemnified Party with respect to
such claim, as required hereunder; (2) a court of competent jurisdiction shall
have finally determined that the Indemnifying Party is not liable to the
Indemnified Party with respect to such claim; or (3) the Indemnified Party
shall have released in writing (or be held to have released) the Indemnified
Party from any liability with respect to such Claim.
(c) In the event that Mortgage Loans related to Servicing Rights
acquired by Purchaser hereunder become subject to any Claim covered by Section
9.1, and other mortgage loans owned or serviced by the Purchaser also are
subject to such Claim, then the extent of Seller's indemnification under
Section 9.1 shall equal (i) the amount of any judgment or settlement
attributable to Seller's actions or omissions for which Seller must indemnify
Purchaser under Section 9.1, and (ii) a share of (a) the expenses and
attorneys' fees incurred by the Purchaser after the relevant Transfer Date in
the defense and/or settlement of any such Claim and (b) the expenses and
attorneys' fees incurred by the claimants after the relevant Transfer Date that
Purchaser is required to pay pursuant to the terms of any judgment or
settlement. Seller's share of (a) and (b) shall be calculated by multiplying
the percentage of the amount that Seller is required to pay under clause (i) of
the entire judgment or settlement amount by the total amount of expenses and
attorneys' fees incurred by Purchaser under clauses (ii)(a) and (ii)(b). For
example, if the amount payable by Seller to the Purchaser under clause (i)
above is equal to 10% of the full amount payable by Purchaser under the terms
of any judgment or settlement (regardless of the percentage of Purchaser's
servicing portfolio (or portion thereof) that is the subject matter of any
claim or settlement that is comprised of Servicing Rights purchased from
Seller), then Seller would also be responsible for 10% of the amounts under
clauses (ii)(a) and (ii)(b).
26
<PAGE> 27
9.5 Losses Net of Insurance. Etc. The amount of any Loss for which
indemnification is provided under this Article IX shall be net of (i) any
amount recovered by the indemnified party pursuant to any indemnification by or
indemnification agreement with any third party, (ii) any insurance proceeds or
other cash receipts or sources of reimbursement received with respect to such
loss (and no right of subrogation shall accrue to any insurer or third party
indemnitor hereunder). If the amount to be netted hereunder from any payment
required under Sections 9.1 or 9.2 is determined after payment to the
indemnified party pursuant to this Article IX, the indemnified party shall repay
to the indemnifying party, promptly after such determination, any amount that
the indemnifying party would not have had to pay pursuant to this Article IX
had such determination had been made at the time of such payment.
ARTICLE X
TERMINATION
10.1 Termination.
(a) This Agreement and the transactions contemplated hereby may be
terminated as follows:
(i) by mutual written consent of the parties at any time prior to the
Sale Date; or
(ii) by Purchaser or Seller, by written notice to the other, if any
condition precedent to the other Party's obligations under this Agreement is
not met within the specified time period and the failure to meet such condition
would have a material and adverse affect on the transactions contemplated
hereunder; provided, however, that neither of the Parties may terminate this
Agreement pursuant to this section 10.1 (ii) if such Party is itself in breach
in any material respect of any of its representations, warranties, covenants or
other obligations set forth herein.
(b) In the event that an Investor Consent of one or more Investors is
not obtained pursuant hereto, or in the event that any such Investor Consent
contains any term or condition that could adversely affect the value of the
related Servicing Rights to Purchaser or impose any material cost or obligation
on Purchaser not normally imposed in the ordinary course of a transfer or
servicing rights, then Purchaser, in addition to its termination rights
afforded through section 7.4, shall have the right to terminate this Agreement
with respect to the related Servicing Rights only, and upon such a termination,
within five (5) Business Days thereafter, Seller shall return to Purchaser any
portions of the Purchase Price related to such Servicing Rights that were paid
by Purchaser to Seller, plus interest on such amounts at the Federal Funds
Rate, less all Servicing Fees paid by Seller to Purchaser pursuant to the
Interim Servicing Agreement with respect to such Servicing Rights.
10.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to section 10.1 hereof, this Agreement (other than Section
11.2 and this Section 10.2) shall forthwith become void and have no effect,
without any liability on the part of any Party other than liability pursuant to
this section 10.2. Upon such a termination of this Agreement for any reason,
within five (5) Business Days thereafter, Seller shall return to Purchaser any
portions of the Purchase Price paid by Purchaser to Seller, plus interest on
such amounts at the Federal Funds Rate, less all Servicing Fees paid by Seller
to Purchaser pursuant to the Interim Servicing Agreement. If this Agreement is
terminated pursuant to Section 10.l(ii) as a result of a willful breach or
default by the non-terminating Party, then the terminating Party shall be
entitled to such additional remedies as may be available to it at
law or in equity.
27
<PAGE> 28
ARTICLE XI
MISCELLANEOUS
11.1 Supplementary Information. From time to time prior to and after
the Transfer Date, each Party shall furnish to the other Party such information
supplementary to the information contained in the documents and schedules
delivered pursuant hereto which is reasonably available and may reasonably be
requested or which may be necessary to file any reports due to the Investors in
connection with the Mortgage Loans or Servicing Rights.
11.2 No Broker's Fees. Each party hereto represents and warrants to the
others that it has made no agreement to pay any agent, finder, or broker or any
other representative, any fee or commission in the nature of a finder's or
broker's fee arising out of or in connection with the subject matter of this
Agreement. Notwithstanding anything to the contrary, Seller shall be
responsible for all fees and commissions of Countrywide Servicing Exchange.
11.3 Further Assurances. Each Party shall, at any time and from time to
time, promptly, upon the reasonable request of the other Party or its
representatives, execute, acknowledge, deliver or perform all such further
acts, deeds, assignments, transfers, conveyances, and assurances as may be
required for the better vesting and confining to Purchaser and its successors
and assigns of title to Servicing Rights or as shall be necessary to effect the
transactions provided for in this Agreement. Purchaser and Seller shall
cooperate in good faith to consummate the transactions contemplated by this
Agreement.
11.4 Survival. Notwithstanding anything else to the contrary herein, all
warranties, representations, covenants, indemnities and other agreements of the
Parties set forth herein shall survive the closing of the sale hereunder until
the expiration of the one-year period commencing on the date that all of the
Mortgage Loans have been paid in full, foreclosed or otherwise retired.
11.5 Assignment. No party hereto shall assign, sub-license, sub-contract,
charge or otherwise encumber any of its rights or obligations under this
Agreement without the prior written consent of the other party.
11.6 Due Diligence. The parties hereto agree that any and all
determinations made by Purchaser in connection with its due diligence review of
the Mortgage Loans, Servicing Rights and related books and records shall have
no bearing on, and shall not limit the effect of, Seller's representations,
warranties, covenants, indemnities and other obligations under this Agreement.
11.7 Notices. Except as otherwise expressly permitted by this Agreement,
all notices and statements to be given under this Agreement are to be in
writing, delivered by hand, facsimile, telegram, national overnight mail
service, or first class United States mail postage prepaid and registered or
certified with return receipt requested, to the following addresses or
facsimile numbers, as applicable (which addresses and facsimile numbers may be
revised by notice):
28
<PAGE> 29
(a) If to the Purchaser, to:
Lawrence P. Washington
Executive Vice President and Chief Financial Officer
First Nationwide Mortgage Corporation
5280 Corporate Drive
Frederick, MD 21701
Facsimile Number: (301) 696-5111
- and -
Stephen E. Simcock, Esq.
Senior Vice President and Senior Counsel
First Nationwide Mortgage Corporation
5280 Corporate Drive
Frederick, MD 21701
Facsimile Number: (301) 815-5612
With a copy to (which shall not constitute notice):
Weiner, Brodsky, Sidman & Kider, P.C.
1350 New York Avenue, N.W.
Suite 800
Washington, DC 20005
Attn: Don J. Halpern, Esq.
Facsimile Number: (202) 628-2011
(b) If to Seller, to:
Cole Taylor Bank
5501 West 79th Street
Burbank, Illinois 60459
Attn: Tom Pisapia
Facsimile Number: (708) 857-3377
All notices and statements shall be deemed given, delivered, received and
effective upon personal delivery or receipt of facsimile or telegram, one (1)
Business Day after sending by overnight mail or three (3) Business Days after
mailing by first class United States mail in the manner set forth above.
11.8 Entire Agreement. This Agreement and the Interim Servicing Agreement
constitute the entire agreement between the parties with respect to the subject
matter hereof. No amendments, modifications or supplements of this Agreement
shall be binding unless executed in writing by the parties hereto. The Exhibits
and Schedules are part of this Agreement.
11.9 Binding Effect; Third Parties. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, express or
implied, is intended to confer on any Person, other than the parties hereto and
their successors and permitted assigns, any rights, obligations, remedies or
liabilities.
29
<PAGE> 30
11.10 Applicable Laws. This Agreement shall be construed in accordance
with federal law and the laws of the State of Maryland, without reference to
the choice of law principles under the laws of the State of Maryland. Any
lawsuit or other legal action instituted by any party hereto in connection with
this Agreement shall be brought in a federal or state court of appropriate
jurisdiction in Frederick County, Maryland.
11.11 Counterparts. This Agreement may be executed in any number of
counterparts, which together shall constitute full and proper execution hereof.
11.12 No Remedy Exclusive. No remedy under this Agreement is intended to
be exclusive of any other available remedy, but each remedy shall be cumulative
AND shall be in addition to any remedies given under this Agreement or existing
at law or in equity.
11.13 Attorney's Fees and Expenses. If any Party shall bring suit against
the other Party as a result of any alleged breach or failure by the other Party
to fulfill or perform any covenants or obligations under this Agreement, then
the prevailing party in such action shall be entitled to receive from the
non-prevailing party reasonable attorney's fees incurred by reason of such
action and all costs of suit and preparation at both trial and appellate levels.
11.14 Waiver. Any forbearance by a Party in exercising any right or remedy
under this Agreement or otherwise afforded by applicable law shall not be a
waiver or preclude the exercise of that or any other right or remedy.
11.15 Announcements. Neither Party shall issue press releases or
announcements regarding, or otherwise disclose to the general public or
mortgage industry, the existence or terms of this Agreement without the prior
written approval of the other parties hereto, except to the extent required by
any court, tribunal, regulatory authority or law.
11.16 Interpretation of Representations and Warranties. The failure of any
event or occurrence to constitute a breach of any one of Seller's
representations or warranties contained herein or in the Interim Servicing
Agreement shall not, by and of itself, prevent such event or occurrence from
constituting a breach of any other representation or warranty of Seller.
Without limiting the foregoing, if a representation or warranty specifically
related to a particular issue is not breached by the occurrence of an event as
to which a loss is incurred, a breach and the related indemnity protection
therefor shall exist hereunder if a general representation and warranty (for
instance, a representation regarding compliance with Applicable Requirements)
would be breached by such occurrence.
11.17 Exclusivity. From the Effective Date to the earlier of the Transfer
Date or the termination of this Agreement in accordance with the terms hereof,
Seller and its affiliates, shareholders, employees, directors and agents shall
not, and Seller shall cause its affiliates, shareholders, employees, directors
and agents to not, directly or indirectly, initiate, encourage, entertain or
accept any bid, submission, proposal or offer to purchase directly or
indirectly all or a portion of the Servicing Rights.
30
<PAGE> 31
IN WITNESS WHEREOF, each of the undersigned parties to this Agreement has
caused this Agreement to be duly executed in its name by one of its duly
authorized officers, all as of the date first above written
FIRST NATIONWIDE MORTGAGE CORPORATION
By: /s/ SIGNATURE
----------------------------------
Its: Senior Vice President
---------------------------------
COLE TAYLOR BANK
/s/ Frank S. DeGradi
---------------------------------
By: Frank S. DeGradi
---------------------------------
Its: Group Executive Vice President
--------------------------------
31
<PAGE> 32
EXHIBIT A
LIST OF MORTGAGE LOANS
32
<PAGE> 33
EXHIBIT B
FORM OF INTERIM SERVICING AGREEMENT
33
<PAGE> 34
EXHIBIT C
SERVICING TRANSFER INSTRUCTIONS
34
<PAGE> 35
INTERIM SERVICING AGREEMENT
THIS INTERIM SERVICING AGREEMENT (Interim Agreement") is entered into on
the 30th day of January, 1998 by and between FIRST NATIONWIDE MORTGAGE
CORPORATION ("FNMC") and COLE TAYLOR BANK ("Subservicer").
WITNESSETH:
WHEREAS, FNMC AND SUBSERVICER ENTERED INTO A SERVICING RIGHTS PURCHASE AND
SALE AGREEMENT DATED JANUARY 30, 1998 (the "PURCHASE AND SALE AGREEMENT");
WHEREAS, pursuant to the Purchase and Sale Agreement, Subservicer has
sold, assigned and transferred to FNMC on the Sale Date all beneficial rights
and interest in and to the Servicing Rights relating to the Mortgage Loans, the
Custodial Accounts and the Mortgage Files; and
WHEREAS, the Purchase and Sale Agreement provides that, effective as of
the Sale Date, the parties thereto shall enter into an Interim Servicing
Agreement regarding: (i) Subservicer's Obligations to perform servicing
functions with respect to the Mortgage Loans for a temporary period from the
Sale Date until the respective Transfer Dates, and (ii) the compensation to be
paid by FNMC to Subservicer for the performance of such functions.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, FNMC and Subservicer agree as
follows:
SECTION I. DEFINITIONS
All capitalized terms used but not defined in this Interim Agreement shall
have the meanings set forth in the Purchase and Sale Agreement.
SECTION 2. TERM
(a) The term of this Interim Agreement shall commence as of the Sale Date
and shall terminate with respect to the Mortgage Loans upon the close of
business on the Business Day immediately preceding the applicable Transfer Date
(except with respect to reconciliations and related matters required by the
Purchase and Sale Agreement and remittances to the applicable Investor on the
following remittance date and the related reports), unless earlier terminated
by either party pursuant to Section 14.
(b) FNMC is and during the term of this Interim Agreement shall remain the
beneficial owner of the Servicing Rights, the Custodial Accounts and the
Mortgage Files, and, subject to the rights of the applicable Investor and the
terms of this Interim Agreement, is entitled to possession thereof.
1
<PAGE> 36
SECTION 3. SERVICING ACTIVITIES
During the term of this Interim Agreement:
(a) Subservicer shall perform all servicing activities with respect to the
Mortgage Loans that are required by, and in accordance with the Applicable
Requirements. Subservicer shall observe and perform all material covenants,
undertakings and obligations required to be observed or performed under to the
Interim Agreement, the Purchase and Sale Agreement and the Applicable
Requirements. All representations and warranties of Subservicer continued in
the Purchase and Sale Agreement are incorporated herein by reference and deemed
made by Subservicer on and as of the Sale Date and the Transfer Date.
Subservicer shall exercise at least the same standard of care as it usually
does in servicing mortgage loans for its own account.
(b) Subservicer shall use commercially reasonable efforts to collect
payments due from Mortgagors under the Mortgage Loans as they become due,
including but not limited to (i) principal, (ii) interest, (iii) amounts for
hazard and flood insurance premiums, mortgage insurance or guaranty premiums,
taxes, legal fees, and costs, as well as repayment of amounts advanced by the
Subservicer on behalf of the Mortgagor, (iv) late charges, (v) assumption fees
and (vi) bad check charges.
(c) During the term of this Interim Agreement, Subservicer shall prepare
and deliver to the applicable Investors (with a copy to FNMC) all reports
relating to the Mortgage Loans that are required pursuant to the Applicable
Requirements. All such reports shall be delivered in a timely manner.
Subservicer will provide FNMC with copies of existing computer reports as
reasonably requested or a monthly master tape, if requested and to the extent
available.
(d) Subservicer shall not, without the prior written consent of FNMC,
destroy any Mortgage File records in its possession that relate to the Mortgage
Loans, nor shall it instruct any third party to destroy such records.
(e) During the term of this Interim Agreement, FNMC shall have the right
to inspect and audit Subservicer's servicing activities and operations, during
normal business hours provided that any such inspection and audit shall not
unreasonably interfere with Subservicer's activities hereunder and that
reasonable notice is given. Subservicer agrees to cooperate with FNMC and to
make available such Mortgage File records and other information as FNMC may
reasonably request. In the event that FNMC discovers any pattern or practice of
Subservicer that is materially inconsistent with Applicable Requirements, FNMC
may notify Subservicer thereof and Subservicer shall use commercially
reasonable efforts to cure or correct such pattern or practice. This paragraph
(e) shall not limit the indemnification obligations of Subservicer hereunder or
under the Purchase and Sale Agreement.
(f) In addition to the other obligations of Subservicer set forth herein,
Subservicer shall process all loan payoffs in the ordinary and normal course of
business, and materially in accordance with Applicable Requirements.
Subservicer shall cause all payoff checks received by it, or on its behalf, to
be date-stamped on the same date that it is received.
2
<PAGE> 37
(g) Seller shall cause all forced order policies to be canceled as of
the applicable Transfer Date.
SECTION 4. CUSTODIAL ACCOUNTS
(a) During the term of this Interim Agreement, Subservicer shall maintain
and subservice the Custodial Accounts as required pursuant to the Applicable
Requirements in the depository institution presently utilized by Subservicer
for such purpose; provided, however, that the Custodial Accounts must at all
times be on deposit in an institution that meets the requirements of the
applicable Investor.
(b) The Custodial Accounts will be held in the name of Subservicer in the
manner required by the Purchase and Sale Agreement and the Applicable
Requirements. Subservicer will not withdraw funds from any such account except
as specifically authorized in the Purchase and Sale Agreement, this Interim
Agreement and the Applicable Requirements.
(c) On each Business Day during the term of this Interim Agreement,
Subservicer shall deposit in the appropriate Custodial Account all principal
and interest, escrow/impound and other collections received by it with respect
to the Mortgage Loans. Subservicer shall be responsible for making all advances
required by the Applicable Requirements, and shall be responsible for prompt
payment of all monthly remittances to the applicable Investor (including the
guaranty fees) and securities holders, all taxes, assessments, premiums for
mortgage insurance and guaranty and premiums for hazard insurance and flood
insurance policies, and all other related fees and charges during the term of
this Interim Agreement. If adequate funds are not held in the Custodial
Accounts to pay such amounts when due, Subservicer shall advance sufficient
funds to cover any such deficiency in a manner to ensure payment of such
amounts prior to the time at which any such items become delinquent.
Subservicer shall be responsible for any damages or tax penalties to the extent
provided for in the Purchase and Sale Agreement. Subservicer shall transfer the
Custodial Accounts to FNMC in accordance with the terms and conditions of the
Purchase and Sale Agreement.
SECTION 5. FEES
(a) The interim servicing fee during the term of this Interim Agreement
shall be equal to Five Dollars ($5.00) per Mortgage Loan for each full or
partial calendar month during the term hereof (the "Interim Servicing Fee"),
provided, however, that FNMC shall have no obligation to pay the Interim
Servicing Fee in any calendar month with respect to any Mortgage Loan that is
serviced by Subservicer hereunder for three (3) or fewer Business Days in such
calendar month. Subservicer shall remit to FNMC within five (5) Business Days
after the monthly Investor cutoff dates, as applicable, all servicing fee
income, less guarantee fees and less the Interim Servicing Fee. In addition,
Subservicer will retain all Ancillary Fees, as collected during the term of
this Interim Agreement, and Subservicer will retain all benefits related to the
Custodial Accounts during the term of this Interim Agreement.
(b) Subservicer will carry out all of its obligations hereunder at its own
expense, except as otherwise specifically provided herein.
3
<PAGE> 38
(c) Subservicer shall be responsible for the payment of any document
custodian fees (other than the fees of FNMC's document custodian). .
SECTION 6. INSURANCE
At all times while this Interim Agreement is in force, FNMC and
Subservicer each shall maintain at their own expense polices of fidelity,
theft, forgery and errors and omissions insurance in such amounts as are
required to maintain FNMC and Subservicer, respectively, in good standing under
all applicable laws and under the requirements of the Applicable Requirements.
SECTION 7. REPRESENTATIONS OF SUBSERVICER
Subservicer hereby represents and warrants to and covenants with FNMC
(such representations and warranties to be true and correct throughout the term
of this Interim Agreement) as follows:
(a) Subservicer is a duly organized, validly existing and in good
standing under the laws of the United States. Subservicer has obtained and will
maintain all necessary permits, qualifications, registrations, licenses, and
other governmental, FHLMC, FNMA, IHDA, HUD, FHA, VA, State Agency and Insurer
approvals, as are necessary in order to conduct its activities hereunder.
(b) Subservicer has the power, authority and legal right to enter into and
perform this Interim Agreement and to perform each of the obligations required
of it hereunder, and this Interim Agreement and any document or instrument
delivered to FNMC by Subservicer pursuant hereto has been duly authorized,
executed and delivered.
(c) This Interim Agreement and any documents or instruments now or
hereafter executed and delivered to FNMC by Subservicer pursuant to this
Interim Agreement constitute (or shall, when delivered to FNMC by Subservicer,
constitute) valid and legally binding obligations of Subservicer enforceable
against Subservicer in accordance with their respective terms, except as may be
limited by or subject to (i) any bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally, and (ii)
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(d) Subservicer has in full force and effect all insurance required
under Section 6.
(e) During the term of this Interim Agreement, Subservicer will service
the Mortgage Loans in accordance with all Applicable Requirements.
4
<PAGE> 39
SECTION 8. REPRESENTATIONS OF FNMC
FNMC hereby represents and warrants to and covenants with subservicer
(such representations and warranties to be true and correct throughout the term
of the Interim Agreement) as follows:
(a) FNMC is a duly organized, validly existing and in good standing under
the laws of the state of Delaware. FNMC has obtained and will maintain all
necessary permits, qualifications, registrations, licenses, and other
governmental, FHLMC, FNMA, GNMA, HUD, FHA, VA and any Insurer approvals, as
are necessary in order to conduct its activities hereunder.
(b) FNMC has the power, authority and legal right to enter into and
perform this Interim Agreement, and this Interim Agreement and any document or
instrument to be delivered by FNMC to Subservicer pursuant hereto has been duly
authorized, executed and delivered.
(c) This Interim Agreement and any document or instruments now or
hereafter executed or delivered by FNMC to Subservicer pursuant to this
Agreement constitute (or shall, when delivered by FNMC to Subservicer,
constitute), valid and legally binding obligations of FNMC enforceable against
FNMC in accordance with their respective terms except as may be limited by or
subject to (i) any bankruptcy, insolvency, reorganization, moratorium or other
laws affecting creditors' rights generally, and (ii) general principals or
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
(d) FNMC has in full force and effect all insurance required under
Section 6.
SECTION 9. INDEMNIFICATION
(a) In addition to and not in limitation of the respective obligations of
the parties set forth in the Purchase and Sale Agreement, each party shall
indemnify and hold harmless the other party against, and reimburse such other
party for, any Losses resulting from or arising out of a breach of any
representation or warranty or covenant, agreement or other requirement of the
indemnifying party contained in this Interim Agreement.
(b) For purposes of establishing whether any matter is indemnifiable under
Section 9, the accuracy of the representations and warranties of Subservicer
and the performance of and compliance with the covenants and other obligations
and agreements of Subservicer contained herein shall be determined without
giving effect to the qualifications to such representations, warranties,
covenants, other obligations and agreements concerning knowledge or materiality
(including, without limitation, any reference to "in all material respects,"
"materially" or any other terms similar thereto).
(c) Each Party shall promptly notify the other Party in writing of the
existence of any material fact known to it giving rise to any obligations of
any Party under this Section 9 and, in the case of any Claim brought by a third
Party, which may give rise to any such obligations, each Party shall promptly
notify the other Party of the making of such Claim or the commencement of such
action by a third Party as and when same becomes known to it. The failure to
provide notice in such manner shall not relieve the Party receiving such notice
of any obligation to indemnify or reimburse any other
5
<PAGE> 40
Party hereunder unless such failure materially prejudices the rights or
increases the liability of the Party receiving such notice with respect to the
matter as to which such notice relates, and then such Party's obligation to
indemnify or reimburse hereunder shall be reduced only by the amount that it
actually has been damaged thereby. The indemnifying Party or Parties, as the
case may be (the "Indemnifying Party") may, at its own cost and expenses,
assume and control defense of any Claim, including, without limitation, the
right to designate counsel and to control, all negotiations, litigation,
settlements, compromises and appeals of any such Claim or potential Claim;
provided that the counsel is satisfactory to the indemnified Party or Parties,
as the case may be ("Indemnified Party") in the exercise of its reasonable
discretion. The Party not controlling the defense or prosecution of any such
Claim may participate at its own costs and expense. Notwithstanding the
foregoing, if FNMC is the Indemnified Party and FNMC reasonably believes that
the assumption of the defense or prosecution OF all or a portion of such Claim
is necessary to assure that its right or ability to enforce a material portion
of its other mortgage loans or servicing rights or to assure that its method of
doing business or its authority and approvals to service are not materially
impaired, then, upon notice to Subservicer from FNMC, Subservicer shall permit
such assumption by FNMC. Neither the Indemnifying Party nor the Indemnified
Party shall be entitled to settle, compromise, decline to appeal, or otherwise
dispose of any Claim, without the written consent of the other Party, which
consent shall not be unreasonably withheld or delayed; provided, however, such
consent shall not be required for a Claim involving less than Ten Thousand
Dollars ($10,000), unless the other Party reasonably believes that the
settlement, compromise, declination to appeal or other disposition may (a)
prejudice the Party in connection with other Claims or potential Claims, or (b)
result in injunctive or other relief (excepting the payment of monetary
damages) against the Party that could materially interfere with the business or
operations of the Party. Following the discharge of the Indemnifying Party's
obligations with respect to any Claim under this Section 9, the Indemnified
Party shall, subject to Applicable Requirements, assign to the Indemnifying
Party any and all related Claims against third parties. Within fifteen (15)
days after receipt, the Indemnified Party shall refund to the Indemnifying
Party the amounts of all recoveries received by the Indemnified Party with
respect to any claim with respect to which it is reimbursed for Losses. The
obligations of the Indemnifying Party under this section 9(d) shall include
Losses for Claims that are settled (with the Indemnifying Party's prior written
consent) whether or not such settlement includes any acknowledgment or
admission of fault, liability or breach by the Indemnifying Party.
(d) Following the receipt of written notice from the Indemnified Party of
a demand for indemnification, the Indemnifying Party shall seek to cure the
problem giving rise to the demand, if possible, and pay the amount for which it
is liable, or otherwise take the actions which it is required to take within
thirty (30) days or such lesser time as may be required by the applicable
Investor, Insurer or third party claimant. As to any Claim for indemnity for
which notice is given as hereinbefore provided, the corresponding obligation of
indemnity shall continue to survive, subject to Section 9(c)(ii), until
whichever of the following events first occurs: (1) the Indemnifying Party
shall have discharged its obligation of indemnity to the Indemnified Party with
respect to such claim, as required hereunder; (2) a court of competent
jurisdiction shall have finally determined that the Indemnifying Party is not
liable to the Indemnified Party with respect to such claim; or (3) the
Indemnified Party shall have released in writing (or be held to have released)
the Indemnified Party from any liability with respect to such Claim.
(e) In the event that Mortgage Loans related to Servicing Rights acquired
by FNMC under the Purchase and Sale Agreement become subject to any Claim
covered by Section 9(a) prior to the
6
<PAGE> 41
applicable Transfer Date, and other mortgage loans owned or serviced by FNMC
also are subject to such Claim, then the extent of Subservicer's
indemnification under Section 9(a) shall equal (i) the amount of any judgment
or settlement attributable to Subservicer's actions or omissions for which
Subservicer must indemnify FNMC under Section 9(a), and (ii) a share of (a) the
expenses and attorneys' fees incurred by FNMC after the relevant Transfer Date
in the defense and/or settlement of any such Claim and (b) the expenses and
attorneys' fees incurred by the claimants after the relevant Transfer Date that
FNMC is required to pay pursuant to the terms of any judgment or settlement.
Subservicer's share of (a) and (b) shall be calculated by multiplying the
percentage of the amount that Subservicer is required to pay under clause (i)
of the entire judgment or settlement amount by the total amount of expenses and
attorneys' fees incurred by FNMC under Clauses (ii)(a) and (ii)(b). For example,
if the amount payable by Subservicer to FNMC under clause (i) above is equal to
10% of the full amount payable by FNMC under the terms of any judgment or
settlement (regardless of the percentage of FNMC's servicing portfolio (or
portion thereof) that is the subject matter of any claim or settlement that is
comprised of Servicing Rights purchased from Subservicer), then Subservicer
shall also be responsible for 10% of the amounts under clauses (ii)(a) and
(ii)(b).
SECTION 10. NOTICE OF PROBLEMS
Subservicer shall promptly furnish to FNMC (a) any notice it receives from
any governmental authority, Insurer, Investor, Agency or Mortgagor of a
possible or asserted claim or lawsuit against Subservicer or FNMC for
repurchase of a Mortgage Loan, indemnification for damages, rescission of an
insurance policy or denial of an insurance claim, or other possible remedy or
sanction based upon an alleged breach or violation by Subservicer, or any prior
servicer, of any Applicable Requirement with respect to the Servicing Rights it
subservices hereunder, or (b) notice of any prior servicing or origination
deficiency of which it receives notice or discovers following its assumption of
servicing responsibilities hereunder, and in either case, shall consult with
FNMC.
SECTION 11. NOTIFICATIONS
Each party shall immediately upon receipt, notify the other party of any
notice, instruction, demand, or any communication from any Investor which
affects the Mortgage Loans, the Servicing Rights, the Custodial Accounts or the
Mortgage File documents.
SECTION 12. DEFAULT
The failure of Subservicer or FNMC to materially perform or materially
comply with any term, condition, or agreement applicable to it contained in
this Interim Agreement shall be an event of default ("Event of Default").
SECTION 13. RIGHT TO CURE
If an Event of Default occurs which does not relate to the payment of
money, then the defaulting party shall have until the earlier of ten ( 10) days
after receipt of written notice of such Event of Default or the applicable
Transfer Date to cure such Event of Default. A party that becomes aware of an
Event of Default by it shall promptly notify the other party.
7
<PAGE> 42
SECTION 14. REMEDIES
If an Event of Default has occurred and has not been cured within any
applicable cure period, FNMC may require Subservicer to repurchase each
Mortgage Loan for which FNMC has incurred a Loss as a result of such Event of
Default in accordance with Section 9.2 of the Purchase and Sale Agreement. The
non-defaulting party may pursue any other remedy available to it under the
terms of this Interim Agreement, the Purchase and Sale Agreement or at law or
in equity.
SECTION 15. EFFECT OF TERMINATION
Each party's indemnification obligations pursuant to Section 9 of this
Interim Agreement shall continue after the term or any termination of this
Interim Agreement subject to the limitations contained in Section 9 of this
Interim Servicing Agreement.
SECTION 16. MISCELLANEOUS
(a) Notices. All notices, requests, demands and other communications that
are required or permitted to be given under this Agreement shall be in writing
and shall be deemed to have been duly given upon the delivery or mailing
thereof, as the case may be, sent by overnight delivery service or by
registered or certified mail, return receipt requested, postage prepaid to the
persons and at the addresses set forth in the corresponding provision in the
Purchase and Sale Agreement or to such other address as FNMC or Subservicer
shall have specified in writing to the other.
(b) Severability of Provisions. If any one or more of the covenants,
agreements, provisions, or terms of this Interim Agreement shall be held
invalid for any reasons whatsoever, then such covenants, agreements,
provisions, or terms shall be deemed severable from the remaining covenants,
agreements, provisions, or terms of this Interim Agreement and shall in no way
affect the validity or enforceability of other covenants, agreements,
provisions, or terms to this Interim Agreement. If the invalidity of any part,
provision, representation, or warranty of this Interim Agreement shall deprive
any party of the economic benefit intended to be conferred by this Interim
Agreement, the parties shall negotiate in good faith to develop a structure the
economic effect of which is nearly as possible the same as the economic effect
of this Interim Agreement without regard to such invalidity.
(c) No Partnership. Nothing herein contained shall be deemed or construed
to create a partnership or joint venture between the parties hereto and the
services of Subservicer shall be rendered as an independent contractor and not
as agent for FNMC.
(d) Execution. This Interim Agreement may be executed in one or more
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement.
(e) Assignment. This Interim Agreement is not assignable.
8
<PAGE> 43
(f) Effect of Headings. The headings in this Interim Agreement are for
purpose of reference only and shall not limit or otherwise affect the meaning
hereof.
(g) Other Agreements. This Interim Agreement Supersedes all prior
agreements and understandings relating to the subject matter hereof, except for
the Purchase and Sale Agreement. In the event of any conflict, contradiction or
inconsistency between the Interim Agreement and Purchase and Sale Agreement,
the terms of the Purchase and Sale agreement shall control over the Interim
Agreement.
(h) Amendments: Waiver. Neither this Interim Agreement nor any term hereof
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought. A failure or delay on the
part of either party to exercise any right, power or privilege hereunder shall
not operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise or the exercise of any other right,
power or privilege, nor shall any waiver as to a particular matter constitute a
waiver as to any future similar matter.
(i) Agreement. The parties agree to execute and deliver such instruments
and take such actions as either party may, from time to time, reasonably
request in order to effectuate the purposes and carry out the terms of this
Interim Agreement.
(j) Existence of the Parties. During the term of this Interim Agreement,
the parties will keep in full force and effect their existence, rights and
franchises, and their status as a HUD-approved mortgagee, a VA-approved
lender, an IHDA originator and servicer, a FHLMC seller/servicer and a FNMA
seller/servicer in good standing.
(k) Governing Law. This Interim Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland, without giving
effect to its choice of law principles.
(l) Access to Information. Subservicer shall, except with respect to those
items as to which one Party has brought an action against the other Party,
allow FNMC and its counsel, accountants, and other representatives, reasonable
access, during normal business hours throughout the Interim Period, to all of
Subservicer's files, books and records directly relating to the Servicing
Rights, the Mortgage Loans, Custodial Accounts and Advances. FNMC and its
representatives and affiliates shall treat all information obtained in such
investigation, not otherwise in the public domain, as confidential and shall
not use any such information for its own benefit, unless FNMC acquires the
related Servicing Rights hereunder.
IN WITNESS WHEREOF, each of the undersigned parties to this Interim
Agreement has caused this Interim Agreement to be duly executed in its name by
one of its duly authorized officers, all as of the date first above written.
FIRST NATIONWIDE MORTGAGE CORPORATION
By: ??????
----------------------
9
<PAGE> 44
Its: Senior Vice President
-------------------------------
COLE TAYLOR BANK
/s/ Frank S. DeGradi
-------------------------------
By: Frank S. DeGradi
-------------------------------
Its: Group Executive Vice President
10
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Successor Basis
- Taylor Capital
Group, Inc. -
Consolidated Predecessor Basis - Cole Taylor Bank
For the Period
of Feb. 12, 1997
to Dec. 31, For the Years Ended December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1. Income before income taxes $ 16,434 $ 29,664 $ 25,940 $ 22,414 $ 17,659
ADD BACK FIXED CHARGES:
2. Total interest expense (1) 60,458 66,377 64,366 44,118 35,147
3. Interest included in operating lease rental
expense (2) 1,184 1,130 996 1,067 965
4. Preferred stock dividend (3) 4,697 -- -- -- --
---------- ---------- ---------- ---------- ----------
5. Adjusted earnings including interest on deposits 82,773 97,171 91,302 67,599 53,771
6. Less: interest expense on deposits 45,275 53,518 47,034 32,998 27,472
---------- ---------- ---------- ---------- ----------
7. Adjusted earnings excluding interest on deposits $ 37,498 $ 43,653 $ 44,268 $ 34,601 $ 26,299
========== ========== ========== ========== ==========
8. Fixed charges including interest on deposits
(line 2 + line 3 + line 4) $ 66,339 $ 67,507 $ 65,362 $ 45,185 $ 36,112
========== ========== ========== ========== ==========
9. Fixed charges excluding interest on deposits
(line 8 - line 6) $ 21,064 $ 13,989 $ 18,328 $ 12,187 $ 8,640
========== ========== ========== ========== ==========
RATIO OF EARNINGS TO FIXED CHARGES
10. Including interest on deposits (line 5 / line 8) 1.25 1.44 1.40 1.50 1.49
========== ========== ========== ========== ==========
11. Excluding interest on deposits (Line 7 / line 9) 1.78 3.12 2.42 2.84 3.04
========== ========== ========== ========== ==========
</TABLE>
(1) Interest expense includes cash interest expense on deposits and other
borrowings 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) The preferred stock dividend amount has been grossed up to compute the
pretax income equivalent assuming an estimated 35% tax rate.
111
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF TAYLOR CAPITAL GROUP, INC.
Cole Taylor Bank * (1)
1965 Milwaukee Ave. Building Corp. (1)
Cole Taylor Deferred Exchange Corp. (1)
Cole Taylor Financial Services, Inc. (1)
CT Car Wash I, Inc. (1)
CT Car Wash II, Inc. (1)
CTRE , Inc. (1)
Drovers Agency, Inc. (1)
CT Mortgage Company, Inc.* (2)
* Indicates direct wholly-owned subsidiary of Taylor Capital Group, Inc.
(1) State of Incorporation = Illinois
(2) State of Incorporation = Delaware
112
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TAYLOR
CAPITAL GROUP, INC. FORM 10-K FOR THE 323 DAY PERIOD ENDED DECEMBER 31, 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> DEC-31-1997
<CASH> 72,210
<INT-BEARING-DEPOSITS> 12,131
<FED-FUNDS-SOLD> 275
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 399,145
<INVESTMENTS-CARRYING> 83,251
<INVESTMENTS-MARKET> 84,581
<LOANS> 1,204,437
<ALLOWANCE> 25,813
<TOTAL-ASSETS> 1,855,711
<DEPOSITS> 1,377,957
<SHORT-TERM> 186,053
<LIABILITIES-OTHER> 38,631
<LONG-TERM> 112,000
0
38,250
<COMMON> 46
<OTHER-SE> 102,774
<TOTAL-LIABILITIES-AND-EQUITY> 1,855,711
<INTEREST-LOAN> 95,356
<INTEREST-INVEST> 25,714
<INTEREST-OTHER> 1,544
<INTEREST-TOTAL> 122,614
<INTEREST-DEPOSIT> 45,275
<INTEREST-EXPENSE> 60,458
<INTEREST-INCOME-NET> 62,156
<LOAN-LOSSES> 4,061
<SECURITIES-GAINS> 401
<EXPENSE-OTHER> 59,534
<INCOME-PRETAX> 16,434
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,113
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.22
<LOANS-NON> 11,624
<LOANS-PAST> 2,009
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 24,607
<CHARGE-OFFS> 3,530
<RECOVERIES> 675
<ALLOWANCE-CLOSE> 25,813
<ALLOWANCE-DOMESTIC> 25,813
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
