<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission File No. 333-14713
TAYLOR CAPITAL GROUP, INC.
Exact Name of Registrant as Specified in Charter
DELAWARE 36-4108550
------------------------------ ---------------------
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification Number
350 EAST DUNDEE ROAD, SUITE 300
WHEELING, ILLINOIS 60090-3199
Address of Principal Executive Offices
(847) 808-6369
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of each of the Registrant's classes of common
stock, as of the latest practicable date:
Class Outstanding at November 6, 1998
- ---------------------------- -------------------------------
Common Stock, $.01 Par Value 4,658,533
<PAGE> 2
TAYLOR CAPITAL GROUP, INC.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION.......................................................................... PAGE
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -
September 30, 1998 and December 31, 1997............................................. 3
Consolidated Statements of Income (Unaudited) -
For the Three and Nine Months Ended September 30, 1998;
For the Three Months Ended September 30, 1997 and the
Period of February 12, 1997 to September 30, 1997.................................... 4
Consolidated Statements of Cash Flows (Unaudited) -
For the Nine Months Ended September 30, 1998;
For the Period of February 12, 1997 to September 30, 1997........................... 5
Notes to Consolidated Financial Statements (Unaudited)................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 31
Item 6. Exhibits and Reports on Form 8-K......................................................... 31
SIGNATURES ......................................................................................... 32
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION - ITEM 1. Financial Statements
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 67,837 $ 72,210
Interest-bearing deposits with banks 117 12,131
Federal funds sold --- 275
Investment securities:
Available-for-sale, at fair value 334,912 399,145
Held-to-maturity, at amortized cost (fair value of $89,181 and $84,581 at
September 30, 1998 and December 31, 1997, respectively) 87,261 83,251
Loans held for sale, net, at lower of cost or market 38,156 31,771
Loans, net of allowance for loan losses of $24,477 and $25,813 at
September 30, 1998 and December 31, 1997, respectively 1,228,723 1,146,853
Premises, leasehold improvements and equipment, net 21,921 22,713
Other real estate and repossessed assets, net 2,022 1,463
Goodwill and other intangibles, net of amortization of $4,070 and $2,235
at September 30, 1998 and December 31, 1997, respectively 32,666 34,356
Other assets 31,861 51,543
---------- ----------
Total assets $1,845,476 $1,855,711
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 313,696 $ 340,419
Interest-bearing 1,070,888 1,037,538
---------- ----------
Total deposits 1,384,584 1,377,957
Short-term borrowings 191,553 186,053
Accrued interest, taxes and other liabilities 17,722 19,874
Nonrecourse borrowings --- 18,757
Notes payable 106,500 112,000
---------- ----------
Total liabilities 1,700,359 1,714,641
---------- ----------
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 redemptive value 38,250 38,250
Common stock, $.01 par value; 7,000,000 shares authorized, 4,658,533
and 4,640,453 shares issued and outstanding at September 30, 1998 and
December 31, 1997, respectively 47 46
Surplus 99,948 99,371
Unearned compensation - stock grants (2,343) (2,656)
Retained earnings 8,756 5,278
Accumulated other comprehensive income 459 781
---------- ----------
Total stockholders' equity 145,117 141,070
---------- ----------
Total liabilities and stockholders' equity $1,845,476 $1,855,711
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Nine For the Period of
Ended September 30, Months Ended Feb. 12, 1997 to
-------------------- September 30, September 30,
1998 1997 1998 1997
-------- ------- ------------- -----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $28,211 $27,664 $82,071 $68,588
Interest and dividends on investment securities:
Taxable 4,918 6,556 17,147 16,473
Tax-exempt 840 729 2,447 1,873
Interest on cash equivalents 307 852 441 1,310
------- ------- ------- -------
Total interest income 34,276 35,801 102,106 88,244
------- ------- ------- -------
Interest expense:
Deposits 12,365 13,382 36,359 32,898
Short-term borrowings 2,525 2,586 7,665 6,204
Notes payable 1,865 2,010 5,610 4,614
------- ------- ------- -------
Total interest expense 16,755 17,978 49,634 43,716
------- ------- ------- -------
Net interest income 17,521 17,823 52,472 44,528
Provision for loan losses 1,050 1,769 3,300 3,157
------- ------- ------- -------
Net interest income after provision
for loan losses 16,471 16,054 49,172 41,371
------- ------- ------- -------
Noninterest income:
Service charges 2,193 2,441 6,784 6,076
Trust fees 965 978 2,887 2,335
Investment securities gains, net --- 329 --- 329
Gain on sales of loans, net 999 939 2,950 2,130
Gain on sale of mortgage servicing rights --- --- 1,462 ---
Gain on sale of merchant credit cards --- 1,230 --- 1,230
Other noninterest income 392 496 1,233 1,229
------- ------- ------- -------
Total noninterest income 4,549 6,413 15,316 13,329
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 9,341 9,344 27,708 22,886
Occupancy of premises, net 1,811 1,541 5,330 3,938
Furniture and equipment 832 868 2,558 2,239
Computer processing 577 584 1,643 1,460
Advertising and public relations 365 444 1,328 963
Goodwill and other intangible amortization 612 642 1,836 1,620
Legal fees 958 530 2,960 1,285
Other noninterest expense 2,896 3,277 8,583 7,963
------- ------- ------- -------
Total noninterest expense 17,392 17,230 51,946 42,354
------- ------- ------- -------
Income before income taxes 3,628 5,237 12,542 12,346
Income taxes 1,445 2,128 5,100 4,816
------- ------- ------- -------
Net income $2,183 $3,109 $7,442 $7,530
======= ======= ======= =======
Preferred dividend requirements (861) (861) (2,582) (2,190)
------- ------- ------- -------
Net income applicable to common stockholders $1,322 $2,248 $4,860 $5,340
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
For the Nine For the Period of
Months Ended Feb. 12, 1997 to
September 30, September 30,
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,442 $ 7,530
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 3,300 3,157
Investment securities gains, net --- (329)
Gain on sale of merchant credit cards --- (1,230)
Gain on sales of loans originated for sale (3,783) (2,622)
Loans originated and held for sale (224,364) (157,804)
Proceeds from sales of loans originated for sale 228,480 154,970
Depreciation and amortization 7,986 3,933
Other adjustments to net income, net 299 1,867
Net changes in other assets and liabilities (45) (8,460)
--------- ---------
Net cash provided by operating activities 19,315 1,012
--------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities (39,363) (173,772)
Proceeds from sales of available-for-sale securities --- 61,568
Proceeds from principal payments and maturities of
available-for-sale securities 100,147 77,091
Purchases of held-to-maturity securities (15,267) (8,834)
Proceeds from principal payments and maturities of
held-to-maturity securities 10,864 2,830
Proceeds from the sale of CT Mortgage assets --- 9,394
Net increase in loans (92,736) (20,004)
Net cash of Bank and Mortgage Company acquired in
Split-Off Transactions --- 62,503
Decrease in reverse exchange assets 18,757 ---
Other, net (1,551) (1,846)
--------- ---------
Net cash (used in) provided by investing activities (19,149) 8,930
--------- ---------
Cash flows from financing activities:
Net increase in deposits 6,627 65,449
Net increase (decrease) in short-term borrowings 5,500 (56,396)
Repayments of notes payable (112,400) (15,000)
Proceeds from notes payable 106,900 77,000
Net proceeds from issuance of preferred stock --- 36,105
Decrease in nonrecourse borrowings (18,757) ---
Dividends paid (4,698) (2,138)
--------- ---------
Net cash (used in) provided by financing activities (16,828) 105,020
--------- ---------
Net (decrease) increase in cash and cash equivalents (16,662) 114,962
Cash and cash equivalents, beginning of period 84,616 ---
--------- ---------
Cash and cash equivalents, end of period $ 67,954 $114,962
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 49,302 $ 42,697
Income taxes $ 6,775 $ 5,352
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation:
The Taylor Capital Group, Inc. 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 and its subsidiaries (the "Bank") and CT
Mortgage Company, Inc. (the "Mortgage Company").
Taylor Capital Group, Inc. acquired the Bank and the Mortgage Company 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 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 Parent Company and then transferred
all of the common stock of the Parent 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 unaudited interim financial statements have been prepared pursuant to
the rules and regulations for reporting on Form 10-Q. Accordingly, certain
disclosures required by generally accepted accounting principles are not
included herein. These interim statements should be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997, as filed with the Securities and Exchange Commission.
Interim statements are subject to possible adjustment in connection with
the annual audit of the Company for the year ended December 31, 1998. In
the opinion of management of the Company, the accompanying unaudited
interim consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of the Company's consolidated financial position and
consolidated results of operations as of the dates and for the periods
presented.
The results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full year.
Certain reclassifications were made to the 1997 financial statements to
conform to the 1998 presentation.
The Bank and Mortgage Company were acquired by the Parent Company on
February 12, 1997; therefore, the Company's consolidated results for 1997
are for a period of less than a full nine months.
6
<PAGE> 7
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
2. Investment Securities:
The amortized cost and estimated fair values of investment securities at
September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------------
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 $151,999 $1,423 $ --- $153,422
U.S. government agency securities 10,098 149 --- 10,247
Collateralized mortgage obligations 97,212 307 (2,833) 94,686
Mortgage-backed securities 74,898 1,739 (80) 76,557
-------- ------ ------- --------
Total available-for-sale 334,207 3,618 (2,913) 334,912
-------- ------ ------- --------
Held-to-maturity:
State and municipal obligations 72,303 1,831 (5) 74,129
Federal Reserve Bank and Federal Home Loan
Bank equity securities 14,133 --- --- 14,133
Other debt securities 825 94 --- 919
-------- ------ ------- --------
Total held-to-maturity 87,261 1,925 (5) 89,181
-------- ------ ------- --------
Total $421,468 $5,543 $(2,918) $424,093
======== ====== ======= ========
<CAPTION>
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>
7
<PAGE> 8
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
3. Loans:
Loans classified by type at September 30, 1998 and December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
(in thousands)
<S> <C> <C>
Commercial and industrial $ 724,446 $ 671,506
Real estate-construction 215,919 179,855
Residential real estate-mortgages 156,832 165,258
Home equity lines of credit 110,024 104,287
Consumer 46,119 50,391
Other loans 1,202 2,448
---------- ----------
Gross loans 1,254,542 1,173,745
Less: Unearned discount (1,342) (1,079)
---------- ----------
Total loans 1,253,200 1,172,666
Less: Allowance for loan losses (24,477) (25,813)
---------- ----------
Loans, net $1,228,723 $1,146,853
========== ==========
</TABLE>
In the first quarter of 1998, the majority of credit card receivables were
transferred, at cost, from the consumer loan category to loans held for
sale. At September 30, 1998, approximately $7.8 million of the Bank's $9.4
million of credit card receivables were classified as loans held for sale.
Management anticipates the sale to occur in November 1998. No loss is
expected from the sale.
4. Interest-Bearing Deposits:
Interest-bearing deposits at September 30, 1998 and December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- --------------
(in thousands)
<S> <C> <C>
NOW accounts $ 124,635 $ 100,309
Savings accounts 109,456 112,978
Money market deposits 235,939 240,294
Certificates of deposit 443,836 417,230
Public time deposits 82,229 96,844
Brokered certificates of deposit 74,793 69,883
---------- ----------
Total $1,070,888 $1,037,538
========== ==========
</TABLE>
8
<PAGE> 9
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
5. Notes Payable:
Notes payable at September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
TAYLOR CAPITAL GROUP, INC.:
$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 rates at September
30, 1998 and December 31, 1997 were 6.91% and 7.12% respectively. $25,000 $25,000
$7 million revolving credit facility bearing interest at prime rate or
LIBOR plus 1.25%, maturing September 1, 1998; weighted average interest
rates at September 30, 1998 and December 31, 1997 were 7.44% and 7.02%
respectively. 1,500 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 1999 and $30 million due
February 2008, callable by the FHLB annually beginning February 1999;
collateralized by qualified first mortgage residential loans and FHLB
stock; weighted average interest rates at September 30, 1998 and December
31, 1997 were 5.23% and 6.04% respectively 80,000 85,000
-------- --------
Total $106,500 $112,000
======== ========
</TABLE>
In October 1998, the Taylor Capital Group, Inc. loan agreement was
extended, effective September 1, 1998 to September 1, 1999. In exchange for
an increase in the revolving credit facility to $12 million from $7 million
and a reduction in the interest rate, the loan agreement, including the $25
million term loan, is now secured by the common stock of the Bank. 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.
As of September 30, 1998, the Company was not aware of any instances of
non-compliance.
6. Incentive Compensation Plan:
The Company has an Incentive Compensation Plan (the "Plan") that allows for
the granting of stock options and stock awards. During the nine months
ended September 30, 1998, stock options were granted with respect to 97,319
shares of common stock at an exercise price of $25.00 per share. Stock
options with respect to 2,020 shares of common stock were forfeited during
this period. As of September 30, 1998, total stock options outstanding, net
of forfeitures, were for 227,272 shares of common stock at a weighted
average exercise price of $23.26. In addition, 14,080 shares of common
stock were awarded in 1998 to certain employees and non-employee members of
the Company's Board of Directors under restricted stock agreements.
9
<PAGE> 10
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
7. Comprehensive Income:
Statement of Financial Accounting Standards No. 130, "Reporting of
Comprehensive Income", requires disclosure of all components of
comprehensive income. Comprehensive income has been defined as changes in
stockholders' equity arising from transactions and other economic events
from non-stockholder sources. For the Company, comprehensive income
includes net income and unrealized holding gains or losses on
available-for-sale investment securities. The following table presents
comprehensive income for the periods indicated:
<TABLE>
<CAPTION>
For the Three For the Nine For the Period
Months Ended Months Ended of Feb. 12, 1997
Sept. 30, Sept. 30, to Sept. 30,
-------------------------- ----------- ------------
1998 1997 1998 1997
------------ ------------ ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Net income, as reported $ 2,183 $ 3,109 $ 7,442 $ 7,530
Other comprehensive income:
Change in unrealized gains (losses) on
available-for-sale securities 1,549 1,881 (478) 1,439
Less: reclassification adjustment for gains
included in net income -- (329) -- (329)
------- ------- ------- -------
1,549 1,552 (478) 1,110
Income tax expense (benefit) related
to other comprehensive income 532 521 (156) 378
------- ------- ------- -------
Other comprehensive income, net of tax 1,017 1,031 (322) 732
------- ------- ------- -------
Total comprehensive income $ 3,200 $ 4,140 $ 7,120 $ 8,262
======= ======= ======= =======
</TABLE>
8. Litigation:
Jeffrey W. Taylor, Chairman of the Board and Chief Executive Officer of the
Company, Bruce W. Taylor, President of the Company, Iris A. Taylor, Sidney
J. Taylor, Cindy Taylor Bleil, related trusts and a related partnership
(collectively, the "Taylor Family") have been named as defendants in the
lawsuits described below relating to (1) the Split-Off Transactions and (2)
the financial and public reporting of Reliance. Certain of the lawsuits
also named other current or former officers and directors of the Company
and Reliance, other stockholders of the Company, Reliance's public
accountants at the time of the Split-Off Transactions (who continue to
serve as the Company's public accountants), the investment banks that were
involved in the Split-Off Transactions, Reliance and the Company as
additional defendants. The filing dates of these lawsuits range from
October, 1997 to September, 1998.
The Split-Off Transactions were a series of transactions completed on
February 12, 1997 in accordance with the Share Exchange Agreement, dated
June 12, 1996 (the "Share Exchange Agreement") between Reliance and the
Taylor Family, which owned approximately 25% of the outstanding common
stock of Reliance prior to the Split-Off Transactions. Pursuant to the
Split-Off Transactions, the Taylor Family and certain other stockholders of
Reliance exchanged all of their common stock of Reliance for all of the
outstanding common stock of the Company. On February 9, 1998, Reliance
filed a voluntary petition under Chapter 11 of the Bankruptcy Code.
10
<PAGE> 11
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
In September 1998, five class actions, brought on behalf of current and
former stockholders of Reliance and pending in Delaware Chancery Court,
were consolidated into one class action. The consolidated class action
alleges that the Taylor Family, certain directors and officers of the
Company, and certain other defendants breached their fiduciary duties in
connection with disclosures made to the stockholders prior to the vote
which approved the Split-Off Transactions. The case seeks relief in the
form of unspecified damages, attorneys' fees and recission of the Split-Off
Transactions. On September 9, 1998 the Delaware Chancery Court stayed this
consolidated class action indefinitely pending resolution of the
consolidated class action in Texas that is described below.
In August 1998, nine class actions, brought on behalf of current and former
stockholders of Reliance and pending in the United States District Court
for the Western District of Texas, were consolidated into one class action.
One class action, brought on behalf of current and former stockholders of
Reliance, is pending in the Northern District of Illinois. These cases
allege that the Taylor Family, certain directors and officers of the
Company, and certain other defendants violated the federal securities laws
and breached common law fiduciary duties. In addition, the cases allege
that the Company and certain other defendants violated ERISA and breached
certain fiduciary duties, including fiduciary 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 and attorneys'
fees. Cole Taylor Bank is named as an additional defendant in the Illinois
action. A motion is pending to transfer the Texas case to Illinois, and a
motion is pending to transfer the Illinois case to Texas.
On August 19, 1998, Irwin Cole and other members of his family, who
collectively owned approximately 25% of the outstanding common stock of
Reliance prior to the Split-Off Transactions, brought suit in Delaware
Chancery Court against members of the Taylor Family, the Company, other
current and/or former officers and directors of Reliance and the Company,
and other stockholders of the Company. The suit alleges that the Taylor
Family, certain directors and officers of the Company, and certain other
defendants breached their fiduciary duties, committed fraud and/or engaged
in self-dealing in connection with the operation of Reliance and the
Split-Off Transactions. The lawsuit seeks unspecified damages, attorneys'
fees and requests that the Court place all of the shares of the Company
held by the Taylor Family in a constructive trust.
On October 5, 1998, the United States Bankruptcy Court of the District of
Delaware (the "Bankruptcy Court") entered an order preliminarily enjoining
the plaintiffs in most of the above lawsuits from prosecuting their cases
on account of the pending adversary proceedings by the Reliance Estate
Representative that are described below. The Company expects that the
Bankruptcy Court's order will be amended in the near future to
preliminarily enjoin the remaining plaintiffs from prosecuting their cases.
11
<PAGE> 12
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
On July 6, 1998, the Bankruptcy Court entered a confirmation order that
discharged the liability of Reliance and its subsidiaries in connection
with all of the lawsuits described above and permanently enjoined the
filing of similar new suits against them. The Bankruptcy Court also
appointed an Estate Representative (the "Estate Representative") for the
Post-Confirmation Chapter 11 Estate of Reliance and its subsidiaries. On
September 4, 1998, the Estate Representative filed two adversary proceeding
complaints which named as defendants members of the Taylor Family, certain
other directors and officers of the Company, one of Reliance's former legal
counsel and Reliance's former public accountants (both of whom continue to
serve the Company), the Company and Cole Taylor Bank, as trustee. The
complaints allege fraudulent conveyance and breaches of fiduciary duties
and contract with respect to the Taylor Family, the Company and Cole Taylor
Bank, as trustee. The complaints charge certain of the other defendants
with alleged breaches of fiduciary duty, breaches of contract, malpractice
and negligent misrepresentation and aiding and abetting the Taylor Family's
and the Company's alleged breaches. These complaints seek unspecified
damages and attorneys' fees and avoidance of the Split-Off Transactions by
the transfer to the Estate Representative of either the assets exchanged in
the Split-Off Transactions or the value of such assets. One of the
complaints demands monetary damages pursuant to the Taylor Family's
obligation under the Share Exchange Agreement to indemnify Reliance for
certain losses resulting from the Split-Off Transactions, and asks the
court to disallow any claims for indemnification that any of the defendants
have against Reliance or, in the alternative, to equitably subordinate such
claims to all other creditor claims against Reliance.
In accordance with the terms and conditions of the Share Exchange Agreement
relating to the Split-Off Transactions, the Taylor Family has agreed to
indemnify Reliance for certain losses incurred by Reliance, including
certain losses relating to the Split-Off Transactions ("Taylor Family
Indemnification Obligations"). In accordance with the terms of an agreement
dated February 6, 1997 between the Taylor Family and the Company, the
Company agreed to indemnify the Taylor Family for certain losses that the
Taylor Family may incur as a result of the Split-Off Transactions,
including a portion of the Taylor Family Indemnification Obligations under
the Share Exchange Agreement. The Company is unable at this time to predict
the extent to which it will be required to pay any amounts under its
indemnification obligation to the Taylor Family. The Company and its
subsidiaries have paid and may continue to pay defense and other legal
costs of the lawsuits described above that are not otherwise advanced by
insurance carriers on behalf of the Taylor Family and other directors,
officers and stockholders of the Company who are defendants in these
lawsuits.
The Company believes that it has meritorious defenses to all of the actions
against the Company, and the Company intends to defend itself and its
subsidiaries vigorously. However, the Company is unable to predict, at this
time, the potential impact of the litigation, the indemnification
obligations and the payment of legal fees described above on the
management, business, financial condition, liquidity and operating results
of the Company. Even if the Taylor Family, the Company and the other
defendants are successful in defending themselves in the lawsuits, the
Company will incur significant costs with respect to such lawsuits.
The Company is from time to time a party to various other legal actions
arising in the normal course of business. Management knows of no such other
threatened or pending legal actions against the Company that are likely to
have a material adverse impact on the business, financial condition,
liquidity or operating results of the Company.
12
<PAGE> 13
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. 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 the Company as of the dates and
for the periods indicated. This discussion should be read in conjunction with
the Company's consolidated financial statements and the notes thereto appearing
elsewhere in this Form 10-Q.
BASIS OF PRESENTATION
The Company's 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 and its
subsidiaries (the "Bank") and CT Mortgage Company, Inc. (the "Mortgage
Company"). This discussion should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
The Bank and Mortgage Company were acquired by the Parent Company on February
12, 1997; therefore, the Company's consolidated results of operations for 1997
are for a period of less than a full nine months.
RESULTS OF OPERATIONS
Overview
For the third quarter of 1998, consolidated net income was $2.2 million, and
annualized return on average assets and return on average equity were 0.46% and
6.02%, respectively. For the third quarter of 1997, consolidated net income was
$3.1 million. For this period, annualized return on average assets and return on
average equity were 0.65% and 8.92%, respectively. The lower net income in the
third quarter of 1998 was primarily due to the Bank's sale, in September 1997,
of its merchant credit card program to an unrelated third party which resulted
in a realized gain of $1.2 million and to increased legal fees at the Parent
Company during 1998. See "-Litigation" below.
For the nine months ended September 30, 1998, consolidated net income was $7.4
million and annualized return on average assets and return on average equity
were 0.54% and 6.95%, respectively. For the period of February 12, 1997 to
September 30, 1997, consolidated net income was $7.5 million. For this period,
annualized return on average assets and return on average equity were 0.64% and
9.25%, respectively. Income for the first nine months of 1998 decreased slightly
due to the increase in legal fees offset in large part to the 1998 reporting
period having 42 more days than the 1997 reporting period.
Net Interest Income
The following table sets forth certain information relating to the Company's
average consolidated balance sheets and reflects the yield on average earning
assets and cost of average liabilities for the periods indicated. Such yields
and costs are derived by dividing annualized income or expense by the average
balance of assets or liabilities. Interest income is measured on a tax
equivalent basis using a 35% income tax rate for each period presented.
13
<PAGE> 14
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND YIELD/RATES
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------------------- -------------------------------
YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%)(4) BALANCE INTEREST (%)(4)
------- -------- --------- -------- -------- ------
INTEREST-EARNING ASSETS: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities (1):
Taxable $376,307 $4,918 5.25 % $414,757 $6,556 6.33 %
Non-taxable (tax equivalent) 69,242 1,355 7.83 62,143 1,206 7.76
---------- ------- ---------- -------
Total investment securities 445,549 6,273 5.65 476,900 7,762 6.52
---------- ------- ---------- -------
Cash equivalents 22,146 307 5.42 58,788 852 5.67
---------- ------- ---------- -------
Loans (2):
Commercial and industrial 920,270 20,801 8.84 866,931 20,028 9.04
Real estate mortgages 191,403 3,476 7.26 212,900 3,948 7.42
Consumer and other 162,445 3,647 8.91 151,428 3,419 8.96
Fees on loans 348 364
---------- ------- ---------- -------
Net loans (tax equivalent) 1,274,118 28,272 8.81 1,231,259 27,759 8.96
---------- ------- ---------- -------
Total earning assets 1,741,813 34,852 7.96 1,766,947 36,373 8.19
---------- ------- ---------- -------
Allowance for loan losses (24,758) (25,037)
NONEARNING ASSETS:
Cash and due from banks 59,696 75,456
Accrued interest and other assets 88,190 90,529
---------- ----------
TOTAL ASSETS $1,864,941 $1,907,895
========== ==========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits $343,784 3,028 3.49 $332,783 2,986 3.56
Savings deposits 110,864 618 2.21 115,682 747 2.56
Time deposits 623,457 8,719 5.55 673,784 9,649 5.68
---------- ------- ---------- -------
Total deposits 1,078,105 12,365 4.55 1,122,249 13,382 4.73
---------- ------- ---------- -------
Short-term borrowings 193,234 2,525 5.18 201,133 2,586 5.10
Notes payable 129,345 1,865 5.64 124,489 2,010 6.32
---------- ------- ---------- -------
Total interest-bearing liabilities 1,400,684 16,755 4.75 1,447,871 17,978 4.93
---------- ------- ---------- -------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 303,490 303,030
Nonrecourse borrowings (3) --- ---
Accrued interest and other liabilities 16,864 18,641
STOCKHOLDERS' EQUITY 143,903 138,353
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,864,941 $1,907,895
========== ==========
Net interest income (tax equivalent) $18,097 $18,395
======= =======
Net interest spread 3.21 % 3.26 %
Net interest margin 4.14 % 4.15 %
====== ======
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE PERIOD OF FEB. 12, 1997 TO
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------------------- ----------------------------------
YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%)(4) BALANCE INTEREST (%)(4)
------- -------- --------- -------- -------- ---------
INTEREST-EARNING ASSETS: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities (1):
Taxable $401,199 $17,147 5.71 % $408,983 $16,473 6.39 %
Non-taxable (tax equivalent) 66,730 3,951 7.89 62,407 3,096 7.90
---------- ------- ---------- -------
Total investment securities 467,929 21,098 6.02 471,390 19,569 6.59
---------- ------- ---------- -------
Cash equivalents 10,630 441 5.47 36,337 1,310 5.62
---------- ------- ---------- -------
Loans (2):
Commercial and industrial 887,424 59,836 8.89 861,169 49,792 9.01
Real estate mortgages 198,403 10,866 7.30 208,410 9,645 7.37
Consumer and other 158,297 10,553 8.91 149,174 8,411 8.91
Fees on loans 1,045 975
---------- ------- ---------- -------
Net loans (tax equivalent) 1,244,124 82,300 8.84 1,218,753 68,823 8.93
---------- ------- ---------- -------
Total earning assets 1,722,683 103,839 8.05 1,726,480 89,702 8.23
---------- ------- ---------- -------
Allowance for loan losses (25,292) (24,893)
NONEARNING ASSETS:
Cash and due from banks 65,396 72,572
Accrued interest and other assets 95,850 87,242
---------- ----------
TOTAL ASSETS $1,858,637 $1,861,401
========== ==========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits $342,182 9,063 3.54 $322,296 7,182 3.52
Savings deposits 112,290 1,995 2.38 117,366 1,900 2.56
Time deposits 604,939 25,301 5.59 670,415 23,816 5.61
---------- ------- ---------- -------
Total deposits 1,059,411 36,359 4.59 1,110,077 32,898 4.68
---------- ------- ---------- -------
Short-term borrowings 198,278 7,665 5.17 189,403 6,204 5.18
Notes payable 127,893 5,610 5.78 110,377 4,614 6.51
---------- ------- ---------- -------
Total interest-bearing liabilities 1,385,582 49,634 4.79 1,409,857 43,716 4.90
---------- ------- ---------- -------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 306,544 297,680
Nonrecourse borrowings (3) 5,359 ---
Accrued interest and other liabilities 18,067 24,712
STOCKHOLDERS' EQUITY 143,085 129,152
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,858,637 $1,861,401
========== ==========
Net interest income (tax equivalent) $54,205 $45,986
======= =======
Net interest spread 3.26 % 3.33 %
Net interest margin 4.20 % 4.22 %
==== ====
</TABLE>
(1) Investment securities average balances are based on amortized cost.
(2) Nonaccrual loans are included in the above stated average balances.
(3) Interest expense on nonrecourse borrowings is netted against trust fees
on the income statement.
(4) Yields / rates are annualized.
14
<PAGE> 15
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net Interest Income -- continued
Net interest income (with an adjustment for tax-exempt income) for the third
quarter of 1998 was $18.1 million, compared to $18.4 million for the third
quarter of 1997. Net interest margin, which is determined by dividing
taxable-equivalent net interest income by average earning assets, decreased to
4.14% for the third quarter of 1998, from 4.15% for the same 1997 quarter. The
decline in net interest margin in 1998 was primarily a result of reduced yields
on collateralized mortgage obligations and commercial loans, partially offset by
a decline in the cost of interest-bearing liabilities.
The yield on earning assets declined to 7.96% from 8.19% for the three months
ended September 30, 1998 and 1997, respectively. In late 1997, the Bank
purchased approximately $92 million of sequential paying collateralized mortgage
obligations at a premium of $7.5 million. The lower mortgage interest rates and
higher refinancing activity experienced during 1998 requires that the Bank
amortize the purchase premium at a rate higher than originally expected.
Accordingly, September 30, 1998, an impairment charge of $463,000 was
recognized. In addition, an adjustment of approximately $200,000 was recorded to
reduce the yields of all the securities to an expected yield given actual
payments received to date and the future expected prepayment rate for these
securities. At September 30, 1998, after the adjustments, these securities
totaled $67 million, with $4.5 million of premium remaining and an expected
yield of 1.5%. These securities are backed by pools of single-family mortgage
loans and guaranteed, as to principal and interest, by certain agencies
including the Federal National Mortgage Association (FNMA) and the Federal Home
Loan Mortgage Corporation (FHLMC). The Bank utilizes actual prepayment rates and
broker estimates of expected future prepayments, as well as current and forward
interest rates, in estimating future prepayment rates. If actual or future
estimated prepayment rates exceed those currently estimated, further impairment
charges and yield reductions would occur. The decreased yield on commercial
loans reflected increased competitive pressure on loan pricing, as well as the
negative impact of increased nonaccrual loans.
The cost of interest-bearing liabilities declined to 4.75% from 4.93% for three
months ended September 30, 1998 and 1997, respectively, primarily as a result of
a lowering of the rate paid on interest-bearing deposits and the repositioning
of a portion of the Federal Home Loan Bank ("FHLB") short-term borrowings to
FHLB long-term callable notes.
Average earning assets for the three months ended September 30, 1998 decreased
$25.1 million, or 1.4% when compared to the same period in 1997.
Net interest income (with an adjustment for tax-exempt income) for the first
nine months of 1998 totaled $54.2 million, as compared to $46.0 million for the
period of February 12, 1997 to September 30, 1997. The higher net interest
income for the first nine months of 1998 was primarily due to the 42 day shorter
reporting period in 1997. Net interest margin was 4.20% for the first nine
months of 1998 as compared to 4.22% for the period of February 12, 1997 to
September 30, 1997. The slight decrease in net interest margin resulted from a
decline in the yield on earning assets to 8.05 % in 1998 from 8.23% in 1997,
primarily from declines in the investment security and commercial loan yields.
The negative impact of the reduced earning asset yield was partially offset by a
decline in the weighted average rate paid on interest-bearing deposits, and FHLB
advances. The total cost of interest bearing liabilities decreased to 4.79% for
the period ended September 30, 1998 from 4.90% for the period ended September
30, 1997.
15
<PAGE> 16
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Provision for Loan Losses
The provision for loan losses decreased $719,000 to $1.1 million in the third
quarter of 1998, from $1.8 million in the third quarter of 1997. The provision
for loan losses increased $143,000 to $3.3 million for the nine months ended
September 30, 1998, from $3.2 million for the period of February 12, 1997 to
September 30, 1997. The provision for any reporting period reflects management's
evaluation of the adequacy of the allowance for loan losses in relation to
nonperforming, impaired and total loans, as well as general economic conditions
and past and expected future loss experience. Net charge-offs were $4.6 million
for the first nine months of 1998 as compared to $2.6 million for the period
February 12, 1997 to September 30, 1997. The increase in charge offs during the
first nine months of 1998 is a result of the ongoing resolution of four older
problem loans within the Bank's commercial loan portfolio. If future net
charge-offs do not decline the provisions for loan losses could be expected to
increase.
16
<PAGE> 17
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Income
The following table displays noninterest income for the periods indicated:
<TABLE>
<CAPTION>
NONINTEREST INCOME
For the Three For the Nine For the Period of
Months Ended Months Ended Feb. 12, 1997 to
Sept. 30, Sept. 30, Sept. 30,
--------------------------- --------------- -----------------
1998 1997 1998 1997
------------ ------------- --------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Deposit service charges $1,911 $2,202 $6,098 $5,510
Retail credit card service charges 140 135 407 324
Merchant credit card processing fees 142 104 279 242
Trust fees 965 978 2,887 2,335
Gain on sale of loans, net 999 939 2,950 2,130
Mortgage loan servicing income (loss), net (47) 90 (95) 100
ATM fees 219 202 626 474
Gain on sale of mortgage servicing rights --- --- 1,462 ---
Gain on sale of merchant credit cards --- 1,230 --- 1,230
Investment securities gains, net --- 329 --- 329
Other noninterest income 220 204 702 655
------ ------ ------- -------
Total noninterest income $4,549 $6,413 $15,316 $13,329
====== ====== ======= =======
</TABLE>
Noninterest income for the third quarter of 1998 totaled $4.5 million, a
decrease of $1.9 million, or 29.1%, from the same quarter in 1997. The primary
reasons for the decrease in noninterest income were the selling of the Bank's
merchant credit card program, resulting in a realized gain of $1.2 million in
September 1997, investment securities gains of $329,000 during the third quarter
of 1997 and a reduction in deposit service charges of $291,000 during the third
quarter of 1998. Noninterest income for the first nine months of 1998 totaled
$15.3 million, an increase of $2.0 million or 14.9%, as compared to $13.3
million for the period of February 12, 1997 to September 30, 1997. Noninterest
income for the first nine months of 1998 exceeded that reported in 1997
primarily because there were 42 fewer days in the 1997 consolidated reporting
period. Additionally, noninterest income in the first quarter of 1998 included a
gain on sale of mortgage servicing rights of $1.5 million.
Mortgage loan servicing income, which declined as result of the sale of
servicing rights in early 1998, is presented net of an impairment provision on
the capitalized mortgage servicing rights of $150,000 and $6,000 for the three
months ended September 30, 1998 and 1997, respectively, and $301,000 and $53,000
for the nine months ended September 30, 1998 and the period of February 12, 1997
to September 30, 1997, respectively. The increased impairment provisions in the
1998 reporting periods over those in 1997 were a result of the lower interest
rate environment resulting in increased anticipated prepayment speeds on the
Bank's current mortgage servicing portfolio. The gain on sale of loans grew in
1998 as a result of a 37% increase in the volume of loans sold (as adjusted for
the difference in days) and an improvement in the average sale price.
17
<PAGE> 18
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Income -- continued
Management anticipates that the Bank will sell the majority of its credit card
receivables which were classified as held for sale, in November 1998. No loss is
expected from the sale. The sale of the majority of the Bank's credit card
portfolio is expected to significantly reduce retail credit card service charges
in future periods.
Noninterest Expense
The following table displays noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
NONINTEREST EXPENSE
For the Nine For the Period of
For The Three Months Ended Months Ended Feb. 12, 1997 to
Sept. 30, Sept. 30, Sept. 30,
----------------------------- ------------- -------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 9,341 $ 9,344 $27,708 $22,886
Occupancy of premises, net 1,811 1,541 5,330 3,938
Furniture and equipment 832 868 2,558 2,239
Computer processing 577 584 1,643 1,460
Legal fees 958 530 2,960 1,285
Advertising and public relations 365 444 1,328 963
Goodwill and other intangible amortization 612 642 1,836 1,620
Other real estate and repossessed asset
expense 200 249 409 447
Other noninterest expense 2,696 3,028 8,174 7,516
------- ------- ------- -------
Total noninterest expense $17,392 $17,230 $51,946 $42,354
======= ======= ======= =======
Efficiency ratio (1) 78.80% 71.09% 76.63% 73.20%
======= ======= ======= =======
</TABLE>
- ---------------------
(1) Noninterest expense divided by an amount equal to net interest income
plus noninterest income.
Total noninterest expense for the third quarter of 1998 was $17.4 million, an
increase of $162,000, or 0.9%, over the prior year's third quarter noninterest
expense of $17.2 million. This increase was primarily due to higher occupancy
and legal expenses, partially offset by a reduction in other noninterest
expenses. Noninterest expense for the nine months ended September 30, 1998
totaled $51.9 million, as compared to $42.4 million for the period of February
12, 1997 to September 30, 1997. The primary reasons for the higher expense in
the nine month period ended September 30, 1998 over that in the period of
February 12, 1997 to September 30, 1997 were increased legal fees, employee
benefit costs and occupancy expenses. The higher expense was also attributable
to the nine month period in 1998 being 42 days longer than the period of
February 12, 1997 to September 30, 1997.
18
<PAGE> 19
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Expense -- continued
Salaries and benefits expense for the third quarter of 1998 remained flat
compared to the same period in 1997. On a comparable days basis for the first
nine months of 1998, as compared to the shorter 1997 reporting period, total
salaries and benefit expense increased 2.4%. The primary reason for the increase
was the expense related to the long-term incentive and restricted stock award
programs introduced in mid-1997 and an increase in the cost of group insurance.
There was an average of 622 full time equivalent employees for the first nine
months of 1998 as compared to 607 for the 1997 reporting period.
Occupancy expense for the third quarter of 1998 increased 17.5% as compared to
the same 1997 period. On a comparable days basis for the first nine months of
1998, as compared to the shorter 1997 reporting period, occupancy expense
increased 14.5%. The rise in occupancy expense was due to the addition of two
new banking facilities. The Old Orchard (Skokie, IL) branch opened in October
1997, and the 111 West Washington branch in downtown Chicago opened in March
1998.
Legal fees for the third quarter of 1998 increased significantly from the third
quarter of 1997, and for the first nine months of 1998 as compared to the
February 12, 1997 to September 30, 1997 reporting period, despite $308,000 in
reimbursements from the Bank's insurance carrier for certain legal defense
costs. These reimbursements were received in the first quarter of 1998 and
related to two suits that were settled in 1997. The legal costs relating to the
bankruptcy of Reliance Acceptance Group, Inc. and the defense of the various
lawsuits relating to the Split-Off Transactions totaled approximately $2.4
million for the first nine months of 1998. Management expects to continue to
incur significant legal expenses in connection with the Split-Off Transactions
litigation, which will continue to adversely affect profitability. A portion of
these defense costs have been and will be submitted to insurance carriers for
reimbursement. Management, however, cannot predict to what extent such costs
will be reimbursed or when such reimbursement will occur. See " - Litigation"
below.
Advertising expense was $365,000 for the third quarter of 1998, as compared to
$444,000 for the third quarter of 1997, representing a decrease of 17.8%. The
decrease was attributable to the timing of certain advertising campaigns.
Advertising expense was $1,328,000 for the first nine months of 1998, as
compared to $963,000 for the period February 12, 1997 to September 30, 1997.
Expenses increased due to the advertising related to the grand opening of a new
banking facility in April 1998 and the 1998 reporting period consisting of 42
more days than the comparable 1997 reporting period.
Income Taxes
Income tax expense of $1.4 million and $2.1 million was recorded for the third
quarters of 1998 and 1997, respectively, reflecting effective tax rates of 40%
and 41%, respectively. The income tax expense for the first nine months of 1998
and the shorter 1997 reporting period totaled $5.1 million and $4.8 million,
respectively, reflecting effective tax rates of 41% and 39%, respectively. The
higher effective tax rate in the first nine months of 1998 was primarily due to
certain employee benefit costs that were not fully deductible for tax purposes.
19
<PAGE> 20
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
Overview
The Company's total assets of $1.85 billion remained effectively unchanged at
September 30, 1998, as compared to total assets of $1.86 billion at December 31,
1997. An increase in loans was offset by a decrease in interest bearing deposits
with banks and investment securities available for sale and the sale of the
Bank's CTRE, Inc. subsidiary on March 19, 1998. CTRE, Inc. was a subsidiary
within which the Bank conducted reverse exchange transactions in connection with
its real estate trust services business. At December 31, 1997, CTRE, Inc.'s
assets totaled $18.7 million and were reflected in other assets. Those assets
were supported by nonrecourse borrowings of an equal amount.
U.S. Treasury securities and mortgage backed securities decreased approximately
$52.3 million and $19.4 million, respectively, during the first nine months of
1998. The maturing U.S. Treasury securities and runoff of mortgage backed
securities, as a result of increased refinancing activity and favorable market
rates, were utilized to fund loan growth in commercial loans, real estate
construction loans and home equity lines of credit. These loan categories
increased $53.0 million, $36.0 million, and $5.7 million, respectively, between
December 31, 1997 and September 30, 1998.
Loans held for sale increased primarily due to approximately $8.1 million of the
Bank's credit card receivables being transferred from consumer loans to loans
held for sale. See "Noninterest Income."
Noninterest-bearing demand deposits declined between December 31, 1997 and
September 30, 1998, primarily due to the recurring seasonal increase in demand
deposits at each year end. On an average basis, demand deposits for the three
months and nine months ended September 30, 1998 exceeded demand deposits for the
three months ended September 30, 1997 and for the period of February 12, 1997 to
September 30, 1997. While total core customer deposits and repurchase agreements
remained essentially unchanged during the first nine months of 1998, the mix of
outstanding balances by product type changed modestly due to promotions of
certain interest-bearing demand deposit accounts and certificates of deposit.
Total wholesale funding, obtained primarily through brokered certificates of
deposit and FHLB advances, remained essentially flat during the nine months
ending September 30, 1998.
Nonperforming Loans and Assets
Management reviews the loan portfolio for problem loans through a loan review
function and various credit committees. Management, through its periodic review
of the Company's loan portfolio, identifies borrowers whose financial capacity
may have deteriorated. Accordingly, 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.
20
<PAGE> 21
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth the amounts of nonperforming loans and other
assets at the end of the periods indicated:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
Sept. 30, December 31,
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Loans contractually past due 90 days or more but
still accruing $2,900 $2,009
Nonaccrual loans 15,738 11,624
------- -------
Total nonperforming loans 18,638 13,633
Other real estate 1,993 1,391
Other repossessed assets 29 72
------- -------
Total nonperforming assets $20,660 $15,096
======= =======
Nonperforming loans to total loans 1.44 % 1.13 %
Nonperforming assets to total loans plus repossessed
property 1.60 % 1.25 %
Nonperforming assets to total assets 1.12 % 0.81 %
</TABLE>
Allowance for Loan Losses
The allowance for loan losses has been established to provide for those loans
which may not be repaid in their entirety. Loan losses are primarily created
from the loan portfolio, but may also be generated from other sources, such as
commitments to extend credit, guarantees and standby letters of credit. The
allowance for loan losses is increased by provisions charged to expense and
decreased by charge-offs, net of recoveries.
The following table summarizes, for the periods indicated, activity in the
allowance for loan losses, including amounts charged-off, amounts recovered,
additions to the allowance charged to operating expense, the ratio of annualized
net charge-offs to average total loans, the ratio of the allowance to total
loans at end of period, and the ratio of the allowance to nonperforming loans:
21
<PAGE> 22
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
For the Nine For the Period of
For the Three Months Ended Months Ended Feb. 12, 1997 to
Sept. 30, Sept. 30, Sept. 30,
-------------------------------- ------------- -------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Average total loans $1,274,118 $1,231,259 $1,244,124 $1,218,753
========== ========== ========== ==========
Total loans at end of period $1,291,356 $1,212,031
========== ==========
ALLOWANCE FOR LOAN LOSSES:
Allowance at beginning of period $24,503 $24,709 $25,813 $24,607
Charge-offs (1,336) (1,407) (5,752) (3,116)
Recoveries 260 131 1,116 554
---------- ---------- ---------- ----------
Net charge-offs (1,076) (1,276) (4,636) (2,562)
---------- ---------- ---------- ----------
Provisions for loan losses 1,050 1,769 3,300 3,157
---------- ---------- ---------- ----------
Allowance at end of period $24,477 $25,202 $24,477 $25,202
========== ========== ========== ==========
Net charge-offs to average total loans 0.34 % 0.41 % 0.50 % 0.33 %
(annualized)
Allowance to total loans at end of period 1.90 % 2.08 %
Allowance to nonperforming loans 131.33 % 183.86 %
</TABLE>
Net charge-offs for the third quarter 1998 as compared to the third quarter 1997
decreased $200,000. Net charge-offs were $4.6 million for the first nine months
of 1998 as compared to $2.6 million for the period February 12, 1997 to
September 30, 1997. The increase in charge-offs during the first nine months of
1998 is a result of the ongoing resolution of four older problem loans within
the Bank's commercial loan portfolio. The amount of nonperforming loans was
$18.6 million at September 30, 1998 as compared to $13.6 million at December 31,
1997. The allowance as a percentage of nonperforming loans declined to 131.33%
at September 30, 1998 from 185.89% at December 31, 1997. The Company establishes
what it believes to be an appropriate allowance level for the portfolio as a
whole, including but not limited to the nonperforming component in the portfolio
and the classification of certain assets as nonperforming in accordance with
established regulatory and management policies. The ratio of allowance to
nonperforming loans decreased from December 31, 1997 primarily due to an
increase in the level of nonperforming loans which was concentrated primarily in
two borrowing relationships. 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.
22
<PAGE> 23
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Capital Resources
The Company actively monitors compliance with bank regulatory capital
requirements, focusing primarily on the risk-based capital guidelines. Under the
risk-based method of capital measurement, computed ratios are dependent on the
amount and composition of assets recorded on the balance sheet, as well as the
amount and composition of off-balance sheet items, in addition to the level of
capital.
The Company's and the Bank's capital ratios were as follows as of the dates
indicated:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
-------------------- --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------- --------------------- --------------------
(dollars in thousands)
<S> <C> <C> <C>
As of September 30, 1998:
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated $129,710 9.17% > $113,162 >8.00% NA
Cole Taylor Bank 152,917 10.83 > 112,942 >8.00 > $141,178 >10.00%
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated 111,944 7.91% > 56,581 >4.00 NA
Cole Taylor Bank 135,186 9.58 > 56,471 >4.00 > 84,707 >6.00
Leverage (1)
Taylor Capital Group, Inc. - Consolidated 111,944 6.12% > 73,180 >4.00 NA
Cole Taylor Bank 135,186 7.39 > 73,181 >4.00 > 91,476 >5.00
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
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)
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)
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
</TABLE>
___________________________
(1) The leverage ratio is defined as Tier 1 capital divided by average
quarterly assets.
For the first nine months of 1998, the Parent Company declared $2.5 million
and $1.3 million in preferred and common stock dividends, respectively.
23
<PAGE> 24
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY
The Company's liquidity position remained stable during the first nine months of
1998. The asset growth of loans was funded primarily by cash flows from maturing
U.S. Treasury securities, repayments of mortgage related securities and loans,
and a modest increase in wholesale borrowings. The Parent Company's revolving
credit facility has been extended to September 1, 1999. In exchange for an
increase in the revolving credit facility to $12 million from $7 million and a
reduction in the interest rate, the loan agreement is now secured by the common
stock of the Bank. The Company believes that its current sources of funds are
adequate to meet all of the Company's financial commitments and asset growth
targets.
As described in Footnote 8 to the consolidated financial statements included in
Part 1, Item 1, and under the caption "Litigation" in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
Company and its subsidiaries continue to pay defense and other legal costs
related to certain significant litigation. As these costs are being paid
primarily by the Parent Company, the Parent Company's liquidity needs have
increased. The liquidity uses of the Parent Company on a standalone basis
consists primarily of dividends to shareholders and expenses for general
corporate purposes including legal costs. The primary source of Parent Company
cash flow is dividends received from the Bank. The Bank currently has adequate
capital to allow continued dividends, out of earnings, to support the expected
liquidity demands of the Parent Company.
THE YEAR 2000 ISSUE
The Company continues to be actively addressing its Year 2000 ("Y2K") issues. A
comprehensive Y2K plan (the "Plan") has been prepared and identifies internal
systems (most of which were purchased from third-party software vendors) and
those provided by third-party data processing service providers that require
modification or replacement. The Plan has been approved by the Company's Board
of Directors and includes multiple phases which are to be completed, including
awareness, assessment, renovation, validation/testing, and implementation. The
Plan also addresses contingency planning. The Company also formed a Y2K
oversight committee which is responsible for ensuring that the Plan is executed
on a timely basis.
The Company has substantially completed the awareness and assessment phases of
the Plan. The awareness phase included understanding the potential impact of Y2K
on the Company, educating employees and customers about Y2K issues, and
implementing various training and communication programs. The assessment phase
included a review of all information technology and non-information technology
systems to determine the effect of the Y2K on each particular system. An
inventory of all systems was developed to assess which systems will be likely to
cause material adverse consequences to the Company upon the arrival of Y2K
unless appropriate remedial action is taken. The Plan calls for the replacement
or upgrade non-compliant systems during the fourth quarter of 1998 and early
1999. In addition, significant vendors and borrowers of the Company have been
contacted and requested to inform the Company whether they are Y2K compliant
and, if not, their timetable for becoming compliant.
24
<PAGE> 25
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Year 2000 Issue -- continued
The Company began the renovation and validation/testing phases of its Plan
during the third quarter of 1998. These phases involve both the repair and
replacement of systems and computer equipment, as well as the development of
test scripts to test typical daily transactions on various systems. Appropriate
corrections, to applicable systems will be made based upon testing results. The
majority of the renovation and validation/testing will be performed during the
fourth quarter of 1998 and in early 1999.
The majority of the Company's mission critical systems (specifically those that
process loans, deposits, investments, and general ledger transactions) are
provided by third party processors and, therefore, the Company continues to work
closely with those service providers through the renovation and
validation/testing phases to ensure effective compliant systems before the Year
2000. The Company's primary data processing provider has been subjected to
independent third-party reviews of its Y2K compliance plan and processes and an
examination by bank regulatory authorities. At this time, the primary data
processing provider reports that it is on target to meet all required dates to
provide compliant systems.
The Company's contingency plans relative to Y2K issues have not yet been
finalized and are being developed as the testing of all systems proceeds. Upon
completion of testing, appropriate contingency plans will be finalized. As the
Company's primary data processing provider is currently on target to meet all
required dates to provide compliant systems, a contingency plan covering this
particular element has not yet been developed.
The Company expensed approximately $60,000 during the nine months ended
September 30, 1998, and expects to incur additional costs through 1998 and 1999,
for its Y2K compliance program. With respect to certain technology applications,
the Company has elected to replace the existing applications with ones of
greater functionality, rather than limit its response only to remediation of the
Y2K issue. For that reason, the Company's future technology expenditures are
expected to materially increase from historical levels. The Company expects the
additional costs incurred related to Y2K to represent only a small portion of
its overall technology expenditures.
Regardless of the Y2K 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 Y2K compliant. Other risks may include potential losses related
to major loan or deposit customers, vendors or other counterparties. The Company
has been evaluating , in accordance with the guidelines outlined by the Federal
Financial Institutions Examination Council, the potential credit risk associated
with Y2K as it relates to the Company's customer base. The Company's analysis
performed to date has not identified major credit exposure within the high risk
category of customers, further in-depth analysis will be performed during the
fourth quarter of 1998.
As a regulated financial institution, the Company is subject to possible
supervisory or enforcement action if the governing regulatory agency deems the
Company's response and progress with respect to the Y2K issue to be of serious
concern. At this time, management believes its progress with respect to Y2K
compliance to be satisfactory.
25
<PAGE> 26
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LITIGATION
Jeffrey W. Taylor, Chairman of the Board and Chief Executive Officer of the
Company, Bruce W. Taylor, President of the Company, Iris A. Taylor, Sidney J.
Taylor, Cindy Taylor Bleil, related trusts and a related partnership
(collectively, the "Taylor Family") have been named as defendants in the
lawsuits described below relating to (1) the Split-Off Transactions and (2) the
financial and public reporting of Reliance. Certain of the lawsuits also named
other current or former officers and directors of the Company and Reliance,
other stockholders of the Company, Reliance's public accountants at the time of
the Split-Off Transactions (who continue to serve as the Company's public
accountants), the investment banks that were involved in the Split-Off
Transactions, Reliance and the Company as additional defendants. The filing
dates of these lawsuits range from October, 1997 to September, 1998.
The Split-Off Transactions were a series of transactions completed on February
12, 1997 in accordance with the Share Exchange Agreement, dated June 12, 1996
(the "Share Exchange Agreement") between Reliance and the Taylor Family, which
owned approximately 25% of the outstanding common stock of Reliance prior to the
Split-Off Transactions. Pursuant to the Split-Off Transactions, the Taylor
Family and certain other stockholders of Reliance exchanged all of their common
stock of Reliance for all of the outstanding common stock of the Company. On
February 9, 1998, Reliance filed a voluntary petition under Chapter 11 of the
Bankruptcy Code.
In September, 1998, five class actions, brought on behalf of current and former
stockholders of Reliance and pending in Delaware Chancery Court, were
consolidated into one class action. The consolidated class action alleges that
the Taylor Family, certain directors and officers of the Company, and certain
other defendants breached their fiduciary duties in connection with disclosures
made to the stockholders prior to the vote which approved the Split-Off
Transactions. The case seeks relief in the form of unspecified damages,
attorneys' fees and recission of the Split-Off Transactions. On September 9,
1998 the Delaware Chancery Court stayed this consolidated class action
indefinitely pending resolution of the consolidated class action in Texas that
is described below.
In August 1998 nine class actions, brought on behalf of current and former
stockholders of Reliance and pending in the United States District Court for the
Western District of Texas, were consolidated into one class action. One class
action, brought on behalf of current and former stockholders of Reliance, is
pending in the Northern District of Illinois. These cases allege that the Taylor
Family, certain directors and officers of the Company, and certain other
defendants violated the federal securities laws and breached common law
fiduciary duties. In addition, the cases allege that the Company and certain
other defendants violated ERISA and breached certain fiduciary duties, including
fiduciary 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 and attorneys' fees. Cole Taylor Bank is named as an
additional defendant in the Illinois action. A motion is pending to transfer the
Texas case to Illinois, and a motion is pending to transfer the Illinois case to
Texas.
On August 19, 1998, Irwin Cole and other members of his family, who collectively
owned approximately 25% of the outstanding common stock of Reliance prior to the
Split-Off Transactions, brought suit in Delaware Chancery Court against members
of the Taylor Family, the Company, other current and/or former officers and
directors of Reliance and the Company, and other stockholders of the Company.
The suit alleges that the Taylor Family, certain directors and officers of the
Company, and certain other defendants breached their fiduciary duties, committed
fraud
26
<PAGE> 27
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Litigation -- continued
and/or engaged in self-dealing in connection with the operation of Reliance and
the Split-Off Transactions. The lawsuit seeks unspecified damages, attorneys'
fees and requests that the Court place all of the shares of the Company held by
the Taylor Family in a constructive trust.
On October 5, 1998, the United States Bankruptcy Court of the District of
Delaware (the "Bankruptcy Court") entered an order preliminarily enjoining the
plaintiffs in most of the above lawsuits from prosecuting their cases on account
of the pending adversary proceedings by the Reliance Estate Representative that
are described below. The Company expects that the Bankruptcy Court's order will
be amended in the near future to preliminarily enjoin the remaining plaintiffs
from prosecuting their cases.
On July 6, 1998, the Bankruptcy Court entered a confirmation order that
discharged the liability of Reliance and its subsidiaries in connection with all
of the lawsuits described above and permanently enjoined the filing of similar
new suits against them. The Bankruptcy Court also appointed an Estate
Representative (the "Estate Representative") for the Post-Confirmation Chapter
11 Estate of Reliance and its subsidiaries. On September 4, 1998, the Estate
Representative filed two adversary proceeding complaints which named as
defendants members of the Taylor Family, certain other directors and officers of
the Company, one of Reliance's former legal counsel and Reliance's former public
accountants (both of whom continue to serve the Company), the Company and Cole
Taylor Bank, as trustee. The complaints allege fraudulent conveyance and
breaches of fiduciary duties and contract with respect to the Taylor Family, the
Company, and Cole Taylor Bank, as trustee. The complaints charge certain of the
other defendants with alleged breaches of fiduciary duty, breaches of contract,
malpractice and negligent misrepresentation and aiding and abetting the Taylor
Family's and the Company's alleged breaches. These complaints seek unspecified
damages and attorneys' fees and avoidance of the Split-Off Transactions by the
transfer to the Estate Representative of either the assets exchanged in the
Split-Off Transactions or the value of such assets. One of the complaints
demands monetary damages pursuant to the Taylor Family's obligation under the
Share Exchange Agreement to indemnify Reliance for certain losses resulting from
the Split-Off Transactions, and asks the court to disallow any claims for
indemnification that any of the defendants have against Reliance or, in the
alternative to equitably subordinate such claims to all other creditor claims
against Reliance.
In accordance with the terms and conditions of the Share Exchange Agreement
relating to the Split-Off Transactions, the Taylor Family has agreed to
indemnify Reliance for certain losses incurred by Reliance, including certain
losses relating to the Split-Off Transactions ("Taylor Family Indemnification
Obligations"). In accordance with the terms of an agreement dated February 6,
1997 between the Taylor Family and the Company, the Company agreed to indemnify
the Taylor Family for certain losses that the Taylor Family may incur as a
result of the Split-Off Transactions, including a portion of the Taylor Family
Indemnification Obligations under the Share Exchange Agreement. The Company is
unable at this time to predict the extent to which it will be required to pay
any amounts under its indemnification obligation to the Taylor Family. The
Company and its subsidiaries have paid and may continue to pay defense and other
legal costs of the lawsuits described above that are not otherwise advanced by
insurance carriers on behalf of the Taylor Family and other directors, officers
and stockholders of the Company who are defendants in these lawsuits.
27
<PAGE> 28
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Litigation -- continued
The Company believes that it has meritorious defenses to all of the actions
against the Company, and the Company intends to defend itself and its
subsidiaries vigorously. However, the Company is unable to predict, at this
time, the potential impact of the litigation, the indemnification obligations
and the payment of legal fees described above on the management, business,
financial condition, liquidity and operating results of the Company. Even if the
Taylor Family, the Company and the other defendants are successful in defending
themselves in the lawsuits, the Company will incur significant costs with
respect to such lawsuits.
The Company is from time to time a party to various other legal actions arising
in the normal course of business. Management knows of no such other threatened
or pending legal actions 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. 131, "Disclosures about Segments
of an Enterprise and Related Information", was issued in June 1997. This
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
stockholders. It also establishes standards for certain related disclosures
about products and services, geographic areas and major customers. The segment
and other information disclosure is required for annual financial reports for
fiscal years beginning after December 15, 1997. Management is currently
assessing what segment information may be required.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued in June 1998. This Statement
standardizes the accounting for derivative instruments. Under the standard,
entities are required to carry all derivative instruments in the statement of
financial condition at fair value. The accounting for changes in fair value
(i.e. gains or losses) of the derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and, if so, the
reason for holding it. If certain conditions are met, entities may elect to
designate the derivative instrument as a hedge of exposure to changes in fair
values, cash flows or foreign currencies. If the hedged exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting gain or loss on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness, as well as the ineffective portion
of the gain or loss, is reported in earnings immediately. Accounting for foreign
currency hedged is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change. The Company must adopt
the Statement by January 1, 2000, however early adoption is permitted. Upon
adoption, the provisions of the Statement must be applied prospectively. The
Company plans to adopt the Statement beginning January 1, 1999. The Company has
not yet quantified the impact of its adoption of the Statement.
28
<PAGE> 29
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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-Q,
including the statements in Part I, Item 3. "Quantitative and Qualitative
Disclosures About Market Risk," 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. Such
forward-looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. When used in this Form 10-Q, the words
"anticipates," "believes," "estimates," "expects," "contemplates" 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 Quarterly
Report on Form 10-Q 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 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 or relating to the Split-Off Transactions, including
pending legal actions. Certain of these risks, uncertainties and other factors
are more fully described in the Company's previous filings with the Securities
and Exchange Commission, including, without limitation, the Company's Prospectus
dated February 7, 1997. The Company does not undertake any obligation to update
or revise any forward looking statements to reflect new events or circumstances
or for any other reason.
29
<PAGE> 30
TAYLOR CAPITAL GROUP, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency risk and commodity price
risk, do not arise in the normal course of the Company's business activities.
Interest rate risk can be defined as the exposure to a movement in interest
rates that could have an adverse effect on the Company's net interest income or
the market value of its financial instruments. The ongoing monitoring and
management of this risk is an important component of the Company's asset and
liability management process, which is governed by policies established by the
Board of Directors and carried out by the Company's Asset/Liability Management
Committee ("ALCO"). ALCO's objectives are to manage, to the degree prudently
possible, the Company's exposure to interest rate risk over both the one year
planning cycle and the longer term strategic horizon and, at the same time, to
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 off-balance sheet financial instruments. Net interest income is
computed by the model assuming market rates remaining unchanged and there is a
parallel shift of market interest rates both up and down 200 basis points. The
impact of imbedded options in such products as callable and mortgage-backed
securities, real estate mortgage loans and callable borrowings are considered.
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.
ALCO utilizes the results of the model to quantify the estimated exposure of net
interest income to sustained interest rate changes.
The Company's simulation modeling at December 31, 1997 indicated that the Bank
was potentially exposed to declining market interest rates in both the one and
two year horizons. During the first nine months of 1998, the Company's potential
exposure to declining interest rates was realized, as current cash flows on the
mortgage backed securities portfolio accelerated and resulted in significantly
reduced yields on collateralized mortgage obligations. Additionally, the Company
entered into a two year interest rate floor agreement on June 24, 1998. The
floor, which has a notional amount of $50 million, is based on 3 month LIBOR,
with a strike rate of 6.0%. The floor is designated as a hedge against certain
floating rate assets, which yields would decrease in a declining interest rate
environment.
At September 30, 1998 the simulation modeling indicated a continued exposure to
declining rates but only in the one year horizon, as the second year exposure
was mitigated through the acquisition of the interest rate floor and the
implementation of certain other balance sheet strategies. At September 30, 1998
the net interest income at risk for year one in the declining rate scenario was
calculated at $1.7 million, or 2.3% lower than the net interest income in the
rates unchanged scenario. The net interest income for year one in the rising
rate scenario was calculated as $1.8 million, or 2.5% higher than the net
interest income in the unchanged scenario. Computation of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, loan and security prepayments, deposit
decay, and pricing and reinvestment strategies and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Company may take 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 parallel
increase in market rates.
30
<PAGE> 31
TAYLOR CAPITAL GROUP, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Footnote 8 to the consolidated financial statements, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Litigation"
included in this Form 10-Q and the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (the "1997 Form 10-K") discusses certain
significant litigation relating to the Split-Off Transactions. Such discussion
is incorporated in this Part II. Item 1. by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -Exhibit 10.1 - Sixth Amendment to Loan Agreement
Between LaSalle National Bank and Taylor Capital Group,
Inc.
- Exhibit 10.2 - Amended and Restated Third Party
Safekeeping Agreement .
- Exhibit 10.3 - Security Agreement and Assignment
of European American Bank Safekeeping Account.
- Exhibit 27 - Financial Data Schedule.
(b) Form 8-K - No reports on Form 8-K were filed during the period
covered by this report.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Taylor Capital Group, Inc.
-----------------------------
(Registrant)
Date: November 12, 1998 /s/ Jeffrey W. Taylor
------------------ ------------------------------------
Jeffrey W. Taylor*
Chairman and Chief Executive Officer
Date: November 12, 1998 /s/ J. Christopher Alstrin
------------------ ------------------------------------
J. Christopher Alstrin*
Chief Financial Officer
* Duly authorized to sign on behalf of the Registrant
32
<PAGE> 1
EXHIBIT 10.1
SIXTH AMENDMENT TO
REVOLVING LOAN AGREEMENT
THIS SIXTH AMENDMENT TO REVOLVING LOAN AGREEMENT dated as of September 1, 1998
(this "Amendment") is between TAYLOR CAPITAL GROUP, INC., a Delaware corporation
(the "Borrower") and LASALLE NATIONAL BANK, a national banking association (the
"Bank").
W I T N E S S E T H:
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, a
Second Amendment dated November 1, 1997, a Third Amendment dated as of May 1,
1998, a Fourth Amendment dated June 1, 1998 and a Fifth Amendment dated as of
August 1, 1998 (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 uses herein without definition shall have the
respective meanings set forth in the Agreement.
2.
AMENDMENTS TO THE AGREEMENT.
2.1
Amendment to Section 1.1. The definition of "Average Yield" set forth in Section
1.1 of the Agreement is hereby deleted and in lieu thereof is inserted the
following: "Average Yield" means for a Fixed Rate Loan the Lender's cost of
funds in the like term treasury yield plus the corresponding swap spread as
determined by Bloomberg Financial Market Commodities News.
2.2
Amendment to Section 1.1. The definition of "Revolving Credit Maturity Date" set
forth in Section 1.1 of the Agreement is hereby amended by deleting therefrom
the date "September 1, 1998" and substituting therefor the date "September 1,
1999".
<PAGE> 2
2.3
Amendment to Section 1.1. The definition of "LIBOR Margin" set forth in Section
1.1 of the Agreement is hereby deleted and in lieu thereof is inserted the
following: "LIBOR Margin" means one and 15/100 percent (1.15%).
2.4
Amendment to Section 1.1. The definition of the term "Revolving Note" appearing
in Section 1.1 of the Loan Agreement is hereby amended and restated in its
entirety to read as follows:
"Revolving Note" means that certain Substitute Revolving Note dated as of
September 1, 1998 in the original aggregate maximum principal amount of Twelve
Million Dollars ($12,000,000), as the same may be amended, modified or
supplemented from time to time, and together with any renewals thereof or
exchanges or substitutes therefor.
2.5
Replacement of Section 2.1. Section 2.1 of the Loan Agreement is hereby amended
and restated in its entirety to read as follows:
2.1 Revolving Loan Commitment. On the terms and subject to the conditions set
forth in this Agreement, Bank agrees to make revolving credit available to
Borrower from time to time prior to the Revolving Credit Termination Date in
such aggregate amounts as the Borrower may from time to time request but in no
event exceeding Twelve Million Dollars ($12,000,000) (the "Revolving Credit
Commitment"). The Revolving Credit Commitment shall be available to Borrower by
means of Revolving Loans, it being understood that Revolving Loans may be repaid
and used again during the period from the date hereof to and including the
Revolving Credit Termination Date, at which time the Revolving Credit Commitment
shall expire.
2.6 Replacement of Section 3.1 Section 3.1 of the Loan Agreement is hereby
amended and restated in its entirety to read as follows:
3.1 Revolving Note. The Revolving Loans made by Bank under the Revolving Credit
Commitment shall be evidenced by that certain Revolving Note dated as of
September 1, 1998, payable to the order of the Bank in the maximum aggregate
principal amount of Twelve Million Dollars ($12,000,000). The unpaid principal
amount of the Revolving Loan shall bear interest and be due and payable as
provided in this Agreement and the Revolving Note. Payments to be made by
Borrower under the Revolving Note shall be made a the time, in the amounts and
upon the terms set forth herein and therein.
2.7
Replacement of Exhibit 3.1
Exhibit 3.1 attached hereto as made a part of the Agreement is hereby deleted in
its entirety and Exhibit 3.1 attached hereto is hereby substituted therefor.
<PAGE> 3
2.8
Amendment to Section 7.2(i)(iii). Section 7.2(i)(iii)(C) is hereby deleted and
in lieu thereof is inserted the following:
(C) six-tenths of one percent (0.60%) from January 1, 1999 through December 31,
1999, and (D) seven-tenths of one percent (0.70%) from January 1, 2000 through
the Termination Date, in each case calculated in accordance with GAAP.
3.
WARRANTIES. To induce the Bank to enter into this Amendment, the Borrower
warrants that:
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
Validity 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.
GENERAL.
<PAGE> 4
4.1
Law. This Amendment shall be construed in accordance with and governed by the
laws of the State of Illinois.
4.2
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.
4.3
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.
5.
EFFECTIVENESS. This Amendment shall become effective upon receipt by the Bank of
the following documents, duly executed by the parties thereto:
(a)
This Amendment;
(b)
Substitute Revolving Note in the form of Exhibit 3.1 attached hereto duly
executed by the Borrower;
(c)
Security Agreement and Assignment of European American Bank Safekeeping Account;
(d)
Amended and Restated Third Party Safekeeping Agreement; and
(e)
Such other documents as the Bank reasonably may request. IN WITNESS WHEREOF, the
parties have executed this Amendment as of the date first above written.
LASALLE NATIONAL BANK
By:________________________________ Its:________________________________
TAYLOR CAPITAL GROUP, INC.
By:_________________________________ Its:_________________________________
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED
THIRD PARTY SAFEKEEPING AGREEMENT
This AMENDED AND RESTATED THIRD PARTY SAFEKEEPING AGREEMENT (this "Agreement")
dated as of September 1, 1998, is entered into by TAYLOR CAPITAL GROUP, INC., a
Delaware corporation (the "Borrower") in favor of LASALLE NATIONAL BANK, a
national banking association (the "Bank") and EUROPEAN AMERICAN BANK, a New York
banking corporation (the "Custodian").
A.
The Bank and the Borrower have previously entered into that certain Loan
Agreement dated as of February 12, 1997 (as amended from time to time, the "Loan
Agreement"), pursuant to which the Bank has extended to the Borrower a line of
credit loan in the amount of $12,000,000 and a term loan in the original amount
of $25,000,000 (collectively, as the same are extended, modified or renewed (the
"Loans")).
B.
Pursuant to that certain Security Agreement and Assignment of European American
Bank Safekeeping Account dated as of September 1, 1998 (the "Security
Agreement"), the Borrower has pledged to the Bank for security purposes and
granted to the Bank a security interest in 1,500,000 shares of common stock
(collectively with all income and profits thereof, all distributions thereon,
all other proceeds thereof and all rights, benefits and privileges pertaining to
or arising thereunder, (the "Pledged Shares") of Cole Taylor Bank (the
"Issuer").
C.
The Borrower has heretofore delivered the Pledged Shares to the Custodian
pursuant to that certain Third Party Safekeeping Agreement dated as of December
29, 1997 (the "Original Agreement") among the Borrower, the Bank, and the
Custodian.
D.
The parties to the Original Agreement desire to amend and restate their
respective rights, duties and obligations in accordance with the terms of this
Agreement.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto agree as
follows:
1.
Custody and Pledge. The Borrower has previously delivered the Pledged Shares to
the Custodian pursuant to the Original Agreement. To secure payment and
performance of all of the obligations of the Borrower to the Bank howsoever
created, arising or evidenced, whether direct or indirect, joint, several or
joint and several, absolute or contingent, now or hereafter existing or due or
to become due under the Loan Agreement (collectively, the "Obligations"), the
Borrower
<PAGE> 2
has granted to the Bank a security interest in the Pledged Shares, pursuant to
the Security Agreement.
2.
Shares. Until the Custodian shall receive written notice from the Bank that all
of the Obligations have been fully paid and satisfied, the parties hereto agree
as follows:
(a)
The Custodian is hereby appointed as agent for the Bank and the Custodian shall
hold and retain possession of the Pledged Shares for the Bank;
(b)
The Borrower shall be unable to withdraw any of the Pledged Shares without the
Bank's prior written consent;
(c)
The Custodian shall deliver all or any part of the Pledged Shares to the Bank
upon its request at any time after the occurrence of an Event of Default; and
(d)
The Bank's receipt for any of the Pledged Shares so delivered by the Custodian
shall be a full and complete receipt and acquittance to the Custodian as
fiduciary for the Pledged Shares.
3.
Sale After Default. If the Bank elects to exercise its rights to dispose of the
Collateral pursuant to the terms of Section 9-504 of the Illinois Uniform
Commercial Code, it shall provide Borrower with not less than 120 days prior
written notice thereof. The notice shall state in reasonable detail the method
and manner of sale. Provided that the Borrower, within said 120 day period,
delivers to Bank a fully executed bona fide contract for the sale of the
Collateral (or a sale of the assets which will be in an amount sufficient to
repay the Obligations), the Borrower shall have an additional period of 60 days
(starting at the conclusion of the original 120 day period) within which to
close the sale and repay the Obligations. The Borrower shall have until the date
of sale in which to repay the Obligations at which time the Bank shall release
its lien on the Collateral. If the Collateral is in the possession of the Bank,
or its agents, the Bank shall also return the Collateral to the Borrower.
4.
Acceptance. The Custodian hereby acknowledges that the Pledged Shares have been
delivered as a condition to the making of certain loans and advances to the
Borrower under the Loan Agreement and are pledged as collateral for the
Obligations pursuant to the terms of the Security Agreement, and the Custodian
hereby accepts appointment as agent for the Bank, and agrees to act in
accordance with the terms and provisions hereof. The Custodian agrees that it
shall not have or assert any right of offset against or any lien or interest in
any of the Pledged Shares. The Pledged Shares have been coded as assigned in the
records of the Custodian, and none of the Pledged Shares will be released by the
Custodian without the prior written consent of the Bank.
<PAGE> 3
5.
Indemnity; Assumption of Risk. (a) To the fullest extent permitted by law, the
Borrower shall defend, indemnify and hold harmless the Custodian and the Bank,
and their respective officers, directors, agents, employees, members and
affiliated companies (collectively, the "Indemnitees") from and against all
claims, judgments, damages, losses, penalties, liabilities, costs and expenses
of investigation and defense of any claim and of any good faith settlement of
whatever kind or nature, contingent or otherwise, matured or unmatured,
foreseeable or unforeseeable, including, without limitation, attorneys' fees and
expenses, any of which are incurred at any time as a result of or in connection
with, the entering into of this Agreement or the transactions contemplated
thereby except to the extent arising from the gross negligence of willful
misconduct of the Custodian or the Bank.
(b)
The Borrower has requested that the Bank and the Custodian enter into this
Agreement. None of the Indemnitees shall be liable for any expense, cost, loss
or damage of any kind or nature resulting or sustained by Borrower as a result
of entering into this Agreement, including, without limitation, any franchise or
other taxes payable as a result thereof, and Borrower expressly assumes all risk
of loss or damage by entering into this Agreement except to the extent arising
from the gross negligence or willful misconduct of the Custodian or the Bank.
IN WITNESS WHEREOF, this Agreement has been signed as of the date first written
above.
ATTEST:
By: Its:
ATTEST:
By: Its:
ATTEST:
By: Its:
TAYLOR CAPITAL GROUP, INC.
By: Its:
LASALLE NATIONAL BANK
By: Its:
EUROPEAN AMERICAN BANK
By: Its:
<PAGE> 1
EXHIBIT 10.3
SECURITY AGREEMENT AND ASSIGNMENT OF
EUROPEAN AMERICAN BANK SAFEKEEPING ACCOUNT
To:
LaSalle National Bank Chicago, Illinois 60674
Ladies and Gentlemen:
The undersigned hereby expressly assigns, grants, transfers and pledges to
LASALLE NATIONAL BANK (the "Bank"), as security for the payment to the Bank of
all of its obligations to the Bank, howsoever created, arising or evidenced,
whether direct or indirect, joint, several or joint and several, absolute or
contingent, now or hereafter existing, or due or to become due under that
certain Loan Agreement (as amended, the "Agreement"), dated as of February 12,
1997, between the undersigned and the Bank (the "Obligations"), a security
interest in the 1,500,000 shares of common stock of Cole Taylor Bank (the
"Pledged Shares") deposited in a safekeeping account (the "Account") with
EUROPEAN AMERICAN BANK (the "Custodian") pursuant to that certain Third Party
Safekeeping Agreement dated as of December 29, 1997 (as amended, the
"Safekeeping Agreement") among the undersigned, the Bank and the Custodian,
together with all substitutions or replacements of the Pledged Shares, as well
as all additions to, and income, interest and dividends on the Pledged Shares
and also including all stock received by the Custodian as the result of any
stock splits and stock dividends declared on the Pledged Shares (collectively,
the "Collateral"). The undersigned represents and warrants to the Bank that it
is the owner of the Collateral and has full power and authority to enter into
this Agreement and no other consents of any other persons are required to be
obtained in connection with the execution and delivery of this Agreement, and
that the Collateral is subject to no existing security agreement or lien.
It is agreed that the Collateral may be held, dealt with, and disposed of by the
Bank, in accordance with the terms, conditions and powers contained in the
instrument or instruments evidencing said Obligations as if the Collateral were
specifically described therein and stated to be collateral therefore, and that
this Agreement shall in no way be construed as limiting or modifying in any
respect the terms of the instrument or instruments evidencing such Obligations.
It is further agreed that, as long as any such Obligations shall remain unpaid
(i) the Custodian shall hold possession of the Collateral, as security for the
payment of all such Obligations and the undersigned will be unable to transfer,
withdraw, or assign any of the Collateral, or any interest therein, or take any
other action with respect thereto without the Bank's prior written consent; (ii)
the Custodian shall deliver all or any part of the Collateral, or the proceeds
from the sale thereof, to the Bank on the Banks request therefor in whatever
form the Bank requests, and without any further agreement or consent from the
undersigned; (iii) the Bank's receipt to the Custodian of such Collateral so
delivered by the Custodian shall be a full and complete receipt and acquittance
to the Custodian, as fiduciary under the Account; and (iv) the agreement and
instructions governing the Account are hereby modified to effectuate all the
provisions hereof.
<PAGE> 2
If at any time hereafter, the undersigned receives or is entitled to receive
into its possession any payments, checks, instruments, chattel paper, dividends
on account, or in respect, of the Collateral, or any proceeds thereof, such
additional property shall also be deemed Collateral and the undersigned shall
accept such property as the Bank's agent, in trust for the Bank without
commingling such Collateral with any other property of the undersigned and
shall, upon receipt, promptly deliver such Collateral to the Custodian for the
benefit of the Bank in the exact form so received, with any necessary
endorsements or stock powers executed by the undersigned in blank; provided,
however, that Borrower shall be entitled to receive and retain all cash
dividends issued prior to the occurrence of an Event of Default (an "Event of
Default" as defined in the Agreement).
Until the occurrence of an Event of Default, the Borrower may direct the
Custodian in writing to vote, give consents, waivers or ratifications in respect
of its ownership of the Collateral. Upon the occurrence of an Event of Default,
the Bank may direct the Custodian in writing to sell, assign, or otherwise
dispose (collectively, a "Disposition") of the Collateral in exchange for cash
or credit subject to the terms hereof and of the Safekeeping Agreement. The
Custodian shall effect any Disposition of Collateral in accordance with the
terms of the Safekeeping Agreement.
The undersigned hereby appoints the Bank as its proxy and attorney-in-fact;
provided, that the Bank shall not be entitled to exercise any rights as proxy
and attorney-in-fact unless an Event of Default has occurred and is continuing.
As proxy and attorney-in-fact and subject to the terms hereof and of the
Safekeeping Agreement, the Bank is authorized to take any action regarding the
Collateral deemed necessary by the Bank to protect the security interest of the
Bank in the Collateral. The undersigned and the Bank acknowledge that the
constitution and appointment of such proxy and attorney-in-fact are coupled with
an interest and are irrevocable.
The undersigned agrees to take all actions reasonably deemed necessary by the
Bank, and, after the occurrence and during the continuance of an Event of
Default, authorizes the Bank to take all such actions in its place and stead, to
establish and maintain a valid, perfected first priority security interest in
the Collateral in favor of the Bank to secure the payment of the Obligations and
to indemnity and reimburse the Bank for all cost and expenses incurred by the
Bank in connection therewith.
The undersigned further agrees to defend the Collateral against any and all
claims of any person or party whose claims are adverse to the claims, rights or
interest of the Bank and the undersigned shall indemnify and hold the Bank
harmless from and against any and all such adverse claims. The undersigned
agrees that it shall bear all risk of loss, damage and diminution in value with
respect to the Collateral, and that the Bank shall have no liability or
obligation to the undersigned with respect to monitoring the value o the
property or for ascertaining any maturities, call, conversions, exchanges,
offers, tenders or similar matters relating to any of the Collateral or for
informing the undersigned with respect to any of such matters (irrespective of
whether the Bank actually has, or may be deemed to have, knowledge thereof). The
Bank shall not be liable for its failure to give notice to the undersigned of a
default under any agreement or document evidencing any of the Obligations,
unless specifically provided for therein, nor shall
<PAGE> 3
the Bank be liable for its failure to use due diligence to collect any amount
payable in respect to the Collateral, but shall be liable only to account to the
undersigned for what the Bank may actually collect and receive thereon. The
foregoing provisions of this paragraph shall be fully applicable to all
securities or similar property held in pledge hereunder, irrespective of whether
the Bank may have exercised any right to have such securities or similar
property registered in its name or in the name of a nominee, and the Bank is
hereby released from any liability resulting from any of the foregoing.
This Agreement and the rights and obligations of the parties hereunder shall be
contested and interpreted in accordance with the laws of the State of Illinois
applicable to agreements made and to be wholly performed in such state.
The Bank is hereby authorized to deliver a copy of this Agreement to the
Custodian, and such delivery shall constitute the undersigned's direction to the
Bank to effectuate the provisions of this Agreement.
Dated as of September 1, 1998
TAYLOR CAPITAL GROUP, INC.
By: Its:
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TAYLOR
CAPITAL GROUP, INC. FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 67,837
<INT-BEARING-DEPOSITS> 117
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 334,912
<INVESTMENTS-CARRYING> 87,261
<INVESTMENTS-MARKET> 89,181
<LOANS> 1,291,356
<ALLOWANCE> 24,477
<TOTAL-ASSETS> 1,845,476
<DEPOSITS> 1,384,584
<SHORT-TERM> 191,553
<LIABILITIES-OTHER> 17,722
<LONG-TERM> 106,500
0
38,250
<COMMON> 47
<OTHER-SE> 106,820
<TOTAL-LIABILITIES-AND-EQUITY> 1,845,476
<INTEREST-LOAN> 82,071
<INTEREST-INVEST> 19,594
<INTEREST-OTHER> 441
<INTEREST-TOTAL> 102,106
<INTEREST-DEPOSIT> 36,359
<INTEREST-EXPENSE> 49,634
<INTEREST-INCOME-NET> 52,472
<LOAN-LOSSES> 3,300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 51,946
<INCOME-PRETAX> 12,542
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,442
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.20
<LOANS-NON> 15,738
<LOANS-PAST> 2,900
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 25,813
<CHARGE-OFFS> 5,752
<RECOVERIES> 1,116
<ALLOWANCE-CLOSE> 24,477
<ALLOWANCE-DOMESTIC> 24,477
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
