<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 JUNE 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 August 5, 1998
- -------------------------------- -----------------------------
Common Stock, $.01 Par Value 4,658,533
<PAGE> 2
TAYLOR CAPITAL GROUP, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION.......................................................................... PAGE
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997.................................................. 3
Consolidated Statements of Income -
For the Three and Six Months Ended June 30, 1998;
For the Three Months Ended June 30, 1997 and the
Period of February 12, 1997 to June 30, 1997......................................... 4
Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1998;
For the Period of February 12, 1997 to June 30, 1997................................ 5
Notes to Financial Statements............................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 26
Item 6. Exhibits and Reports on Form 8-K......................................................... 26
Signatures .............................................................................. 27
</TABLE>
2
<PAGE> 3
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 67,731 $ 72,210
Interest-bearing deposits with banks 10,256 12,131
Federal funds sold -- 275
Investment securities:
Available-for-sale, at fair value 378,483 399,145
Held-to-maturity, at amortized cost (fair value of $84,256 and $84,581 at
June 30, 1998 and December 31, 1997, respectively) 82,913 83,251
Loans held for sale, net, at lower of cost or market 48,607 31,771
Loans, net of allowance for loan losses of $24,503 and $25,813 at June 30, 1998
and December 31, 1997, respectively 1,179,330 1,146,853
Premises, leasehold improvements and equipment, net 22,486 22,713
Other real estate and repossessed assets, net 2,102 1,463
Goodwill and other intangibles, net of amortization of $3,458 and $2,235
at June 30, 1998 and December 31, 1997, respectively 33,278 34,356
Other assets 32,002 51,543
----------- -----------
Total assets $ 1,857,188 $ 1,855,711
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 326,594 $ 340,419
Interest-bearing 1,065,222 1,037,538
----------- -----------
Total deposits 1,391,816 1,377,957
Short-term borrowings 175,357 186,053
Accrued interest, taxes and other liabilities 15,078 19,874
Nonrecourse borrowings -- 18,757
Notes payable 132,000 112,000
----------- -----------
Total liabilities 1,714,251 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, 4,654,533
and 4,640,453 shares issued and outstanding at June 30, 1998 and
December 31, 1997, respectively 47 46
Surplus 99,806 99,371
Unearned compensation - stock grants (2,503) (2,656)
Retained earnings 7,895 5,278
Accumulated other comprehensive income (558) 781
----------- -----------
Total stockholders' equity 142,937 141,070
----------- -----------
Total liabilities and stockholders' equity $ 1,857,188 $ 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 Six For the Period of
For the Three Months Ended Months Ended Feb. 12, 1997 to
June 30, June 30, June 30,
-------------------------- ------------- ----------------
1998 1997 1998 1997
-------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 27,405 $ 27,018 $ 53,860 $ 40,924
Interest and dividends on investment
securities:
Taxable 5,751 6,673 12,229 9,917
Tax-exempt 822 734 1,607 1,144
Interest on cash equivalents 44 214 134 458
-------- -------- -------- --------
Total interest income 34,022 34,639 67,830 52,443
-------- -------- -------- --------
Interest expense:
Deposits 12,052 12,851 23,994 19,516
Short-term borrowings 2,643 2,397 5,140 3,618
Notes payable 1,880 1,847 3,745 2,604
-------- -------- -------- --------
Total interest expense 16,575 17,095 32,879 25,738
-------- -------- -------- --------
Net interest income 17,447 17,544 34,951 26,705
Provision for loan losses 1,500 904 2,250 1,388
-------- -------- -------- --------
Net interest income after provision
for loan losses 15,947 16,640 32,701 25,317
-------- -------- -------- --------
Noninterest income:
Service charges 2,267 2,371 4,591 3,635
Trust fees 977 864 1,922 1,357
Gain on sales of loans, net 1,150 920 1,951 1,103
Gain on sale of mortgage servicing rights 15 -- 1,462 --
Other noninterest income 431 411 841 821
-------- -------- -------- --------
Total noninterest income 4,840 4,566 10,767 6,916
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits 9,242 8,970 18,367 13,542
Occupancy of premises, net 1,805 1,522 3,519 2,397
Furniture and equipment 917 895 1,726 1,371
Computer processing 505 603 1,066 876
Advertising and public relations 805 412 963 519
Goodwill and other intangible amortization 613 664 1,224 978
Legal fees 1,688 636 2,002 756
Other noninterest expense 2,691 3,238 5,687 4,685
-------- -------- -------- --------
Total noninterest expense 18,266 16,940 34,554 25,124
-------- -------- -------- --------
Income before income taxes 2,521 4,266 8,914 7,109
Income taxes 1,143 1,853 3,655 2,688
-------- -------- -------- --------
Net income $ 1,378 $ 2,413 $ 5,259 $ 4,421
======== ======== ======== ========
Preferred dividend requirements (860) (861) (1,721) (1,329)
-------- -------- -------- --------
Net income applicable to common stockholders $ 518 $ 1,552 $ 3,538 $ 3,092
======== ======== ======== ========
</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 Six For the Period of
Months Ended Feb. 12, 1997 to
June 30, June 30,
------------ -----------------
1998 1997
------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,259 $ 4,421
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 2,250 1,388
Gain on sales of loans originated for sale (2,290) (1,102)
Loans originated and held for sale (158,270) (94,933)
Proceeds from sales of loans originated for sale 151,077 89,452
Depreciation and amortization 4,974 2,398
Other adjustments to net income, net 211 (259)
Net changes in other assets and liabilities (3,226) (10,352)
--------- ---------
Net cash used in operating activities (15) (8,987)
--------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities (21,516) (106,669)
Purchases of held-to-maturity securities (10,089) (7,248)
Proceeds from principal payments and maturities of
available-for-sale securities 38,532 57,154
Proceeds from principal payments and maturities of
held-to-maturity securities 10,165 2,830
Net increase in loans (43,133) (39,969)
Net cash of Bank and Mortgage Company acquired in
Split-Off Transactions -- 65,311
Decrease in reverse exchange assets 18,757 --
Other, net (1,179) (352)
--------- ---------
Net cash used in investing activities (8,463) (28,943)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 13,859 110,628
Net decrease in short-term borrowings (10,696) (73,490)
Repayments of notes payable (86,400) (10,000)
Proceeds from notes payable 106,400 76,000
Net proceeds from issuance of preferred stock -- 36,105
Decrease in nonrecourse borrowings (18,757) --
Dividends paid (2,557) (873)
--------- ---------
Net cash provided by financing activities 1,849 138,370
--------- ---------
Net increase (decrease) in cash and cash equivalents (6,629) 100,440
Cash and cash equivalents, beginning of period 84,616 --
--------- ---------
Cash and cash equivalents, end of period $ 77,987 $ 100,440
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 33,284 $ 24,160
Income taxes 6,775 3,348
</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 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 consolidated financial position and consolidated
results of operations as of the dates and for the periods presented.
The results of operations for the six months ended June 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.
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
June 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
June 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 $196,993 $ 822 $ (21) $197,794
U.S. government agency securities 10,213 94 -- 10,307
Collateralized mortgage obligations 89,791 59 (2,650) 87,200
Mortgage-backed securities 82,330 1,020 (168) 83,182
-------- -------- -------- --------
Total available-for-sale 379,327 1,995 (2,839) 378,483
-------- -------- -------- --------
Held-to-maturity:
State and municipal obligations 67,956 1,279 -- 69,235
Federal Reserve Bank and Federal Home Loan
Bank equity securities 14,132 -- -- 14,132
Other debt securities 825 64 -- 889
-------- -------- -------- --------
Total held-to-maturity 82,913 1,343 -- 84,256
-------- -------- -------- --------
Total $462,240 $ 3,338 $ (2,839) $462,739
======== ======== ======== ========
</TABLE>
<TABLE>
<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 June 30, 1998 and December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Commercial and industrial $ 698,358 $ 671,506
Real estate-construction 194,586 179,855
Residential real estate-mortgages 159,462 165,258
Home equity lines of credit 107,615 104,287
Consumer 43,218 50,391
Other loans 1,860 2,448
----------- -----------
Gross loans 1,205,099 1,173,745
Less: Unearned discount (1,266) (1,079)
----------- -----------
Total loans 1,203,833 1,172,666
Less: Allowance for loan losses (24,503) (25,813)
----------- -----------
Loans, net $ 1,179,330 $ 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 June 30, 1998, approximately $8.1 million of the Bank's $9.5
million of credit card receivables were classified as loans held for sale.
The Bank currently is under contract to sell these receivables. No loss is
expected from the sale.
4. Interest-Bearing Deposits:
Interest-bearing deposits at June 30, 1998 and December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
(in thousands)
<S> <C> <C>
NOW accounts $ 109,056 $ 100,309
Savings accounts 112,938 112,978
Money market deposits 224,237 240,294
Certificates of deposit 434,089 417,230
Public time deposits 110,133 96,844
Brokered certificates of deposit 74,769 69,883
---------- ----------
Total $1,065,222 $1,037,538
========== ==========
</TABLE>
8
<PAGE> 9
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
5. Notes Payable:
Notes payable at June 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
TAYLOR CAPITAL GROUP, INC.:
Unsecured $25 million term loan bearing interest at prime rate or LIBOR plus
1.25%, annual principal reductions of $1 million commencing 1999 and a
balloon payment of $22 million on February 12, 2002; interest rates at June
30, 1998 and December 31, 1997 were 6.94% and 7.12% respectively. $25,000 $25,000
Unsecured $7 million revolving credit facility bearing interest at prime rate or
LIBOR plus 1.25%, maturing August 1, 1998; interest rates at June 30, 1998
and December 31, 1997 were 6.94% and 7.02% respectively. 2,000 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 June 30, 1998 and December 31, 1997 were 5.32%
and 6.04% respectively 105,000 85,000
-------- --------
Total $132,000 $112,000
======== ========
</TABLE>
In July 1998, the Taylor Capital Group, Inc. loan agreement was amended to
extend the maturity date of the revolving credit facility from August 1,
1998 to September 1, 1998. 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 June 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 six months ended
June 30, 1998, stock options were granted with respect to 95,019 shares of
common stock at $25.00 per share. As of June 30, 1998, total stock options
outstanding, net of forfeitures, were for 228,430 shares of common stock at
a weighted average option price of $23.25.
In addition, 14,080 shares of common stock were awarded in 1998 to certain
employees and non-employee members of the 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 nonstockholder 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 Period
For the Three For the Six of Feb. 12, 1997
Months Ended Months Ended to
June 30, June 30, June 30,
------------------ ------------ ----------------
1998 1997 1998 1997
-------- ------- ------------ ----------------
(in thousands)
<S> <C> <C> <C> <C>
Net income, as reported $ 1,378 $ 2,413 $ 5,259 $ 4,421
Other comprehensive income:
Change in unrealized gains (losses) on
available-for-sale securities (1,042) 3,166 (2,027) (442)
Income tax expense (benefit) related
to other comprehensive income (353) 1,076 (688) (143)
------- ------- ------- -------
Other comprehensive income, net of tax (689) 2,090 (1,339) (299)
------- ------- ------- -------
Total comprehensive income $ 689 $ 4,503 $ 3,920 $ 4,122
======= ======= ======= =======
</TABLE>
8. Litigation:
The Company has been named as a defendant in a number of lawsuits relating
to either or both (1) the Split-Off Transactions which resulted in the
Company being split-off from CTFG (now Reliance Acceptance Group, Inc.,
hereinafter referred to as "Reliance") in February 1997, and (2) the
financial and public reporting of Reliance. The lawsuits name Reliance
and/or current or former officers, directors and stockholders of the
Company and Reliance as additional defendants. Included among the
defendants are Jeffrey W. Taylor, Chairman of the Board and Chief Executive
Officer of the Company, and Bruce W. Taylor, President of the Company, and
other members of the Taylor Family (as defined below). All of the lawsuits
have been brought as purported class actions on behalf of current and
former stockholders of Reliance.
Five of these actions are pending in Delaware Chancery Court. These cases
allege that the defendants breached their fiduciary duties in connection
with disclosures made to the stockholders prior to the vote which approved
the Split-Off Transactions. These cases seek relief in the form of
unspecified damages, attorneys' fees and rescission of the Split-Off
Transactions. Two other cases are pending in the United States District
Court for the Western District of Texas and one case is pending in the
Northern District of Illinois. These cases allege that the defendants
violated the federal securities
10
<PAGE> 11
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
laws, and the Illinois action also alleges that the defendants breached
common law fiduciary duties. In addition, the Illinois case alleges that
the defendants violated ERISA and breached duties owed to a subclass
consisting of participants in Reliance's ESOP and 401(k)/Profit Sharing
Plan. The Texas and Illinois cases seek unspecified damages and attorneys'
fees and the Texas case seeks rescission of the Split-Off Transactions.
Cole Taylor Bank is named as a defendant in the Illinois action.
Seven other similar lawsuits are pending in the United States District
Court for the Western District of Texas. Although the Company and its
subsidiaries have not been named as a defendant in these other suits,
certain directors, officers and stockholders of the Company, including
Jeffrey W. Taylor, Bruce W. Taylor, other members of the Taylor Family and
J. Christopher Alstrin, Chief Financial Officer of the Company, have been
named.
On February 9, 1998, Reliance filed a voluntary petition under Chapter 11
of the Bankruptcy Code. On July 6, 1998, the Bankruptcy Judge entered a
confirmation order that discharged the liability of Reliance and its
subsidiaries in connection with the lawsuits described above and
permanently enjoined the filing of similar new suits against them. In
addition, the Bankruptcy Judge has entered an order enjoining the parties
to the above-described lawsuits from taking any actions in those lawsuits,
except actions relating to certain procedural matters, until September 30,
1998.
Although 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, the Company is unable to predict at this
time the potential impact of the Split-Off litigation described above on
the financial condition of the Company.
In accordance with the terms and conditions of the Share Exchange Agreement
relating to the Split-Off Transactions, Jeffrey W. Taylor, Bruce W. Taylor,
Iris A. Taylor, Sidney J. Taylor, Cindy Taylor Bleil, related trusts and a
related partnership (collectively, the "Taylor Family") have agreed to
indemnify Reliance for certain losses that Reliance incurs, including
certain losses relating to the Split-Off Transactions ("Taylor Family
Indemnification Obligations"). In accordance with the terms of an agreement
between the Taylor Family and the Company, the Company agreed to indemnify
the Taylor Family for certain losses that the Taylor Family incurs as a
result of the Split-Off Transactions, including a substantial 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 or predict the potential impact that such
indemnification obligation will have on the financial condition of the
Company.
The Company and its subsidiaries have advanced and may continue to advance
defense costs of the lawsuits described above on behalf of the Taylor
Family and the directors and officers of the Company who are defendants in
these lawsuits.
The Company is from time to time a party to various other legal actions
arising in the normal course of its business. Management knows of no such
other threatened or pending legal actions against the Company that are
likely to have a material adverse impact on the financial condition of the
Company.
11
<PAGE> 12
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 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 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 consolidated results of operations for 1997 are for a
period of less than a full six months.
RESULTS OF OPERATIONS
Overview
For the second quarter of 1998, consolidated net income was $1.4 million.
Annualized return on average assets and return on average equity were .30% and
3.86%, respectively. For the second quarter of 1997, consolidated net income was
$2.4 million. For this period, annualized return on average assets and return on
average equity were .52% and 7.23%, respectively. The lower net income in the
second quarter of 1998 was primarily due to increases in the loan loss provision
at the Bank and legal fees at the Parent Company.
For the six months ended June 30, 1998, consolidated net income was $5.3
million. Annualized return on average assets and return on average equity were
.57% and 7.43%, respectively. For the period of February 12, 1997 to June 30,
1997, consolidated net income was $4.4 million. For this period, annualized
return on average assets and return on average equity were .63% and 8.58%,
respectively. Despite increases in the loan loss provision and legal fees,
income for the first six months of 1998 increased, primarily due to a $1.5
million gain on the sale of mortgage servicing rights and 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.
12
<PAGE> 13
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND YIELD/RATES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 1998 JUNE 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 $ 405,558 $ 5,751 5.72 % $ 419,219 $ 6,673 6.38 %
Non-taxable (tax equivalent) 67,145 1,326 7.90 62,139 1,214 7.81
---------- ------- ---------- -------
Total investment securities 472,703 7,077 6.00 481,358 7,887 6.59
---------- ------- ---------- -------
Cash equivalents 3,226 44 5.40 15,412 214 5.55
---------- ------- ---------- -------
Loans (2):
Commercial and industrial 882,482 19,811 8.88 860,421 19,655 9.04
Real estate mortgages 210,311 3,782 7.19 208,636 3,759 7.21
Consumer and other 157,253 3,492 8.91 148,238 3,284 8.89
Fees on loans 395 412
---------- ------- ---------- -------
Net loans (tax equivalent) 1,250,046 27,480 8.81 1,217,295 27,110 8.93
---------- ------- ---------- -------
Total earning assets 1,725,975 34,601 8.04 1,714,065 35,211 8.23
---------- ------- ---------- -------
Allowance for loan losses (25,340) (24,737)
NONEARNING ASSETS:
Cash and due from banks 64,168 73,058
Accrued interest and other assets 91,769 89,315
---------- ----------
TOTAL ASSETS $1,856,572 $1,851,701
========== ==========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits $338,948 2,996 3.55 $313,565 2,733 3.50
Savings deposits 113,093 666 2.36 118,600 757 2.56
Time deposits 602,279 8,390 5.59 675,447 9,361 5.56
---------- ------- ---------- -------
Total deposits 1,054,320 12,052 4.58 1,107,612 12,851 4.65
---------- ------- ---------- -------
Short-term borrowings 204,258 2,643 5.19 184,343 2,397 5.22
Notes payable 130,657 1,880 5.69 114,244 1,847 6.40
---------- ------- ---------- -------
Total interest-bearing 1,389,235 16,575 4.79 1,406,199 17,095 4.88
---------- ------- ---------- -------
liabilities
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 306,919 294,201
Nonrecourse borrowings (3) -- --
Accrued interest and other 17,297 17,390
liabilities
STOCKHOLDERS' EQUITY 143,121 133,911
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' $1,856,572 $1,851,701
========== ==========
EQUITY
Net interest income (tax equivalent) $18,026 $18,116
======= =======
Net interest spread 3.25 % 3.35 %
Net interest margin 4.18 % 4.23 %
==== ====
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE PERIOD OF FEBRUARY 12,
JUNE 30, 1998 1997 TO JUNE 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 $ 413,645 $12,229 5.94 % $ 405,519 $ 9,917 6.42 %
Non-taxable (tax equivalent) 65,474 2,596 7.93 62,566 1,890 7.94
---------- ------- ---------- -------
Total investment securities 479,119 14,825 6.21 468,085 11,807 6.63
---------- ------- ---------- -------
Cash equivalents 4,872 134 5.47 22,867 458 5.22
---------- ------- ---------- -------
Loans (2):
Commercial and industrial 871,001 39,035 8.91 857,712 29,764 8.99
Real estate mortgages 201,903 7,390 7.32 205,717 5,697 7.28
Consumer and other 156,223 6,906 8.91 147,821 4,992 8.87
Fees on loans 697 611
---------- ------- ---------- -------
Net loans (tax equivalent) 1,229,127 54,028 8.85 1,211,250 41,064 8.90
---------- ------- ---------- -------
Total earning assets 1,713,118 68,987 8.11 1,702,202 53,329 8.23
---------- ------- ---------- -------
Allowance for loan losses (25,559) (24,806)
NONEARNING ASSETS:
Cash and due from banks 68,246 70,844
Accrued interest and other assets 99,680 85,267
---------- ----------
TOTAL ASSETS $1,855,485 $1,833,507
========== ==========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits $ 341,381 6,035 3.56 $ 316,003 4,196 3.49
Savings deposits 113,003 1,377 2.46 118,376 1,153 2.56
Time deposits 595,680 16,582 5.61 668,394 14,167 5.57
---------- ------- ---------- -------
Total deposits 1,050,064 23,994 4.61 1,102,773 19,516 4.65
---------- ------- ---------- -------
Short-term borrowings 200,800 5,140 5.16 182,365 3,618 5.21
Notes payable 127,167 3,745 5.86 101,910 2,604 6.62
---------- ------- ---------- -------
Total interest-bearing 1,378,031 32,879 4.81 1,387,048 25,738 4.87
---------- ------- ---------- -------
liabilities
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 308,071 294,473
Nonrecourse borrowings (3) 8,083 --
Accrued interest and other 18,624 16,651
liabilities
STOCKHOLDERS' EQUITY 142,676 135,335
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' $1,855,485 $1,833,507
========== ==========
EQUITY
Net interest income (tax equivalent) $36,108 $27,591
======= =======
Net interest spread 3.30 % 3.36 %
Net interest margin 4.24 % 4.26 %
==== ====
</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.
13
<PAGE> 14
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 second
quarter of 1998 was $18.0 million, compared to $18.1 million for the second
quarter of 1997. Net interest margin, which is determined by dividing
taxable-equivalent net interest income by average earning assets, decreased to
4.18% for the second quarter of 1998, from 4.23% for the same 1997 quarter. The
decline in net interest margin in 1998 was 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 8.04% from 8.23% for the three months ended June 30, 1998 and 1997,
respectively. The yield on mortgage related securities was negatively impacted
by accelerated repayments occurring in the first half of 1998. The 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 4.79% from 4.88% for three months ended
June 30, 1998 and 1997, respectively, primarily as a result of lowering the rate
paid on savings accounts and restructuring a portion of the Federal Home Loan
Bank ("FHLB") borrowings to long-term callable notes. Average earning assets
remained essentially unchanged.
Net interest income (with an adjustment for tax-exempt income) for the first six
months of 1998 totaled $36.1 million as compared to $27.6 million for the period
of February 12, 1997 to June 30, 1997. The higher net interest income for the
first six months of 1998 was primarily due to the 42 day shorter reporting
period in 1997. Net interest margin was 4.24% for the first six months of 1998
as compared to 4.26% for the period of February 12, 1997 to June 30, 1997. The
decrease in net interest margin resulted from a decline in the yield on earning
assets to 8.11 % 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 liabilities, customer repurchase
agreements and FHLB advances which decreased to 4.81% from 4.87% for the periods
ended June 30, 1998 and 1997, respectively.
Provision for Loan Losses
The provision for loan losses in the second quarter of 1998 increased $596,000
to $1.5 million from $904,000 in the second quarter of 1997, and increased
$862,000 to $2.3 million for the six months ended June 30, 1998, from $1.4
million for the period of February 12, 1997 to June 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. The increase in the provision in 1998 was due to the increased net
charge-offs during the period. Net charge-offs were $3.6 million for the first
six months of 1998 as compared to $1.3 million for the period February 12, 1997
to June 30, 1997. Management does not believe the increased charge-offs to be
predictive of a worsening trend, but rather the resolution of certain older,
chronic commercial problem loans that ripened during the period.
14
<PAGE> 15
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:
NONINTEREST INCOME
<TABLE>
<CAPTION>
For the Six For the Period of
For the Three Months Months Ended Feb. 12, 1997 to
Ended June 30, June 30, June 30,
-------------------- ------------ -----------------
1998 1997 1998 1997
-------- -------- ------------ -----------------
(in thousands)
<S> <C> <C> <C> <C>
Deposit service charges $ 2,097 $ 2,148 $ 4,187 $ 3,308
Retail credit card service charges 137 125 267 189
Merchant credit card processing fees 33 98 137 138
Trust fees 977 864 1,922 1,357
Gain on sale of loans 1,150 920 1,951 1,103
Mortgage loan servicing income (loss) (38) (1) (48) 87
ATM fees 213 175 406 272
Gain on sale of mortgage servicing rights 15 -- 1,462 --
Other noninterest income 256 237 483 462
-------- -------- -------- --------
Total noninterest income $ 4,840 $ 4,566 $ 10,767 $ 6,916
======== ======== ======== ========
</TABLE>
Noninterest income for the second quarter of 1998 totaled $4.8 million, a
$274,000, or 6.0% increase from the same quarter in 1997. Noninterest income for
the first six months of 1998 totaled $10.8 million as compared to $6.9 million
for the period of February 12, 1997 to June 30, 1997. The income for the first
six 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 $97,000 and $47,000, for the three
months ended June 30, 1998 and 1997, respectively, and $150,000 and $47,000 for
the six months ended June 30, 1998 and for the period of February 12, 1997 to
June 30, 1997, respectively. The gain on sale of loans in 1998 grew 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.
In the first quarter of 1998, the majority of the Bank's credit card receivables
were marketed for sale. The Bank is currently under contract to sell these
receivables late in the third quarter of 1998. 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.
15
<PAGE> 16
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Expense
The following table displays noninterest expense for the periods indicated:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
For the Six For the Period of
For The Three Months Ended Months Ended Feb. 12, 1997 to
June 30, June 30, June 30,
-------------------------- ------------ -----------------
1998 1997 1998 1997
-------- ---------- ------------ -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 9,242 $ 8,970 $18,367 $13,542
Occupancy of premises, net 1,805 1,522 3,519 2,397
Furniture and equipment 917 895 1,726 1,371
Computer processing 505 603 1,066 876
Legal fees 1,688 636 2,002 756
Advertising and public relations 805 412 963 519
Goodwill and other intangible amortization 613 664 1,224 978
Other real estate and repossessed asset
expense 111 192 209 198
Other noninterest expense 2,580 3,046 5,478 4,487
------- ------- ------- -------
Total noninterest expense $18,266 $16,940 $34,554 $25,124
======= ======= ======= =======
Efficiency ratio (1) 81.96 % 76.62 % 75.58 % 74.73 %
======= ======= ======= =======
</TABLE>
- ---------------
(1) Noninterest expense divided by an amount equal to net interest income plus
noninterest income.
Total noninterest expense for the second quarter of 1998 was $18.3 million, a
$1.3 million, or 7.8%, increase over the prior year's second quarter noninterest
expense of $16.9 million. Noninterest expense for the six months ended June 30,
1997 totaled $34.6 million, as compared to $25.1 million for the period of
February 12, 1997 to June 30, 1997. The primary reasons for the higher expense
in the 1998 reporting periods over that in 1997 was increased legal fees,
employee benefit costs and occupancy expenses. Additionally, the six month
period in 1998 was 42 days larger that the period February 12, 1997 to June 30,
1997.
Salaries and benefits expense for the second quarter of 1998 increased 3.0% from
the second quarter of 1997. On a comparable days basis for the first six months
of 1998 as compared to the shorter 1997 reporting period, total salaries and
benefit expense increased 4.2%. The primary reason for the increase was the
expense related to the long-term incentive and restricted stock award programs
which were introduced in mid-1997 and an increase in the cost of group
insurance. There was an average of 620 full time equivalent employees for the
first six months of 1998 as compared to 605 for the 1997 reporting period.
16
<PAGE> 17
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Expense -- continued
Occupancy expense for the second quarter of 1998 increased 18.6% as compared to
the same 1997 period. On a comparable days basis for the first six months of
1998 as compared to the shorter 1997 reporting period, occupancy expense
increased 12.7%. 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 second quarter of 1998 increased significantly from the
second quarter of 1997, and for the first six months of 1998 as compared to the
February 12, 1997 to June 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 and the defense of the various lawsuits relating to the
Split-Off Transactions totaled approximately $1.5 million for the first six
months of 1998. Management expects to continue to incur significant legal
expenses in connection with Split-Off Transactions litigation, which would then
continue to adversely affect profitability Management anticipates that a
portion of the defense costs the Company has paid or will in the future pay will
be reimbursed by insurance will occur, if at all. See "Litigation" and "-Item
1-Legal Proceedings".
Advertising expense was $805,000 for the second quarter of 1998, as compared to
$412,000 for the second quarter of 1997, representing an increase of 95%. The
increase was attributable to the timing of certain advertising campaigns as well
as expenses related to the grand opening of a new branch facility. Advertising
expense was $963,000 for the first six months of 1998 as compared to $519,000
for the period February 12, 1997 to June 30, 1997. In addition to the increased
advertising schedule, the 1998 reporting period consisted of 42 more days that
the comparable 1997 reporting period.
Income Taxes
Income tax expense of $1.1 million and $1.9 million was recorded for the second
quarters of 1998 and 1997, respectively, reflected an effective tax rate of 45%
and 43%, respectively. The income tax expense for the first six months of 1998
and the shorter 1997 reporting period totaled $3.7 million and $2.7 million,
respectively, reflecting an effective tax rate of 41% and 38%, respectively. The
higher effective tax rate in 1998 was primarily due to certain employee benefit
costs that were not fully deductible for tax purposes.
FINANCIAL CONDITION
Overview
The Company's total assets of $1.86 billion remained unchanged at June 30, 1998
as compared to December 31, 1997. An increase in loans was offset by a decrease
in investment securities 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
17
<PAGE> 18
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
totaled $18.7 million and were reflected in other assets. Those assets were
supported by nonrecourse borrowings of an equal amount.
Loans held for sale increased while mortgage backed securities and residential
real estate mortgage loans decreased as a result of increased refinancing
activity due to favorable market rates. In addition, approximately $8.1 million
of the Bank's credit card receivables were transferred from consumer loans to
loans held for sale as the Bank negotiated to sell these receivables.
Noninterest-bearing demand deposits declined between December 31, 1997 and June
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 six
months ended June 30, 1998 exceeded demand deposits for the three months ended
June 30, 1997 and for the period of February 12, 1997 to June 30, 1997. While
total core customer deposits and repurchase agreements remained essentially
unchanged during the first six 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, increased $18.5 million during the six months ending
June 30, 1998.
Nonperforming Loans and Assets
Management reviews the loan portfolio for problem loans through a loan review
function and various credit committees. During the ordinary course of business,
management through its periodic review of its loan portfolio identifies that the
financial capacity of certain borrowers 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.
The following table sets forth the amounts of nonperforming loans and other
assets at the end of the periods indicated:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Loans contractually past due 90 days or more but $ 1,338 $ 2,009
still accruing 15,140 11,624
------- -------
Nonaccrual loans 16,478 13,633
Total nonperforming loans 2,087 1,391
Other real estate 15 72
------- -------
Other repossessed assets $18,580 $15,096
======= =======
Total nonperforming assets
1.32 % 1.13 %
Nonperforming loans to total loans
Nonperforming assets to total loans plus repossessed 1.48 % 1.25 %
property 1.00 % 0.81 %
Nonperforming assets to total assets
</TABLE>
18
<PAGE> 19
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
Allowance for Loan Loses
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:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
For the Six For the Period of
For the Three Months Ended Months Ended Feb. 12, 1997 to
June 30, June 30, June 30,
-------------------------------- ------------- ------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Average total loans $1,250,046 $1,217,295 $1,229,127 $1,211,250
========== ========== ========== ==========
Total loans at end of period $1,252,440 $1,243,251
========== ==========
ALLOWANCE FOR LOAN LOSSES:
Allowance at beginning of period $25,642 $24,529 $25,813 $24,607
Charge-offs (3,276) (954) (4,416) (1,709)
Recoveries 637 230 856 423
------- ------- ------- -------
Net charge-offs (2,639) (724) (3,560) (1,286)
------- ------- ------- -------
Provisions for loan losses 1,500 904 2,250 1,388
------- ------- ------- -------
Allowance at end of period $24,503 $24,709 $24,503 $24,709
======= ======= ======= =======
Net charge-offs to average total loans 0.85 % 0.24 % 0.58 % 0.28 %
(annualized)
Allowance to total loans at end of period 1.96 % 1.99 %
Allowance to nonperforming loans 148.70 % 185.89 %
</TABLE>
Net charge-offs for the quarter and six months ended June 30, 1998 increased
over the comparable periods for 1997. Net charge-offs were $3.6 million for the
six months ended June 30, 1998 as compared to $1.3 million for the period
February 12, 1997 to June 30, 1997. Management does not believe the increased
charge-offs to be predictive of a worsening trend, but rather the resolution of
certain older, chronic commercial problem loans that ripened during the period.
The amount of nonperforming loans was $18.6 million at June 30, 1998 as compared
to $15.1 million at December 31, 1997. This increase was concentrated primarily
in two borrowing relationships. The allowance as a percentage of nonperforming
loans declined to 148.7% at June 30, 1998 from 185.89% at December 31, 1997.
19
<PAGE> 20
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 for the dates
indicated:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under
Prompt
Corrective
For Capital Action
Actual Adequacy Purposes Provision
------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ---------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated $126,993 9.49% >$107,054 >8.00% NA
Cole Taylor Bank 152,786 11.42 > 107,044 >8.00 >$133,805 >10.00%
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated 110,170 8.23% > 52,527 >4.00 NA
Cole Taylor Bank 135,966 10.16 > 53,522 >4.00 > 80,283 > 6.00
Leverage (1)
Taylor Capital Group, Inc. - Consolidated 110,170 6.05% > 72,828 >4.00 NA
Cole Taylor Bank 135,966 7.47 > 72,829 >4.00 > 91,036 > 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 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 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 six months of 1998, the Parent Company declared $1.7 million and
$838,000 in preferred and common stock dividends, respectively.
20
<PAGE> 21
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 six months of
1998. The asset growth of loans and loans held-for-sale was funded primarily by
cash flows from repayments of mortgage related securities and loans and a modest
increase in wholesale borrowings. The Company believes that its current sources
of funds are adequate to meet all of the Company's financial commitments and
asset growth targets. The Parent Company's revolving credit facility continued
to be extended, most recently until September 1, 1998 as the Company continued
to negotiate the terms of its renewal. Management anticipates that the agreement
will be renewed for a one year term prior to its current maturity date.
THE YEAR 2000 ISSUE
The Company is continuing to evaluate the impact of the Year 2000 issue. A
comprehensive project plan has been prepared and is being diligently refined as
the assessment, renovation, validation (testing) and implementation stages of
the project progress. The plan 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.
Because the Company's primary "mission-critical" systems (specifically those
that process loans, deposits, investments and general ledger) are provided by
third-party processors, the assessment and testing phases include working
closely with those service providers to ensure effective compliant systems
before the year 2000. The Company's primary data processing provider has been
subjected to an independent third-party review of its Year 2000 compliance plan
and processes and an examination by bank regulatory authorities. At this time,
the data processing provider reports that it is on target to meet all required
dates to provide compliant systems. The Company is commencing the testing phase
of its plan, which contemplates completing all testing and remediation by
mid-1999. The development of contingency plans is scheduled for mid-1999.
As a regulated financial institution, the Company is subject to possible
supervisory or enforcement action if the governing regulatory agency deem the
Company's response and progress with respect to the Year 2000 issue to be of
serious concern. The Company's Year 2000 plan and progress was reviewed by the
Federal Reserve in May 1998 and while no formal written report has been
received, it understands that its progress was deemed satisfactory. An
information technology examination by the State of Illinois banking authorities
is scheduled to commence August 17, 1998.
The impact of ensuring all Company systems are Year 2000 compliant is expected
to be significant in terms of utilization of the Company's technology
expenditures and existing human resources. With respect to certain technology
applications, the Company is electing to replace the existing applications with
ones of greater functionality rather than limit its response to only remediation
of the Year 2000 issue. For that reason, the Company's future technology
expenditures are expected to materially increase from historical levels. The
Company is continuing to identify and quantify all of the elements and expected
cost of its technology upgrade and remediation plans.
21
<PAGE> 22
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
The Year 2000 Issue -- continued
Regardless of the Year 2000 compliance of the Company's systems, there can be no
assurance that the Company will not be adversely affected by the failure of
others to become Year 2000 compliant. Other risks may include potential losses
related to major loan or deposit customers, vendors or other counterparties. The
Company's Year 2000 plan incorporates assessment of customer and vendor related
risks. The Company has implemented certain changes to its credit policy to
address the due diligence of its borrowing customers and will continue to
implement processes to reduce customer and vendor risk.
LITIGATION
The Company has been named as a defendant in a number of lawsuits relating to
either or both (1) the Split-Off Transactions which resulted in the Company
being split-off from CTFG (now Reliance Acceptance Group, Inc., hereinafter
referred to as "Reliance") in February 1997, and (2) the financial and public
reporting of Reliance. The lawsuits name Reliance and/or current or former
officers, directors and stockholders of the Company and Reliance as additional
defendants. Included among the defendants are Jeffrey W. Taylor, Chairman of the
Board and Chief Executive Officer of the Company, and Bruce W. Taylor, President
of the Company, and other members of the Taylor Family (as defined below). All
of the lawsuits have been brought as purported class actions on behalf of
current and former stockholders of Reliance.
Five of these actions are pending in Delaware Chancery Court. These cases allege
that the defendants breached their fiduciary duties in connection with
disclosures made to the stockholders prior to the vote which approved the
Split-Off Transactions. These cases seek relief in the form of unspecified
damages, attorneys' fees and rescission of the Split-Off Transactions. Two other
cases are pending in the United States District Court for the Western District
of Texas and one case is pending in the Northern District of Illinois. These
cases allege that the defendants violated the federal securities laws, and the
Illinois action also alleges that the defendants breached common law fiduciary
duties. In addition, the Illinois case alleges that the defendants violated
ERISA and breached duties owed to a subclass consisting of participants in
Reliance's ESOP and 401(k)/Profit Sharing Plan. The Texas and Illinois cases
seek unspecified damages and attorneys' fees and the Texas case seeks rescission
of the Split-Off Transactions. Cole Taylor Bank is named as a defendant in the
Illinois action.
Seven other similar lawsuits are pending in the United States District Court for
the Western District of Texas. Although the Company and its subsidiaries have
not been named as a defendant in these other suits, certain directors, officers
and stockholders of the Company, including Jeffrey W. Taylor, Bruce W. Taylor,
other members of the Taylor Family and J. Christopher Alstrin, Chief Financial
Officer of the Company, have been named.
On February 9, 1998, Reliance filed a voluntary petition under Chapter 11 of the
Bankruptcy Code. On July 6, 1998, the Bankruptcy Judge entered a confirmation
order that discharged the liability of Reliance and its subsidiaries in
connection with the lawsuits described above and permanently enjoined the filing
of similar new suits against them. In addition, the Bankruptcy Judge has entered
an order enjoining the
22
<PAGE> 23
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
Litigation -- continued
parties to the above-described lawsuits from taking any actions in those
lawsuits, except actions relating to certain procedural matters, until September
30, 1998.
Although 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, the Company is unable to predict at this time the
potential impact of the Split-Off litigation described above on the financial
condition of the Company.
In accordance with the terms and conditions of the Share Exchange Agreement
relating to the Split-Off Transactions, Jeffrey W. Taylor, Bruce W. Taylor, Iris
A. Taylor, Sidney J. Taylor, Cindy Taylor Bleil, related trusts and a related
partnership (collectively, the "Taylor Family") have agreed to indemnify
Reliance for certain losses that Reliance incurs, including certain losses
relating to the Split-Off Transactions ("Taylor Family Indemnification
Obligations"). In accordance with the terms of an agreement between the Taylor
Family and the Company, the Company agreed to indemnify the Taylor Family for
certain losses that the Taylor Family incurs as a result of the Split-Off
Transactions, including a substantial 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 or predict
the potential impact that such indemnification obligation will have on the
financial condition of the Company.
The Company and its subsidiaries have advanced and may continue to advance
defense costs of the lawsuits described above on behalf of the Taylor Family and
the directors and officers of the Company who are defendants in these lawsuits.
The Company is from time to time a party to various other legal actions arising
in the normal course of its business. Management knows of no such other
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 position 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, on the
reason for holding it. If certain conditions are met, entities may elect to
designate the derivative instrument as a hedge of exposure to
23
<PAGE> 24
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
New Accounting Pronouncements -- continued
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) an 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 earning 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 the adoption of the Statement.
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 1996. When used in this Form 10-Q, the words
"anticipate," "believe," "estimate," "expect," "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.
24
<PAGE> 25
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 longer term strategic horizon and, at the same time, provide
a stable and steadily increasing flow of net interest income.
The Company's primary measurement of interest rate risk is earnings at risk,
which is determined through computerized simulation modeling. The simulation
model assumes a static balance sheet, using the balances, rates, maturities and
repricing characteristics of all of the Bank's existing assets and liabilities,
including off-balance sheet financial instruments. Net interest income is
computed by the model assuming market rates unchanged and a parallel shift of
market interest rates both up and down 200 basis points. The impact of imbedded
options in such products as 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 half of 1998, the Company's potential
exposure to declining interest rates increased as a result of additional
collateralized mortgage obligations coupled with increasing prepayment speeds on
mortgage-backed securities and mortgage loans and a continued flattening of the
yield curve. In response to this exposure, 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 June 30, 1998, the modeling indicated a continued exposure to declining
interest 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 June 30, 1998, the
net interest income at risk for one year in the declining rate scenario was
calculated as $3.1 million or 4.2% of net interest income in the rates unchanged
scenario. The net interest income for year one in the rising rate scenario was
calculated as modestly greater (1.2%) than net interest income in the rates
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.
25
<PAGE> 26
TAYLOR CAPITAL GROUP, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Footnote 8 to the consolidated financial statements included in Part 1, Item 1
and Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations to 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. On July
6, 1998, the Bankruptcy Judge entered a confirmation order that discharged the
liability of Reliance and its subsidiaries in connection with the lawsuits and
permanently enjoined the filing of similar new suits against them. In addition,
the Bankruptcy Judge has entered an order enjoining the parties to the lawsuits
from taking any actions in those lawsuits, except actions relating to certain
procedural matters, until September 30, 1998. Although 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, the Company is
unable to predict at this time the potential impact of the Split-Off litigation
on the financial condition of the Company
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Exhibit 10.1 - Fourth Amendment to Loan Agreement
Between LaSalle National Bank and Taylor Capital
Group, Inc.
- Exhibit 10.2 - Fifth Amendment to Loan Agreement
Between LaSalle National Bank and Taylor Capital
Group, Inc.
- Exhibit 27 - Financial Data Schedule.
(b) Form 8-K - No reports on Form 8-K were filed during the period
covered by this report.
26
<PAGE> 27
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)
/s/ J. CHRISTOPHER ALSTRIN
Date: August 13, 1998 --------------------------
----------------------------------- J. Christopher Alstrin*
Chief Financial Officer
* Duly authorized to sign on behalf of the Registrant
27
<PAGE> 1
EXHIBIT 10.1
THIS FOURTH AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT dated as
of June 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 February 12, 1997, as amended by a First Amendment dated February 27, 1997, a
Second Amendment dated November 1, 1997, a Third Amendment dated May 1, 1998 and
a Fourth Amendment dated June 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 used 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 "Revolving Credit
Maturity Date" set forth in Section 1.1 of the Agreement is hereby amended by
deleting therefrom the date "June 1, 1998" and substituting therefor the date
"August 1, 1998".
2.2 Replacement of Exhibit 3.1. Exhibit 3.1 attached to and made a
part of the Agreement is hereby deleted in its entirety and Exhibit 3.1 attached
hereto is hereby substituted therefor.
3. WARRANTIES. To induce the Bank to enter into this Amendment, the
Borrower warrants that:
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
<PAGE> 2
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
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; and
(c) such other documents as the Bank reasonably may request.
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
LASALLE NATIONAL BANK TAYLOR CAPITAL GROUP, INC.
By: /s/ Jay C. Goldner By: /s/ J. C. Alstrn
------------------------- --------------------------
Its: Vice President Its: CFO
------------------------ -------------------------
<PAGE> 4
SUBSTITUTE REVOLVING NOTE
$7,000,000 Dated as of June 1,1998
Due: August 1, 1998
FOR VALUE RECEIVED, TAYLOR CAPITAL GROUP, INC., a Delaware corporation (the
"Maker") promises to pay to the order of LASALLE NATIONAL BANK, a national
banking association (the "Bank") the lesser of the principal sum of SEVEN
MILLION DOLLARS ($7,000,000) or the aggregate unpaid principal amount of
Revolving Loans outstanding under the Loan Agreement hereinafter referred to at
the maturity or maturities and in the amount or amounts as stated on the records
of the Bank, together with interest (computed on the basis of a year consisting
of 360 days for actual days elapsed) on any and all such principal amounts
outstanding hereunder from time to time from the date hereof until maturity.
Interest shall be payable at the rate of interest and the times set forth in the
Loan Agreement date as of February 12, 1997 between the maker and the Bank (as
amended, supplemented or modified from time to time, the "Loan Agreement"). In
no event shall any principal amount have a maturity later than August 1, 1998.
Principal and interest shall be paid to the Bank at its Office at 135 South
LaSalle Street, Chicago, Illinois 60603, or at such other place as the holder of
this Note may designate in writing to the Maker. This Note may be prepaid in
whole or in part as provided for in the Loan Agreement.
This Note evidences indebtedness incurred under the Loan Agreement to which
reference is hereby made for a statement of the terms and conditions under which
the due date of this Note or any payment hereon may be accelerated. The holder
of this Note is entitled to all of the benefits and security provided for in the
Loan Agreement.
Demand, presentment, protests and notice of non-payment are hereby waived
by the Maker.
This Note is a replacement and substitute for, but not a repayment of, that
certain $7,000,000 Substitute Revolving Note dated as of May 1, 1998 of the
Maker payable to the order of the Bank and does not and shall not be deemed to
constitute a novation therefor.
TAYLOR CAPITAL GROUP, INC.
By: /s/ J.C. Alstrn
-----------------------------
Its: CFO
----------------------------
<PAGE> 1
EXHIBIT 10.2
FIFTH AMENDMENT TO
REVOLVING LOAN AGREEMENT
THIS FIFTH AMENDMENT TO REVOLVING LOAN AND SECURITY AGREEMENT dated as of
August 1, 1998 (this "Amendment"), is between TAYLOR CAPITAL GROUP, INC., an
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
February 12, 1997, as amended by a First Amendment dated February 27, 1997, a
Second Amendment dated November 1, 1997, a Third Amendment dated May 1, 1998
and a Fourth Amendment dated June 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 used 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 "Revolving Credit
Maturity Date" set forth in Section 1.1 of the Agreement is hereby amended by
deleting therefrom the date "August 1, 1998" and substituting therefor the date
"September 1, 1998".
2.2 Addition of Section 7.1(ee). The following new Section 7.19(ee) is
hereby added to the Agreement:
"The Borrower has reviewed the areas within its business and operations
which could be adversely affected by, and have developed or are developing a
program to address on a timely basis, the "Year 2000 problem" (that is, the
risk that computer applications used by the Borrower may be unable to recognize
and perform properly date-sensitive functions involving certain dates prior to
and any date after December 31, 1999), and have made related appropriate
inquiry of material suppliers and vendors. Based on such review and program,
the Borrower believes that the "Year 2000 Problem" will not have a material
adverse effect on the Borrower."
<PAGE> 2
2.3 Amendment to Section 7.2(d)(iv). The following sentence is hereby
added at the end of Section 7.2(d)(iv):
"Statements of financial performance and compliance certificates
required to be provided by the Borrower to the Bank herein shall: (i)
include a statement that the Year 2000 remediation efforts of the
Borrower are proceeding as scheduled, and (ii) indicate whether an
auditor, regulator or third party consultant has issued a management
letter or other communication regarding the Year 2000 exposure program
or progress of the Borrower."
2.4 Replacement of Exhibit 3.1. Exhibit 3.1 attached to and made a
part of the Agreement is hereby deleted in its entirety and Exhibit 3.1 attached
hereto is hereby substituted therefor.
3. WARRANTIES. To induce the Bank to enter into this Amendment, the
Borrower warrants that:
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
4.1 Law. This Amendment shall be construed in accordance with and
governed by the laws of the State of Illinois.
<PAGE> 3
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; and
(c) 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 TAYLOR CAPITAL GROUP, INC.
By: By: /s/ J. C. Alstrn
------------------------- --------------------------
Its: Its: CFO
------------------------ -------------------------
<PAGE> 4
EXHIBIT 3.1
SUBSTITUTE REVOLVING NOTE
$7,000,000 Dated as of August 1, 1998
Due: September 1, 1998
FOR VALUE RECEIVED, TAYLOR CAPITAL GROUP, INC., a Delaware corporation
(the "Maker") promises to pay to the order of LASALLE NATIONAL BANK, a national
banking association (the "Bank") the lesser of the principal sum of SEVEN
MILLION DOLLARS ($7,000,000) or the aggregate unpaid principal amount of
Revolving Loans outstanding under the Loan Agreement hereinafter referred to at
the maturity or maturities and in the amount or amounts as stated on the
records of the Bank, together with interest (computed on the basis of a year
consisting of 360 days for actual days elapsed) on any and all such principal
amounts outstanding hereunder from time to time from the date hereof until
maturity. Interest shall be payable at the rate of interest and the times set
forth in the Loan Agreement date as of February 12, 1997 between the Maker and
the Bank (as amended, supplemented or modified from time to time, the "Loan
Agreement"). In no event shall any principal amount have a maturity later than
September 1, 1998.
Principal and interest shall be paid to the Bank at its office at 135
South LaSalle Street, Chicago, Illinois 60603, or at such other place as the
holder of this Note may designate in writing to the Maker. This Note may be
prepaid in whole or in part as provided for in the Loan Agreement.
This Note evidences indebtedness incurred under the Loan Agreement to which
reference is hereby made for a statement of the terms and conditions under
which the due date of this Note or any payment hereon may be accelerated. The
holder of this Note is entitled to all of the benefits and security provided
for in the Loan Agreement.
Demand, presentment, protests and notice of non-payment are hereby waived
by the Maker.
This Note is a replacement and substitute for, but not a repayment of,
that certain $7,000,000 Substitute Revolving Note dated as of June 1, 1998 of
the Maker payable to the order of the Bank and does not and shall not be deemed
to constitute a novation therefor.
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 SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 67,731
<INT-BEARING-DEPOSITS> 10,256
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 378,483
<INVESTMENTS-CARRYING> 82,913
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<ALLOWANCE> 24,503
<TOTAL-ASSETS> 1,857,188
<DEPOSITS> 1,391,816
<SHORT-TERM> 175,357
<LIABILITIES-OTHER> 15,078
<LONG-TERM> 132,000
0
38,250
<COMMON> 47
<OTHER-SE> 104,640
<TOTAL-LIABILITIES-AND-EQUITY> 1,857,188
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<INCOME-PRETAX> 8,914
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<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 25,813
<CHARGE-OFFS> 4,416
<RECOVERIES> 856
<ALLOWANCE-CLOSE> 24,503
<ALLOWANCE-DOMESTIC> 24,503
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
