<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 MARCH 31, 1999
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) 808-6873
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 May 6, 1999
- ---------------------------- --------------------------
Common Stock, $.01 Par Value 4,652,549
<PAGE> 2
TAYLOR CAPITAL GROUP, INC.
--------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION ...........................................PAGE
- ----------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -
March 31, 1999 and December 31, 1998....................... 3
Consolidated Statements of Income (Unaudited) -
For the Three Months Ended March 31, 1999 and For the
Three Months Ended March 31, 1998.......................... 4
Consolidated Statements of Cash Flows (Unaudited) -
For the Three Months Ended March 31, 1999 and For the
Three Months Ended March 31, 1998.......................... 5
Notes to Consolidated Financial Statements (Unaudited)........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 33
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings............................................. 34
Item 6. Exhibits and Reports on Form 8-K.............................. 35
Signatures............................................................. 36
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)
------------------------
March 31, December 31,
1999 1998
----------- -----------
ASSETS
Cash and due from banks $ 65,174 $ 66,192
Interest-bearing deposits with banks 44 1,200
Federal funds sold 37,300 31
Investment securities:
Available-for-sale, at fair value 349,907 351,408
Held-to-maturity, at amortized cost
(fair value of $89,379 and $91,620 at
March 31, 1999 and December 31, 1998,
respectively) 87,939 89,753
Loans held for sale, net, at lower of cost
or market 24,859 42,257
Loans, net of allowance for loan losses of
$24,834 and $24,599 at March 31, 1999
and December 31, 1998, respectively 1,291,053 1,269,125
Premises, leasehold improvements and
equipment, net 24,530 22,702
Other real estate and repossessed assets, net 3,191 3,267
Goodwill, net of amortization of $5,295
and $4,683 at March 31, 1999 and December
31, 1998, respectively 30,791 32,053
Other assets 34,254 32,342
----------- -----------
Total assets $ 1,949,042 $ 1,910,330
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 324,293 $ 350,711
Interest-bearing 1,151,377 1,089,026
----------- -----------
Total deposits 1,475,670 1,439,737
Short-term borrowings 171,777 171,718
Accrued interest, taxes and other liabilities 24,963 22,242
Notes payable 130,500 131,500
----------- -----------
Total liabilities 1,802,910 1,765,197
----------- -----------
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, 4,656,549 and
4,658,533 shares issued and outstanding
at March 31, 1999 and December 31, 1998,
respectively 47 47
Surplus 100,056 99,990
Unearned compensation - stock grants (2,026) (2,083)
Employee stock ownership plan loan (576) (576)
Retained earnings 10,283 9,434
Accumulated other comprehensive income 98 71
----------- -----------
Total stockholders' equity 146,132 145,133
----------- -----------
Total liabilities and
stockholders' equity $ 1,949,042 $ 1,910,330
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
------------------------
For the Three Months Ended
----------------------------
March 31, 1999 March 31, 1998
-------------------------------
Interest income:
Interest and fees on loans $ 27,464 $ 26,455
Interest and dividends on investment
securities:
Taxable 4,649 6,478
Tax-exempt 898 785
Interest on cash equivalents 81 90
----------- -----------
Total interest income 33,092 33,808
----------- -----------
Interest expense:
Deposits 11,440 11,942
Short-term borrowings 1,973 2,497
Notes payable 1,749 1,865
----------- -----------
Total interest expense 15,162 16,304
----------- -----------
Net interest income 17,930 17,504
Provision for loan losses 1,500 750
----------- -----------
Net interest income after provision
for loan losses 16,430 16,754
----------- -----------
Noninterest income:
Service charges 2,129 2,324
Trust fees 1,080 945
Gain on sales of loans, net 807 801
Gain on sale of mortgage servicing rights --- 1,462
Investment securities gains, net 107 ---
Other noninterest income 686 395
----------- -----------
Total noninterest income 4,809 5,927
----------- -----------
Noninterest expense:
Salaries and employee benefits 9,480 9,125
Occupancy of premises, net 1,757 1,714
Furniture and equipment 758 809
Computer processing 623 561
Advertising and public relations 152 158
Goodwill and other intangible amortization 612 611
Legal fees 1,147 314
Other noninterest expense 2,696 2,996
----------- -----------
Total noninterest expense 17,225 16,288
----------- -----------
Income before income taxes and cumulative
effect of change in accounting principle 4,014 6,393
Income taxes 1,632 2,512
----------- -----------
Income before cumulative effect of change in
accounting principle 2,382 3,881
Cumulative effect of change in accounting
principle, net of tax (214) ---
----------- -----------
Net income $ 2,168 $ 3,881
=========== ===========
Preferred dividend requirements (861) (861)
----------- -----------
Net income applicable to common stockholders $ 1,307 $ 3,020
=========== ===========
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
------------------------
For the Three Months Ended
------------------------------
March 31, 1999 March 31, 1998
------------------------------
Cash flows from operating activities:
Net income $ 2,168 $ 3,881
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Investment securities gains, net (107) ---
Amortization of premiums and
discounts, net 920 727
Provision for loan losses 1,500 750
Gain on sales of loans originated for sale (640) (925)
Loans originated and held for sale (38,467) (75,122)
Proceeds from sales of loans originated
for sale 56,505 62,445
Depreciation and amortization 1,529 1,585
Other adjustments to net income, net 425 70
Net changes in other assets and
liabilities 1,566 (2,704)
----------- -----------
Net cash provided by (used in)
operating activities 25,399 (9,293)
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (93,944) (21,516)
Purchases of held-to-maturity securities (249) (4,331)
Proceeds from principal payments and
maturities of available-for-sale
securities 44,672 21,389
Proceeds from principal payments and
maturities of held-to-maturity securities 1,962 1,955
Proceeds from sales of available-for-sale
securities 50,102 ---
Net (increase) decrease in loans (24,351) 2,615
Disposition of reverse exchange assets --- 18,757
Other, net (2,209) (588)
----------- -----------
Net cash provided by (used in)
investing activities (24,017) 18,281
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 35,933 (9,171)
Net (decrease) increase in short-term
borrowings 59 (6,176)
Repayments of notes payable (26,000) (65,000)
Proceeds from notes payable 25,000 81,400
Decrease in nonrecourse borrowings --- (18,757)
Dividends paid (1,279) (1,278)
----------- -----------
Net cash provided by (used in)
financing activities 33,713 (18,982)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 35,095 (9,994)
Cash and cash equivalents, beginning of period 67,423 84,616
----------- -----------
Cash and cash equivalents, end of period $ 102,518 $ 74,622
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 15,346 $ 16,182
Income taxes --- ---
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, 1998, 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, 1999. 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 three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
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
March 31, 1999 and December 31, 1998 were as follows:
March 31, 1999
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- -------- --------- ---------
(in thousands)
Available-for-sale:
U.S. Treasury securities $ 65,425 $ 407 $ (20) $ 65,812
U.S. government agency
securities 66,429 91 (113) 66,407
Collateralized mortgage
obligations 105,919 90 (1,151) 104,858
Mortgage-backed securities 111,983 1,424 (577) 112,830
-------- -------- --------- --------
Total available-for-sale 349,756 2,012 (1,861) 349,907
-------- -------- --------- --------
Held-to-maturity:
State and municipal
obligations 72,776 2,284 (905) 74,155
Federal Reserve Bank and
Federal Home Loan Bank
equity securities 14,338 --- --- 14,338
Other debt securities 825 61 --- 886
-------- -------- --------- --------
Total held-to-maturity 87,939 2,345 (905) 89,379
-------- -------- --------- --------
Total $437,695 $ 4,357 $ (2,766) $439,286
======== ======== ========= ========
December 31, 1998
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- -------- --------- ---------
(in thousands)
Available-for-sale:
U.S. Treasury securities $110,019 $ 859 $ --- $110,878
U.S. government agency
securities 51,287 125 (86) 51,326
Collateralized mortgage
obligations 91,696 52 (2,054) 89,694
Mortgage-backed securities 98,296 1,466 (252) 99,510
-------- -------- --------- --------
Total available-for-sale 351,298 2,502 (2,392) 351,408
-------- -------- --------- --------
Held-to-maturity:
State and municipal
obligations 74,609 2,752 (947) 76,414
Federal Reserve Bank and
Federal Home Loan Bank
equity securities 14,319 --- --- 14,319
Other debt securities 825 62 --- 887
-------- -------- --------- --------
Total held-to-maturity 89,753 2,814 (947) 91,620
-------- -------- --------- --------
Total $441,051 $ 5,316 $ (3,339) $443,028
======== ======== ========= ========
7
<PAGE> 8
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
3. Loans:
------
Loans classified by type at March 31, 1999 and December 31, 1998 were as
follows:
March 31, December 31,
1999 1998
---------- ------------
(in thousands)
Commercial and industrial $ 753,902 $ 749,984
Real estate-construction 246,331 232,018
Residential real estate-mortgages 147,349 150,930
Home equity lines of credit 105,014 106,521
Consumer 62,879 53,751
Other loans 1,636 1,806
---------- ----------
Gross loans 1,317,111 1,295,010
Less: Unearned discount (1,224) (1,286)
---------- ----------
Total loans 1,315,887 1,293,724
Less: Allowance for loan losses (24,834) (24,599)
---------- ----------
Loans, net $1,291,053 $1,269,125
========== ==========
4. Interest-Bearing Deposits:
--------------------------
Interest-bearing deposits at March 31, 1999 and December 31, 1998 were as
follows:
March 31, December 31,
1999 1998
---------- ----------
(in thousands)
NOW accounts $ 131,256 $ 120,900
Savings accounts 108,059 107,274
Money market deposits 230,439 234,197
Certificates of deposit 470,532 448,773
Public time deposits 131,535 121,614
Brokered certificates of deposit 79,556 56,268
---------- ----------
Total $1,151,377 $1,089,026
========== ==========
8
<PAGE> 9
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
5. Notes Payable:
--------------
Notes payable at March 31, 1999 and December 31, 1998 were as follows:
March 31, December 31,
1999 1998
---------- ------------
(in thousands)
TAYLOR CAPITAL GROUP, INC.:
---------------------------
$25 million term loan bearing interest at prime
rate or LIBOR plus 1.15%, annual principal
reductions of $1 million commencing in
February 1999 and a balloon payment of
$22 million on February 12, 2002; interest
rates at March 31, 1999 and December 31,
1998 were 6.12% and 6.42% respectively. $ 24,000 $ 25,000
$12 million revolving credit facility bearing
interest at prime rate or LIBOR plus 1.15%,
maturing September 1, 1999; interest rates
at March 31, 1999 and December 31, 1998
were 6.12% and 6.43% respectively. 1,500 1,500
COLE TAYLOR BANK:
-----------------
Federal Home Loan Bank (FHLB) - various
advances ranging from $25 million to $30
million due at various dates through
October 2000 and $30 million due February
2008, callable by the FHLB quarterly
beginning February 1999; collateralized
by qualified first mortgage residential
loans and FHLB stock; weighted average
interest rates at March 31, 1999 and
December 31, 1998 were 5.08% and 5.23%
respectively. 105,000 105,000
---------- ----------
Total $ 130,500 $ 131,500
========== ==========
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 March 31, 1999, 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 other stock awards. During the three
months ended March 31, 1999, stock options were granted with respect to
103,570 shares of common stock at an exercise price of $27.00 per share,
the fair market value of the common stock on the grant date, as determined
by an independent appraisal. Stock options with respect to 17,957 shares of
common stock were forfeited during the period. As of
9
<PAGE> 10
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
March 31, 1999 total stock options outstanding, net of forfeitures, were
for 316,049 shares of common stock at a weighted average exercise price of
$24.39.
In addition during the first quarter of 1999, 13,925 shares of common stock
were awarded and 15,909 shares of common stock were forfeited under
restricted stock agreements.
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:
For the Three Months Ended
--------------------------
March 31, 1999 March 31, 1998
-------------- --------------
(in thousands)
Net income, as reported $ 2,168 $ 3,881
Other comprehensive income:
Change in unrealized gains
(losses) on available-for-sale
securities 148 (985)
Less: reclassification adjustment
for gains included in net income (107) ---
---------- ----------
41 (985)
Income tax expense (benefit)
related to other comprehensive
income 14 (335)
---------- ----------
Other comprehensive income, net
of tax 27 (650)
---------- ----------
Total comprehensive income $ 2,195 $ 3,231
========== ==========
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 ranged from
October 1997 to September 1998.
10
<PAGE> 11
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
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 recision 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 also 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 and
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
11
<PAGE> 12
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
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. Motions to
consolidate the two adversary proceedings and to have the adversary cases
heard by the District Court, as opposed to the Bankruptcy Court, are
pending.
On December 7, 1998, the Estate Representative filed a motion for a
preliminary injunction which seeks to enjoin the Company and Cole Taylor
Bank from paying directly or indirectly any dividends to any of their
respective shareholders and from paying any of the litigation defense costs
of the Taylor Family or any other co-defendants with respect to any
litigation arising out of the Split-Off Transactions. On March 3, 1999, the
Company filed a memorandum in opposition that opposes such preliminary
injunction. This motion for a preliminary injunction is currently pending.
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
12
<PAGE> 13
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
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 has incurred and will continue to 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.
9. Segment Reporting
-----------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131"). SFAS No. 131 provides guidance
for the way enterprises report information about operating segments in
annual and interim financial statements.
The Company's operations include two primary segments: banking and mortgage
banking. Through its 12 banking branches located in the Chicago
metropolitan area, the Company provides a full range of commercial and
consumer banking services to small and mid size businesses. The mortgage
banking segment originates residential mortgage and home equity loans from
approved mortgage brokers and other financial intermediaries, as well as
employee loan originators who are compensated on a full commission basis.
The majority of the first mortgage loans originated are conforming loans
which are generally sold into the secondary market. The home equity loans
are retained by the Bank and included in the Company's mortgage banking
segment.
The Company's two reportable segments are separately managed as they offer
different products and services and have different marketing strategies. In
addition, the mortgage banking segment, through its wholesale origination
operation, services a different customer base than the banking segment.
The segment financial information provided below has been derived from the
internal profitability reporting system used by management to monitor and
manage the financial performance of the Bank. The Bank evaluates segment
performance based on profit or loss before income taxes. Certain indirect
expenses have been allocated based on actual volume measurements and other
13
<PAGE> 14
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
criteria, as the Bank considers appropriate. The Bank accounts for
intersegment revenue at current market prices.
The following table presents reportable segment information for the periods
indicated:
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------------------------------------
March 31, 1999 March 31, 1998
Mortgage Mortgage
Banking Banking Total Banking Banking Total
----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 17,365 $ 964 $ 18,329 $ 17,413 $ 567 $ 17,980
Noninterest income 3,857 101 3,958 3,692 44 3,736
Depreciation and
amortization 1,523 6 1,529 1,558 27 1,585
Other significant
noncash items:
Provision for
loan losses 1,458 42 1,500 750 --- 750
Gain on sales of
loans, net --- 807 807 --- 801 801
Gain on sale of
mortgage
servicing
rights --- --- --- --- 1,462 1,462
Impairment of
mortgage
servicing
rights --- --- --- --- 53 53
Reduction of
impairment
reserve on
mortgage
servicing
rights --- 47 47 --- --- ---
Income taxes 2,421 (68) 2,353 2,706 485 3,191
Segment net income
(loss) $ 3,959 $ (163) $ 3,796 $ 4,277 $ 898 $ 5,175
========== ======= ========== ========== ======= ==========
Segment average
assets $1,816,637 $87,801 $1,904,438 $1,779,077 $56,642 $1,835,719
========== ======= ========== ========== ======= ==========
</TABLE>
14
<PAGE> 15
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)
The following table reconciles segment information to the consolidated
financial statements for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------------
March 31, 1999 March 31, 1998
-----------------------------------------------------------------------
Reportable Consolidated Reportable Consolidated
Segments Other Totals Segments Other Totals
-----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 18,329 $ (399) $ 17,930 $ 17,980 $ (476) $ 17,504
Noninterest income 3,958 (3) 3,955 3,736 (19) 3,717
Depreciation and
amortization 1,529 --- 1,529 1,585 --- 1,585
Other significant
noncash items:
Provision for
loan losses 1,500 --- 1,500 750 --- 750
Gain on sales
of loans, net 807 --- 807 801 --- 801
Gain on sale of
mortgage --- --- ---
servicing
rights --- --- --- 1,462 --- 1,462
Impairment of
mortgage
servicing
rights --- --- --- 53 --- 53
Reduction of
impairment
reserve on
mortgage
servicing
rights 47 --- 47 --- --- ---
Income taxes 2,353 (721) 1,632 3,191 (679) 2,512
Net income (loss) $ 3,796 $(1,628) $ 2,168 $ 5,175 $(1,294) $ 3,881
========== ======= ========== ========== ======= ==========
Average assets $1,904,438 $ 3,653 $1,908,091 $1,835,719 $18,667 $1,854,386
========== ======= ========== ========== ======= ==========
</TABLE>
For the three months ended March 31, 1999 and 1998, respectively, amounts
presented in the other columns represent the operations of the Parent
Company, the Mortgage Company, and CTRE, Inc. which have not been defined
as reportable segments.
15
<PAGE> 16
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-(Continued)
10. Cumulative Effect of Change in Accounting Principle
---------------------------------------------------
As of January 1, 1999, the Company adopted Statement of Position 98-5 (SOP
98-5), "Reporting on the Costs of Start-Up Activities," which requires that
the cost of start-up activities and organization costs be expensed as
incurred. The initial adoption of SOP 98-5 resulted in a charge of $214,000
(net of a tax benefit of $146,000) and is reported in the Consolidated
Statements of Income as a cumulative effect of change in accounting
principle. The charge represents remaining organization costs in connection
with the Split-Off Transactions which had not yet been fully amortized.
16
<PAGE> 17
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS 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 and for the dates and
periods indicated. This discussion should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto, appearing
elsewhere in this Form 10-Q.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Taylor Capital
Group, Inc. (the "Parent Company") 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, 1998.
OVERVIEW
The Company's first quarter 1999 financial results reflected a decline in
profitability in comparison to the financial results for the first quarter of
1998. Major factors contributing to this decline include: 1) the decrease in
total interest income to $33.1 million from $33.8 million for the same period in
1998, 2) the increase in the provision for loan losses to $1.5 million in 1999
from $750,000 in 1998, 3) the $1.5 million gain on the sale of mortgage
servicing rights which occurred during the first quarter of 1998, 4) the
increase in noninterest expenses to $17.2 million in 1999 from $16.3 million in
1998, and 5) the adoption of SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which resulted in a charge of $214,000 (net of a tax benefit of
$146,000) during the first quarter of 1999. These factors were partially offset
by a decrease in interest expense to $15.2 million during the first quarter of
1999 from $16.3 million for the same period in 1998.
For the first quarter of 1999, consolidated net income was $2.2 million.
Annualized return on average assets and return on average equity were 0.46% and
6.03%, respectively. For the first quarter of 1998, consolidated net income was
$3.9 million. For this period, annualized return on average assets and return on
average equity were 0.85% and 11.07%, respectively. Total assets of the Company
were $1.95 billion and $1.91 billion at March 31, 1999 and December 31, 1998,
respectively. Loans were $1.34 billion at both March 31, 1999 and December 31,
1998, and total deposits grew to $1.48 billion at March 31, 1999 from $1.44
billion at December 31, 1998. Stockholders' equity increased to $146.1 million
at March 31, 1999 as compared to $145.1 million at December 31, 1998.
17
<PAGE> 18
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the difference between total interest income earned on
earning assets and total interest expense incurred on interest-bearing
liabilities, is the Company's principal source of earnings. The amount of net
interest income is affected by changes in the volume and mix of earning assets
and interest-bearing liabilities, and the level of rates earned or paid on those
assets and liabilities.
Net interest income (with an adjustment for tax-exempt income) for the first
quarter of 1999 was $18.6 million, compared to $18.1 million for the first
quarter of 1998.
Net interest margin, which is determined by dividing taxable-equivalent net
interest income by average interest-earning assets, decreased to 4.22% during
the first quarter of 1999 from 4.30% (on an annualized basis) for the same
period in 1998. The decline in net interest margin was primarily a result of
reduced yields on sequential-paying collateralized mortgage obligations, as
described below, and commercial loans, partially offset by a decline in the cost
of interest-bearing liabilities and a change in asset mix from investment
securities and into loans.
The yield on earning assets declined to 7.67% from 8.19% for the first quarter
1999, as compared to the same period in 1998. In late 1997 and January 1998, the
Bank purchased approximately $92 million of sequential-paying collateralized
mortgage obligations at a premium of $7.5 million. The decline in mortgage
interest rates and higher refinancing activity experienced during 1998 required
that the Bank amortize the purchase premium at a rate faster than originally
expected. Accordingly, in the third and fourth quarter of 1998, adjustments were
recorded to reduce the yields of the securities to an expected yield given
actual payments received to date and the future expected prepayment rate for
these securities. At March 31, 1999, these securities totaled $41 million, with
$2.1 million of premium remaining and an expected yield of 1.1%. 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 decreased yield on commercial loans was reflected by
the 75 basis point reduction in the Company's prime rate during the fourth
quarter of 1998, as well as increased competitive pressure on loan pricing. The
yield on real estate mortgages decreased as mortgage prepayments increased and
new mortgage production rates were lower due to the lower interest rate
environment.
The cost of interest-bearing liabilities declined to 4.32% during the first
quarter of 1999 from 4.84% for the first quarter of 1998, 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 March 31, 1999 increased $76.8
million, or 4.5% when compared to the 1998 reporting period.
18
<PAGE> 19
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth 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.
19
<PAGE> 20
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS 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
MARCH 31, 1999 MARCH 31, 1998
------------------------------- -------------------------------
YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%)(3) BALANCE INTEREST (%)(3)
---------- ------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (dollars in thousands)
Investment securities (1):
Taxable $ 359,225 $ 4,649 5.20% $ 421,823 $ 6,478 6.23%
Non-taxable (tax
equivalent) 74,003 1,429 7.73 63,784 1,270 7.96
---------- ------- ---------- -------
Total investment
securities 433,228 6,078 5.63 485,607 7,748 6.46
---------- ------- ---------- -------
Cash equivalents 6,768 81 4.79 6,535 90 5.51
---------- ------- ---------- -------
Loans (2):
Commercial and
industrial 987,899 20,761 8.41 859,393 19,224 8.95
Real estate mortgages 184,713 3,274 7.09 193,402 3,608 7.46
Consumer and other 164,302 3,290 8.12 155,182 3,414 8.92
Fees on loans 240 301
---------- ------- ---------- -------
Net loans
(tax equivalent) 1,336,914 27,565 8.35 1,207,977 26,547 8.90
---------- ------- ---------- -------
Total earning
assets 1,776,910 33,724 7.67 1,700,119 34,385 8.19
---------- ------- ---------- -------
Allowance for loan losses (25,313) (25,780)
NONEARNING ASSETS:
Cash and due from
banks 66,668 72,370
Accrued interest and
other assets 89,826 107,677
---------- ----------
TOTAL ASSETS $1,908,091 $1,854,386
========== ==========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing
demand deposits 359,724 2,778 3.13 $ 343,841 3,039 3.58
Savings deposits 106,924 475 1.80 112,911 711 2.55
Time deposits 648,592 8,187 5.12 589,008 8,192 5.64
---------- ------- ---------- -------
Total deposits 1,115,240 11,440 4.16 1,045,760 11,942 4.63
---------- ------- ---------- -------
Short-term borrowings 178,214 1,973 4.49 197,304 2,497 5.13
Notes payable 131,122 1,749 5.34 123,638 1,865 6.03
---------- ------- ---------- -------
Total interest-
bearing
liabilities 1,424,576 15,162 4.32 1,366,702 16,304 4.84
---------- ------- ---------- -------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing
deposits 313,908 309,236
Nonrecourse
borrowings (4) 16,256
Accrued interest and
other liabilities 23,689 19,965
STOCKHOLDERS' EQUITY 145,918 142,227
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,908,091 $1,854,386
========== ==========
Net interest income
(tax equivalent) $18,562 $18,081
======= =======
Net interest spread 3.36% 3.35%
Net interest margin 4.22% 4.30%
======== ==========
</TABLE>
- ----------------------------------------
(1) Investment securities average balances are based on amortized cost.
(2) Nonaccrual loans are included in the above stated average balances.
(3) Yields / rates are annualized.
(4) Interest expense on nonrecourse borrowings is netted against trust fees on
the income statement.
20
<PAGE> 21
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Provision for Loan Losses
Management determines a provision for loan losses which it considers sufficient
to maintain an adequate level of allowance for loan losses. In evaluating the
adequacy of the allowance for loan losses, consideration is given to historical
charge-off experience, growth of the loan portfolio, changes in the composition
of the loan portfolio, general economic conditions, information about specific
borrower situations, including their financial position and collateral values,
and other factors and estimates which are subject to change over time.
Estimating the risk of loss and amount of loss on any loan is subjective.
Ultimate losses may vary from current estimates. These estimates are reviewed
quarterly and, as changes in estimates are identified by management, the amounts
are reflected in income through the provision for loan losses in the appropriate
period.
The provision for loan losses in the first quarter of 1999 was $1.5 million as
compared to $750,000 for the first quarter of 1998. The $750,000 increase in the
provision for loan losses in 1999 over 1998 was a result of an increase in net
charge-off activity and loan volume in 1998 and early 1999. Net charge-offs were
$1.3 million in the first quarter of 1999 as compared to $921,000 for the same
1998 period. If the commercial loan portfolio continues to grow and/or future
net charge-offs do not decline, and/or nonperforming loans increase, the Company
expects that the provision for loan losses will continue to increase over the
1998 level. As of March 31, 1999, management believes that the allowance for
loan losses is adequate. See "Financial Condition -- Nonperforming Loans and
Assets".
Noninterest Income
The following table shows noninterest income for the periods indicated:
NONINTEREST INCOME
For the Three Months Ended
--------------------------
March 31, 1999 March 31, 1998
-------------- --------------
(in thousands)
Deposit service charges $2,074 $2,090
Retail credit card service charges 53 130
Merchant credit card processing fees 2 104
Trust fees 1,080 945
Gain on sale of loans, net 807 801
Mortgage loan servicing income, net 141 (10)
ATM fees 257 193
Gain on sale of mortgage
servicing rights --- 1,462
Investment securities gains, net 107 ---
Other noninterest income 288 212
------ ------
Total noninterest income $4,809 $5,927
====== ======
21
<PAGE> 22
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Total noninterest income for the first quarter of 1999 was $4.8 million as
compared to $5.9 million for the first quarter of 1998. The decrease in first
quarter 1999 noninterest income as compared to the first quarter of 1998 was
primarily due to the 1998 reporting period including a gain on sale of mortgage
servicing rights of $1.5 million. In addition, retail credit card service
charges and merchant credit card processing fees decreased during 1999 due to
the Bank's sale of the majority of its credit card portfolio and merchant credit
card deposit program in November 1998 and September 1997, respectively.
Trust fees increased 14% due to an increase in corporate trust business. The
increase in mortgage loan servicing income was primarily a result of a $47,000
reduction in the valuation reserve related to capitalized mortgage servicing
rights during the first quarter of 1999, as mortgage prepayment activity slowed
modestly. An impairment provision of $53,000 had been recognized during the
first quarter of 1998. The Company's higher ATM fee income during the first
quarter of 1999 was due to an increase in the surcharge fee during the fourth
quarter of 1998.
Noninterest Expense
The following table shows noninterest expense for the periods indicated:
NONINTEREST EXPENSE
For the Three Months Ended
--------------------------
March 31, 1999 March 31, 1998
-------------- --------------
(dollars in thousands)
Salaries and employee benefits $ 9,480 $9,125
Occupancy of premises, net 1,757 1,714
Furniture and equipment 758 809
Computer processing 623 561
Advertising and public relations 152 158
Goodwill and other intangible
amortization 612 611
Legal fees 1,147 314
Other real estate and repossessed
asset expense 95 98
Other noninterest expense 2,601 2,898
------- -------
Total noninterest expense $17,225 $16,288
======= =======
Efficiency ratio (1) 75.75% 69.51%
======= =======
------------------------
(1) Noninterest expense divided by an amount equal to net interest
income plus noninterest income.
Total noninterest expense for the first quarter of 1999 was $17.2 million as
compared to $16.3 million for the first quarter of 1998. The primary reason for
the higher expense in 1999 was an increase in salaries and benefit expenses and
increased litigation expenses associated with the Split-Off Transactions.
22
<PAGE> 23
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Salaries and benefit expense increased 4% during the first quarter of 1999. The
primary reasons for this increase were routine annual salary increases and
increased number of full-time equivalent employees. The number of full-time
equivalent employees averaged 630 in the first quarter of 1999 as compared to
617 during the 1998 reporting period.
Occupancy expense increased 3% during the first quarter of 1999. The increase in
occupancy expense was due to the addition of the West Washington banking
facility, which opened in March 1998.
In late 1998 and the first quarter of 1999, the Bank implemented significant
technology enhancements within the Bank's operations center and replaced certain
hardware and software applications with ones of greater functionality. Capital
expenditures related to the replacement of hardware and software are expected to
total approximately $2.5 million. The Company anticipates these enhancements and
replacements will increase furniture and equipment expenses in future periods.
Legal expenses for the first quarter of 1999 increased significantly from 1998.
This increase was primarily due to $308,000 in reimbursements received during
the first quarter of 1998 from the Bank's insurance carrier for certain 1997
Bank-related defense costs and increased Parent Company legal costs ,in the
first quarter of 1999, relating to the bankruptcy of Reliance Acceptance Group,
Inc. 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 $1.1 million and $500,000 during the 1999 and
1998 reporting periods. The Company 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.
The Company, however, cannot predict to what extent such costs will be
reimbursed or when such reimbursement could occur. See " - Litigation" below.
Income Taxes
The income tax expense of $1.6 million for the first quarter of 1999 reflected
an effective tax rate of 41%. The income tax expense of $2.5 million for the
first quarter of 1998 reflected an effective tax rate of 39%. The higher
effective tax rate in 1999 was primarily due to certain employee benefit costs
that were not fully deductible for tax purposes.
Cumulative Effect of Change in Accounting Principle
As of January 1, 1999, the Company adopted Statement of Position 98-5 (SOP
98-5), "Reporting on the Costs of Start-Up Activities," which requires that the
cost of start-up activities and organization costs be expensed as incurred. The
initial adoption of SOP 98-5 resulted in a charge of $214,000 (net of a tax
benefit of $146,000) and is reported in the Consolidated Statements of Income as
a cumulative effect of change in accounting principle. The charge represents
remaining organization costs in connection with the Split-Off Transactions which
had not yet been fully amortized.
23
<PAGE> 24
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
Overview
Early in the first quarter of 1999, the Company's commercial and real estate
construction loan growth was funded with out-of- market and brokered
certificates of deposit. Noninterest-bearing deposits declined due to the
recurring seasonal increase at each year-end. As the quarter progressed,
customer deposits increased, providing additional liquidity that was deployed
into short-term investments in expectation of continued loan growth. Both
mortgage loans and mortgage loans held-for-sale declined due to continued
refinancing activity and an increase in the volume of mortgage loans delivered
for sale.
In March 1999, the Company executed a modest restructuring of the
available-for-sale investment portfolio. Approximately $50 million of
short-maturity U.S. Treasury securities were sold and the proceeds were
reinvested in longer-term Treasury, government agency and mortgage-backed
securities, thereby lengthening the duration of the investment portfolio.
Premises and equipment expenses increased approximately $1.8 million during the
first quarter of 1999 primarily as a result of the purchase of operations and
technology hardware and software.
Goodwill may be reduced by the utilization of acquired state net operating loss
carryforwards in connection with the Split-Off Transactions. The state income
tax benefit of these items is applied against goodwill when recognized, rather
than as a reduction of income tax expense.
Nonperforming Loans and Assets
Management reviews the loan portfolio for problem loans through a loan review
function and various credit committees. During the ordinary course of business,
management may become aware of borrowers who may not be able to meet the
contractual requirements of loan agreements. Such loans are placed under close
supervision, with consideration given to placing the loan on a nonaccrual
status, the need for an additional allowance for loan loss, and (if appropriate)
a partial or full charge-off.
24
<PAGE> 25
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS 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
March 31, December 31,
1999 1998
--------- ------------
(dollars in thousands)
Loans contractually past due 90 days
or more but still accruing $ 2,698 $ 2,618
Nonaccrual loans 9,067 11,365
------- -------
Total nonperforming loans 11,765 13,983
Other real estate 3,199 3,185
Other repossessed assets 82 83
------- -------
Total nonperforming assets $15,046 $17,251
======= =======
Nonperforming loans to total loans 0.88% 1.05%
Nonperforming assets to total loans
plus repossessed property 1.06% 1.29%
Nonperforming assets to total assets 0.77% 0.90%
Allowance for Loan Losses
An allowance for loan losses has been established to provide for those loans
which may not be repaid in their entirety. The allowance for loan losses is
increased by provisions charged to expense and decreased by charge-offs, net of
recoveries. The allowance is maintained by management at a level it considers
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations, including their financial position, collateral values, and other
factors and estimates which are subject to change over time. These estimates are
reviewed quarterly and, as changes in estimates are identified by management,
the resulting amounts are reflected through the provision for loan losses in the
appropriate period. Although management believes that the Company's 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. See "Results of Operations
- --Provision for Loan Losses".
The following table summarizes, for the periods indicated, activity in the
allowance for loan losses, including amounts charged-off, amounts of recoveries,
additions to the allowance charged to operating expense, the ratio of annualized
net charge-offs to average total loans, the ratio of the allowance to total
loans at end of period, and the ratio of the allowance to nonperforming loans:
25
<PAGE> 26
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
For the Three Months Ended
--------------------------
March 31, 1999 March 31, 1998
-------------- --------------
(dollars in thousands)
Average total loans $1,336,914 $1,207,977
========== ==========
Total loans at end of period $1,340,746 $1,214,294
========== ==========
ALLOWANCE FOR LOAN LOSSES:
Allowance at beginning of period $ 24,599 $ 25,813
Charge-offs (2,100) (1,140)
Recoveries 835 219
---------- ----------
Net charge-offs (1,265) (921)
---------- ----------
Provisions for loan losses 1,500 750
---------- ----------
Allowance at end of period $ 24,834 $ 25,642
========== ==========
Net charge-offs to average total
loans (annualized) 0.38% 0.31%
Allowance to total loans at end of
period 1.85% 2.11%
Allowance to nonperforming loans 211.08% 173.05%
Net charge-offs for the first quarter 1999 as compared to the first quarter 1998
increased $344,000. The increase was primarily a result of charge-offs within
the Bank's commercial loan portfolio. The amount of nonperforming loans was
$11.8 million at March 31, 1999 as compared to $14.0 million at December 31,
1998. The allowance as a percentage of nonperforming loans increased to 211.08%
at March 31, 1999 from 175.92% at December 31, 1998. The ratio of allowance to
nonperforming loans increased from December 31, 1998 primarily due to a 16%
decrease in the amount of nonperforming loans.
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.
26
<PAGE> 27
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company's and the Bank's capital ratios were as follows for the dates
indicated:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provision
--------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- --------- ------ --------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated $133,709 9.07% >$117,963 >8.00% NA
Cole Taylor Bank 155,882 10.53 > 118,476 >8.00 >$148,096 >10.00%
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated 115,198 7.81% > 58,982 >4.00 NA
Cole Taylor Bank 137,293 9.27 > 59,238 >4.00 > 88,857 > 6.00
Leverage (1)
Taylor Capital Group, Inc. - Consolidated 115,198 6.14% > 75,089 >4.00 NA
Cole Taylor Bank 137,293 7.33 > 74,943 >4.00 > 93,680 > 5.00
As of December 31, 1998:
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated $131,218 9.02% $ 116,405 >8.00% NA
Cole Taylor Bank 154,943 10.67 > 116,144 >8.00 >$145,507 >10.00%
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated 112,951 7.76 58,203 NA
Cole Taylor Bank 136,717 9.42 > 58,072 >4.00 > 87,304 > 6.00
Leverage (1)
Taylor Capital Group, Inc. - Consolidated 112,951 6.17 73,204 NA
Cole Taylor Bank 136,717 7.33 > 74,655 >4.00 > 91,506 > 5.00
- ---------------------
</TABLE>
(1) The leverage ratio is defined as Tier 1 capital divided by average quarterly
assets.
During the first quarter of 1999, the Parent Company's capital ratios remained
stable and above regulatory guidelines. The cash flow requirements at the Parent
Company, which have increased significantly as a result of the legal defense
costs related to the Split-Off Transactions, continue to result in increased
dividends from the Bank. As a result, the Bank's capital ratios declined at
March 31, 1999 in comparison to December 31, 1998.
Management of the Company recognizes the need to effectively manage capital
levels to remain above the regulatory "well capitalized" guidelines as it
relates to asset growth. In order to avoid declining capital levels, management
will continue to evaluate options, including utilizing the Parent Company's
revolving credit facility to fund Parent Company legal costs and other expenses.
For the first quarter of 1999, the Parent Company declared $861,000 and $419,000
in preferred and common stock dividends, respectively.
27
<PAGE> 28
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity
The Company's liquidity position remained stable during the first quarter of
1999. Asset growth was supported through the issuance of brokered certificates
of deposit, as well as increased customer deposits. Cash flow was also provided
through increased delivery of loans held for sale. The Parent Company paid $1
million on its term loan during the quarter. The Company believes that its
current sources of funds are adequate to meet all of the Company's financial
commitments and asset growth targets for 1999.
On December 7, 1998 a motion was filed for a preliminary injunction which seeks
to prevent the Company and the Bank from paying any dividends to any of their
respective shareholders. In March 1999, the Company filed a memorandum in
opposition that opposes such preliminary injunction. See Part II - Item 1.-
"Legal Proceedings."
As described in Footnote 8 to the consolidated financial statements included in
Part I, 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 cash needs have increased.
The liquidity uses of the Parent Company on a standalone basis consist 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.
YEAR 2000 COMPLIANCE
The Company continues to be actively addressing its Year 2000 ("Y2K") compliance
issues. A comprehensive Y2K plan (the "Plan") has been prepared which includes
awareness, assessment, renovation, validation/testing, implementation and
contingency planning. A Y2K oversight committee is responsible for ensuring that
the Plan is executed on a timely basis.
The Company has substantially completed the awareness, assessment, renovation,
and validation phases of the Plan. The Plan called for the replacement or
upgrade of non-compliant systems and validation of those replacements or
upgrades during the fourth quarter of 1998 and early 1999. The Company currently
expects all replacements and upgrades to be tested and implemented by June 30,
1999.
The majority of the Company's mission critical systems (specifically those that
process loans, deposits, and general ledger transactions) are provided by third
party processors. At this time, the primary data processing provider reports
that it is on target to meet all required dates to provide compliant systems.
All core applications provided by the Company's primary data processing provider
have been tested for Y2K readiness and the majority of the remediated core
applications have already been implemented. The Company anticipates that the
remaining core applications provided by the Company's primary data processing
provider will be implemented by May 31, 1999.
28
<PAGE> 29
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 during 1999, 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 element has not yet been developed.
The Company expensed approximately $121,000 during the first quarter of 1999,
and expects to incur additional costs throughout the remainder of 1999 for its
Y2K compliance program. With respect to certain technology applications, the
Company has elected to replace the existing applications with applications
having greater functionality, rather than limit its response only to remediation
of the Y2K issue. For that reason, the Company's technology expenditures have
materially increased 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 and liquidity
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; in-depth analysis will continue to
be performed during 1999. The Company has developed a liquidity strategy for Y2K
in order to meet expected currency demands at the Bank's branches and ATM's.
This strategy will be fully implemented during 1999.
Based on the Company's progress to date in executing its Plan, the Company
expects no significant disruption of business activities resulting from Y2K.
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.
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
29
<PAGE> 30
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
banks that were involved in the Split-Off Transactions, Reliance and the Company
as additional defendants. The filing dates of these lawsuits ranged 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 recision 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
also 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
and attorneys' fees and requests that the Court place all of the shares of the
Company held by the Taylor Family in a constructive trust.
30
<PAGE> 31
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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. Motions to consolidate the two adversary proceedings and to
have the adversary cases heard by the District Court, as opposed to the
Bankruptcy Court, are pending.
On December 7, 1998, the Estate Representative filed a motion for a preliminary
injunction which seeks to enjoin the Company and Cole Taylor Bank from paying
directly or indirectly any dividends to any of their respective shareholders and
from paying any of the litigation defense costs of the Taylor Family or any
other co-defendants with respect to any litigation arising out of the Split-Off
Transactions. On March 3, 1999, the Company filed a memorandum in opposition
that opposes such preliminary injunction. This motion for a preliminary
injunction is currently pending.
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
31
<PAGE> 32
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 has incurred and will continue to 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.
NEW ACCOUNTING PRONOUNCEMENTS
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, are 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 during 1999. The Company has not yet
quantified the impact of its adoption of the Statement.
32
<PAGE> 33
TAYLOR CAPITAL GROUP, INC.
MANAGEMENTS 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" 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 1999 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 compliance issue on the computer
systems of the Company, its service providers and 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 or restrictions 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 elsewhere in this Form
10-Q. Except as specifically required by the federal securities laws 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.
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.
33
<PAGE> 34
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company uses various interest rate contracts (floors and swaps) and forward
sale commitments to manage interest rate and market risk. These contracts are
designated as hedges of specific existing assets and liabilities. The Company's
asset and liability management and investment policies do not allow the use of
derivative financial instruments for trading purposes.
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 is 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 first quarter 1999 simulation model indicated a continued exposure to
declining rates in the one-year horizon. At February 28, 1999 the net interest
income at risk for year one in the declining rate scenario was calculated at
$573,000, or 0.75% lower than the net interest income in the rates unchanged
scenario. This exposure was well within the Bank's policy guidelines of 10%. The
net interest income for year one in the rising rate scenario was calculated as
$1.3 million, or 1.7% higher than the 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Footnote 8 to the Consolidated Financial Statements, and "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, 1998 discusses certain significant
litigation relating to the Split-Off Transactions. Such discussion is
incorporated in this Part II. Item 1. by reference.
34
<PAGE> 35
TAYLOR CAPITAL GROUP, INC
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 10.1 - First Amendment of Taylor Capital
Group, Inc. Deferred Compensation Plan
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the period covered by this report.
35
<PAGE> 36
TAYLOR CAPITAL GROUP, INC
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: May 13,1999 /s/ Jeffrey W. Taylor
-------------------------
Jeffrey W. Taylor*
Chairman and Chief Executive Officer
Date: May 13,1999 /s/ J. Christopher Alstrin
---------------------------
J. Christopher Alstrin*
Chief Financial Officer
* Duly authorized to sign on behalf of the Registrant
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT
OF
TAYLOR CAPITAL GROUP, INC.
DEFERRED COMPENSATION PLAN
WHEREAS, Taylor Capital Group, Inc. maintains the Deferred Compensation
Plan; and
WHEREAS, amendment of the Plan is desired by the Board of Directors;
NOW, THEREFORE, by virtue of the right of the Board of Directors to
amend the Plan as described in Section 8.1, the Plan is hereby amended
by restating Sections 4.3 and 4.6 of the Plan to read as follows:
4.3 Deferral Limitations. A Participant's Agreement to participate in
the Plan and to defer Salary, Bonus, or both, shall be subject to the
following limitations:
(a) a Participant may elect to defer no less than five percent
(5%) and no more than twenty-five percent (25%) of Salary, in
increments of one percentage point (1%); and
(b) a Participant's Agreement to defer up to one hundred
percent (100%) of Bonus shall be in increments of ten
percentage points (10%); and
(c) for the Plan Year coincident with the Plan Effective Date,
a Participant may elect to defer no less than five percent
(5%) nor more than one hundred percent (100)) of Salary, in
increments of one percentage point (1%), remaining to be paid
in 1994 Plan Year; and
(d) any Agreement to defer Salary, Bonus, or both, may not
apply to a Plan Year after the 2004 Plan Year; and
(e) the Agreement shall be irrevocable upon acceptance by the
Company.
4.6 Annual Company Allocation. The Company shall credit a Company
Allocation to a Participant's Deferred Benefit Account. The amount of
the Company Allocation, if any, shall be calculated and determined as
followed:
(a) The Company shall credit a Participant's Deferred Benefit
Account with the amount, if any, which is equivalent to
reductions of Company contributions under the 401(k)/ESOP
caused by the Participant's reduction in Salary and Bonus
attributable to participation in this Plan.
(b) The Company shall credit a Participant's Deferred Benefit
Account with the amount, if any, which is equivalent to the
Company contribution which could not be made under the
401(k)/ESOP because of:
<PAGE> 2
(1) the dollar limit on contributions under IRC
ss.415(c); and
(2) the annual limitation of compensation which can
be taken into account under IRC ss.401(a)(17).
In order to qualify for the Company Allocation to be credited
in accordance with this subsection (b), a Participant must
elect (or have elected) either:
(1) to defer at least six percent (6%) of
compensation as a contribution to the 401(k)/ESOP,
or
(2) a percentage amount which would result (but for
the limits of IRC ss.402(g)) in a deferral amount
which exceeds the maximum dollar amount permitted
under IRC ss.402(g).
(c) The Company may credit, from time to time, a Participant's
Deferred Benefit Account with a discretionary contribution as
the Company so determines. Such amount shall vest in
accordance with Section 4.7.
A Company Allocation, if any, made to a Participant's Deferred Benefit
Account in accordance with this Section shall be credited to his or her
Deferred Benefit Account at the same time the Company's contributions
are made (or would have been made) to the 401(k)/ESOP.
This amendment and restatement shall be effective as of January 1, 1999.
* * *
IN WITNESS WHEREOF, the Company has adopted this TAYLOR CAPITAL GROUP,
INC. DEFERRED COMPENSATION PLAN amendment and restatement to the Plan by signing
on its behalf by a duly authorized officer, this ____ day of ________________,
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 THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 65,174
<INT-BEARING-DEPOSITS> 44
<FED-FUNDS-SOLD> 37,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 349,907
<INVESTMENTS-CARRYING> 87,939
<INVESTMENTS-MARKET> 89,379
<LOANS> 1,340,756
<ALLOWANCE> 24,834
<TOTAL-ASSETS> 1,949,042
<DEPOSITS> 1,475,670
<SHORT-TERM> 171,777
<LIABILITIES-OTHER> 24,963
<LONG-TERM> 130,500
0
38,250
<COMMON> 47
<OTHER-SE> 107,835
<TOTAL-LIABILITIES-AND-EQUITY> 1,949,042
<INTEREST-LOAN> 27,464
<INTEREST-INVEST> 5,547
<INTEREST-OTHER> 81
<INTEREST-TOTAL> 33,092
<INTEREST-DEPOSIT> 11,440
<INTEREST-EXPENSE> 15,162
<INTEREST-INCOME-NET> 17,930
<LOAN-LOSSES> 1,500
<SECURITIES-GAINS> 107
<EXPENSE-OTHER> 17,225
<INCOME-PRETAX> 4,014
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 214
<NET-INCOME> 2,168
<EPS-PRIMARY> 0
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<YIELD-ACTUAL> 4.22
<LOANS-NON> 9,067
<LOANS-PAST> 2,698
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<ALLOWANCE-OPEN> 24,599
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