<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 5 , 1999
- ---------------------------- ---------------------------------
Common Stock, $.01 Par Value 4,625,792
<PAGE> 2
TAYLOR CAPITAL GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION.......................................................................... PAGE
-----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -
September 30, 1999 and December 31, 1998............................................. 3
Consolidated Statements of Income (Unaudited) -
For the Three and Nine Months Ended September 30, 1999
and For the Three and Nine Months Ended September 30, 1998........................... 4
Consolidated Statements of Cash Flows (Unaudited) -
For the Nine Months Ended September 30, 1999 and For
the Nine Months Ended September 30, 1998............................................. 5
Notes to Financial Statements (Unaudited)................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 36
Item 5. Other Information........................................................................ 36
Item 6. Exhibits and Reports on Form 8-K......................................................... 37
SIGNATURES.......................................................................................... 37
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION - ITEM 1. Financial Statements
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 69,281 $ 66,192
Interest-bearing deposits with banks 3,050 1,200
Federal funds sold 1,750 31
Investment securities:
Available-for-sale, at fair value 347,192 351,408
Held-to-maturity, at amortized cost (fair value of $84,168 and $91,620 at
September 30, 1999 and December 31, 1998, respectively) 84,229 89,753
Loans held for sale, net, at lower of cost or market 27,874 42,257
Loans, net of allowance for loan losses of $26,561 and $24,599 at September 30,
1999 and December 31, 1998, respectively 1,381,373 1,269,125
Premises, leasehold improvements and equipment, net 23,702 22,702
Other real estate and repossessed assets, net 759 3,267
Goodwill, net of amortization of $6,495 and $4,683
at September 30, 1999 and December 31, 1998, respectively 29,592 32,053
Other assets 36,593 32,342
---------- ----------
Total assets $2,005,395 $1,910,330
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $332,082 $350,711
Interest-bearing 1,219,021 1,089,026
Total deposits 1,551,103 1,439,737
Short-term borrowings 167,456 171,718
Accrued interest, taxes and other liabilities 25,361 22,242
Notes payable 114,500 131,500
---------- ----------
Total liabilities 1,858,420 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, 4,625,792
and 4,658,533 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 47 47
Surplus 100,016 99,990
Unearned compensation - stock grants (1,516) (2,083)
Employee stock ownership plan loan (576) (576)
Retained earnings 14,110 9,434
Accumulated other comprehensive income (loss) (2,421) 71
Treasury stock, at cost (935) ---
---------- ----------
Total stockholders' equity 146,975 145,133
---------- ----------
Total liabilities and stockholders' equity $2,005,395 $1,910,330
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PE
==
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
---------------------------
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $30,289 $28,211 $86,747 $82,071
Interest and dividends on investment securities:
Taxable 5,405 4,918 15,084 17,147
Tax-exempt 828 840 2,583 2,447
Interest on cash equivalents 323 307 597 441
------ ------ ------ ------
Total interest income 36,845 34,276 105,011 102,106
------ ------ ------ ------
Interest expense:
Deposits 12,802 12,365 36,140 36,359
Short-term borrowings 2,324 2,525 6,418 7,665
Notes payable 1,552 1,865 4,908 5,610
------ ------ ------ ------
Total interest expense 16,678 16,755 47,466 49,634
------ ------ ------ ------
Net interest income 20,167 17,521 57,545 52,472
Provision for loan losses 1,500 1,050 4,500 3,300
------ ------ ------ ------
Net interest income after provision
for loan losses 18,667 16,471 53,045 49,172
------ ------ ------ ------
Noninterest income:
Service charges 2,533 2,193 7,054 6,784
Trust fees 1,182 965 3,313 2,887
Gain on sales of loans, net 363 999 1,854 2,950
Gain on sale of mortgage servicing rights 5 --- 198 1,462
Investment securities gains, net --- --- 107 ---
Other noninterest income 507 392 1,813 1,233
------ ------ ------ ------
Total noninterest income 4,590 4,549 14,339 15,316
------ ------ ------ ------
Noninterest expense:
Salaries and employee benefits 9,524 9,341 28,265 27,708
Occupancy of premises, net 1,645 1,811 4,965 5,330
Furniture and equipment 954 832 2,577 2,558
Computer processing 588 577 1,776 1,643
Advertising and public relations 418 365 831 1,328
Goodwill and other intangible amortization 600 612 1,812 1,836
Legal fees 1,505 958 4,123 2,960
Other noninterest expense 2,571 2,896 8,207 8,583
------ ------ ------ ------
Total noninterest expense 17,805 17,392 52,556 51,946
------ ------ ------ ------
Income before income taxes and cumulative
effect of change in accounting principle 5,452 3,628 14,828 12,542
Income taxes 2,213 1,445 5,982 5,100
------ ------ ------ ------
Income before cumulative effect of change in
accounting principle 3,239 2,183 8,846 7,442
Cumulative effect of change in accounting
principle, net of tax --- --- (214) ---
------ ------ ------ ------
Net income $3,239 $2,183 $8,632 $7,442
====== ====== ====== ======
Preferred dividend requirements (860) (861) (2,581) (2,582)
------ ------ ------ ------
Net income applicable to common stockholders $2,379 $1,322 $6,051 $4,860
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
-------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,632 $ 7,442
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 1,745 3,364
Provision for loan losses 4,500 3,300
Gain on sales of loans originated for sale (1,108) (3,783)
Loans originated and held for sale (138,189) (224,364)
Proceeds from sales of loans originated for sale 153,549 228,480
Depreciation and amortization 4,800 4,832
Other adjustments to net income, net (1,284) (677)
Net changes in other assets and liabilities 1,751 721
-------- --------
Net cash provided by operating activities 34,289 19,315
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (143,286) (39,363)
Purchases of held-to-maturity securities (286) (15,267)
Proceeds from principal payments and maturities of
available-for-sale securities 92,229 100,147
Proceeds from principal payments and maturities of
held-to-maturity securities 5,509 10,864
Proceeds from sales of available-for-sale securities 50,102 ---
Net increase in loans (115,978) (92,736)
Decrease in reverse exchange assets --- 18,757
Other, net (1,258) (1,551)
-------- --------
Net cash used in investing activities (112,968) (19,149)
-------- --------
Cash flows from financing activities:
Net increase in deposits 111,366 6,627
Net (decrease) increase in short-term borrowings (4,262) 5,500
Repayments of notes payable (42,000) (112,400)
Proceeds from notes payable 25,000 106,900
Decrease in nonrecourse borrowings --- (18,757)
Purchases of treasury stock (935) ---
Dividends paid (3,832) (4,698)
-------- --------
Net cash provided by (used in) financing activities 85,337 (16,828)
-------- --------
Net increase (decrease) in cash and cash equivalents 6,658 (16,662)
Cash and cash equivalents, beginning of period 67,423 84,616
-------- --------
Cash and cash equivalents, end of period $ 74,081 $ 67,954
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 45,513 $ 49,302
Income taxes 4,500 6,775
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
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").
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 nine months ended September 30, 1999 are
not necessarily indicative of the results to be expected for the full year.
Certain reclassifications to the Company's prior year's consolidated
financial statements have been made to conform to the current year's
presentation.
2. Investment Securities:
The amortized cost and estimated fair values of investment securities at
September 30, 1999 and December 31, 1998 were as follows:
6
<PAGE> 7
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ----------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $ 65,250 $ 107 $ (91) $ 65,266
U.S. government agency securities 71,734 2 (460) $71,276
Collateralized mortgage obligations 113,972 8 (1,816) 112,164
Mortgage-backed securities 99,959 922 (2,395) 98,486
-------- ------ ------- --------
Total available-for-sale 350,915 1,039 (4,762) 347,192
-------- ------ ------- --------
Held-to-maturity:
State and municipal obligations 69,310 1,239 (1,299) 69,250
Federal Reserve Bank and Federal Home Loan
Bank equity securities 14,069 --- --- 14,069
Other debt securities 850 7 (8) 849
-------- ------ ------- --------
Total held-to-maturity 84,229 1,246 (1,307) 84,168
-------- ------ ------- --------
Total $435,144 $2,285 $(6,069) $431,360
======== ====== ======= ========
<CAPTION>
December 30, 1999
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ----------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $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
======== ====== ======= ========
</TABLE>
7
<PAGE> 8
3. Loans:
Loans classified by type at September 30, 1999 and December 31, 1998 were
as follows:
September 30, December 31,
1999 1998
------------ ------------
(in thousands)
Commercial and industrial $ 800,941 $ 749,984
Real estate-construction 248,262 232,018
Residential real estate-mortgages 165,318 150,930
Home equity lines of credit 104,774 106,521
Consumer 84,720 53,751
Other loans 4,787 1,806
---------- ----------
Gross loans 1,408,802 1,295,010
Less: Unearned discount (868) (1,286)
---------- ----------
Total loans 1,407,934 1,293,724
Less: Allowance for loan losses (26,561) (24,599)
---------- ----------
Loans, net $1,381,373 $1,269,125
========== ==========
4. Interest-Bearing Deposits:
Interest-bearing deposits at September 30, 1999 and December 31, 1998 were
as follows:
September 30, December 31,
1999 1998
------------ ------------
(in thousands)
NOW accounts $ 142,293 $ 120,900
Savings accounts 103,098 107,274
Money market deposits 244,355 234,197
Certificates of deposit 475,649 448,773
Public time deposits 100,720 121,614
Brokered certificates of deposit 152,906 56,268
---------- ----------
Total $1,219,021 $1,089,026
========== ==========
8
<PAGE> 9
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
5. Notes Payable:
Notes payable at September 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
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 September 30, 1999 and
December 31, 1998 were 6.46% 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, 2000; interest rates at
September 30, 1999 and December 31, 1998 were 6.52% and 6.43%
respectively. 500 1,500
COLE TAYLOR BANK:
Federal Home Loan Bank (FHLB) - various advances ranging from
$10 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
September 30, 1999 and December 31, 1998 were 5.03% and 5.23%
respectively. 90,000 105,000
-------- --------
Total $114,500 $131,500
======== ========
</TABLE>
In September 1999, the Taylor Capital Group, Inc. loan agreement was
extended, effective September 1, 1999 to September 1, 2000. There were no
other changes in the terms of the agreement other than the extension. The
loan agreement requires compliance with certain defined financial covenants
relating to the Bank, including covenants related to regulatory capital,
return on average assets, nonperforming assets and Parent Company leverage.
As of September 30, 1999, the Company was unaware 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 nine
months ended September 30, 1999, stock options were granted with respect to
116,070 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 the most recent semi-annual independent appraisal. Stock options with
respect to 41,006 shares of common stock were forfeited during the period.
Stock options with respect to 5,982 shares were exercised during the period
at an average exercise price of $24.16. As of September 30, 1999, there
were total stock
9
<PAGE> 10
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)
options outstanding, net of forfeitures, with respect to 299,518 shares of
common stock at a weighted average option price of $24.48.
In addition, during the first nine months of 1999, 16,703 shares of common
stock were awarded, and 24,454 shares of common stock were forfeited, under
restricted stock agreements.
7. Comprehensive Income:
Comprehensive income has been defined as changes in stockholders' equity
arising from transactions and other economic events from nonstockholder
sources. For the Company, comprehensive income includes net income and
unrealized holding gains or losses on available-for-sale investment
securities. The following table presents comprehensive income for the
periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------------------------------------
1999 1998 1999 1998
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Net income, as reported $3,239 $2,183 $8,632 $7,442
Other comprehensive income:
Change in unrealized gains (losses) on
available-for- sale securities 517 1,549 (3,620) (478)
Less: reclassification adjustment for gains
included in net income --- --- (107) ---
------ ------ ------ ------
517 1,549 (3,727) (478)
Income tax expense (benefit) related
to other comprehensive income (loss) 181 532 (1,235) (156)
------ ------ ------ ------
Other comprehensive income (loss), net of tax 336 1,017 (2,492) (322)
------ ------ ------ ------
Total comprehensive income $3,575 $3,200 $6,140 $7,120
====== ====== ====== ======
</TABLE>
8. Litigation:
Jeffrey W. Taylor, Chairman of the Board and Chief Executive Officer of the
Company, Bruce W. Taylor, President of the Company, Iris A. Taylor, Sidney
J. Taylor, Cindy Taylor Bleil, related trusts and a related partnership
(collectively, the "Taylor Family") have been named as defendants in the
lawsuits described below relating to (1) the Split-Off Transactions and (2)
the financial and public reporting of Reliance Acceptance Group, Inc.
(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 October 1999.
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
10
<PAGE> 11
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
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. The Illinois and Texas cases have been effectively concluded as the
result of the plaintiffs' filing of a consolidated amended complaint in
Illinois.
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 lawsuits from prosecuting their cases
on account of the pending adversary proceedings by the Reliance Estate
Representative that are described below. On June 2, 1999 the District Court
for the District of Delaware reversed the Bankruptcy Court's order. The
District Court's order has been appealed.
11
<PAGE> 12
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
On July 6, 1998, the Bankruptcy Court entered a confirmation order that
discharged the liability of Reliance and its subsidiaries in connection
with all of the lawsuits described above and permanently enjoined the
filing of similar new suits against them. The Bankruptcy Court also
appointed an Estate Representative (the "Estate Representative") for the
Post-Confirmation Chapter 11 Estate of Reliance and its subsidiaries. On
September 4, 1998, the Estate Representative filed two adversary proceeding
complaints, since consolidated, 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. On
July 22, 1999, the District Court for the District of Delaware issued an
order withdrawing the adversary proceedings from the Bankruptcy Court to
the District Court. Discovery is ongoing in the adversary proceedings and a
September 2000 trial date has been set.
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 October 14, 1999
the District Court denied the motion for preliminary injunction.
On July 21, 1999, the Company and certain other defendants in the federal
securities cases and the adversary proceedings submitted a request to the
Judicial Panel on Multidistrict Litigation seeking to have all of these
cases transferred to the Northern District of Illinois for coordinated or
consolidated pretrial proceedings. This request is set for a hearing on
November 18, 1999. An amended consolidated complaint was filed in the
shareholders' suits on August 11, 1999 in the Northern District of
Illinois.
On October 4, 1999, another lawsuit relating to the Split-Off Transactions
was filed in the Circuit Court of Cook County, Illinois by four Reliance
stockholders. Members of the Taylor Family, a related partnership, Taylor
Capital Group, Inc., Cole Taylor Bank, and another officer and director of
Taylor Capital Group, Inc., were named as defendants. Damages in an
unspecified amount are sought.
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
12
<PAGE> 13
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
by Reliance, including certain losses relating to the Split-Off
Transactions ("Taylor Family Indemnification Obligations"). In accordance
with the terms of an agreement dated February 6, 1997 between the Taylor
Family and the Company, the Company agreed to indemnify the Taylor Family
for certain losses that the Taylor Family may incur as a result of the
Split-Off Transactions, including a portion of the Taylor Family
Indemnification Obligations under the Share Exchange Agreement. The Company
is unable at this time to predict the extent to which it will be required
to pay any amounts under its indemnification obligation to the Taylor
Family. The Company and its subsidiaries have paid and may continue to pay
defense and other legal costs of the lawsuits described above that are not
otherwise advanced by insurance carriers on behalf of the Taylor Family and
other directors, officers and stockholders of the Company who are
defendants in these lawsuits.
The Company believes that it has meritorious defenses to all of the actions
against the Company, and the Company intends to defend itself and its
subsidiaries vigorously. However, the Company is unable to predict, at this
time, the potential impact of the litigation, the indemnification
obligations and the payment of legal fees described above on the
management, business, financial condition, liquidity and operating results
of the Company. Even if the Taylor Family, the Company and the other
defendants are successful in defending themselves in the lawsuits, the
Company 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
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
13
<PAGE> 14
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
indirect expenses have been allocated based on actual volume measurements
and other criteria, as the Bank considers appropriate. The Bank accounts
for intersegment revenue at current market prices.
The following tables present reportable segment information for the periods
indicated:
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------------------------------------------------------
September 30, 1999 September 30, 1998
--------------------------------------------------------------------------
Mortgage Mortgage
Banking Banking Total Banking Banking Total
--------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 19,356 $ 1,204 $ 20,560 $ 17,367 $ 621 $ 17,988
Noninterest income 4,146 78 4,224 3,600 102 3,702
Depreciation and amortization 1,677 5 1,682 1,603 26 1,629
Other significant noncash items:
Provision for loan losses 1,449 51 1,500 1,041 9 1,050
Gain on sales of loans, net --- 363 363 --- 999 999
Gain on sale of mortgage
servicing rights --- 5 5 --- --- ---
Impairment of mortgage
servicing rights --- --- --- --- 151 151
Income taxes (benefit) 3,389 (342) 3,047 2,157 (61) 2,096
Segment net income (loss) $ 5,475 $ (685) $ 4,790 $ 3,320 $ 91 $ 3,411
==========================================================================
Segment average assets $1,925,557 $92,554 $2,018,111 $1,797,072 $62,598 $1,859,670
==========================================================================
</TABLE>
14
<PAGE> 15
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended
-----------------------------------------------------------------------------
September 30, 1999 September 30, 1998
-----------------------------------------------------------------------------
Mortgage Mortgage
Banking Banking Total Banking Banking Total
-----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 55,402 $ 3,312 $ 58,714 $ 52,081 $ 1,813 $ 53,894
Noninterest income 12,029 218 12,247 11,006 205 11,211
Depreciation and amortization 4,784 16 4,800 4,644 78 4,722
Other significant noncash items:
Provision for loan losses 4,358 142 4,500 3,290 10 3,300
Gain on sales of loans, net --- 1,854 1,854 --- 2,950 2,950
Gain on sale of mortgage
servicing rights --- 198 198 --- 1,462 1,462
Impairment of mortgage
servicing rights --- --- --- --- 301 301
Reduction of impairment
reserve on mortgage
servicing rights --- 47 47 --- --- ---
Income taxes (benefit) 8,935 (586) 8,349 6,915 427 7,342
Segment net income (loss) $ 14,518 $(1,177) $ 13,341 $ 10,687 $ 991 $ 11,678
=============================================================================
Segment average assets $1,867,654 $94,984 $1,962,638 $1,794,113 $56,643 $1,850,756
=============================================================================
</TABLE>
15
<PAGE> 16
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
The following tables reconcile segment information to the consolidated financial
statements for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------------------
September 30, 1999 September 30, 1998
-----------------------------------------------------------------------------
Reportable Consolidated Reportable Consolidated
Segments Other Totals Segments Other Totals
-----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 20,560 $ (393) $ 20,167 $ 17,988 $ (467) $ 17,521
Noninterest income 4,224 (2) 4,222 3,702 (1) 3,701
Depreciation and amortization 1,682 --- 1,682 1,629 --- 1,629
Other significant noncash items:
Provision for loan losses 1,500 --- 1,500 1,050 --- 1,050
Gain on sales of loans, net 363 --- 363 999 --- 999
Gain on sale of mortgage
servicing rights 5 --- 5 --- --- ---
Impairment of mortgage
servicing rights --- --- --- 151 --- 151
Income taxes (benefit) 3,047 (834) 2,213 2,096 (651) 1,445
Net income (loss) $ 4,790 $(1,551) $ 3,239 $ 3,411 $(1,228) $ 2,183
=============================================================================
Average assets $2,018,111 $ 4,310 $2,022,421 $1,859,670 $ 5,271 $1,864,941
=============================================================================
</TABLE>
16
<PAGE> 17
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended
-----------------------------------------------------------------------------
September 30, 1999 September 30, 1998
-----------------------------------------------------------------------------
Reportable Consolidated Reportable Consolidated
Segments Other Totals Segments Other Totals
-----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 58,714 $(1,169) $ 57,545 $ 53,894 $(1,422) $ 52,472
Noninterest income 12,247 (7) 12,240 11,211 (6) 11,205
Depreciation and amortization 4,800 --- 4,800 4,722 --- 4,722
Other significant noncash items:
Provision for loan losses 4,500 --- 4,500 3,300 --- 3,300
Gain on sales of loans, net 1,854 --- 1,854 2,950 --- 2,950
Gain on sale of mortgage
servicing rights 198 --- 198 1,462 --- 1,462
Impairment of mortgage
servicing rights --- --- --- 301 --- 301
Reduction of impairment
reserve on mortgage
servicing rights 47 --- 47 --- --- ---
Income taxes (benefit) 8,349 (2,367) 5,982 7,342 (2,242) 5,100
Net income (loss) $ 13,341 $(4,709) $ 8,632 $ 11,678 $(4,236) $ 7,442
=============================================================================
Average assets $1,962,638 $ 2,497 $1,965,135 $1,850,756 $ 7,881 $1,858,637
=============================================================================
</TABLE>
For the three and nine months ended September 30, 1999 and 1998,
respectively, amounts presented in the other columns represent the operations
of the Parent Company and the Mortgage Company that have not been defined as
reportable segments.
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 associated with the Split-Off Transactions which
had not yet been fully amortized.
17
<PAGE> 18
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presents management's discussion and analysis of financial
condition and results of operations of the Company as of the dates and for the
periods indicated. This discussion should be read in conjunction with the
Company's Consolidated Financial Statements, and the Notes thereto, appearing
elsewhere in this Form 10-Q.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Taylor Capital
Group, Inc. (the "Parent Company") and its wholly owned subsidiaries
(collectively, with the Parent Company, the "Company"), Cole Taylor Bank and its
subsidiaries (the "Bank") and CT Mortgage Company, Inc. (the "Mortgage
Company"). This discussion should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
RESULTS OF OPERATIONS
Overview
The Company's third quarter 1999 financial results reflected an increase in
profitability in comparison to the financial results for the third quarter of
1998. This increase was primarily a result of an increase in net interest income
to $20.2 million from $17.5 million for the same period in 1998. This increase
was partially offset by a decrease in gain on sales of loans, net, to $363,000
for the third quarter of 1999 from $999,000 for the same period in 1998 and an
increase in noninterest expense to $17.8 million in 1999 from $17.4 million in
1998.
For the third quarter of 1999, consolidated net income was $3.2 million.
Annualized return on average assets and return on average equity were 0.64% and
8.77%, respectively. For the third quarter of 1998, consolidated net income was
$2.2 million, and annualized return on average assets and return on average
equity were 0.46% and 6.02%, respectively. Total assets of the Company were
$2.01 billion and $1.91 billion at September 30, 1999 and December 31, 1998,
respectively. Loans and deposits grew to $1.44 billion and $1.55 billion,
respectively, at September 30, 1999 from $1.34 billion and $1.44 billion,
respectively, at December 31, 1998. Stockholders' equity increased to $147.0
million at September 30, 1999 as compared to $145.1 million at December 31,
1998.
For the nine months ended September 30, 1999, consolidated net income was $8.6
million. Annualized return on average assets and return on average equity were
0.60% and 7.86%, respectively. For the same period in 1998, consolidated net
income was $7.4 million. Annualized return on average assets and return on
average equity were 0.54% and 6.95%, respectively. Despite an increase in net
interest income to $57.5 million for the nine months ended September 30, 1999
from $52.5 million for the same period in 1998, net income increased only
modestly primarily due to an increase in the loan loss provision to $4.5 million
in 1999 from $3.3 million in 1998, a $1.5 million gain on the sale of mortgage
servicing rights in 1998 and an increase in legal fees to $4.1 million in 1999
compared to $3.0 million in 1998.
18
<PAGE> 19
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net Interest Income
The following table sets forth certain information relating to the Company's
average consolidated balance sheets and reflects the yield on average earning
assets and cost of average liabilities for the periods indicated. Such yields
and costs are derived by dividing annualized income or expense by the average
balance of assets or liabilities. Interest income is measured on a tax
equivalent basis using a 35% income tax rate for each period presented.
19
<PAGE> 20
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT INTEREST AND YIELD/RATES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
-------------------------- -------------------------- --------------------------
YIELD/ YIELD/ YIELD/
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE INTEREST (%) BALANCE INTEREST (%) BALANCE INTEREST (%)
--------- -------- ------ --------- -------- ------ --------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities (1):
Taxable $ 372,999 $5,404 5.79% $ 376,307 $ 4,918 5.25% $ 366,661 $15,084 5.49%
Non-taxable (tax equivalent) 69,330 1,322 7.63 69,242 1,355 7.83 71,552 4,118 7.67
---------- ------ ---------- ------- ---------- -------
Total investment securities 442,329 6,726 6.07 445,549 6,273 5.65 438,213 19,202 5.85
--------- ------ ---------- ------- ---------- -------
Cash equivalents 25,199 323 5.02 22,146 307 5.42 16,091 597 4.89
--------- ------ ---------- ------- ---------- -------
Loans (2):
Commercial and industrial 1,049,749 22,619 8.43 920,270 20,801 8.84 1,021,477 65,513 8.46
Real estate mortgages 190,097 3,427 7.21 191,403 3,476 7.26 184,041 9,890 7.17
Consumer and other 186,140 3,860 8.23 162,445 3,647 8.91 175,018 10,644 8.13
Fees on loans 483 348 1,000
---------- ------ ---------- ------- ---------- -------
Net loans (tax equivalent) 1,425,986 30,389 8.46 1,274,118 28,272 8.81 1,380,536 87,047 8.43
---------- ------ ---------- ------- ---------- -------
Total earning assets 1,893,514 37,438 7.86 1,741,813 34,852 7.96 1,834,840 106,846 7.78
---------- ------ ---------- ------- ---------- -------
Allowance for loan losses (26,555) (24,758) (25,719)
NONEARNING ASSETS:
Cash and due from banks 70,598 59,696 68,004
Accrued interest and other assets 84,864 88,190 88,010
---------- ---------- ----------
TOTAL ASSETS $2,022,421 $1,864,941 $1,965,135
========== ========== ==========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits $ 368,950 2,864 3.08% $ 343,784 3,028 3.49% $ 361,728 8,337 3.08%
Savings deposits 105,576 445 1.67 110,864 618 2.21 106,820 1,359 1.70
Time deposits 745,659 9,493 5.05 623,457 8,719 5.55 698,981 26,444 5.06
---------- ------ ---------- ------- ---------- -------
Total deposits 1,220,185 12,802 4.16 1,078,105 12,365 4.55 1,167,529 36,140 4.14
---------- ------ ---------- ------- ---------- -------
Short-term borrowings 198,670 2,324 4.64 193,234 2,525 5.18 189,494 6,418 4.53
Notes payable 114,373 1,552 5.31 129,345 1,865 5.64 122,229 4,908 5.30
---------- ------ ---------- ------- ---------- -------
Total interest-bearing liabilities 1,533,228 16,678 4.32 1,400,684 16,755 4.75 1,479,252 47,466 4.29
---------- ------ ---------- ------- ---------- -------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 317,134 303,490 315,948
Nonrecourse borrowings (3) --- --- ---
Accrued interest and other liabilities 25,595 16,864 23,561
STOCKHOLDERS' EQUITY 146,464 143,903 146,374
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,022,421 $1,864,941 $1,965,135
========== ========== ==========
Net interest income (tax equivalent) $20,760 $18,097 $59,380
======= ======= =======
Net interest spread 3.54% 3.21% 3.49%
Net interest margin 4.36% 4.14% 4.32%
==== ==== ====
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
--------------------------
YIELD/
AVERAGE RATE
BALANCE INTEREST (%)
--------- -------- ------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities (1):
Taxable $ 401,199 $17,147 5.71%
Non-taxable (tax equivalent) 66,730 3,951 7.89
---------- -------
Total investment securities 467,929 21,098 6.02
---------- -------
Cash equivalents 10,630 441 5.47
---------- -------
Loans (2):
Commercial and industrial 887,424 59,836 8.89
Real estate mortgages 198,403 10,866 7.30
Consumer and other 158,297 10,553 8.91
Fees on loans 1,045
---------- -------
Net loans (tax equivalent) 1,244,124 82,300 8.84
---------- -------
Total earning assets 1,722,683 103,839 8.05
---------- -------
Allowance for loan losses (25,292)
NONEARNING ASSETS:
Cash and due from banks 65,396
Accrued interest and other assets 95,850
----------
TOTAL ASSETS $1,858,637
==========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits $ 342,182 9,063 3.54%
Savings deposits 112,290 1,995 2.38
Time deposits 604,939 25,301 5.59
---------- -------
Total deposits 1,059,411 36,359 4.59
---------- -------
Short-term borrowings 198,278 7,665 5.17
Notes payable 127,893 5,610 5.78
---------- -------
Total interest-bearing liabilities 1,385,582 49,634 4.79
---------- -------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 306,544
Nonrecourse borrowings (3) 5,359
Accrued interest and other liabilities 18,067
STOCKHOLDERS' EQUITY 143,085
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,858,637
==========
Net interest income (tax equivalent) $54,205
=======
Net interest spread 3.26%
Net interest margin 4.20%
=====
</TABLE>
(1) Investment securities average balances are based on amortized cost.
(2) Nonaccrual loans are included in the above stated average balances.
(3) Interest expense on nonrecourse borrowings is netted against trust fees on
the income statement.
20
<PAGE> 21
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net Interest Income -- continued
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 third
quarter of 1999 was $20.8 million, compared to $18.1 million for the third
quarter of 1998. The increase in net interest income in 1999 was a result of an
increase in average earning assets and net interest margin. Average earning
assets increased $151.7 million, or 8.7%, for the three months ended September
30, 1999 when compared to the 1998 reporting period. Net interest margin, which
is determined by dividing taxable-equivalent net interest income by average
earning assets, increased to 4.36% for the third quarter of 1999, from 4.14% for
the same 1998 quarter. The third quarter 1998 net interest margin was adversely
impacted by mortgage prepayment activity, in excess of that originally expected
related to certain sequential paying obligations that were purchased at a
significant premium. This excess prepayment activity resulted in impairment
charges of $463,000 and additional premium amortization of approximately
$200,000. During 1999 a change in asset mix occurred whereby maturing investment
securities were utilized to fund higher yielding loans. These factors increasing
the net margin during 1999 were partially offset by reduced yields on loans. The
yield on earning assets declined to 7.86% from 7.96% for the three months ended
September 30, 1999 and 1998, respectively. The yield on loans reflected reduced
yields as a result of a lower interest rate environment versus the same period
in 1998 as well as increased competitive pressure on loan pricing. The cost of
interest-bearing liabilities declined to 4.32% from 4.75% for the three months
ended September 30, 1999 and 1998, respectively, primarily as a result of
lowering the rate paid on interest-bearing deposits and the renewal of maturing
notes payable at lower interest rates due to the comparatively lower interest
rate environment from the last quarter of 1998 through the first half of 1999.
Net interest income (with an adjustment for tax-exempt income) for the first
nine months of 1999 totaled $59.4 million as compared to $54.2 million for the
first nine months of 1998. The increase in net interest income was a result of
an increase in average earning assets and net interest margin. Average earning
assets increased $112.2 million, or 6.5%, for the nine months ended September
30, 1999 when compared to the 1998 reporting period. Net interest margin was
4.32% for the first nine months of 1999 as compared to 4.20% for the 1998
reporting period. The 1999 net interest margin was positively impacted by a
payoff of a loan which was originally purchased at a discount by the Bank. This
payoff resulted in the recognition of the remaining unamortized discount as
interest income in the amount of $535,000. The net interest margin was also
positively impacted by a 50 basis point decline in the cost of interest-bearing
liabilities. These increases were partially offset by declines in the investment
security and loan yields. The yield on earning assets declined to 7.78% from
8.05% for the first nine months of 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
quarters 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 September 30, 1999,
these securities totaled $29.5 million, with $1.2 million of premium remaining
and an expected yield of 5.79%. These securities are backed
21
<PAGE> 22
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net Interest Income -- continued
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 reflected 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 decrease in consumer
loan yields resulted from a change in portfolio mix due to the sale of the
majority of the Bank's credit card portfolio in October 1998.
The cost of interest-bearing liabilities declined to 4.29% during the first nine
months of 1999 from 4.79% for the comparable period in 1998 primarily as a
result of lowering the rate paid on interest-bearing deposits and the renewal of
maturing notes payable at lower interest rates due to the lower interest rate
environment from the last quarter of 1998 through the first half of 1999.
Provision for Loan Losses
Management determines a provision for loan losses which it considers sufficient
to maintain an allowance covering probable losses inherent in the portfolio as
of the balance sheet date. 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 third quarter of 1999 and the third quarter
of 1998 were $1.5 million and $1.1 million, respectively. For the first nine
months of 1999 the provision for loan losses totaled $4.5 million versus $3.3
million for the same period of 1998. The $1.2 million increase in the provision
was primarily a result of an increase in loan volume in 1999. Net charge-offs
were $794,000 for the third quarter of 1999 as compared to $1.1 million for the
same 1998 period. For the first nine months of 1999 net charge-offs totaled $2.5
million as compared to $4.6 million for the same 1998 period. The higher net
charge-off activity experienced in 1998 was a result of the resolution of
certain older, chronic commercial problem loans. If the loan portfolio continues
to grow and/or future net charge-offs, and/or nonperforming loans continue to
increase, the Company expects that the provision for loan losses will continue
to exceed 1998 levels. As of September 30, 1999, management believes that the
allowance for loan losses is adequate. See "Financial Condition -- Nonperforming
Loans and Assets."
22
<PAGE> 23
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Income
The following table displays noninterest income for the periods indicated:
<TABLE>
<CAPTION>
NONINTEREST INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1999 1998 1999 1998
------ ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Deposit service charges $2,513 $1,911 $6,809 $6,098
Retail credit card service charges 12 140 210 407
Merchant credit card processing fees 8 142 35 279
Trust fees 1,182 965 3,313 2,887
Gain on sale of loans, net 363 999 1,854 2,950
Mortgage loan servicing income (loss) 78 (47) 264 (95)
ATM fees 263 219 765 626
Gain on sale of mortgage servicing rights 5 --- 198 1,462
Investment securities gains, net --- --- 107 ---
Other noninterest income 166 220 784 702
------ ------ ------- -------
Total noninterest income $4,590 $4,549 $14,339 $15,316
====== ====== ======= =======
</TABLE>
Noninterest income for the third quarter of 1999 totaled $4.6 million, a
$41,000, or 0.9%, increase from the same quarter in 1998. Increases in deposit
service charges, trust fees, ATM fees, and mortgage loan servicing income, which
totaled $988,000, in the aggregate, for the three months ended September 30,
1999, as compared to the same period in 1998 were primarily offset by a $636,000
decrease in gain on sale of loans, net and a decrease of $262,000 in retail and
merchant credit card charges and fees. The increase in deposit service charges
was due to the increased service charge schedules/rates during 1999. The
decrease in the gain on sale of loans, net was primarily a result of a 32%
decrease in the volume of loans sold as compared to 1998.
Total noninterest income for the first nine months of 1999 was $14.3 million as
compared to $15.3 million for the same period in 1998. The decrease in
noninterest income was primarily due to the 1998 reporting period inclusion of a
gain on sale of mortgage servicing rights of $1.5 million versus a gain of only
$198,000 for the 1999 reporting period. In addition, merchant credit card
processing fees decreased during 1999 due to reductions in pricing of credit
card deposit services.
For the first nine months of 1999, trust fees increased $426,000, as compared to
the same period in 1998, primarily due to an increase in corporate trust
business. The gain on sale of loans, net continued to decrease during 1999 due
to a slowdown in mortgage prepayment activity and a rising mortgage interest
rate environment. 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 during 1999. An impairment provision of $301,000 had
been recognized during the first nine months of 1998. The Company's higher ATM
fee income during the first nine months of 1999 was due to an increase in the
surcharge fee implemented in the fourth quarter of 1998.
23
<PAGE> 24
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Expense
The following table displays noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
NONINTEREST INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1999 1998 1999 1998
------ ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 9,524 $ 9,341 $ 28,265 $27,708
Occupancy of premises, net 1,645 1,811 4,965 5,330
Furniture and equipment 954 832 2,577 2,558
Computer processing 588 577 1,776 1,643
Legal fees 1,505 958 4,123 2,960
Advertising and public relations 418 365 831 1,328
Goodwill and other intangible amortization 600 612 1,812 1,836
Other real estate and repossessed asset expense (92) 200 73 409
Other noninterest expense 2,663 2,696 8,134 8,174
Total noninterest expense $17,805 $17,392 $ 52,556 $51,946
Efficiency ratio (1) 71.92% 78.80% 73.11% 76.63%
</TABLE>
- -------------------
(1) Noninterest expense divided by an amount equal to net interest income plus
noninterest income.
Total noninterest expense for the third quarter of 1999 was $17.8 million, a
$413,000, or 2.4%, increase as compared to the prior year's third quarter
noninterest expense of $17.4 million. The primary reason for the higher expense
for the 1999 reporting period was an increase in legal fees of $547,000 related
to Parent Company legal costs. Decreases in occupancy expense of $166,000 and
other real estate and repossessed asset expense of $292,000 were partially
offset by an increase in furniture and equipment expenses of $122,000.
Noninterest expense for the nine months ended September 30, 1999 totaled $52.6
million, as compared to $51.9 million for the 1998 reporting period. The primary
reasons for the higher expense in the 1999 reporting period over that in the
1998 period were increased legal fees and employee benefit costs, partially
offset by decreases in advertising and public relations expense, occupancy
expenses, and other real estate and repossessed asset expense.
Salaries and benefits expense for the first nine months of 1999 increased 2.0%
versus the same period in 1998. The primary reason for the increase was routine
annual salary increases partially offset by a lower number of full-time
equivalent employees in 1999 versus 1998.
Occupancy expense for the first nine months of 1999 decreased $365,000 as
compared to the same 1998 period. A reduction in rent expense related to one of
the Bank's facilities contributed to the decrease.
24
<PAGE> 25
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Expense -- continued
In late 1998 and the first two quarters of 1999, the Bank implemented
significant technology enhancements within the Bank's operations center and
replaced certain hardware and software applications with systems of greater
functionality. Capital expenditures related to the replacement of hardware and
software totaled approximately $2.8 million. These enhancements and replacements
have resulted in increased furniture and equipment expenses during 1999 versus
the same period in 1998.
Legal expenses for the first nine months of 1999 increased $1.2 million from
1998. Parent Company legal costs increased during 1999, relating to the defense
of the various lawsuits relating to the Split-Off Transactions. The legal costs
relating to the defense of the various related lawsuits relating to the
Split-Off Transactions totaled approximately $3.5 million and $2.4 million
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.
Other real estate and repossessed asset expense decreased $336,000 for the first
nine months of 1999 versus the same reporting period in 1998. This decrease was
primarily a result of 13 other real estate properties being sold during 1999.
These sales resulted in gains on sale and other income on other real estate
owned of approximately $223,000. In addition, carrying expenses related to these
properties decreased as sales occurred in 1999.
Income Taxes
Income tax expense of $2.2 million and $1.4 million was recorded for the third
quarters of 1999 and 1998, respectively, reflecting an effective tax rate of 41%
and 40%, respectively. The income tax expense for the first nine months of 1999
and 1998 totaled $6.0 million and $5.1 million, respectively, reflecting an
effective tax rate of 40% and 41%, respectively.
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 associated with the Split-Off Transactions which
had not yet been fully amortized.
25
<PAGE> 26
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
Overview
During the first nine months of 1999 total assets increased $95.1 million to
$2.01 billion at September 30, 1999 from $1.91 billion at December 31, 1998. The
asset growth in the Company's commercial and consumer loan portfolios was
primarily funded with brokered certificates of deposit. Growth in customer
interest-bearing deposits was offset by a seasonal decline in customer
non-interest bearing deposits and a decrease in FHLB advances. Mortgage loans
held-for-sale declined due to a slowdown in mortgage prepayment activity and a
rising mortgage interest rate environment.
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 $1.0 million during the
first nine months of 1999 primarily as a result of the purchase of operations
and technology hardware and software.
Goodwill may periodically be reduced by the utilization of state net operating
loss carryforwards acquired 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.
The following table sets forth the amounts of nonperforming loans and other
assets at the end of the periods indicated:
26
<PAGE> 27
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Nonperforming Loans and Assets -- continued
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
(dollars in thousands)
Loans contractually past due 90 days or more but still accruing $ 4,839 $ 2,618
Nonaccrual loans 13,078 11,365
------- -------
Total nonperforming loans 17,917 13,983
Other real estate 719 3,185
Other repossessed assets 116 83
------- -------
Total nonperforming assets $18,752 $17,251
======= =======
Nonperforming loans to total loans 1.25% 1.05%
Nonperforming assets to total loans plus repossessed property 1.31% 1.29%
Nonperforming assets to total assets 0.94% 0.90%
</TABLE>
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 absorb probable losses inherent in the portfolio as of the balance
sheet date. Factors considered include 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:
27
<PAGE> 28
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Allowance for Loan Losses -- continued
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
For the Three Months Ended For The Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Average total loans $1,425,364 $1,274,118 $1,380,536 $1,224,124
========== ========== ========== ==========
Total loans at end of period $1,435,808 $1,291,356
========== ==========
ALLOWANCE FOR LOAN LOSSES:
Allowance at beginning of period $ 25,855 $ 24,503 $ 24,599 $ 25,813
Charge-offs (1,333) (1,336) (4,166) (5,752)
Recoveries 539 260 1,628 1,116
---------- ---------- ---------- ----------
Net charge-offs (794) (1,076) (2,538) (4,636)
---------- ---------- ---------- ----------
Provision for loan losses 1,500 1,050 4,500 3,300
---------- ---------- ---------- ----------
Allowance at end of period $ 26,561 $ 24,477 $ 26,561 $ 24,477
========== ========== ========== ==========
Net charge-offs to average total loans 0.22% 0.34% 0.25% 0.50%
(annualized)
Allowance to total loans at end of period 1.85% 1.90%
Allowance to nonperforming loans 148.24% 131.33%
</TABLE>
Net charge-offs for the quarter and nine months ended September 30, 1999
decreased over the comparable periods for 1998. Net charge-offs were $2.5
million for the nine months ended September 30, 1999, as compared to $4.6
million for the 1998 reporting period. The decrease in 1999 was primarily due to
the resolution of certain older, chronic commercial problem loans which were
charged-off during the second quarter of 1998. The amount of nonperforming loans
was $17.9 million at September 30, 1999 as compared to $14.0 million at December
31, 1998. The increase in nonperforming loans and corresponding decrease in the
ratio of the allowance to nonperforming loans was primarily due to one
commercial loan, totalling $2.1 million, net of a charge-off of $1.0 million,
being put into nonaccrual status during September 1999.
Capital Resources
The Company actively monitors compliance with bank regulatory capital
requirements, focusing primarily on the risk-based capital guidelines. Under the
risk-based method of capital measurement, computed ratios are dependent on the
amount and composition of assets recorded on the balance sheet, as well as the
amount and composition of off-balance sheet items, in addition to the level of
capital.
The Company's and the Bank's capital ratios were as follows for the dates
indicated:
28
<PAGE> 29
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Capital Resources -- continued
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ --------- ------ --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated $138,527 8.97% >$123,547 >8.00% NA
Cole Taylor Bank 163,231 10.60 > 123,211 >8.00 >$154,015 >10.00%
Tier I Capital (to Risk Weighted Assets)
Taylor Capital Group, Inc. - Consolidated 119,133 7.71 > 61,773 >4.00 NA
Cole Taylor Bank 143,890 9.34 > 61,606 >4.00 > 92,409 >6.00
Leverage (1)
Taylor Capital Group, Inc. - Consolidated 119,133 5.98 > 79,726 >4.00 NA
Cole Taylor Bank 143,890 7.23 > 79,615 >4.00 > 99,518 >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 >4.00 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 >4.00 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.
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 maintain desired capital levels, at the
Bank, management will continue to evaluate options to fund Parent Company legal
costs and other expenses, including utilizing the Parent Company's revolving
credit facility.
For the first nine months of 1999, the Parent Company declared $2.6 million
and $1.3 million in preferred and common stock dividends, respectively.
Under the terms of the Company's Employee Stock Ownership Plan (ESOP), the
Company is obligated to purchase shares of Company stock from terminated and
current employees related to "put" rights. During the three months ended
September 30, 1999, the Company repurchased 24,990 shares of its common stock
totaling approximately $935,000. These shares are currently being held as
treasury stock at their purchase price, as determined by the June 30, 1999
independent third party appraisal.
29
<PAGE> 30
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity
The asset growth of loans was funded primarily through the issuance of brokered
certificates of deposits as loan growth outpaced customer deposit growth.
Brokered certificates of deposits increased to $152.9 million at September 30,
1999 from $56.3 million at December 31, 1998. Adverse operating results at the
Bank or changes in industry conditions could lead to an inability to replace
such brokered deposits at maturity, which could result in higher costs to or
reduced asset levels of the Bank. The Parent Company paid $1 million on its term
loan and $1 million on its revolving credit facility during the first nine
months of 1999. 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 and beyond.
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. On October 14, 1999 the District Court denied the
motion for preliminary injunction. See "Litigation."
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 requirements for 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 Company believes that the Bank
currently has adequate capital to allow continued dividends, out of earnings, to
support 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. The Company has developed an extensive Y2K communication
program. The Company will continue to update customers as to our progress as the
year ensues. A part of this communication program will focus on Y2K-related
fraud prevention. 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. Non-compliant systems
were upgraded or replaced during the fourth quarter of 1998 and early 1999 in
accordance with the Company's Plan. The Company has completed remediation,
testing, and implementation of mission critical applications and substantially
all mission critical applications/systems have been remediated as of June 30,
1999 in accordance with milestones set forth by the Federal Financial
Institutions Examination Council (FFIEC).
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
30
<PAGE> 31
PE
==
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Year 2000 Compliance -- continued
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 implemented into the production
environment.
The Company has made significant progress relative to contingency plans for Year
2000. Throughout the remainder of the fourth quarter we will continue to
validate and refine contingency plans. In conjunction with contingency planning,
the Company has developed a liquidity strategy for Y2K in order to meet expected
currency demands at the Bank's branches and automated teller machines. This
strategy will be implemented during the fourth quarter of 1999.
The Company expensed approximately $211,000 during the first nine months 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 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 remediation 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 who have Y2K
compliance problems. The Company has been evaluating, in accordance with the
guidelines outlined by the FFIEC, 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 the fourth quarter of 1999.
Based on the Company's progress to date in executing its Plan, the Company
expects no significant disruption of business activities resulting from the
arrival of the 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 Acceptance Group, Inc. (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
31
<PAGE> 32
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Litigation -- continued
in the Split-Off Transactions, Reliance and the Company as additional
defendants. The filing dates of these lawsuits ranged from October 1997 to
October 1999.
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. The Illinois and Texas cases have
been effectively concluded as the result of the plaintiffs' filing of a
consolidated amended complaint in Illinois.
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 lawsuits from prosecuting their cases on account
of the pending adversary proceedings by the Reliance Estate Representative that
are described below. On
32
<PAGE> 33
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Litigation -- continued
June 2, 1999 the District Court for the District of Delaware reversed the
Bankruptcy Court's order. The District Court's order has been appealed.
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, since consolidated,
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. On July
22, 1999, the District Court for the District of Delaware issued an order
withdrawing the adversary proceedings from the Bankruptcy Court to the District
Court. Discovery is ongoing in the adversary proceedings and a September 2000
trial date has been set.
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 October 14, 1999 the District Court denied the motion for
preliminary injunction.
On July 21, 1999, the Company and certain other defendants in the federal
securities cases and the adversary proceedings submitted a request to the
Judicial Panel on Multidistrict Litigation seeking to have all of these cases
transferred to the Northern District of Illinois for coordinated or consolidated
pretrial proceedings. This request is set for a hearing on November 18, 1999. An
amended consolidated complaint was filed in the shareholders' suits on August
11, 1999 in the Northern District of Illinois.
On October 4, 1999, another lawsuit relating to the Split-Off Transactions was
filed in the Circuit Court of Cook County, Illinois by four Reliance
stockholders. Members of the Taylor Family, a related partnership, Taylor
Capital Group, Inc., Cole Taylor Bank, and another officer and director of
Taylor Capital Group, Inc., were named as defendants. Damages in an unspecified
amount are sought.
33
<PAGE> 34
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Litigation -- continued
In accordance with the terms and conditions of the Share Exchange Agreement
relating to the Split-Off Transactions, the Taylor Family has agreed to
indemnify Reliance for certain losses incurred by Reliance, including certain
losses relating to the Split-Off Transactions ("Taylor Family Indemnification
Obligations"). In accordance with the terms of an agreement dated February 6,
1997 between the Taylor Family and the Company, the Company agreed to indemnify
the Taylor Family for certain losses that the Taylor Family may incur as a
result of the Split-Off Transactions, including a portion of the Taylor Family
Indemnification Obligations under the Share Exchange Agreement. The Company is
unable at this time to predict the extent to which it will be required to pay
any amounts under its indemnification obligation to the Taylor Family. The
Company and its subsidiaries have paid and may continue to pay defense and other
legal costs of the lawsuits described above that are not otherwise advanced by
insurance carriers on behalf of the Taylor Family and other directors, officers
and stockholders of the Company who are defendants in these lawsuits.
The Company believes that it has meritorious defenses to all of the actions
against the Company, and the Company intends to defend itself and its
subsidiaries vigorously. However, the Company is unable to predict, at this
time, the potential impact of the litigation, the indemnification obligations
and the payment of legal fees described above on the management, business,
financial condition, liquidity and operating results of the Company. Even if the
Taylor Family, the Company and the other defendants are successful in defending
themselves in the lawsuits, the Company 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 position at fair value. The accounting for changes in fair value (i.e.
gains or losses) of the derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. If certain conditions are met, entities may elect to
designate the derivative instrument as a hedge of exposure to changes in fair
values, cash flows or foreign currencies. If the hedged exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change, together with the offsetting gain or loss on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) an subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness, as well as the ineffective portion
of the gain or loss, is reported in earnings immediately. Accounting for foreign
currency hedged is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change. In June 1999 the
Financial Accounting Standards
34
<PAGE> 35
TAYLOR CAPITAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
New Accounting Pronouncements -- continued
Board (FASB) issued statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133." This statement delays the effective date of FASB No. Statement 133 for one
year, to fiscal years beginning after June 15, 2000. The Company must adopt the
Statement by January 1, 2001, however early adoption is permitted. Upon
adoption, the provisions of the Statement must only be applied prospectively.
The Company has not yet quantified the impact of the adoption of the Statement.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-Q,
including the statements in Part I, Item 3 "Quantitative and Qualitative
Disclosures About Market Risk," are forward-looking statements that are based on
the beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. Such
forward-looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 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 the remainder of 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
35
<PAGE> 36
TAYLOR CAPITAL GROUP, INC.
Quantitative and Qualitative Disclosures About Market Risk -- continued
Company's Asset/Liability Management Committee ("ALCO"). ALCO's objectives are
to manage, to the degree prudently possible, the Company's exposure to interest
rate risk over both the one-year planning cycle and the longer-term strategic
horizon and, at the same time, to provide a stable and steadily increasing flow
of net interest income.
The Company uses various interest rate contracts (floors) 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 also
assuming parallel shifts of market interest rates up and down 200 basis points.
The impact of imbedded options in products such as callable securities 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 modeled net interest income in the rates
unchanged scenario. ALCO utilizes all of the results of the model to quantify
the estimated exposure of net interest income to sustained interest rate
changes.
There have been no material changes in the Company's market risk exposure from
the information provided in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
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 discuss certain significant litigation relating to
the Split-Off Transactions. Such discussion is incorporated in this Part II.
Item 1. by reference.
ITEM 5. OTHER INFORMATION
The Company's management intends to suspend its duty to file reports (including
Form 10-Q's and Form 10-K's) pursuant to the Securities Exchange Act of 1934
following the Company's filing of its Annual Report on Form 10-K for the year
ending December 31, 1999.
36
<PAGE> 37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Exhibit 10.1 - First Amendment of Taylor Capital
Group, Inc. 401(k) plan
- Exhibit 10.2 - $12,000,000 Substitute Revolving Note
between Taylor Capital Group, Inc.
and LaSalle Bank National Association
- Exhibit 10.3 - Seventh Amendment to Revolving Loan
Agreement between Taylor Capital
Group, Inc. and LaSalle Bank National
Association
- 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.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Taylor Capital Group, Inc.
-------------------------------------
(Registrant)
Date: November 12, 1999 /s/ Jeffrey W. Taylor
------------------ -------------------------------------
Jeffrey W. Taylor*
Chairman and Chief Executive Officer
Date: November 12, 1999 /s/ J. Christopher Alstrin
------------------ -------------------------------------
J. Christopher Alstrin*
Chief Financial Officer
* Duly authorized to sign on behalf of the Registrant
37
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT
OF
TAYLOR CAPITAL GROUP, INC.
401(k) PLAN
WHEREAS, Taylor Capital Group, Inc. (the "Company")
established and maintains the Taylor Capital Group, Inc. 401(k) Plan (the
"Plan"); and
WHEREAS, the Board of Directors of this Company believe the
best interests of this Company and the employees of this Company would be served
by amending the loan provisions of the Plan to extend the time in which a loan
may be repaid upon an employee's termination of employment;
NOW, THEREFORE, IT IS RESOLVED that, pursuant to the power to
amend the Plan reserved to this Company by Section 15.1 of the Plan, and by
authority granted to the officers of this Company by the Board of Directors of
this Company in resolutions adopted on ______________, 1999, the text of Section
9.3(e)(ii) of the Plan is hereby replaced by the following effective January 1,
1999:
"A participant whose settlement date has occurred and who has
an unpaid loan or unpaid portion of a loan still outstanding
immediately prior to the settlement date may repay an amount
equal to the unpaid balance of such loan.
If (A) the participant will not receive an immediate
distribution of his Plan benefits, repayment may be made by
the last day of the calendar quarter following the calendar
quarter in which his settlement date occurs, or if (B) the
participant will receive an immediate distribution of his Plan
benefits, repayment may be made prior to the time distribution
of his Plan benefits will be made.
<PAGE> 2
If a participant does not repay the entire balance of the loan
within the time period specified in (A) or (B) of this
subparagraph (ii), the balance of the loan shall be considered
in default as of the date specified in (A) or (B) of this
subparagraph (ii).
On the date that a loan is considered in default, the
promissory note shall immediately become due and payable and
an amount equal to such loan or any part thereof, together
with the accrued interest thereon, shall be deemed distributed
to the participant and shall be charged to the participant's
accounts after all other adjustments required under the Plan
have been made, but before any other distribution.
The provisions of this subparagraph (ii) shall apply to
existing loans provided the loan recipients are notified of
the terms of this subparagraph (ii), as well as to new loans."
* * *
IN WITNESS WHEREOF, Taylor Capital Group, Inc. has caused
these presents to be signed on its behalf by its duly authorized officer this
____ day of _________________, 1999.
TAYLOR CAPITAL GROUP, INC.
By:
----------------------------------
Its:
---------------------------------
-2-
<PAGE> 1
EXHIBIT 10.2
SUBSTITUTE REVOLVING NOTE
$12,000,000 Dated as of September 1, 1999
Due: September 1, 2000
FOR VALUE RECEIVED, TAYLOR CAPITAL GROUP, INC., a Delaware corporation
(the "Maker") promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION
(formerly known as LaSalle National Bank), a national banking association (the
"Bank") the lesser of the principal sum of TWELVE MILLION DOLLARS ($12,000,000)
or the aggregate unpaid principal amount of Revolving Loans outstanding under
the Loan Agreement hereinafter referred to at the maturity or maturities and in
the amount or amounts as stated on the records of the Bank, together with
interest (computed on the basis of a year consisting of 360 days for actual days
elapsed) on any and all such principal amounts outstanding hereunder from time
to time from the date hereof until maturity. Interest shall be payable at the
rate of interest and the times set forth in the Loan Agreement dated as of
February 12, 1997 between the Maker and the Bank (as amended, supplemented or
modified from time to time, the "Loan Agreement"). In no event shall any
principal amount have a maturity later than September 1, 2000.
Principal and interest shall be paid to the Bank at its office at 135
South LaSalle Street, Chicago, Illinois 60603, or at such other place as the
holder of this Note may designate in writing to the Maker. This Note may be
prepaid in whole or in part as provided for in the Loan Agreement.
This Note evidences indebtedness incurred under the Loan Agreement to
which reference is hereby made for a statement of the terms and conditions under
which the due date of this Note or any payment hereon may be accelerated. The
holder of this Note is entitled to all of the benefits and security provided for
in the Loan Agreement,
Demand, presentment, protest and notice on non-payment are hereby waived
by the Maker.
This Note, in part, is a replacement and substitute for, but not a
repayment of, that certain $12,000,000 Substituting Revolving Note dated as of
September 1, 1998 of the Maker payable to the order of the Bank and does not and
shall not be deemed to constitute a novation therefor.
TAYLOR CAPITAL GROUP, INC.
By:
---------------------------------
Its:
---------------------------------
<PAGE> 1
EXHIBIT 10.3
SEVENTH AMENDMENT TO
REVOLVING LOAN AGREEMENT
THIS SEVENTH AMENDMENT TO REVOLVING LOAN AGREEMENT dated as of September
1, 1999 (this "Amendment") is between TAYLOR CAPITAL GROUP, INC., a Delaware
corporation (the "Borrower") and LASALLE BANK NATIONAL ASSOCIATION (formerly
known as LaSalle National Bank), a national banking association (the "Bank").
WHEREAS, the Borrower and the Bank entered into a Loan Agreement dated as
of February 12, 1997, as amended by a First Amendment dated February 27, 1997, a
Second Amendment dated November 1, 1997, a Third Amendment dated as of May 1,
1998, a Fourth Amendment dated June 1, 1998, a Fifth Amendment dated as of
August 1, 1998 and a Sixth Amendment dated as of September 1, 1998 (as so
amended, the "Agreement"); and
WHEREAS, the Borrower and the Bank have agreed to amend the Agreement as
more fully described herein.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms uses herein without definition
shall have the respective meanings set forth in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
2.1 Amendment to Section 1.1. The definition of "Revolving Credit
Maturity Date" set forth in Section 1.1 of the Agreement is hereby amended by
deleting therefrom the date "September 1, 1999" and substituting therefor the
date "September 1, 2000".
2.2 Amendment to Section 1.1. The definition of the term "Revolving
Note" appearing in Section 1.1 of the Loan Agreement is hereby amended and
restated in its entirety to read as follows:
"Revolving Note" means that certain Substitute Revolving Note
dated as of September 1, 1999 in the original aggregate maximum
principal amount of Twelve Million Dollars ($12,000,000), as the
same may be amended, modified or supplemented from time to time,
and together with any renewals thereof or exchanges substitutes
therefor.
<PAGE> 2
2.3 Amendment to Section 3.1. The date set forth in Section 3.1 of the
Agreement is hereby amended by deleting therefrom the date "September 1, 1999"
and substituting therefor the date "September 1, 2000".
2.4 Replacement of Exhibit 3.1 Exhibit 3.1 attached hereto as made
a part of the Agreement is hereby deleted in its entirety and Exhibit 3.1
attached hereto is hereby substituted therefor.
3. WARRANTIES. To induce the Bank to enter into this Amendment, the
Borrower warrants that:
3.1 Authorization. The Borrower is duly authorized to execute and
deliver this Amendment and is and will continue to be duly authorized to borrow
monies under the Agreement, as amended hereby, and to perform its obligations
under the Agreement, as amended hereby.
3.2 No Conflicts. The execution and delivery of this Amendment and the
performance by the Borrower of its obligations under the Agreement, as amended
hereby, do not and will not conflict with any provision of law or of the charter
or by-laws of the Borrower or of any agreement binding upon the Borrower.
3.3 Validity and Binding Effect. The Agreement, as amended hereby, is a
legal, valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency or other similar laws of general application affecting
the enforcement of creditors' rights or by general principles of equity limiting
the availability of equitable remedies.
3.4 No Default. As of the date hereof, no Event of Default under
Section 8 of the Agreement, as amended by this Amendment, or event or condition
which, with the giving of notice or the passage of time, shall constitute an
Event of Default, has occurred or is continuing.
3.5 Warranties. As of the date hereof, the representations and
warranties in Section 7 of the Agreement are true and correct as though made on
such date, except for such changes as are specifically permitted under the
Agreement.
4. GENERAL.
4.1 Law. This Amendment shall be construed in accordance with and
governed by the laws of the State of Illinois.
4.2 Successors. This Amendment shall be binding upon the Borrower and
the Bank and their respective successors and assigns, and shall inure to the
benefit of the Borrower and the Bank and their respective successors and
assigns.
2
<PAGE> 3
4.3 Confirmation of the Agreement. Except as amended hereby, the
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects.
5. EFFECTIVENESS. This Amendment shall become effective upon receipt
by the Bank of the following documents, duly executed by the parties thereto:
(a) This Amendment;
(b) Substitute Revolving Note in the form of Exhibit 3.1
attached hereto duly executed by the Borrower;
(e) Such other documents as the Bank reasonably may request.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
LASALLE BANK NATIONAL TAYLOR CAPITAL GROUP, INC.
ASSOCIATION
By: By:
-------------------------------- --------------------------------
Its: Its:
------------------------------- -------------------------------
3
<PAGE> 4
Exhibit 3.1
SUBSTITUTE REVOLVING NOTE
$12,000,000 Dated as of September 1, 1999
Due: September 1, 2000
FOR VALUE RECEIVED, TAYLOR CAPITAL GROUP, INC., a Delaware corporation
(the "Maker") promises to pay to the order of LASALLE BANK NATIONAL
ASSOCIATION (formerly known as LaSalle National Bank), a national banking
association (the "Bank") the lesser of the principal sum of TWELVE MILLION
DOLLARS ($12,000,000) or the aggregate unpaid principal amount of Revolving
Loans outstanding under the Loan Agreement hereinafter referred to at the
maturity or maturities and in the amount or amounts as stated on the records of
the Bank, together with interest (computed on the basis of a year consisting of
360 days for actual days elapsed) an any and all such principal amounts
outstanding hereunder from time 10 time from the date hereof until maturity.
Interest shall be payable at the rate of interest and the times set forth in the
Loan Agreement dated as of February 12, 1997 between the Maker and the Bank (as
amended, supplemented or modified from time to time, the "Loan Agreement"). In
no event shall any principal amount have a maturity later than September 1,
2000.
Principal and interest shall be paid to the Bank at its office at 135
South LaSalle Street, Chicago, Illinois 60603, or at such other place as the
holder of this Note may designate in writing to the Maker. This Note may be
prepaid in whole or in part as provided for in the Loan Agreement.
This Note evidences indebtedness incurred under the Loan Agreement to
which reference is hereby made for a statement of the terms and conditions under
which the due date of this Note or any payment hereon may be accelerated. The
holder of this Note is entitled to all of the benefits and security provided for
in the Loan Agreement.
Demand, presentment, protest and notice on non-payment are hereby waived
by the Maker.
This Note, in part, is a replacement and substitute for, but not a
repayment of, that certain $12,000,000 Substituting Revolving Note dated as of
September 1, 1998 of the Maker payable to the order of the Bank and does not and
shall not be deemed to constitute a novation therefor.
TAYLOR CAPITAL GROUP, INC.
By:
-------------------------------
Its:
------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TAYLOR CAPITAL GROUP, INC. FORM 10-Q FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 69,281
<INT-BEARING-DEPOSITS> 3,050
<FED-FUNDS-SOLD> 1,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 347,192
<INVESTMENTS-CARRYING> 84,229
<INVESTMENTS-MARKET> 84,168
<LOANS> 1,435,808
<ALLOWANCE> 26,561
<TOTAL-ASSETS> 2,005,395
<DEPOSITS> 1,551,103
<SHORT-TERM> 167,456
<LIABILITIES-OTHER> 25,361
<LONG-TERM> 114,500
0
38,250
<COMMON> 47
<OTHER-SE> 108,678
<TOTAL-LIABILITIES-AND-EQUITY> 2,005,395
<INTEREST-LOAN> 86,747
<INTEREST-INVEST> 17,667
<INTEREST-OTHER> 597
<INTEREST-TOTAL> 105,011
<INTEREST-DEPOSIT> 36,140
<INTEREST-EXPENSE> 47,466
<INTEREST-INCOME-NET> 57,545
<LOAN-LOSSES> 4,500
<SECURITIES-GAINS> 107
<EXPENSE-OTHER> 52,556
<INCOME-PRETAX> 14,828
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 214
<NET-INCOME> 8,632
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.32
<LOANS-NON> 13,078
<LOANS-PAST> 4,839
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 24,599
<CHARGE-OFFS> 4,166
<RECOVERIES> 1,628
<ALLOWANCE-CLOSE> 26,561
<ALLOWANCE-DOMESTIC> 26,561
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
