<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File
SEPTEMBER 30, 1996 No.0-23854
COLE TAYLOR
FINANCIAL GROUP, INC.
Exact Name of Registrant as Specified in Charter
DELAWARE 36-3235321
- ---------------------- ----------------------
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) 459-1111
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 shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date:
Class Outstanding at November 7, 1996
- ----------------------------------- -------------------------------
Common Stock, $.01 Par Value 14,793,866
Exhibit Index is located on page 22
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
---------------------------------
INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION ...................................................................... PAGE
- ------------------------------- ----
Item 1. Financial Statements (Unaudited)
<S> <C>
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 .................................................... 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1996 and 1995 ..................................... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 ............................................... 5
Notes to Condensed Consolidated Financial Statements .......................................... 6
Item 2. Management's Discussion and Analysis of the Results
of Operations and Financial Condition ....................................................... 11
<CAPTION>
PART II. OTHER INFORMATION
- ---------------------------
<S> <C>
Item 1. Legal Proceedings ........................................................................... 20
Item 2. Changes in Securities ....................................................................... 20
Item 3. Defaults Upon Senior Securities ............................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 20
Item 5. Other Information ........................................................................... 20
Item 6. Exhibits and Reports on Form 8-K ............................................................ 20
</TABLE>
2
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
____________________
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Cash $488 $3,375
Short-term investments 1,900 1,454
Finance receivables 348,662 231,726
Less nonrefundable dealer discounts (13,965) (12,655)
---------- ----------
Finance receivables, net 334,697 219,071
Other assets 25,506 10,009
Net assets of discontinued operations 146,228 138,653
---------- ----------
Total assets $508,819 $372,562
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commercial paper 191,288 127,268
Long-term debt 133,960 82,657
Accounts payable and other liabilities 7,193 8,020
---------- ----------
Total liabilities 332,441 217,945
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized --- ---
Common stock, $.01 par value; 40,000,000 shares authorized;
14,764,769 and 14,571,429 shares issued and outstanding
at September 30, 1996, and December 31, 1995, respectively 148 146
Class A common stock, $.01 par value 2,000,000 shares authorized --- ---
Surplus 77,870 75,212
Retained earnings 98,360 79,516
Employee Stock Ownership Plan loan --- (257)
---------- ----------
Total stockholders' equity 176,378 154,617
---------- ----------
Total liabilities and stockholders'equity $508,819 $372,562
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
INTEREST AND FEE INCOME $18,837 $9,877 $51,774 $24,468
INTEREST EXPENSE 5,686 2,977 14,706 7,959
-------- ------- ------- -------
NET INTEREST INCOME 13,151 6,900 37,068 16,509
-------- ------- ------- -------
OTHER INCOME 221 293 928 799
-------- ------- ------- -------
OPERATING EXPENSE:
SALARIES AND EMPLOYEE BENEFITS 3,904 2,318 10,780 5,852
OCCUPANCY OF PREMISES, NET 254 175 683 424
FURNITURE AND EQUIPMENT 151 55 386 141
COMPUTER PROCESSING 93 117 321 301
OTHER OPERATING EXPENSE 2,408 1,094 8,312 3,129
-------- ------- ------- -------
TOTAL OPERATING EXPENSE 6,810 3,759 20,482 9,847
-------- ------- ------- -------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 6,562 3,434 17,514 7,461
INCOME TAXES 2,620 1,330 6,853 2,953
-------- ------- ------- -------
INCOME FROM CONTINUING
OPERATIONS 3,942 2,104 10,661 4,508
-------- ------- ------- -------
DISCONTINUED OPERATIONS:
INCOME FROM DISCONTINUED
OPERATIONS BEFORE INCOME
TAXES 5,928 6,421 17,633 16,911
INCOME TAXES 2,000 1,732 5,486 4,368
-------- ------- ------- -------
INCOME FROM DISCONTINUED
OPERATIONS 3,928 4,689 12,147 12,543
-------- ------- ------- -------
NET INCOME $7,870 $6,793 $22,808 $17,051
======== ======= ======= =======
PRIMARY EARNINGS PER SHARE FROM
CONTINUING OPERATIONS $0.26 $0.14 $0.69 $0.30
PRIMARY EARNINGS PER SHARE FROM
DISCONTINUED OPERATIONS 0.25 0.30 0.79 0.82
======== ======= ======= =======
PRIMARY EARNINGS PER SHARE $0.51 $0.44 $1.48 $1.12
======== ======= ======= =======
CASH DIVIDENDS DECLARED PER
SHARE $0.09 $0.07 $0.27 $0.21
======== ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
---------------------
<TABLE>
<CAPTION>
For the nine months ended
September 30,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $22,808 $17,051
Adjustments to reconcile net income to
net cash provided by operating activities:
Dealer discount accretion (3,106) (1,979)
Depreciation and amortization 327 6
Other adjustments to net income, net 61 (542)
Net changes in other assets and
liabilities (14,683) 641
------- ---------
Net cash provided by operating activities 5,407 15,177
------- ---------
Cash flows from investing activities:
Loan repayments 100,825 43,859
Loan originations (213,209) (130,859)
Net increase in assets of discontinued operations prior to
split-off (7,575) (10,477)
Other, net (1,373) (514)
------- ---------
Net cash used in investing activities (121,332) (97,991)
------- ---------
Cash flows from financing activities:
Proceeds from commercial paper 840,091 312,047
Repayments of commercial paper (776,071) (201,884)
Proceeds from long-term debt 295,470 141,000
Repayments of long-term debt (243,910) (169,000)
Net proceeds from issuance of common stock 1,560 319
Payments to acquire common stock --- (220)
Dividends paid (3,656) (2,760)
------- ---------
Net cash provided by financing activities 113,484 79,502
------- ---------
Net decrease in cash and cash equivalents (2,441) (3,312)
Cash and cash equivalents, beginning of period 4,829 5,630
------- ---------
Cash and cash equivalents, end of period $2,388 $2,318
======= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated organization consists of Cole Taylor Financial Group, Inc. (the
"Company" or the "Parent Company") and its subsidiaries, Reliance Acceptance
Corporation (formerly known as Cole Taylor Finance Co.) (the "Finance Company"),
Cole Taylor Bank (the "Bank") and CT Mortgage Company, Inc.(the "Mortgage
Company"). The Finance Company operates through wholly owned subsidiaries under
the name Reliance Acceptance Corp.
On June 12, 1996, the Board of Directors of the Company approved a definitive
share exchange agreement providing for the split-off of the Bank and Mortgage
Company to an investment group headed by the Company's Chairman Jeffrey Taylor,
President Bruce Taylor and Company director and co-founder Sidney Taylor. Under
the terms of the agreement, the Company will receive between 4.0 and 4.5 million
shares of Common Stock of the Company plus (i) the Bank's used automobile
receivables business, principally consisting of sales finance receivables
secured by automobiles, and (ii) cash amounts. The aggregate value of the cash
and receivables to be transferred to the Company will range from $82 million to
$98 million depending on the number of shares exchanged. The Company currently
anticipates that the split-off will be consummated by the first quarter of 1997.
The split-off entity, consisting of the Bank and Mortgage Company, qualifies as
discontinued operations as defined in Accounting Principles Board Opinion 30
(APB 30). The Company has received indications from the significant
stockholders, and other executive officers and directors of the Company, of
their intent to vote or direct to vote for approval of the split-off of the Bank
and Mortgage Company at the next annual meeting of stockholders. The affirmative
votes of these stockholders, aggregating approximately 55% of the outstanding
shares, will be sufficient to approve the split-off transaction, regardless of
the votes of any other stockholders. Accordingly, the Company's consolidated
balance sheets as of September 30, 1996 and December 31, 1995 and the
consolidated statements of income and cash flows for the three and nine months
ended September 30, 1995 and 1996, have been restated to reflect the split-off
entity's net assets and financial operations as discontinued operations. The
split-off will be accounted for as a non-reciprocal distribution to stockholders
and an accounting gain will be recognized at the date of the split-off to the
extent the fair value of the split-off entity, measured by the fair value of the
shares and cash exchanged, exceeds the Company's basis in the split-off entity.
The assets and liabilities of the discontinued operations have been separately
classified on the accompanying balance sheet as net assets of discontinued
operations. A summary of these assets and liabilities is included in footnote 4
of these financial statements.
The consolidated financial statements report the operations of the Finance
Company and applicable assets, liabilities and expenses of the Parent Company as
continuing operations. The Bank and Mortgage Company operations and a portion of
the Parent Company expenses are reported as discontinued operations, In
addition, all expenses directly attributable to the split-off transaction are
reported in discontinued operations. The accounting and reporting policies
conform to generally accepted accounting principles and to the general reporting
practices within the finance industry. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of financial
statements in
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. These estimates may differ from
actual results.
The unaudited interim condensed consolidated 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 Company's historical consolidated financial statements
restated for discontinued operations and the notes thereto included in the
Company's Current Report on Form 8-K, dated October 10, 1996 (the "October 1996
8-K"), as filed with the Securities and Exchange Commission. The December 31,
1995 condensed and consolidated balance sheet presented in this Form 10-Q has
been derived from the financial statements included in the October 1996 8-K, but
does not include all disclosures required by generally accepted accounting
principles.
In the opinion of management of the Company, the unaudited interim consolidated
financial statements reflect all adjustments necessary for a fair presentation
of the consolidated financial position and consolidated results of operations
for the periods presented. The results of operations for the three and nine
month periods ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
2. FINANCE RECEIVABLES AND NONREFUNDABLE DEALER DISCOUNTS:
The following table summarizes the components of finance receivables on the
dates shown (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Gross finance receivables $465,298 $315,908
Less:
Unearned finance charges 116,150 83,612
Unearned insurance commissions 486 229
Unearned processing fees - 341
-------- --------
Finance receivables, before dealer
discounts 348,662 231,726
Nonrefundable dealer discounts 13,965 12,655
-------- --------
Finance receivables, net $334,697 $219,071
======== ========
</TABLE>
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the activity in the nonrefundable dealer
discounts for the nine month periods ending September 30, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at January 1 $ 12,655 $ 5,351
Nonrefundable dealer discounts
established 16,551 9,857
Discount accretion (3,106) (1,979)
Finance receivables charged to dealer
discounts (12,135) (2,498)
------------ -----------
Balance at September 30 $ 13,965 $10,731
============ ===========
</TABLE>
In conjunction with the purchase of sales finance contracts by the Finance
Company, agreements are entered into with dealers whereby amounts are withheld
as a discount to provide protection from potential losses associated with such
contracts. These nonrefundable dealer discounts are available to cover losses
on sales finance contracts.
Effective January 1, 1996, the Finance Company adopted the practice of
accumulating loss data on individual pools of loans based on month of
origination (pools). The nonrefundable dealer discount within each pool is
available to cover losses incurred on the pool or to be accreted into income
over the estimated life of the related loans, based upon managements estimate
of loan losses. To the extent management's estimate of losses by pool exceeds
the related available dealer discount, income accretion, if any, would cease and
a loan loss reserve would be established through charges to operating expense.
Prior to January 1, 1996, the discount was accreted into income over the
contractual life of the loan, subject to aggregate loan charge-offs.
Additionally, effective January 1, 1996, repossession and repair expenses, which
were formerly added to the customer loan balances and reported as part of the
charge to the dealer discount, are now being immediately reported in other
operating expenses as incurred. Repossession expenses reported in other
expenses were $4.0 million for the nine months September 30, 1996 as compared to
$153,000 for the first nine months of 1995.
Effective January 1, 1996, the Companys policy regarding repossessions was
revised to require that repossessed assets and deficiency balance accounts
(account balances remaining after the sale of a repossessed asset to be
satisfied by the refundable portions of insurance and warranty policies) be
charged down to the estimated net realizable value on an immediate basis.
Previously, repossessed assets and balances remaining after repossession or sale
were charged down to the estimated net realizable value in the month following
the 90 and 60 day agings, respectively.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. COMMERCIAL PAPER AND LONG-TERM DEBT:
During the second quarter of 1995, the Finance Company began issuing commercial
paper, backed by the Finance Company's revolving credit agreement. The weighted
average interest rate of commercial paper outstanding was 5.85% and 6.18% at
September 30, 1996 and December 31, 1995, respectively. The maturities on
commercial paper extend out no more than 270 days.
The following table reflects certain aspects of the long-term debt of the Parent
and Finance Companies:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
-------------------------- -----------------------
(in thousands)
BALANCE RATE BALANCE RATE
-------------------------- -----------------------
<S> <C> <C> <C> <C>
COLE TAYLOR FINANCIAL GROUP, INC.:
- ----------------------------------
Cole Taylor Financial Group subordinated notes $25,000 9.00% $25,000 9.00%
Cole Taylor Financial Group, Inc. $30.0 million unsecured
revolving loan, bearing interest at prime rate or
LIBOR plus 1.5% 25,000 7.50% --- ---
Employee Stock Ownership Plan ("ESOP") loan, collateralized
by a pledge of the Company's stock held by the ESOP --- --- 257 8.00%
COLE TAYLOR FINANCE CO.:
- ------------------------
Cole Taylor Finance Co. $295 million revolving credit
agreement bearing interest at reference
rate plus .50% or adjusted LIBOR plus 2.25% 83,960 8.35% 57,400 8.24%
----------- ------------
Total $133,960 $82,657
=========== ============
</TABLE>
The interest rates in the preceding table for the Finance Company's revolving
credit agreement do not include fees associated with the agreement. These fees,
which are included in interest expense in the condensed consolidated financial
statements, increased the effective interest rate on the revolving credit
agreement by approximately 37 basis points for the quarter and nine months
ending September 30, 1996.
The Finance Company's revolving credit agreement was increased from $275 million
to $295 million during the third quarter of 1996 and the unsecured revolving
loan increased from $25.0 million to $30.0 million on September 25, 1996.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. NET ASSETS OF DISCONTINUED OPERATIONS:
The assets and liabilities of the discontinued operations have been separately
classified on the balance sheet as net assets of discontinued operations. A
summary of these assets and liabilities follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 95,137 $ 68.413
Federal funds sold 10,950 5,000
Interest-bearing deposits in other
banks 61 19,134
Investment securities 449,232 438,348
Loans, net 1,235,448 1,187,753
Premises, leasehold improvements
and equipment, net 15,718 16,907
Other assets 52,361 43,787
---------- ----------
Total assets - discontinued
operations 1,858,907 1,779,342
---------- ----------
LIABILITIES:
Deposits 1,455,525 1,363,511
Borrowing 239,246 263,036
Accrued interest, taxes and other
liabilities 17,980 14,142
---------- ----------
Total liabilities -
discontinued operations 1,712,679 1,640,689
---------- ----------
Net assets of discontinued
operations $ 146,228 $ 138,653
========== ==========
</TABLE>
A summary of the net income of the discontinued operations for the three and
nine months ended September 30, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net interest income $ 18,359 $ 17,460 $ 54,135 $ 51,876
Provision for loan losses (953) (965) (3,005) (3,297)
Noninterest income 4,442 3,402 12,195 10,247
Noninterest expense (15,920) (13,476) (45,692) (41,915)
Income taxes (2,000) (1,732) (5,486) (4,368)
-------- -------- -------- --------
Net income $ 3,928 $ 4,689 $ 12,147 $ 12,543
======== ======== ======== ========
</TABLE>
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Item 2
The following presents managements discussion and analysis of the results of
operations of the Company for the three and nine months ended September 30, 1996
as compared to the same periods in 1995, and the financial condition of the
Company as of September 30, 1996, compared to December 31, 1995. This discussion
should be read in conjunction with the consolidated financial statements and
accompanying notes presented elsewhere in this Form 10-Q.
ORGANIZATION
The consolidated organization consists of Cole Taylor Financial Group, Inc. (the
"Company" or the "Parent Company") and its subsidiaries, Reliance Acceptance
Corporation (formerly known as Cole Taylor Finance Co.) (the "Finance Company"),
Cole Taylor Bank (the "Bank") and CT Mortgage Company, Inc. (the "Mortgage
Company"). The Finance Company operates through wholly owned subsidiaries under
the name Reliance Acceptance Corporation.
On June 12, 1996, the Board of Directors of the Company approved a definitive
share exchange agreement providing for the split-off of the Bank and Mortgage
Company to an investment group headed by the Company's Chairman Jeffrey Taylor,
President Bruce Taylor and Company director and co-founder Sidney Taylor. Under
the terms of the agreement, the Company will receive between 4.0 and 4.5 million
shares of Common Stock of the Company plus (i) the Bank's used automobile
receivables business, principally consisting of sales finance receivables
secured by automobiles, and (ii) cash amounts. The aggregate value of the cash
and receivables to be transferred to the Company will range from $82 million to
$98 million depending on the number of shares exchanged. The Company currently
anticipates that the split-off will be consummated by the first quarter of 1997.
The split-off entity, consisting of the Bank and Mortgage Company, qualifies as
discontinued operations as defined in Accounting Principles Board Opinion 30
(APB 30). The Company has received indications from the significant stockholders
and other executive officers and directors of the Company, of their intent to
vote or direct to vote for approval of the split-off of the Bank and Mortgage
Company at the next annual meeting of stockholders. The affirmative votes of
these stockholders, aggregating approximately 55% of the outstanding shares,
will be sufficient to approve the split-off transaction, regardless of the votes
of any other stockholders. Accordingly, the Company's consolidated balance
sheets as of September 30, 1996 and December 31, 1995 and the consolidated
statements of income and cash flows for the three and nine months ended
September 30, 1995 and 1996, have been restated to reflect the split-off
entity's net assets and financial operations as discontinued operations. The
split-off will be accounted for as a non-reciprocal distribution to stockholders
and an accounting gain will be recognized at the date of the split-off to the
extent the fair value of the split-off entity, measured by the fair value of the
shares and cash exchanged, exceeds the Company's basis in the split-off entity.
The assets and liabilities of the discontinued operations have been separately
classified on the accompanying balance sheet as net assets of discontinued
operations. A summary of these assets and liabilities is included in footnote 4
of these financial statements.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The consolidated financial statements report the operations of the Finance
Company and applicable assets, liabilities and expenses of the Parent Company as
continuing operations. The Bank and Mortgage Company operations and a portion of
the Parent Company expenses are reported as discontinued operations. In
addition, all expenses directly attributable to the split-off transaction are
reported in discontinued operations. All significant intercompany balances and
transactions have been eliminated in consolidation.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition are forward-looking statements
that are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management, and that are subject to certain risks or uncertainties. Such
forward-looking statements are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. When used herein, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such forward-
looking statements. The Company cautions readers of this Quarterly Report on
Form 10-Q that a number of important factors could cause the Company's actual
results, performance or achievements in 1996 and beyond to differ materially
from the results, performance or achievements expressed in, or implied by, such
forward-looking statements. These factors include, without limitation, risks
associated with dependence on a single business segment and other risks and
uncertainties relating to the separation of the traditional commercial and
consumer banking business from the Company in the split-off; risks regarding the
possible non-consummation of the split-off; dependence on sales of automobiles
and related demand by consumers for financing: general economic and business
conditions affecting the Company's customers; the continued ability of the
Company (a) to find expansion opportunities and to successfully implement the
Company's expansion strategy, (b) to obtain new sources of funds through
securitizations of automobile loans, public or private offerings of debt
securities or otherwise (c) to establish and maintain relationships with
automobile dealers and (d) to purchase an increased number of loans meeting the
Company's underwriting standards; changes in interest rates; the adequacy of the
Finance Company's dealer reserves; competition from other finance companies and
financial institutions; the impact of any other strategic transactions
undertaken by the Company; federal and state legislation, regulation and
supervision; the risk that a portion of the sales finance contracts purchased
by the Finance Company will become defaulted contracts or be subject to certain
claims of defenses which automobile buyers may assert against automobile dealers
or the Finance Company as the holder of the contracts; contractual, statutory
and regulatory restrictions on the payment of dividends; and, until consummation
of the split-off or if the split-off is not consummated, the adequacy of the
Bank's allowance for loan losses and other risks relating to the conduct of a
commercial and consumer banking business. These and other factors are more
fully described in the Company's other filings with the Securities and Exchange
Commission, including without limitation, the Company's Proxy Statement for its
1996 Annual Meeting of Stockholders and the Company's Prospectus dated May 25,
1994.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
OVERVIEW
The Company has operated in the financial services industry, engaged primarily
in the banking and consumer loan acceptance business. As a result of the split-
off, the Finance Company will constitute the sole business operations of the
Company. This Management's Discussion and Analysis of Results of Operations and
Financial Condition focuses on the continuing operations of the Company and the
Finance Company, with separate and summarized discussion of the discontinued
operations, consisting of the Bank and Mortgage Company.
The Finance Company commenced operations in January 1993, and at September 30,
1996, operated 46 Reliance Acceptance Corp. offices in sixteen states. The
Finance Company's headquarters are located in San Antonio, Texas. To date, the
Finance Company's operations have focused on purchasing closed-end retail sales
finance contracts in connection with sales of used automobiles.
The Finance Company purchases each sales finance contract in accordance with its
underwriting standards and procedures. The majority of automobiles financed by
the Finance Company range in age from used current year models to those that are
five years old with less than 100,000 miles. Most of the Finance Company's
customers have some derogatory credit history, but have performed satisfactorily
in recent automobile financing transactions. Typically, loans range for terms of
24 to 60 months at annual interest rates between 18% and 25%. Accounts are
repayable in monthly installments and are assessed late payment fees if
scheduled payments are not made within ten days of their due date.
FINANCIAL CONDITION
FINANCE RECEIVABLES
Net finance receivables increased 53% to $335 million at September 30, 1996;
from $219 million at December 31, 1995. The increase in finance receivables was
primarily attributable to increased production volume in existing offices.
The Company's offices in Texas accounted for approximately 42% of gross finance
receivables as of September 30, 1996; offices in Georgia accounted for
approximately 16%; and each of the remaining fourteen states where offices are
located accounted for less than 10%. The total number of offices at September
30, 1996 was 46 compared to 35 at September 30, 1995 and 36 at December 31,
1995.
DELINQUENCIES AND REPOSSESSIONS
The Company generally suspends the accrual of interest when an account becomes
90 or more days contractually delinquent and no full contractual payment is
received in the month the account attains such delinquency status.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
If an account becomes 61 or more days contractually delinquent and no full
contractual payment is received in the month the account attains such delinquent
status, it is classified as delinquent. The following table sets forth certain
information with respect to the Company's 61 day and greater contractually
delinquent receivables and repossessed assets (in thousands):
<TABLE>
<CAPTION>
As of As of As of
9/30/96 12/31/95 9/30/95
------------- ------------ -------------
<S> <C> <C> <C>
Delinquent receivables (61 days or more past due) $5,631 $2,063 $1,762
Repossessed assets 6,480 5,235 3,309
------------- ------------ -------------
Total delinquent receivables and repossessed assets $12,111 $7,298 $5,071
============= ============ =============
Delinquent receivables to gross finance receivables 1.21% 0.65% 0.69%
Delinquent receivables and repossessed assets to gross
finance receivables plus repossessed assets 2.57% 2.27% 1.95%
</TABLE>
Delinquent accounts 61 days or more past due have increased from 2.1 million
dollars, or 0.65% of gross finance receivables, at December 31, 1995 to 5.6
million dollars or 1.21% of gross finance receivables, at September 30, 1996.
The increase is due to an increase in the duration of collection activities
prior to repossession of collateral, as management believes this results in
higher ultimate collection amounts.
While repossessions have increased from $5.2 million at the end of 1995 to $6.5
million at the end of the third quarter of 1996, repossessions have decreased to
1.39% of gross finance receivables at September 30, 1996 from 1.66% at December
31, 1995.
NONREFUNDABLE DEALER DISCOUNTS
The following table summarizes, for the periods indicated, period end and
average finance receivables, activity in the nonrefundable dealer discounts,
charges to dealer discounts and related ratios:
<TABLE>
<CAPTION>
Nine Months Ended Nine months ended
Sept. 30, 1996 Sept. 30, 1995
----------------- -----------------
<S> <C> <C>
Finance receivables, before dealer discount, end of period $348,663 $188,257
Average finance receivables, before dealer discount 295,499 134,235
Nonrefundable dealer discount at January 1 $12,655 $5,351
Nonrefundable dealer discount established 16,551 9,857
Discount accretion (3,106) (1,979)
Net charges to dealer discount (12,135) (2,498)
----------------- -----------------
Nonrefundable dealer discount at September 30 $13,965 $10,731
================= =================
Net charges to the dealer discount to average finance receivables
before dealer discount (annualized) 5.48% 2.48%
Dealer discount to finance receivables before dealer discount at
end of period 4.00% 5.70%
</TABLE>
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Net charges to the nonrefundable dealer discount were $12.1 million and $2.5
million for the nine month periods ending September 30, 1996 and 1995,
respectively. Charges to the dealer discount for the first nine months of 1996
increased as compared to the same period in 1995, in part due to earlier
recognition of expected losses on unsold repossessions and deficiency balance
accounts. Before the Company's policy, effective January 1, 1996 regarding
repossessions was revised to require that repossessed assets and deficiency
balance accounts be charged down to the estimated net realizable value on an
immediate basis. Previously, repossessed assets and balances remaining after
repossession or sale were charged down to the estimated net realizable value in
the month following the 90 and 60 day agings, respectively. Excluding the
acceleration of loss recognition on repossessions and deficiency balances,
charges to the dealer discount in 1996 would have been lower than shown above.
The increase in loss experience is due to the above mentioned acceleration of
loss recognition, a maturing portfolio and an increase in loss on disposition of
repossessions. Management expects a reduction in the rate of accretion income
from the dealer discount in future quarters due to the trend of higher static
loss experience in certain pools. If management's intensified efforts of
recovery from accounts in repossession don't materialize as expected, further
adjustment may be necessary, including possible loss provision additions to
certain static pool reserves.
Additionally, effective January 1, 1996, repossession expenses, which were
formerly added to the customer balance and reported as part of the charge to the
dealer discount, are immediately reported in other operating expenses as
incurred. Repossession expenses reported in other operating expenses were $4.0
million for the nine months ended September 30, 1996, as compared to $153,000
for the first nine months of 1995. The reclassification of repossession expenses
in other operating expenses had the effect of reducing reported charges to the
dealer discount and increasing operating expenses in comparison to periods prior
to 1996.
DEBT
The Finance Company's purchases of sales finance contracts are primarily
financed with funds drawn on three principal sources. First is a $200 million
commercial paper facility which is guaranteed by the Company and supported by a
$295 million secured senior debt revolving credit agreement. The commercial
paper is rated D-2 by Duff & Phelps Credit Rating Service (Duff & Phelps) and F-
2 by Fitch Investor Services (Fitch). Second, is the $295 million secured senior
debt revolving credit agreement. Third, is advances from the Parent Company.
Duff & Phelps has placed the Company's subordinated debt rating and the Finance
Company's commercial paper rating on credit watch for possible downgrade as a
result of the share exchange agreement and the pending split-off of the Bank and
Mortgage. In addition, Fitch has placed the Finance Company's commercial paper
rating on FitchAlert with an evolving status. Any downgrading of the Company's
credit rating could have the effect of increasing the Company's borrowing rates
and the interest rates on the Finance Company's commercial paper and could
negatively impact the marketability of the Finance Company's commercial paper.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS
NET INCOME
For the three and nine months ended September 30, 1996, the Company's net income
of $7.9 million and $22.8 million represented an increase of 16% and 33%,
respectively, as compared to $6.8 million and $17.1 million in the three and
nine month periods ended September 30, 1995. For the three and nine months ended
September 30, 1996, net income from continuing operations increased to $3.9
million and $10.7 million, representing an increase of 87% and 137%,
respectively, as compared to $2.1 million and $4.5 million in the same periods
of last year. The increase in net income is primarily attributable to an
increase of 100% and 120%, respectively, in average net finance receivables
outstanding for the comparable periods. Net income from discontinued operations,
comprised of the Bank and Mortgage Company, decreased 16% and 3% for the three
and nine months periods, ending September 30, 1996, respectively, over the same
periods of the prior year. The decrease in net income from discontinued
operations is primarily attributable to increased Parent Company expenses
including those expenses directly attributable to the Split-Off transaction.
NET INTEREST INCOME
The primary component of net income is net interest income, which is the
difference between interest earned on finance receivables and interest paid on
borrowings. For the three and nine months ended September 30, 1996, the
Company's net interest income increased 91.0% to $13.2 million and 125.0% to
$37.1 million as compared with $6.9 million and $16.5 million in the same
periods of 1995. The net interest margin (annualized), which is the ratio of net
interest income divided by average finance receivables was 15.8% and 16.6% in
the three and nine months ended September 30, 1996 versus 16.6% and 16.4% for
the same periods in 1995. During the third quarter of 1996, the decrease in net
interest margin was a result of higher interest expense due to increased use of
the revolving credit agreement, a slowdown in income accretion from the dealer
reserve and lower APR's on installment contracts. The slight increase in the net
interest margin for the nine months ending September 30, 1996 was primarily a
result of the Company's commercial paper program, which was initiated in May
1995. The program has grown from $127.3 million outstanding at September 30,
1995 to $191.3 million at September 30, 1996. Prior to inception of the program,
the Finance Company was dependent on its revolving credit facility for funding
purposes. Average rates on commercial paper were 5.85% versus borrowings under
the revolving credit facility of 8.35% at September 30, 1996.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
OPERATING EXPENSES
In addition to interest expense, the Finance Company incurs operating expenses
in the conduct of its business. The following table summarizes the components of
operating expenses for the three and nine months ended September 30, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
% of % of % of % of
1996 ANR 1995 ANR 1996 ANR 1995 ANR
-------- ------- -------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $3,904 4.68 $2,318 5.57 $10,780 4.86 $5,852 5.81
Occupancy - furniture and
equipment 405 .49 230 .55 1,069 .48 565 .56
Other operating expenses 2,501 3.00 1,211 2.91 8,633 3.90 3,430 3.41
-------- ------- -------- -------- -------- ------- -------- --------
Total $6,810 8.17 $3,759 9.03 $20,482 9.24 $9,847 9.78
======== ======= ======== ======== ======== ======= ======== ========
</TABLE>
ANR = Average finance receivables, before dealer discounts
For the three and nine months ended September 30, 1996, operating expenses
increased 81% and 108%, respectively, as compared to the comparable 1995
periods. Overall, operating expenses decreased as a percentage of average
finance receivables before dealer discount from 9.03% to 8.17% and from 9.78% to
9.24% for the three and nine months periods ending September 30, 1995 and 1996,
respectively. Salaries and employees benefits expense and other operating
expenses increased as a result of the opening of 11 new branches and an
accompanying increase in headcount to 450 at September 30, 1996 from 277 at
September 30, 1995. Beginning in 1996, repossession expenses are charged
immediately to other operating expense rather than reflecting these costs as
part of the customer loan balance and resulting charges to the dealer discount.
Repossession expenses reported in other operating expenses were $4.0 million for
the nine months ended September 30, 1996 as compared to $153,000 for the first
nine months of 1995. As a result of the treatment of repossession expenses,
other operating expenses increased as a percentage of average receivables from
2.91% and 3.41% in the three and nine month periods ending September 30, 1995,
respectively, to 3.00% and 3.90% in the comparable periods in 1996.
DISCONTINUED OPERATIONS
As discussed above, on June 12, 1996, the Board of Directors of the Company
approved a definitive share exchange agreement providing for the split-off of
the Bank and Mortgage Company. The assets and results of operations related to
the Bank and Mortgage Company's subsidiaries were reported in prior years in a
separate segment called banking.
The banking segment provides a wide array of diversified financial services
including commercial and consumer banking services, both to small and mid-size
businesses and to individuals in Chicago neighborhoods and suburban Cook and
DuPage counties.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
As a result of the agreement to split-off the Bank and Mortgage Company, all
related operating activity of the Bank and Mortgage Company was reclassified and
reported as discontinued operations as of and for the three and nine months
ended September 30, 1996. Additionally, earlier reported financial results and
condition of the Company for the three and nine months ended September 30, 1995
and as of December 31, 1995 have been restated to reflect discontinued
operations.
The Company estimates that a net gain on disposal will be recognized upon
consummation of the split-off transaction. No gain will be recognized until the
split-off has been completed. A summary of the assets and liabilities and
results of discontinued operations is included in footnote 4 of the financial
statements included in this Form 10-Q.
For the first nine months of 1996 compared to the same period in 1995, net
interest income before loan loss provision improved $2.3 million due to the $80
million growth in average earning assets, offset by a seven basis point decline
in the net interest margin. For the third quarter of 1996 compared to the same
quarter in 1995, net interest income improved $899,000 due to the $100
million growth in average earning assets offset by a 11 basis point decline in
net interest margin.
The provision for loan losses for the first nine months of 1996 was $292,000
lower than in the same 1995 period. For the third quarter of 1996, the provision
was essentially flat when compared to the same period of 1995. The loan loss
reserve as a percentage of loans was 1.95% and 2.00% at September 30, 1996 and
1995, respectively. Excluding loans held for sale, the reserve as a percentage
of loans was 2.14% and 2.02% at September 30, 1996 and 1995, respectively.
Noninterest income in 1996 improved $1.9 million for the first nine months and
$1.0 million for the third quarter over the same 1995 periods. These
improvements were primarily due to increases in the mortgage banking income,
deposit account and credit card service charges.
Noninterest expenses increased $3.8 million for the first nine months of 1996,
as compared to the same 1995 period. This increase is primarily due to a 9%
increase in employee related expenses, professional fees related to the split-
off transaction totaling $856,000, and increased nonperformings asset expenses
relating to the disposition of a large nonperforming asset, offset by a $1.3
million decrease in FDIC insurance premiums. For the third quarter of 1996, non
interest expenses increased $2.4 million, primarily due to a 14% increase in
employee related expenses and professional fees related to the split-off
transaction.
The income tax provision for the first nine months of 1996 and 1995 was 31% and
26% of pretax income, respectively. For the third quarter of 1996 and 1995,
these percentages were 34% and 27%, respectively. In 1995, the Bank benefited
from state tax credits which lowered 1995's effective tax rates.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
LIQUIDITY
A significant portion of the Finance Company's funding is obtained from
commercial paper with maturities of 270 days or less. Because the Finance
Company's finance contracts receivable have average maturities in excess of one
year, the Finance Company's net interest income (and margin) can be negatively
impacted in periods of rising interest rates. In addition, the Finance Company's
continued growth is dependent upon its ability to obtain sufficient financing to
fund its purchases of finance contracts. The Finance Company is presently
negotiating a permanent increase in the revolving credit agreement and an
extension of the maturity date. The existing $295 million secured revolving
credit agreement is due to be reduced to $250 million on November 15, 1996.
Management is actively pursuing and expects to complete in November 1996 an
asset-backed securitization, which will be recorded as a financing for
accounting purposes, of a portion of its portfolio as one strategy to meet its
future funding requirements.
Duff & Phelps and Fitch have placed the Company's subordinated debt rating and
the Finance Company's commercial paper rating on watch for a possible downgrade
as a result of the share exchange agreement and the split-off of the Bank and
Mortgage. Any downgrading of the Company's credit ratings could have the effect
of increasing the Company's borrowing rates and the interest rates on the
Finance Company's commercial paper and could negatively impact the marketability
of the Finance Company's commercial paper. The Company is working with Duff &
Phelps and Fitch to reaffirm its prior rating.
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index on page 22.
(b) Reports on Form 8-K - The Company filed a current Report on Form
8-K dated October 10, 1996, to provide (i) the Company's
historical financial statements restated for discontinued
operations (the "Restated Financials"), reflecting the
reclassification of the Company's historical consolidated
financial statements for 1995, 1994 and 1993 to present the net
assets and the results of operations of the banking segment as a
separate component, and (ii) Management's Discussion and Analysis
of Financial Condition and Results of Operations based upon the
Restated Financials.
<PAGE>
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.
Cole Taylor Financial Group Inc.
------------------------------------
(Registrant)
Date: November 14, 1996 /s/ J. Christopher Alstrin
----------------- ------------------------------------
J. Christopher Alstrin*
Chief Financial Officer
/s/ Michael D. Bernick
------------------------------------
Michael D. Bernick
Chief Financial Officer
Reliance Acceptance Corporation
* Duly authorized to sign on behalf of the Registrant
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Documents Number
-------- ------------------------ ------
<S> <C> <C>
11 Statement regarding computation of primary earnings per share ....
27 Financial Data Schedule ..........................................
</TABLE>
<PAGE>
EXHIBIT 11
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
----------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
1 Average common shares outstanding 14,733,731 14,546,054 14,646,749 14,530,994
2 Net additional shares assuming stock
options exercised and proceeds used to
purchase treasury stock 745,243 704,325 713,759 645,967
------------ ------------ ------------ --------------
3 Average number of common and common
equivalent shares outstanding 15,478,974 15,250,379 15,360,508 15,176,961
------------ ------------ ------------ --------------
EARNINGS
4 Net income from continuing operations $3,942,000 $2,104,000 $10,661,000 $4,508,000
5 Net income from discontinued operations 3,928,000 4,689,000 12,147,000 12,543,000
6 Net income $7,870,000 $6,793,000 $22,808,000 $17,051,000
============ ============ ============ ==============
PER SHARE AMOUNTS
7 Net income per share from continuing
operations (line 4 / line 3) $0.26 $0.14 $0.69 $0.30
8 Net income per share from discontinued
operations (line 5 / line 3) 0.25 0.30 0.79 0.82
9 Net income per share (line 6 / line 3) $0.51 $0.44 $1.48 $1.12
============ ============ ============ ==============
</TABLE>
Note: In all periods, earnings per share were calculated using the treasury
stock method. Fully diluted earnings per share are not presented as they
are less than 3% dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 488
<SECURITIES> 1,900
<RECEIVABLES> 348,662
<ALLOWANCES> 13,965
<INVENTORY> 0
<CURRENT-ASSETS> 171,734
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 508,819
<CURRENT-LIABILITIES> 198,481
<BONDS> 133,960
<COMMON> 148
0
0
<OTHER-SE> 176,230
<TOTAL-LIABILITY-AND-EQUITY> 508,819
<SALES> 0
<TOTAL-REVENUES> 52,702
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,706
<INCOME-PRETAX> 17,514
<INCOME-TAX> 6,853
<INCOME-CONTINUING> 10,661
<DISCONTINUED> 12,147
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,808
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.48
</TABLE>
