<PAGE>
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 Quarter Ended Commission File
JUNE 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 August 7, 1996
- ----------------------------- -----------------------------
Common Stock, $.01 Par Value 14,715,004
Exhibit Index is located on page 21
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
---------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION .................................... PAGE
- ------------------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995.................... 3
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 1996 and 1995...... 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 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
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings........................................ 19
Item 2. Changes in Securities.................................... 19
Item 3. Defaults Upon Senior Securities.......................... 19
Item 4. Submission of Matters to a Vote of Security Holders...... 19
Item 5. Other Information........................................ 19
Item 6. Exhibits and Reports on Form 8-K......................... 19
2
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Cash $509 $3,375
Short-term investments 944 1,454
Finance receivables 318,547 231,726
Less nonrefundable dealer discounts (12,255) (12,655)
--------- ---------
Finance receivables, net 306,292 219,071
Other assets 14,268 10,009
Net assets of discontinued operations 143,520 138,653
--------- ---------
Total assets 465,533 372,562
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commercial paper 184,129 127,268
Long-term debt 103,668 82,657
Accounts payable and
other liabilities 8,648 8,020
--------- ---------
Total liabilities 296,445 217,945
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value;
20,000,000 shares authorized --- ---
Common stock, $.01 par value;
40,000,000 shares authorized;
14,706,341 and 14,571,429 shares
issued and outstanding at June 30,
1996, and December 31, 1995,
respectively 147 146
Class A common stock, $.01 par value;
2,000,000 shares authorized --- ---
Surplus 77,290 75,212
Retained earnings 91,819 79,516
Employee Stock Ownership Plan loan (168) (257)
--------- ---------
Total stockholders' equity 169,088 154,617
--------- ---------
Total liabilities and
stockholders' equity $ 465,533 $ 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 six months
ended June 30, ended June 30,
-------------------- ------------------
1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fee income $17,540 $8,045 $32,937 $14,591
Interest expense 4,831 2,790 9,020 4,982
------- ------ ------- -------
Net interest income 12,709 5,255 23,917 9,609
------- ------ ------- -------
Other income 339 262 707 506
------- ------ ------- -------
Operating expense:
Salaries and employee benefits 3,680 1,903 6,876 3,534
Occupancy of premises, net 214 130 429 249
Furniture and equipment 138 43 235 86
Computer processing 110 91 228 184
Other operating expense 3,066 1,008 5,904 2,035
------- ------ ------- -------
Total operating expense 7,208 3,175 13,672 6,088
------- ------ ------- -------
Income from continuing
operations before income taxes 5,840 2,342 10,952 4,027
Income taxes 2,274 941 4,233 1,623
------- ------ ------- -------
Net income from continuing
operations 3,566 1,401 6,719 2,404
------- ------ ------- -------
Discontinued operations:
Income from discontinued
operations before income taxes 6,445 5,375 11,705 10,490
Income taxes 1,936 1,375 3,486 2,636
------- ------ ------- -------
Net income from
discontinued operations 4,509 4,000 8,219 7,854
------- ------ ------- -------
Net income $ 8,075 $5,401 $14,938 $10,258
======= ====== ======= =======
Primary earnings per share from
continuing operations $ 0.23 $ 0.09 $ 0.44 $ 0.16
Primary earnings per share from
discontinued operations 0.29 0.27 0.53 0.52
------- ------ ------- -------
Primary earnings per
share $ 0.52 $ 0.36 $ 0.97 $ 0.68
======= ====== ======= =======
Cash dividends declared per share $ 0.09 $ 0.07 $ 0.18 $ 0.14
======= ====== ======= =======
</TABLE>
See accompanying notes to condensed consolidated finacncial statements.
4
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
-----------------------
<TABLE>
<CAPTION>
For the six months ended
June 30,
--------------------------
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,938 $10,258
Adjustments to reconcile net income to
net cash provided by
operating activities:
Dealer discount accretion (2,255) (1,403)
Depreciation and amortization 158 17
Other adjustments to net income, net 68 (334)
Net changes in other assets and
liabilities (2,686) (1,512)
-------- -------
Net cash provided by operating
activities 10,223 7,026
-------- -------
Cash flows from investing activities:
Loan repayments 95,048 43,297
Loan originations (179,890) (93,874)
Net increase in assets of discontinued
operations prior to split-off (4,867) (7,631)
Other, net (498) (239)
-------- -------
Net cash used in investing
activities (90,207) (58,447)
-------- -------
Cash flows from financing activities:
Proceeds from commercial paper 481,441 25,062
Repayments of commercial paper (424,580) ---
Proceeds from long-term debt 176,950 93,000
Repayments of long-term debt (155,850) (68,000)
Net proceeds from issuance of common
stock 979 277
Payments to acquire common stock --- (220)
Dividends paid (2,332) (1,742)
-------- -------
Net cash provided by financing
activities 76,608 48,377
-------- -------
Net decrease in cash and cash
equivalents (3,376) (3,044)
Cash and cash equivalents, beginning of
period 4,829 5,630
-------- -------
Cash and cash equivalents, end of period $ 1,453 $ 2,586
======== =======
</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, Cole Taylor Finance Co.
(the "Finance Company"), Cole Taylor Bank (the "Bank") and CT Mortgage Company,
Inc. ("Mortgage"). Cole Taylor Finance Co. 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 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 the Bank's used automobile receivables
business, principally consisting of cash and sales finance receivables secured
by automobiles. The 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 transaction must be approved by the Company's stockholders
and bank regulatory authorities and is also subject to a ruling of the Internal
Revenue Service that the transaction qualifies as a tax free transaction. The
Company currently anticipates that the split-off transaction will be consummated
by mid-1997.
The split-off entity, consisting of the Bank and Mortgage, qualifies as
discontinued operations as defined in Accounting Principles Board Opinion 30
(APB 30). Accordingly, for the three and six months ended June 30, 1996, the
Company's unaudited interim condensed consolidated financial statements 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 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 operations and a portion of the
Parent Company expenses are reported as 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 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 accompanying 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
6
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (the "1995 10-K") as filed with the
Securities and Exchange Commission. The 1995 10-K does not reflect the Bank
and Mortgage as discontinued operations. 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 Company's 1995 10-K, but does not
include all disclosures required by generally accepted accounting principles.
In the opinion of management of the Company, the accompanying 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 six month periods ended June 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>
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Gross finance receivables $429,433 $315,908
Less:
Unearned finance charges 110,358 83,612
Unearned insurance commissions 389 229
Unearned processing fees 139 341
-------- --------
Finance receivables, before dealer
discounts 318,547 231,726
Nonrefundable dealer discounts 12,255 12,655
-------- --------
Finance receivables, net $306,292 $219,071
======== ========
</TABLE>
The following table summarizes the activity in the nonrefundable dealer
discounts for the six month periods ending June 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 11,353 5,750
Discount accretion (2,255) (1,403)
Finance receivables charged to dealer
discounts (9,498) (1,259)
------- ------
Balance at June 30 $12,255 $8,439
======= ======
</TABLE>
7
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 management's 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, that
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
operating expenses were $2.7 million for the six months ended June 30, 1996
as compared to $90,000 for the first six months of 1995.
The Company's 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. The revised timing of recognition of charges to the nonrefundable
dealer discount resulted in an increase in charges to the nonrefundable dealer
discount of approximately $3.4 million during the second quarter.
8
<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 5.82% and 6.18% at
June 30, 1996 and December 31, 1995, respectively. The maturities on commercial
paper extend out no more that 270 days.
The following table reflects certain aspects of the long-term debt of the
Parent and Finance Companies:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------ -----------------
(in thousands)
BALANCE RATE BALANCE RATE
--------- ------ --------- ------
COLE TAYLOR FINANCIAL GROUP, INC.:
- ---------------------------------
<S> <C> <C> <C> <C>
Cole Taylor Financial Group
subordinated notes $ 25,000 9.00% $25,000 9.00%
Cole Taylor Financial Group, Inc.
$25.0 million unsecured revolving loan,
bearing interest at prime rate or
LIBOR plus 1.5%. 22,600 7.40 -- --
Employee Stock Ownership Plan ("ESOP")
loan, collateralized by a pledge of
the Company's stock held by the
ESOP 168 8.00% 257 8.00%
COLE TAYLOR FINANCE CO.:
- -----------------------
Cole Taylor Finance Co. $275 million
revolving credit agreement bearing
interest at reference rate plus .50% or
adjusted LIBOR plus 2.25% 55,900 7.83% 57,400 8.24%
-------- -------
Total $103,668 $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, increase the effective interest rate on the revolving credit
agreement by approximately 42 basis points at June 30, 1996.
During the first quarter of 1996, the Parent Company's revolving loan agreement
was revised to increase the facility to $25 million from $15 million. The
Finance Company's revolving credit agreement was increased from $200 million to
$275 million.
9
<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>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 85,997 $ 68,413
Federal funds sold 15,400 5,000
Interest-bearing deposits in other banks 16,090 19,134
Investment securities 417,559 438,348
Loans, net 1,259,246 1,187,753
Premises, leasehold improvements and
equipment, net 17,009 16,907
Other assets 50,483 43,787
---------- -----------
Total assets - discontinued operations 1,861,784 1,779,342
---------- -----------
LIABILITIES
Deposits 1,486,128 1,363,511
Borrowings 217,209 263,036
Accrued interest, taxes and other
liabilities 14,927 14,142
---------- -----------
Total liabilities - discontinued
operations 1,718,264 1,640,689
---------- -----------
Net assets of discontinued operations $ 143,520 $ 138,653
========== ===========
</TABLE>
A summary of the net income of the discontinued operations for the three and six
months ended June 30, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
1996 1995 1996 1995
------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
Net interest income $ 18,128 $ 17,094 $ 35,776 $ 34,416
Provision for loan losses (1,053) (1,055) (2,052) (2,332)
Noninterest income 4,052 3,595 7,753 6,845
Noninterest expense (14,682) (14,259) (29,772) (28,439)
Income taxes (1,936) (1,375) (3,486) (2,636)
-------- -------- -------- --------
Net income $ 4,509 $ 4,000 $ 8,219 $ 7,854
======== ======== ======== ========
</TABLE>
10
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following presents management's discussion and analysis of the results of
operations and financial condition of the Company for the three and six months
ended June 30, 1996 as compared to the same periods in 1995. This discussion
should be read in conjunction with the consolidated financial statements and
accompanying notes presented elsewhere in this Form 10-Q.
The consolidated organization consists of Cole Taylor Financial Group, Inc. (the
"Company" or the "Parent Company") and its subsidiaries, Cole Taylor Finance Co.
(the "Finance Company"), Cole Taylor Bank (the "Bank") and CT Mortgage Company,
Inc. ("Mortgage"). Cole Taylor Finance Co. 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
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 the Bank's used automobile
receivables business, principally consisting of cash and sales finance
receivables secured by automobiles. The 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 transaction must be approved by the
Company's stockholders and bank regulatory authorities and is also subject to a
ruling of the Internal Revenue Service that the transaction qualifies as a tax
free transaction. The Company currently anticipates that the split-off
transaction will be consummated by mid-1997.
The split-off entity, consisting of the Bank and Mortgage, qualifies as
discontinued operations as defined in APB 30 and for the three and six month
ended June 30, 1996, the Company's unaudited interim condensed consolidated
financial statements 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 balance sheet as net assets of discontinued operations.
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 operations and a portion of the
Parent Company expenses are reported as 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
11
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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; general economic and business
conditions affecting the Company's customers; the ability of the Finance Company
to succeed in its expansion efforts and to obtain sufficient financing to fund
asset growth; 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 of
defaults on sales finance 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 Prospectus dated May 25, 1994.
OVERVIEW
The Company has operated in the financial services industry, engaged primarily
in the banking and consumer loan acceptance businesses. As a result of the
split-off, the Finance Company will constitute the sole business operations
of the 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.
The Finance Company commenced operations in January 1993 and, at June 30, 1996,
operated 37 Reliance Acceptance Corp. offices in fourteen 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.
12
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
FINANCIAL CONDITION
FINANCE RECEIVABLES
Net finance receivables increased 40% to $306 million at June 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 total
outstandings, Georgia 16%, and the remainder in the other twelve states where
offices are located, none of which exceed 10% of total outstandings. The total
number of offices at June 30, 1996, was 37 compared to 30 at June 30, 1995 and
36 at December 31, 1995.
DELINQUENCIES AND REPOSSESSIONS
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
6/30/96 12/31/95 6/30/95
-------- -------- -------
<S> <C> <C> <C>
Delinquent receivables (61 days or more $2,567 $2,063 $1,428
past due)
Repossessed assets 6,646 5,235 2,636
------ ------ ------
Total delinquent receivables and
repossessed assets $9,213 $7,298 $4,064
====== ====== ======
Delinquent receivables to gross finance
receivables 0.60% 0.65% 0.71%
Delinquent receivables and repossessed
assets to gross finance receivables
plus repossessed assets 2.11% 2.27% 1.99%
</TABLE>
The improvement in the above delinquency ratio reflects the impact of the
Company's increased collection efforts. The improvement in the delinquency and
repossession ratio reflects the impact of the earlier recognition of expected
losses from repossessions.
13
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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>
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
----------------- ----------------
<S> <C> <C>
Finance receivables, before dealer $318,547 $148,870
discount, end of period
Average finance receivables, before 277,176 117,870
dealer discount
Balance at January 1 $ 12,655 $ 5,351
Nonrefundable dealer discount 11,353 5,750
established
Discount accretion (2,255) (1,403)
Net charges to dealer discount (9,498) (1,259)
-------- --------
Balance at June 30 $ 12,255 $ 8,439
======== ========
Net charge to the dealer discount to
average finance receivables before
dealer discount (annualized) 6.85% 2.15%
Dealer discount to finance receivables
before dealer discount at end
of period 3.85% 5.67%
</TABLE>
Charges to the nonrefundable dealer discount were $9.5 million and $1.3 million
for the six month periods ending June 30, 1996 and 1995, respectively. Charges
to the dealer discount for the first six 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. The Company's policy
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 would have been lower. The increased
loss experience is due to the above mentioned acceleration of loss recognition,
a maturing portfolio and an increase in loss on disposition of repossessions.
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 now being immediately reported in other operating expenses
as incurred. Repossession expenses reported in other operating expenses were
$2.7 million for the six months ended June 30, 1996, as compared to $90,000 for
the first six months of 1995. The reclassification of repossession expenses in
other operating expenses had the effect of
14
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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
$275 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 $275 million secured senior
debt revolving credit agreement. Third, is advances from the Parent Company.
Duff & Phelps and Fitch have 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. 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.
RESULTS OF OPERATIONS
NET INCOME
For the three and six months ended June 30, 1996, the Company's net income of
$8.1 million and $14.9 million represented an increase of 50% and 46%,
respectively, as compared to $5.4 million and $10.2 million in the three and six
month periods ended June 30, 1995. For the three and six months ended June 30,
1996, income from continuing operations increased to $3.6 million and $6.7
million, representing a 155% and 179% increase as compared to $1.4 million and
$2.4 million in the same periods of last year. The increase in net income is
primarily attributable to a 131% and 137% increase respectively in average net
finance receivables outstanding for the comparable periods. Net income from
discontinued operations, comprised of the Bank and Mortgage, increased 13% and
5% for the three and six month periods respectively over the same periods the
prior year.
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 six months ended June 30, 1996, the Company's net
interest income increased 142% to $12.7 million and 149% to $23.9 million as
compared with $5.3 million and $9.6 million in 1995. The net interest margin
(annualized) which is the ratio of net interest income divided by average net
receivables was 17.8% and 18.2% in the three and six months ended June 30, 1996
versus 17.0% and 17.3% for the same periods in 1995. The increase in the net
interest margin is primarily a result of the Company's commercial paper program
which was
15
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
initiated in May 1995. The program has grown from $25 million outstanding at
June 30, 1995 to $185 million at June 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 5.82% versus borrowings
under the revolving credit facility of 7.83% at June 30, 1996.
OTHER INCOME
In 1996, other income increased 29% for the second quarter and 40% for the first
six months over the same 1995 periods. These increases are primarily due to the
growth in finance receivables. However, other income as a percentage of average
finance receivables has declined in the three and six months ended June 30, 1996
as compared to each of the same periods of last year. These declines are the
result of management's decision, in early 1996, to include certain fee income
received on new contracts, into the nonrefundable dealer discount. A portion of
the dealer discount is then accreted into interest income. Prior to 1996, one of
the components of other income was the amortization of substantially all of the
fees earned from financing the dealers' sale of credit-life-disability insurance
and vehicle warranties.
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 six months ended June 30 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 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 $3,680 4.90% $1,903 5.55% $ 6,876 4.96% $3,534 6.00%
Occupancy - furniture and
equipment 352 0.47 173 0.51 664 0.48 335 0.57
Other operating expenses 3,176 4.22 1,099 3.20 6,132 4.43 2,219 3.76
------ ---- ------ ----- ------- ---- ------ -----
Total $7,208 9.59% $3,175 9.26% $13,672 9.87% $6,088 10.33%
====== ==== ====== ===== ======= ==== ====== =====
ANR = Average finance receivables, before dealer discounts
</TABLE>
For the three and six months ended June 30, 1996, operating expenses increased
127% and 125%, respectively as compared to the previous 1995 periods. Overall,
operating expenses have increased as a percentage of average finance receivables
before dealer discount from 9.26% to 9.59% and decreased from 10.33% to 9.87%
for the three and six month periods ending June 30, 1995 and 1996 respectively.
Salaries and employees benefits expense and other operating expense have
increased as a result of opening seven new branches and an accompanying increase
in headcount to 371 from 204 at June 30, 1996 and 1995 respectively. Beginning
in 1996, repossession expenses were charged directly to other operating expense
rather than reflecting these costs as part of the customer loan balance and
resulting charges to the dealer discount.
16
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND, SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Repossession expenses reported in other operating expenses were $2.7 million for
the six months ended June 30, 1996 as compared to $90,000 for the first six
months of 1995. Other operating expenses have increased as a percentage of
average finance receivables from 3.20% and 3.76% in the three and six month
periods ending June 30, 1995, respectively to 4.22% and 4.43% 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 the
Bank and Mortgage. The assets and results of operations related to the Bank and
Mortgage 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.
As a result of the agreement to split-off the Bank and Mortgage, all related
operating activity of the Bank and Mortgage was reclassified and reported as
discontinued operations as of and for the three and six months ended June 30,
1996. Additionally, earlier reported financial results and condition of the
Company for the three and six months ended June 30, 1995 and as of December 31,
1995 have been restated to reflect discontinued operations. Management's intent
is to complete the split-off transaction by mid-1997.
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 six months of 1996 compared to the same period in 1995, net
interest income before loan loss provision, improved $1.3 million due to the $71
million growth in average earning assets, offset by a four basis point decline
in the net interest margin. For the second quarter of 1996 compared to the same
quarter in 1995, net interest income improved $1.0 million due to the $80
million growth in average earning assets and a 4 basis point improvement in net
interest margin.
The provision for loan losses for the first six months of 1996 was $280,000
lower than in the same 1995 period. For the second quarter of 1996, the
provision was essentially flat when compared to 1995. The loan loss reserve as a
percentage of loans was 1.91% and 2.03% at June 30, 1996 and 1995, respectively.
Excluding mortgages held for sale, the reserve as a percentage of loans was
1.98% and 2.10% at June 30, 1996 and 1995, respectively.
Noninterest income in 1996 improved $908,000 for the first six months and
$457,000 for the second quarter, over the same 1995 periods. These improvements
were primarily due to an increase in deposit account and credit card service
charges.
17
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Noninterest expenses increased $1.3 million in the first half of 1996, as
compared to the first half of 1995. This increase is primarily due to a 7%
increase in employee related expenses, increased nonperforming asset expenses
relating to the interim operating expenses and disposition of a large
nonperforming asset, offset by a $1.4 million decrease in FDIC insurance
premiums. For the second quarter of 1996, non interest expenses increased
$423,000, primarily due to a 9% increase in employee related expenses, along
with a $202,000 increase in advertising and public relations expenditures,
offset by a $705,000 decrease in FDIC insurance premiums.
The income tax provision for the first six months of 1996 and 1995, as a
percentage of pretax income, was 30% and 25%, respectively. For the second
quarter of 1996 and 1995, these percentages were 30% and 26%, respectively. In
1995, the Bank benefited from state tax credits which lowered 1995's effective
tax rates.
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 $275 million secured revolving
credit agreement is due to be reduced to $250 million on November 15, 1996.
Management is actively pursuing an asset-backed securitization 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.
18
<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 21.
(b) Reports on Form 8-K - The Company filed a current Report on
Form 8-K dated June 12, 1996, to report that the Company had
entered into the share exchange agreement with certain members of
the Taylor Family providing for the split-off of a portion of the
Company's operations.
19
<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: August 14, 1996 /S/ J. Christopher Alstrin
--------------- --------------------------
J. Christopher Alstrin *
Chief Financial Officer
* Duly authorized to sign on behalf of the Registrant
20
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
EXHIBIT INDEX
Exhibit Page
Number Description of Documents Number
- ------- ------------------------ ------
11 Statement regarding computation of primary earnings per share .. 22
27 Financial Data Schedule ......................................... 23
99(c)(2) Share Exchange Agreement and related Escrow Agreement
(incorporated by reference to Form 8-K dated June 12, 1996)
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
COMPUTATION OF PRIMARY EARNINGS PER SHARE
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
<S> <C> <C> <C> <C>
1 Average common shares outstanding 14,629,280 14,530,731 14,602,780 14,523,339
2 Net additional shares assuming stock options exercised
and proceeds used to purchase treasury stock 775,542 615,234 739,375 620,659
---------- ---------- ----------- ----------
3 Average number of common and common
equivalent shares outstanding 15,404,822 15,145,965 15,342,155 15,143,998
---------- ---------- ----------- ----------
EARNINGS
4 Net income from continuing operations $3,566,000 $1,401,000 $6,719,000 $2,404,000
5 Net income from discontinued operations 4,509,000 4,000,000 8,219,000 7,854,000
---------- ---------- ----------- -----------
6 Net income $8,075,000 $5,401,000 $14,938,000 $10,258,000
========== ========== =========== ===========
PER SHARE AMOUNTS
7 Net income per share from continuing operations
(line 4 / line 3) $0.23 $0.09 $0.44 $0.16
8 Net income per share from discontinued operations
(line 5 / line 3) 0.29 0.27 0.53 0.52
---------- ---------- ----------- -----------
9 Net income per share (line 6 / line 3) $0.52 $0.36 $0.97 $0.68
========== ========== =========== ===========
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>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 509
<SECURITIES> 944
<RECEIVABLES> 318,547
<ALLOWANCES> 12,255
<INVENTORY> 0
<CURRENT-ASSETS> 157,788
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 465,533
<CURRENT-LIABILITIES> 192,777
<BONDS> 103,668
<COMMON> 147
0
0
<OTHER-SE> 168,941
<TOTAL-LIABILITY-AND-EQUITY> 465,533
<SALES> 0
<TOTAL-REVENUES> 33,644
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,020
<INCOME-PRETAX> 10,952
<INCOME-TAX> 4,233
<INCOME-CONTINUING> 6,719
<DISCONTINUED> 8,219
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,938
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.97
</TABLE>
