<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: OCTOBER 10, 1996
COLE TAYLOR
FINANCIAL GROUP, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
DELAWARE 0-23854 36-3235321
STATE OR OTHER COMMISSION I.R.S EMPLOYER
JURISDICTION OF FILE NO. IDENTIFICATION
INCORPORATION OR NUMBER
ORGANIZATION
350 EAST DUNDEE ROAD, SUITE 300
WHEELING, ILLINOIS 60090-3199
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
(847) 537-0020
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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<PAGE>
ITEM 5. OTHER EVENTS
On June 12, 1996 (the "Measurement Date"), Cole Taylor Financial Group, Inc.
(the "Company") entered into a Share Exchange Agreement with Jeffrey W.
Taylor, Sidney J Taylor, Bruce W. Taylor and certain other members of the
Taylor family. The transactions contemplated by the Share Exchange Agreement
include the Company's exchange ("the Split-Off") of (a) all of the capital
stock of a newly formed subsidiary of the Company holding, among other things,
all of the capital stock of Cole Taylor Bank (the "Bank") and CT Mortgage
Company (the "Mortgage Company") for (b) shares of Common Stock of the Company
owned by the Taylor family and, possibly, certain other parties. As of the
Measurement Date, the Company's banking segment, consisting of the Bank and
the Mortgage Company, qualifies as discontinued operations as defined in
Accounting Principles Board Opinion No. 30.
This Form 8-K is filed solely 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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations based upon the Restated Financials is included on pages 27 through
39 of this Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following Restated Financials, and Notes thereto, are included on pages
3 through 26 of this Form 8-K:
Report of KPMG Peat Marwick LLP
Report of Coopers & Lybrand L.L.P.
Historical Consolidated Balance Sheets restated for discontinued
operations as of December 31, 1995 and 1994
Historical Consolidated Statements of Income restated for discontinued
operations for the years ended December 31, 1995, 1994 and 1993
Historical Consolidated Statements of Changes in Stockholders' Equity
restated for discontinued operations for the years ended December 31,
1995, 1994 and 1993
Historical Consolidated Statements of Cash Flows restated for
discontinued operations for the years ended December 31, 1995, 1994
and 1993
Notes to Consolidated Financial Statements
The following Exhibit is filed with this Form 8-K:
Exhibit 27.1 Financial Data Schedule
2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Cole Taylor Financial Group, Inc.:
We have audited the historical consolidated balance sheets restated for
discontinued operations of Cole Taylor Financial Group, Inc. and subsidiaries
("the Company") as of December 31, 1995 and 1994, and the related historical
consolidated statements of income, changes in stockholders' equity and cash
flows restated for discontinued operations for the years then ended. These
historical consolidated financial statements restated for discontinued
operations are the responsibility of the Company's management. Our
responsibility is to express an opinion on these historical consolidated
financial statements restated for discontinued operations based on our audits.
The accompanying historical consolidated statement of income, changes in
stockholders' equity and cash flows restated for discontinued operations of
the Company for the year ended December 31, 1993, were audited by other
auditors whose report dated January 25, 1994, January 28, 1994, and October 2,
1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1995 and 1994 historical consolidated financial
statements restated for discontinued operations referred to above present
fairly, in all material respects, the financial position of Cole Taylor
Financial Group, Inc. and subsidiaries as of December 31, 1995 and 1994 and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
January 24, 1996, except for
Notes 2 and 13 as to which
the date is October 8, 1996
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Cole Taylor Financial Group, Inc.
We have audited the accompanying consolidated statements of income, changes
in stockholders' equity and cash flows of Cole Taylor Financial Group, Inc.
and subsidiaries for the year ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash
flows of Cole Taylor Financial Group, Inc. and Subsidiaries for the year ended
December 31, 1993, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
January 25, 1994, except as to
the information presented in
Note 8 for which the date
is January 28, 1994, and
Notes 2 and 13 for which
the date is October 2, 1996.
4
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
HISTORICAL FINANCIAL STATEMENTS RESTATED FOR DISCONTINUED OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
ASSETS
------
<S> <C> <C>
Cash....................................................... $ 3,375 $ 430
Short-term investments..................................... 1,454 5,200
Finance receivables........................................ 231,726 93,653
Less nonrefundable dealer discounts........................ (12,655) (5,351)
-------- --------
Finance receivables, net................................. 219,071 88,302
Other assets............................................... 10,009 2,665
Net assets of discontinued operations...................... 138,653 125,838
-------- --------
Total assets........................................... $372,562 $222,435
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Commercial paper......................................... $127,268 $ --
Long-term debt........................................... 82,657 83,343
Accounts payable and other accrued liabilities........... 8,020 4,775
-------- --------
Total liabilities...................................... 217,945 88,118
-------- --------
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized, no shares issued and outstanding at December
31, 1995 and 1994....................................... -- --
Common stock, $.01 par value; 40,000,000 shares
authorized; 14,571,429 and 14,508,353 shares issued and
outstanding at December 31, 1995, and December 31, 1994,
respectively............................................ 146 145
Class A common stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding at December
31, 1995 and 1994....................................... -- --
Surplus.................................................. 75,212 74,597
Retained earnings........................................ 79,516 59,918
Employee Stock Ownership Plan loan....................... (257) (343)
-------- --------
Total stockholders' equity............................. 154,617 134,317
-------- --------
Total liabilities and stockholders' equity............. $372,562 $222,435
======== ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
HISTORICAL FINANCIAL STATEMENTS RESTATED FOR DISCONTINUED OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fee income $ 36,419 $ 14,199 $ 2,109
Interest expense 11,594 3,314 1,892
---------- ---------- ----------
Net interest income 24,825 10,885 217
Provision (reduction of allowance) for
credit losses -- (363) 375
---------- ---------- ----------
Net interest income (loss) after
provision for credit losses 24,825 11,248 (158)
---------- ---------- ----------
Other income 1,250 509 110
---------- ---------- ----------
Operating expense:
Salaries and employee benefits 8,679 4,176 948
Occupancy of premises 627 249 65
Furniture and equipment 230 76 32
Computer processing 427 215 60
Office supplies and printing 394 208 72
Telephone 561 290 67
Employee travel 469 259 36
Other operating expense 3,187 879 345
---------- ---------- ----------
Total operating expense 14,574 6,352 1,625
---------- ---------- ----------
Income (loss) from continuing operations
before income taxes 11,501 5,405 (1,673)
Income taxes 4,439 2,133 (551)
---------- ---------- ----------
Income (loss) from continuing operations 7,062 3,272 (1,122)
---------- ---------- ----------
Discontinued operations:
Income from discontinued operations before
income taxes 22,521 20,342 17,104
Income taxes 5,911 5,855 4,749
---------- ---------- ----------
Income from discontinued operations 16,610 14,487 12,355
---------- ---------- ----------
Net income $ 23,672 $ 17,759 $ 11,233
========== ========== ==========
Primary earnings (loss) per share from
continuing operations $ 0.47 $ 0.23 $ (0.09)
Primary earnings per share from discontinued
operations 1.09 1.03 1.00
---------- ---------- ----------
Primary earnings per share $ 1.56 $ 1.26 $ 0.91
========== ========== ==========
Cash dividends declared per share $ 0.28 $ 0.18 $ 0.13
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK EMPLOYEE
----------------------------- STOCK
VOTING NON- OWNERSHIP
-------------- PARTICIPATING, RETAINED TREASURY PLAN (ESOP)
COMMON CLASS A NON-VOTING SURPLUS EARNINGS STOCK LOAN TOTAL
------ ------- -------------- ------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993 $105 $ 17 $ 420 $46,363 $34,972 $(1,172) $(514) $ 80,191
Reduction of loan to
ESOP.................. 85 85
Issuance of director
qualifying shares --
400 shares............ 2 2
Restricted common
stock issued in
connection with long-
term incentive plan,
3,560 shares.......... 3 21 24
Exercise of common
stock options in
connection with long-
term incentive plan,
21,600 shares -- net
of 3,600 restricted
shares canceled....... 58 37 95
Purchase of common
stock for treasury--
4,440 shares, at
cost.................. (29) (29)
Common stock issued in
exchange for non-
participating, non-
voting, common stock
-- 50,920 shares...... (420) 420 --
Cancellation of
treasury shares --
195,960 shares........ (2) (1,139) 1,141 --
Dividends:
Common -- $0.125 per
share............... (1,285) (1,285)
Class A common --
$0.125 per share.... (214) (214)
Net income............. 11,233 11,233
---- ---- ----- ------- ------- ------- ----- --------
Balance at December 31,
1993................... 103 17 -- 45,705 44,706 -- (429) 90,102
Reduction of loan to
ESOP.................. 86 86
Net proceeds from
issuance of common
stock -- 2,300,000
shares................ 23 27,280 27,303
Restricted common
stock issued in
connection with long-
term incentive plan,
2,921 shares.......... 32 32
Exercise of common
stock options in
connection with long-
term incentive plan,
85,962 shares -- net
of 6,434 restricted
shares canceled....... 1 374 375
Payments to acquire
and retire common
stock -- 22,000
shares................ (303) (303)
Conversion of Class A
common stock to
common stock --
1,708,000 shares...... 17 (17) --
Conversion of
mandatory convertible
note-- 90,910 shares.. 1 1,249 1,250
Tax benefit associated
with exercise of
common stock options.. 260 260
Dividends:
Common -- $0.18125
per share........... (2,489) (2,489)
Class A -- $0.13125
per share........... (58) (58)
Net income............. 17,759 17,759
---- ---- ----- ------- ------- ------- ----- --------
Balance at December 31,
1994................... 145 -- -- 74,597 59,918 -- (343) 134,317
Reduction of loan to
ESOP.................. 86 86
Exercise of common
stock options in
connection with long-
term incentive plan,
73,900 shares -- net
of 588 restricted
shares canceled....... 1 461 462
Payments to acquire
and retire common
stock -- 10,236
shares................ (220) (220)
Tax benefit associated
with exercise of
common stock options.. 374 374
Dividends:
Common -- $0.28 per
share............... (4,074) (4,074)
Net income............. 23,672 23,672
---- ---- ----- ------- ------- ------- ----- --------
Balance at December 31,
1995................... $146 $-- $ -- $75,212 $79,516 $ -- $(257) $154,617
==== ==== ===== ======= ======= ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
HISTORICAL FINANCIAL STATEMENTS RESTATED FOR DISCONTINUED OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 23,672 $ 17,759 $ 11,233
Adjustments to reconcile net income to net
cash provided by operating activities:
Dealer discount accretion................... (2,279) (2,071) (375)
Provision (reduction of allowance) for
credit losses.............................. -- (363) 375
Deferred income taxes....................... (20) 163 (129)
Depreciation and amortization............... 152 199 51
Other, net.................................. 6 (13) 32
Changes in assets and liabilities:
Other assets.............................. (6,503) (1,849) (320)
Accounts payable and other liabilities.... 3,075 3,570 (198)
--------- -------- --------
Net cash provided by operating activities....... 18,103 17,395 10,669
--------- -------- --------
Cash flow from investing activities:
Loan repayments............................... 64,547 20,569 2,523
Loan originations............................. (192,671) (89,162) (19,714)
Capital expenditures, net..................... (772) (304) (147)
Net increase in assets of discontinued
operations prior to split-off................ (12,815) (21,095) (6,109)
--------- -------- --------
Net cash used in investing activities........... (141,711) (89,992) (23,447)
--------- -------- --------
Cash flows from financing activities:
Proceeds from commercial paper................ 540,420 -- --
Repayments of commercial paper................ (413,152) -- --
Proceeds from long-term debt.................. 188,400 121,500 40,550
Repayments of long-term debt.................. (189,000) (68,500) (30,550)
Debt issuance expense......................... (324) (355) (32)
Net proceeds from issuance of common stock.... 462 27,678 97
Payments to acquire common stock.............. (220) (303) (29)
Dividends paid................................ (3,779) (2,199) (1,496)
--------- -------- --------
Net cash provided by financing activities....... 122,807 77,821 8,540
--------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (801) 5,224 (4,238)
Cash and cash equivalents, beginning of year.... 5,630 406 4,644
--------- -------- --------
Cash and cash equivalents, end of year.......... $ 4,829 $ 5,630 $ 406
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
HISTORICAL FINANCIAL STATEMENTS RESTATED FOR DISCONTINUED OPERATIONS
(IN THOUSANDS)
Supplemental disclosure of cash flow information for the three years ended
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Cash paid (received) during the year for:
Interest.............................................. $11,613 $2,806 $2,542
Income taxes.......................................... 2,253 519 (523)
Supplemental disclosures of noncash investing and
financing activities:
Conversion of non-participating, non-voting common
stock to common stock................................ -- -- 420
Conversion of mandatory convertible note to common
stock................................................ -- 1,250 --
Dividends declared but not paid....................... 1,020 725 377
Compensation paid through issuance of common stock.... -- 32 24
Tax benefit associated with exercise of common stock
options.............................................. 374 260 --
Reduction in ESOP loan................................ 86 86 85
Cancellation of treasury stock........................ -- -- 1,141
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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"). Cole Taylor Finance Co. operates through wholly
owned subsidiaries under the name Reliance Acceptance Corp. The Bank and
Mortgage Company are now accounted for as discontinued operations as fully
described in footnote number 2.
2. DISCONTINUED OPERATIONS:
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 cash and 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 transaction
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. 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 shareholders. Accordingly, the Company's consolidated
balance sheets as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
three years then ended, 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 sheets as net assets of
discontinued operations. A summary of these assets and liabilities is included
in footnote 13 of these financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
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 and
banking industries. 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.
10
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition:
Finance charges and nonrefundable dealer reserves on precomputed notes are
credited to unearned finance charges and nonrefundable dealer reserves,
respectively, at the time the notes are acquired and taken into income using
the actuarial method, which approximates the level yield method. 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, the accrual of income is suspended until one or more full
contractual monthly payments are received.
Processing fees, net of amounts estimated to offset the direct costs of
acquiring the accounts, are deferred and amortized into income on the sum-of-
the-digits method over 24 months, which approximates the average term of the
receivable. Late charges and deferment charges are taken into income as
collected. Extension fees are taken into income on the same basis as finance
charges.
In conjunction with its financing activities, the Finance Company, as agent
for unaffiliated insurers, receives commissions on credit life, accident and
health, collateral protection and vehicle warranty insurance. Commissions on
credit life and accident and health insurance are taken into income on the
same basis as finance charges. Commissions on collateral protection and
vehicle warranty insurance are taken into income on a straight-line basis over
12 months and 13 months, respectively, which approximates the average
contractual term of the related policies.
The net amount of participations in commissions received from dealers for
financing dealer placed insurance and participations in commissions paid to
dealers for selling company placed insurance are included in deferred income
and amortized into income over the estimated average terms of such underlying
insurance policies. Credit life and accident and health insurance commissions
are taken into income on a sum-of-the-digits method over a period of 24
months.
Allowance for Credit Losses and Nonrefundable Dealer Discounts:
In conjunction with the financing of installment contracts, agreements are
entered into with dealers whereby nonrefundable dealer discounts are
established to protect the Finance Company from potential losses associated
with such contracts. These dealer discounts, net of charges to dealer
discounts for loan losses, are accreted to income over the terms of the loans
using the level yield method. All nonrefundable dealer discounts are available
to charge accounts against. Any dealer discounts not used to absorb losses are
available for accretion into income.
In 1994 the Finance Company maintained both an allowance for credit losses
and a nonrefundable dealer discount. Subsequent experience had indicated to
management that the nonrefundable dealer discount is adequate to absorb
possible losses on credits that may become uncollectible. Accordingly, the
allowance for credit losses was taken into income in 1994. Management's
opinion in determining the adequacy of the nonrefundable dealer discount to
absorb losses is based on historical experience of the portfolio, estimates of
the collectibility of the accounts, the value of the underlying collateral,
and current economic conditions.
Repossessed Assets:
Repossessed assets are normally carried at the net receivable balance until
the assets are sold and all refundable amounts are received. Repossessed
assets on hand after 90 days are charged down to the net realizable value in
the month following the 90 day aging. Beginning in the fourth quarter of 1995,
any outstanding balances remaining more than 60 days after the sale of a
repossessed asset due to refundable amounts pending receipt are charged down
to the estimated net realizable value in the month following the 60 day aging.
Previously, these deficiency balances were charged off only after receipt of
all related refundable amounts.
11
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents:
The Company considers its cash and short term investments to be cash and
cash equivalents for purposes of the statement of cash flows. Short-term
investments consist of overnight purchase of securities under agreements to
resell. The investments are carried at cost.
Furniture, Fixtures, and Equipment:
Furniture, fixtures, and equipment are carried at cost less accumulated
depreciation. Depreciation is charged to expense using the straight-line
method over three to ten years, the estimated useful lives of the assets.
Income Taxes:
The Company files a consolidated federal income tax return. The provision
for federal income taxes is calculated as if each entity files a separate
return, except that the benefits of losses are allocated to the entity
incurring such losses to the extent that the losses reduce consolidated
taxable income. The income tax provision is computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109 and consists of
current income taxes payable and the change in deferred income taxes provided
for temporary differences. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying value of assets and liabilities
for financial reporting purposes and the values used for income tax purposes.
Deferred income taxes are recorded at the statutory Federal and state rates in
effect at the time the temporary differences are expected to reverse.
Earnings Per Share:
The weighted average number of common and common equivalent shares
outstanding for purposes of computing primary earnings per share was
15,222,426, 14,077,776 and 12,360,560 in 1995, 1994 and 1993 respectively.
Primary weighted average shares outstanding include common and common
equivalent shares attributable to outstanding stock options under the long-
term incentive plan using the treasury stock method in each of the periods.
4. FINANCE RECEIVABLES:
All finance receivables are sales finance receivables; the Finance Company
has no direct loans. Sales finance receivables are accounted for on a discount
basis and generally have terms of 18 to 48 months, with maximum terms of 60
months. Sales finance receivables outstanding at December 31, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross finance receivables:............................. $315,908 $126,665
Less:
Unearned finance charges........................... 83,612 32,760
Unearned insurance commissions..................... 229 46
Unearned processing fee............................ 341 206
-------- --------
Finance receivables, before dealer discounts........... 231,726 93,653
Nonrefundable dealer discounts......................... 12,655 5,351
-------- --------
Finance receivables, net............................. $219,071 $ 88,302
======== ========
</TABLE>
12
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the years ended December 31, 1995 and 1994, cash collections of
principal amounts of sales finance receivables (excluding finance charges
earned, nonrefundable dealer discounts, and processing fees) totaled
$64,547,000 and $20,569,000, respectively, and the ratio of these cash
collections to average principal balances was 44.5% and 38.5%, respectively.
A summary of the activity in the allowance for finance credit losses and the
nonrefundable dealer discount for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
ALLOWANCE FOR NONREFUNDABLE
CREDIT LOSSES DEALER DISCOUNT
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Balance December 31, 1992.................. $ -- $ --
Provision/dealer discount established.... 375 1,567
Finance receivables charged to dealer
discount................................ (35)
Discount accretion....................... (375)
----- -------
Balance December 31, 1993.................. 375 1,157
Provision/dealer discount established.... (363) 6,729
Finance receivables charged to dealer
discount................................ -- (476)
Finance receivables charged to allowance
for credit losses....................... (12) --
Discount accretion....................... -- (2,059)
----- -------
Balance December 31, 1994.................. -- 5,351
Provison/dealer discount established..... -- 13,992
Finance receivables charged to dealer
discount................................ -- (4,642)
Discount accretion....................... -- (2,046)
----- -------
Balance December 31, 1995.................. $ -- $12,655
===== =======
</TABLE>
5. COMMERCIAL PAPER:
During the second quarter of 1995, the Finance Company began issuing
commercial paper. The commercial paper program is limited to $150 million and
is fully backed by the Finance Company's revolving credit agreement and subject
to the borrowing limitations contained in the revolving credit agreement.
Additionally, the commercial paper is guaranteed by the Parent Company. As of
December 31, 1995, there was $127.3 million in commercial paper outstanding.
Rates during 1995 ranged from 5.95% to 6.48% and original terms ranged from one
to 270 days. Rates at December 31, 1995 ranged from 5.85% to 6.30% and the
maturity dates ranged from January, 1996 through July, 1996.
13
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
COLE TAYLOR FINANCIAL GROUP, INC.:
Cole Taylor Financial Group subordinated notes bearing
interest at 9% payable monthly, maturing June 15,
2001................................................. $25,000 $25,000
Cole Taylor Financial Group, Inc. $15.0 million
unsecured revolving loan, bearing interest at prime
rate or LIBOR plus 1.5%, maturing July 1, 1996; a
commitment fee of .25% per annum on the unused
portion of the credit line is payable quarterly,
repaid in 1995....................................... -- 5,000
Employee Stock Ownership Plan ("ESOP") loan,
collateralized by a pledge of the Company's stock
held by the ESOP; bearing interest at 8%; payable in
annual principal installments of $86,000 plus
interest until June 15, 1998......................... 257 343
COLE TAYLOR FINANCE CO.:
Cole Taylor Finance Co. $200 million revolving credit
agreement bearing interest at reference rate plus
.50% or adjusted LIBOR plus 2.25%, maturing July 12,
1997, collateralized by finance receivables; an
unused line fee of 1/8 of 1% per annum of the amount
by which the total credit facility exceeds the
average daily unpaid balance of the loan is payable
monthly, an annualized fee equal to 5/16 of 1% of the
average commercial paper outstanding during the
month, and an audit fee of up to $200 per branch per
month................................................ 57,400 53,000
------- -------
Total............................................... $82,657 $83,343
======= =======
</TABLE>
The agreement under which the Parent Company's revolving loan was issued
includes financial covenants relating to the amount of tangible net worth (as
defined), the ratio of indebtedness to tangible net worth, the ratio of
nonperforming assets to primary capital (as defined), and the amount of net
income. It also contains restrictions as to mergers or disposals of assets and
creation of liens on assets owned or acquired. As of December 31, 1995 and
1994, the Company was in compliance with the provisions of the agreement.
During 1995, the Finance Company's $100 million revolving credit agreement
was amended and increased to $200 million and the maturity was extended one
year. Rates at December 31, 1995 ranged from 7.94% to 9.00%. The borrowings
are secured by a "letter of responsibility" provided by the Parent Company.
The agreement includes financial covenants relating to the ratio of debt to
adjusted tangible net worth (as defined), the ratios of the allowance for loan
losses and nonrefundable dealer discounts to finance receivables, the ratio of
unsubordinated debt to borrowing base (as defined), the ratio of adjusted net
income (as defined) to interest expense and to fixed charges (as defined), and
the charge-off policy. It also contains restrictions amongst others, as to
dividend payments, merger or disposal of assets and creation of liens on
assets owned or acquired. As of December 31, 1995 and 1994, Finance Company
was in compliance with the provisions of the agreement.
14
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following are the scheduled maturities of long-term borrowings at December
31, 1995:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1996...................... $ 86
1997...................... 57,486
1998...................... 85
1999...................... --
2000...................... --
Thereafter................ 25,000
-------
Total................. $82,657
=======
</TABLE>
7. STOCKHOLDERS' EQUITY:
On May 31, 1994, 20 million shares of undesignated preferred stock were
authorized. The preferred stock may be issued at the direction of the Board of
Directors, without stockholder approval, in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereon, to the extent that such are not fixed in
the Company's certificate of incorporation, as the Board of Directors
determines. The rights, preferences, limitations and restrictions of different
series of preferred stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and other matters. The Board of Directors
may authorize the issuance of preferred stock which ranks senior to the common
stock with respect to the payment of dividends and the distribution of assets
on liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on common
stock to be effective while any shares of preferred stock are outstanding.
8. LONG-TERM INCENTIVE PLAN:
Under the terms of the Company's stock option plans, key employees are
granted options, at the discretion of the Board of Directors, to purchase
shares of the Company's common stock at the fair market value. Generally,
these shares vest at a rate of 20% per year over a five year period starting
on the first anniversary of the grant. A total of 1.96 million shares of
common stock are reserved for issuance under the Stock Option Plan.
The changes in the stock options under the long-term incentive plan for the
three years ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1993 (129,240
exercisable) 759,200 $ 3.38 - 5.75
Granted...................................... 117,000 6.60 - 8.25
Exercised.................................... (25,200) 4.02 - 5.75
Canceled..................................... (34,000) 5.38 - 5.75
--------- --------------
Outstanding at December 31, 1993 (240,480
exercisable) 817,000 3.38 - 8.25
Granted...................................... 419,000 10.80 - 13.75
Exercised.................................... (92,400) 3.38 - 5.75
Canceled..................................... (50,400) 5.38 - 10.80
--------- --------------
Outstanding at December 31, 1994 (292,800
exercisable) 1,093,200 4.02 - 13.75
Granted...................................... 347,565 17.00 - 27.50
Exercised.................................... (73,900) 4.02 - 10.80
Canceled..................................... (41,075) 5.38 - 17.75
--------- --------------
Outstanding at December 31, 1995 (509,235
exercisable).................................. 1,325,790 $ 4.68 - 27.50
========= ==============
</TABLE>
15
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These plans provide that in the event of disability, death or retirement of
the participant, or upon change in control of the Company (as defined), the
options, including those described in the paragraphs above, become immediately
exercisable.
The definitive share exchange agreement described in footnote number 2,
provides for fully vesting of all of the outstanding stock options when the
split-off transaction is consummated. Employees of the discontinued operations
account for approximately 78% of the outstanding stock options, and
accordingly, are expected to exercise those options.
9. EMPLOYEE BENEFIT PLANS:
The Company has an ESOP and a profit-sharing plan covering substantially all
employees. Company contributions are at the discretion of the Board of
Directors, with the exception of certain matching of employee contributions
and a minimum ESOP contribution sufficient to service the ESOP debt. During
1995 and 1994, the Parent Company and Finance Company contributions made to
the Profit Sharing Plan and ESOP totaled $248,000 and $18,000, respectively.
There were no contributions made during 1993.
At December 31, 1995 and 1994, the ESOP owned 58,746 and 54,539 shares,
respectively, of the Company's common stock held in trust for the Parent
Company's and the Finance Company's employees. The plan's trustee is Cole
Taylor Bank.
10. INCOME TAX PROVISION:
The components of the income tax provision for the years ended December 31,
1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense:
Federal.......................................... $3,763 $1,582 $(422)
State............................................ 696 388 --
------ ------ -----
Total current income tax expense............... 4,459 1,970 (422)
Deferred income tax (benefit) expense.............. (20) 163 (129)
------ ------ -----
Total income tax provision (benefit)........... $4,439 $2,133 $(551)
====== ====== =====
</TABLE>
The tax effect of temporary differences at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
----- -----
(IN
THOUSANDS)
<S> <C> <C>
Deferred income tax (liabilities) assets:
State net operating loss carryforward.................... $ 728 $ 875
Other.................................................... 19 (1)
----- -----
Gross deferred tax assets.............................. 747 874
Less valuation allowance................................... (728) (875)
----- -----
Total deferred income tax (liabilities) assets......... $ 19 $ (1)
===== =====
</TABLE>
At December 31, 1995 and 1994, the Company had net operating loss
carryforwards for Illinois state income tax purposes of approximately $15
million and $18 million, respectively. These carryforwards will expire at
various dates through the year 2006. A valuation allowance has been made for
these net operating loss carryforwards because of the uncertainty surrounding
their utilization.
16
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (benefit) was different from the amounts computed by
applying the federal statutory rate of 34% in 1995, 1994 and 1993 to income
before income taxes because of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense at statutory rate........ $3,910 $1,838 $(569)
(Decrease) increase in taxes resulting from:
State income tax expense, net of federal income
tax benefit...................................... 459 261 --
Other, net........................................ 70 34 18
------ ------ -----
Total........................................... $4,439 $2,133 $(551)
====== ====== =====
</TABLE>
11. COMMITMENTS:
The Company leases various office facilities under operating leases expiring
through March 31, 2000. Estimated future minimum rentals under noncancelable
operating leases as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS)
--------------
<S> <C>
1996...................... $ 596
1997...................... 459
1998...................... 281
1999...................... 198
2000...................... 86
------
Total................. $1,620
======
</TABLE>
It is expected that in the normal course of business, office leases that
expire will be renewed or replaced by leases on other similar properties. Rent
expense for the years ended December 31, 1995, 1994 and 1993 was $604,000,
$233,000 and $58,000, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of financial instruments.
Estimations and present value calculations were used by the Company for the
purposes of estimating fair values. Fair value estimates are made at specific
point in time for the Company's financial instruments; they are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore, cannot be determined with precision. Fair value estimates do not
reflect the total value of the Company as a going concern.
The methods and assumptions used to determine fair values for each
significant class of financial instruments are presented below:
Cash and Equivalents:
The carrying amount approximates fair value because of the short maturity of
these instruments.
Finance Receivables:
The interest rates on the receivables outstanding at December 31, 1995 and
1994 are consistent with the rates at which loans would currently be made to
borrowers of similar credit quality and the same maturities and security; as
such, the carrying value of the receivables outstanding at December 31, 1995
and 1994 approximate fair value at that date.
17
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Short Term Debt--Commercial Paper:
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long Term Debt:
Long Term has been valued at present values of future cash flows using rates
which approximate current market rates for similar instruments. The estimated
fair value of long term debt as of December 31, 1995 and 1994 was $87,380,000
and $80,863,000, respectively.
Discontinued Operations:
A significant portion of the discontinued operations' assets and liabilities
are considered financial instruments as defined in SFAS No. 107. Cash, due
from banks and short term investments are reported at amounts that approximate
fair value. Investment securities are determined from quoted market prices.
Fair value of loans has been estimated by the present value of future cash
flows, using current rates at which similar loans would be made. Deposit
liabilities have been valued at the present value of future cash flows using
rates which approximate current market rates for similar instruments. Short
term borrowings and long term debt have been valued at present values of
future cash flows using rates which approximate current market rates for
similar instruments. As of December 31, 1995, the estimated fair value of net
discontinued financial instruments having a carrying book value of
$110,972,000, was $110,987,000. At December 31, 1994, the estimated fair value
of net discontinued financial instruments having a carrying book value of
$72,799,000, was $41,332,000. The fair value of off-balance sheet interest
rate swap agreements as of December 31, 1995 and 1994 was a deficit value of
$96,000 and $2,400,000, respectively, and was estimated using quoted market
prices.
13. 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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and due from banks........................... $ 68,413 $ 63,475
Federal funds sold................................ 19,134 6,240
Interest-bearing deposits in other banks.......... 5,000 23,600
Investment securities............................. 438,348 464,419
Loans, net........................................ 1,187,753 1,107,344
Premises, leasehold improvements and equipment,
net.............................................. 16,906 13,873
Other assets...................................... 43,787 47,941
---------- ----------
Total assets--discontinued operations........... $1,779,341 $1,726,892
========== ==========
LIABILITIES:
Deposits.......................................... $1,363,511 $1,293,410
Short-term borrowings............................. 263,035 291,861
Accrued interest, taxes and other liabilities..... 14,142 15,783
---------- ----------
Total liabilities--discontinued operations...... 1,640,688 1,601,054
---------- ----------
Net assets of discontinued operations........... $ 138,653 $ 125,838
========== ==========
</TABLE>
18
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the net income of the discontinued operations for the following
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net interest income............................ $69,421 $71,434 $66,786
Provision for loan losses...................... (4,056) (7,374) (10,521)
Noninterest income............................. 14,227 12,887 15,425
Noninterest expense............................ (57,071) (56,605) (54,586)
Income taxes................................... (5,911) (5,855) (4,749)
------- ------- -------
Net income..................................... $16,610 $14,487 $12,355
======= ======= =======
</TABLE>
14. PARENT COMPANY ONLY:
Summarized unconsolidated financial information of Cole Taylor Financial
Group, Inc. is as follows:
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Noninterest-bearing deposits with subsidiary Bank.......... $ 1 $ 336
Securities purchased under agreement to resell with
subsidiary Bank........................................... 1,454 5,200
Investment in subsidiaries................................. 23,583 13,971
Investment in discontinued operations...................... 138,653 125,838
Advances to Finance Company................................ 15,055 19,750
Other assets............................................... 2,798 1,011
-------- --------
Total assets............................................. $181,544 $166,106
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest, taxes and other liabilities.............. $ 1,670 $ 1,446
Long-term borrowings....................................... 25,257 30,343
Stockholders' equity....................................... 154,617 134,317
-------- --------
Total liabilities and stockholders' equity............... $181,544 $166,106
======== ========
</TABLE>
19
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income:
Interest.......................................... $ 1,842 $ 853 $ 270
Management fees from Finance Company.............. 130 -- --
------- ------- -------
Total income.................................... 1,972 853 270
------- ------- -------
Expenses:
Interest.......................................... 3,057 1,148 1,860
Salaries and employee benefits.................... 903 529 --
Other............................................. 1,412 379 207
Intercompany services............................. 359 297 195
------- ------- -------
Total expenses.................................. 5,731 2,353 2,262
------- ------- -------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries........... (3,759) (1,500) (1,992)
Income tax benefit.................................. 1,209 476 672
Equity in undistributed net income of Finance
Company............................................ 9,612 4,296 198
Income from discontinued operations................. 16,610 14,487 12,355
------- ------- -------
Net income...................................... $23,672 $17,759 $11,233
======= ======= =======
</TABLE>
20
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 23,672 $ 17,759 $ 11,233
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................ 10 -- 3
Provision for deferred income taxes......... (532) 87 (103)
Equity in undistributed net income of
subsidiaries............................... (9,612) (4,296) (198)
Other, net.................................. 145 82 32
Changes in assets and liabilities:
Other assets.............................. (1,106) (1,030) (10)
Other liabilities......................... 38 489 (498)
--------- -------- --------
Net cash provided by operating
activities............................. 12,615 13,091 10,459
--------- -------- --------
Cash flows from investing activities:
Net decrease (increase) in short-term
investments.................................. 3,746 (4,700) 3,800
Investment in subsidiaries.................... -- (4,500) (4,924)
Advances to subsidiaries...................... (160,715) (48,350) --
Repayments of advances to subsidiaries........ 165,410 28,600 --
Other, net.................................... (39) -- --
Net increase in net assets of discontinued
operations................................... (12,815) (21,095) (6,109)
--------- -------- --------
Net cash provided by (used in) investing
activities............................. (4,413) (50,045) (7,233)
--------- -------- --------
Cash flows from financing activities:
Dividends paid................................ (3,779) (2,199) (1,496)
Repayments of long-term borrowings............ (81,000) (37,500) (24,000)
Proceeds from long-term borrowings............ 76,000 49,500 23,000
Net proceeds from issuance of common stock.... 462 27,678 97
Payments to acquire common stock.............. (220) (303) (29)
--------- -------- --------
Net cash (used in) provided by financing
activities............................. (8,537) 37,176 (3,428)
--------- -------- --------
Net (decrease) increase in cash................. (335) 222 (202)
Cash and cash equivalents, beginning of year.... 336 114 316
--------- -------- --------
Cash and cash equivalents, end of year.......... $ 1 $ 336 $ 114
========= ======== ========
</TABLE>
21
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. PARENT COMPANY ONLY (CONTINUED):
Supplemental disclosure of cash flow information for the three years ended
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
-------------------
1995 1994 1993
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................... 3,105 1,003 2,510
Income taxes received.............................. (790) (696) (565)
</TABLE>
The Bank is subject to dividend restrictions set forth by regulatory
authorities. Under such restrictions, the Bank may not, without prior approval
of regulatory authorities, declare dividends in excess of the sum of the
current year's earnings (as defined) plus the retained earnings (as defined)
from the prior two years. The dividends, as of December 31, 1995, that the
Bank could declare and pay to the Company, without the approval of regulatory
authorities, amounted to approximately $29.4 million, subject to the Bank
remaining in compliance with all applicable capital ratios.
At December 31, 1995, all the Company's and the Bank's capital ratios were
in compliance with the applicable regulatory requirements.
Allocation of Parent Company Expenses to Discontinued Operations
Certain Parent Company expenses have been allocated to the discontinued
operations. For the years ended December 31, 1995, 1994 and 1993, the after
tax expenses allocated to discontinued operations were $1.5 million, $.6
million and $.4 million, respectively. The allocation was based upon review of
individual expense line items and various assumptions on costs related to
management of the discontinued operations.
22
<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 (as defined below) as of
the dates and for the periods indicated, based upon the Company's historical
financial statements restated for discontinued operations, and the notes
thereto, included in this Form 8-K (the "Restated Financials"). This
discussion should be read in conjunction with the Restated Financials and the
financial statements and other financial information included in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
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. ("Mortgage").
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 (i) the Bank's used
automobile financing 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
transaction must be approved by the Company's stockholders and bank regulatory
authorities. The Company currently anticipates that the split-off transaction
will be consummated by the first quarter of 1997.
The split-off segment, consisting of the Bank and Mortgage, qualifies as
discontinued operations as defined in Accounting Principles Board Opinion 30
(APB 30). Accordingly, the Company's consolidated balance sheets as of
December 31, 1995 and 1994, and 1993, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for the three years
then ended, have been restated to reflect the split-off segment'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 segment, measured by the fair value of the
shares and cash exchanged, exceeds the Company's basis in the split-off
segment. 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
13 of the Restated Financials included in this Form 8-K.
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 Current
Report on Form 8-K 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-
23
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
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 to (a)
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 or 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 Prospectus dated May 25, 1994.
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, along with the used automobile receivables
business of the Bank, 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.
The Finance Company commenced operations in January 1993 and at December 31,
1995 operated 36 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, primarily 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 have terms ranging from 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.
The Company's net income of $23.7 million in 1995 represented a 33.3%
increase over net income of $17.8 million in 1994. Net income in 1994
surpassed 1993's net income of $11.2 million by 58.1%. Total assets of the
Company were $372.6 million, $222.4 million and $122.9 million at December 31,
1995, 1994 and 1993, respectively. Finance receivables, were $231.7 million at
December 31, 1995, compared to $93.6 million at December 31, 1994 and $18.7
million at December 31, 1993. Stockholders' equity increased to $154.6 million
at December 31, 1995 compared to $134.3 million and $90.1 million at December
31, 1994 and 1993, respectively. The significant increase in stockholders'
equity during 1994 was primarily the result of the successful completion of
the Company's initial public offering.
24
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Net income from continuing operations of the Finance Company totaled $7.1
million in 1995 compared to $3.3 million in 1994 and a loss of $1.1 million in
1993, the year in which operations commenced. Net interest income increased to
$24.8 million in 1995 compared to $10.9 million in 1994 and $200,000 in 1993.
As of year end, gross finance receivables increased to $315.9 million from
$126.7 million in 1994 and $24.4 million in 1993. Operating expense increased
to $14.6 million in 1995 compared to $6.4 million in 1994 and $1.6 million in
1993, reflecting the increased operational expenses of a growing organization.
FINANCIAL CONDITION
Finance Receivables
Gross finance receivables increased $189.2 million, or 150%, to $315.9
million at December 31, 1995 from $126.7 million at December 31, 1994.
Comparatively, gross finance receivables at December 31, 1994 of $126.7
million represented an increase of $102.3 million, or 419%, from $24.4 million
at December 31, 1993. These increases were largely a result of the Company's
expansion throughout 1995 and 1994 of its decentralized branch network and
favorable market and legislative conditions. As of December 31, 1995, the
Company operated 11 branches in Texas, 4 in Georgia, 3 in Colorado, 3 in
Florida, 3 in Ohio, 2 in Indiana, 2 in Nevada, 2 in Tennessee, 1 in Arizona, 1
in Illinois, 1 in Kentucky, 1 in New Mexico, 1 in North Carolina and 1 in
South Carolina.
The Company's offices in Texas accounted for approximately 42%, 54% and 91%
of gross finance receivables as of December 31, 1995, 1994 and 1993,
respectively; offices in Georgia accounted for 12%, 16% and 0% of gross
finance receivables as of December 31, 1995, 1994 and 1993, respectively; and
offices in Ohio accounted for 9%, 14% and 9% of gross finance receivables as
of December 31, 1995, 1994 and 1993, respectively. Each of the remaining
states where offices are located accounted for less than 10% of total gross
finance receivables throughout the three years.
The following table summarizes the components of finance receivables for the
years ending as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AS OF AS OF
12/31/95 12/31/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Gross finance receivables..................... $315,908 $126,665 $24,412
Less:
Unearned finance charges.................. 83,612 32,760 5,673
Unearned insurance commission............. 229 46 17
Unearned processing fees.................. 341 206 --
-------- -------- -------
Finance receivables, before nonrefundable
dealer discounts............................. 231,726 93,653 18,722
Nonrefundable dealer discounts................ 12,655 5,351 1,157
-------- -------- -------
Finance receivables, net...................... $219,071 $ 88,302 $17,565
======== ======== =======
</TABLE>
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.
If an account becomes 61 or more days contractually delinquent and no full
contractual payment is received in the month the account attains such
delinquency status, it is classified as delinquent. The following table sets
25
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
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
12/31/95 12/31/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Delinquent receivables (61 days or more past
due)......................................... $2,063 $ 661 $ 10
Repossessed assets............................ 5,235 914 106
------ ------ ----
Total delinquent receivables and
repossessed assets....................... $7,298 $1,575 $116
====== ====== ====
Delinquent receivables to gross finance
receivables.................................. 0.65% 0.52% 0.04%
Delinquent receivables and repossessed assets
to gross finance receivables plus repossessed
assets....................................... 2.27% 1.23% 0.47%
</TABLE>
The Finance Company's ratios reported above reflect increasing trends with
respect to the level of nonperforming loans and repossessions and the level of
charges to dealer discount to average loans and a decreasing trend with respect
to dealer discount "coverage" ratios (the level of dealer discounts to total
loans). The increase in the level of nonperforming loans and repossessions and
the level of charges to dealer discount is explained by the fact that the
Finance Company was newly formed in 1993 and has grown significantly in its
first three years of operations. The finance receivable portfolio did not begin
to "mature" until the latter part of 1994, thereby reporting levels of
nonperforming loans and repossessions and charges to dealer discounts in 1993
and 1994, which were lower due to the immaturity of the finance receivables
portfolio. The decrease in the "coverage" ratios between 1994 and 1993 was
primarily due to the elimination of the allowance for credit losses. Since
inception and prior to December 31, 1994, the Finance Company had maintained
both an allowance for credit losses and the nonrefundable dealer discount to
absorb possible credit losses. Actual loss experience indicated to management
that the nonrefundable dealer discount was adequate to absorb possible losses
on loans which may become uncollectable. Accordingly, the allowance for credit
losses was taken into income during 1994. The decrease in the ratio of dealer
discounts to total loans in 1995 was primarily attributable to the continued
maturity of the finance receivables portfolio.
Allowance for Credit Losses and Nonrefundable Dealer Discounts
The Company has nonrefundable dealer discounts available against which losses
can be charged. In conjunction with the financing of installment contracts,
agreements are entered into with dealers whereby nonrefundable discounts are
established to provide protection from potential losses associated with such
contracts. These dealer discounts, net of charges to dealer discount for loan
losses, are accreted to income over the lives of the loans using the level-
yield method.
In 1994 the Finance Company maintained both an allowance for credit losses
and a nonrefundable dealer discount. Subsequent experience has indicated to
management that the nonrefundable dealer discount is adequate to absorb
possible losses on credits that may become uncollectable. Accordingly, the
allowance for credit losses amounting to $375,000 at December 31, 1993, was
accreted into income in 1994.
26
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
The following table summarizes, for the periods indicated, period end and
average finance receivables, and activity in the nonrefundable dealer discount
and related ratios:
<TABLE>
<CAPTION>
12/31/95 12/31/94 12/31/93
-------- -------- --------
<S> <C> <C> <C>
Net finance receivables, before nonrefundable
dealer discount, end of period.............. $231,726 $93,563 $18,723
Average finance receivables, before
nonrefundable dealer discount............... 153,603 51,885 7,261
Balance at January 1--nonrefundable dealer
discount.................................... 5,351 1,157 0.00
Nonrefundable dealer discount established.... 13,992 6,729 1,567
Discount accretion........................... (2,046) (2,059) (375)
Net charges to dealer discount............... (4,642) (476) (35)
-------- ------- -------
Balance at December 31--nonrefundable dealer
discount.................................... $ 12,655 $ 5,351 $ 1,157
======== ======= =======
Net charges to the nonrefundable dealer
discount to average finance receivables
before nonrefundable dealer discount
(annualized)................................ 3.02% 0.92% 0.48%
Nonrefundable dealer discount to finance
receivables before dealer discount at end of
period...................................... 5.46% 5.71% 8.18%
</TABLE>
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,
which were formerly added to the customer loan balances and reported as part of
the charge to the dealer discount, are immediately reported in other operating
expenses as incurred. This revision will reduce charges to the dealer discount
and increase operating expenses.
The Company's policy regarding repossessions was revised, beginning January
1, 1996, 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. Accordingly, charges to the
nonrefundable dealer discount are expected to increase as the timing
accelerates but be the same over the life of the loan and vehicle disposition
period.
Debt
The Finance Company's purchases of sales finance contracts are primarily
financed with funds drawn on three principal sources. First, is a $150 million
(as of December 31, 1995) commercial paper facility which is guaranteed by the
Company and supported by a $200 million (as of December 31, 1995) secured
senior debt revolving credit agreement. The commercial paper is rated D-2 by
Duff & Phelps Credit Rating Service ("Duff
27
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
& Phelps") and F-2 by Fitch Investor Services ("Fitch"). Commercial paper
outstanding at December 31, 1995 was $127 million. The program began in May
1995 and accordingly there was no usage in 1994 or 1993. Second, is the $200
million secured senior debt revolving credit agreement. Third, are advances
from the Parent Company.
The Finance Company, as of December 31, 1995, had $57.4 million of borrowings
outstanding under the $200 million secured senior debt revolving credit
agreement compared with $53 million outstanding as of December 31, 1994.
The Company, as of December 31, 1995 and 1994, had outstanding $25 million of
9% subordinated debt which was issued concurrently with the Company's initial
public offering during 1994. The Company also has available a $15 million
senior unsecured revolving loan, under which no borrowings were outstanding as
of December 31, 1995 compared with $5 million outstanding as of December 31,
1994 (see Notes 5 and 6 to the Restated Financials).
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.
Discontinued Operations
The loan portfolio of the Company's discontinued operations has grown in each
of the last three years. Gross loans increased $81.0 million, or 7.1% at
December 31, 1995 as compared to December 31, 1994. In 1994, gross loans
increased $143.8 million, or 14.7%, as compared to December 31, 1993.
Commercial and industrial loans are the largest component of the portfolio,
representing 52.5% and 53.8% at December 31, 1995 and 1994, respectively.
Nonperforming assets totaled $15.3 million and $13.7 million at December 31,
1995 and 1994, respectively. Nonperforming assets to total loans plus
repossessed property were 1.26% and 1.21% at December 31, 1995 and 1994,
respectively.
Average deposits increased 5.0% in 1995 as compared to an increase of 11.6%
in 1994. In recent years, the earning asset growth has exceeded core deposit
growth, which has resulted in increased use of brokered certificates of deposit
and other borrowed funds. The Bank is categorized as "well capitalized" with
respect to all bank regulatory capital guidelines. Interest rate swaps have
been entered into by the bank as a designated hedge against then existing
balance sheet interest rate risk. The notional amount of all interest rate
swaps at December 31, 1995 was $75 million.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the difference between total interest income earned on
earning assets and total interest expense paid on interest-bearing liabilities,
is the Company's principal source of earnings. The amount of net interest
income is affected by changes in the volume of earning assets, the level of
rates earned on those assets, the volume of interest-bearing liabilities, and
the level of rates paid on those interest-bearing liabilities.
The net interest income of the Company has grown in each of the last two
years. Net interest income for 1995 was $24.8 million, an increase of 128% from
1994. Net interest income for 1994 was $10.9 million, an
28
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
increase of 53.5% from $200,000 in 1993. Growth in net interest income during
1995 was primarily due to a 147% increase in net finance receivables. The
Finance Company's net interest margin was 17.9% during 1995 compared to 22.9%
during 1994 and 26.4% during 1993, its first year of operations. These
decreases were generally due to an increase in the level of charges to
nonrefundable dealer discount (which reduces the amount of discount accretion)
and an expected increased utilization of debt rather than equity to fund
incremental asset growth.
Provision for Loan Losses
The Company's primary protection against losses is the nonrefundable dealer
discount. However, in the first year and a half of operations, the Company did
not have any historical loss experience and established an allowance for
credit losses of $375,000 in addition to the nonrefundable dealer discount.
During 1994 management determined the nonrefundable Dealer discount was
adequate to absorb possible losses on credits that may become uncollectable.
Accordingly, the allowance for credit losses was accreted into income in 1994.
Other Income
Other income, which principally includes insurance commissions and warranty
service fees, increased $741,000, or 145%, to $1.3 million in 1995 from
$509,000 in 1994 and increased $399,000, or 363%, in 1994 from $110,000 in
1993. Both years' increases are principally due to the increase in the number
of branch offices and in finance receivables.
In early 1996, a management decision was made to include certain fee income
related to warranty financing received on new contracts in the nonrefundable
dealer discount. A portion of the dealer discount is then accreted into
interest income. The revision will have the effect of increasing the discount
and accretion income and lowering other income.
Operating Expense
The following table shows the Company's operating expenses for the years
indicated in dollars and as a percent of average net receivables (dollars in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
-------------- ------------- ------------
$ %ANR $ %ANR $ %ANR
-------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits.... $ 8,679 5.99 $ 4,176 8.56 $ 948 13.89
Occupancy of premises, net........ 627 .43 249 .51 65 .95
Furniture and equipment........... 230 .16 76 .16 32 .47
Computer processing............... 427 .29 215 .44 60 .88
Other operating expense........... 4,611 3.18 1,636 3.35 520 7.62
-------- ----- ------- ----- ------ -----
Total operating expense....... $ 14,574 10.05 $ 6,352 13.01 $1,625 23.81
======== ===== ======= ===== ====== =====
Average net receivables........... $144,964 $48,807 $6,825
</TABLE>
29
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Operating expense increased $8.2 million, or 129%, to $14.6 million in 1995,
as compared to $6.4 million in 1994. For 1994, operating expense increased
$4.7 million, or 291%, to $6.4 million from $1.6 million in 1993. These
increases were primarily attributed to the opening of new branches and the
growth in average net receivables. Expenses as a percentage of average net
receivables showed a consistent decrease as the Company benefited from
economies of scale as individual office sizes grew. The average size office at
the end of 1995 was $8.8 million in gross finance receivables versus $5.3
million at the end of 1994 and $2.0 million at the end of 1993.
Salaries and employee benefits represent the largest category of operating
expense, accounting for 59.6% of the 1995 total versus 65.7% in 1994 and 58.3%
in 1993. Salaries and employee benefits increased $4.5 million, or 108%, to
$8.7 million in 1995 from $4.2 million in 1994. During 1994, salaries and
employee benefits increased $3.2 million, or 341%. Salaries and employee
benefits expense includes contributions to the Company's management incentive,
employee stock ownership and profit sharing plans of $4.3 million, $3.9
million and $2.9 million in 1995, 1994 and 1993, respectively. The increases
in these contributions were attributable to the increased profitability of the
Company. The Company's group health insurance costs were maintained at $2.4
million in 1995 and 1994 compared with $2.5 million in 1993. In 1995, 1994 and
1993, the average number of full-time equivalent employees at the Company was
339, 140 and 49, respectively. The annual percentage increases of 141% and
188% in 1995 and 1994, respectively, were due to the growth of the Company in
number of offices and finance receivables.
Occupancy expenses increased $378,000, or 152%, to $627,000 in 1995 from
$249,000 in 1994 and increased $184,000, or 283%, in 1994 from $65,000 in
1993. These increases were attributable to the Company's opening 11 new branch
offices in 1995 and 12 in 1994. The Company normally leases space for a period
of 3 years in Class B professional office buildings.
Furniture and equipment expenses increased $154,000, or 203%, to $230,000 in
1995 from $76,000 in 1994, and increased $44,000, or 138%, in 1994 from
$32,000 in 1993. The majority of these increases related to the establishment
of new offices.
Computer processing expense increased $212,000, or 98.6%, to $427,000 in
1995 from $215,000 in 1994 and increased $155,000, or 258%, in 1994 from
$60,000 in 1993. The increases were a result of increased data processing
charges from the Company's outside vendor, and were directly attributable to
the growth in the number of branch offices and transactions processed.
Other operating expense (which principally includes certain professional
fees, consulting, outside services and other operating expenses, such as
telephone, postage, office supplies and employee travel) increased $3.0
million, or 182%, to $4.6 million in 1995 from $1.6 million in 1994. During
1994, other operating expense increased $1.1 million, or 215%, from $500,000
in 1993. The rise in other operating expense was generally attributable to
increased costs associated with growth in offices, finance receivables and
headcount. These expenses as a percent of average net receivables continue to
trend downward as the economics of scale at the Company are realized. The
average branch size continued to increase to the 1995 level of $8.8 million in
gross finance receivables.
Income Taxes
The income tax provision before discontinued operations for 1995, 1994 and
1993 was $4.4 million, $2.1 million and $(0.6) million, respectively. As a
percentage of pretax income, income tax expense for 1995 was 38.6%, as
compared to 39.5% in 1994 and an income tax benefit of 32.9% in 1993. The
increase in income tax expense as a percentage of pretax income during 1994
was generally due to state income tax provisions. Management expects the
percentage of income tax provision to pretax income to remain similar to 1995
rates as earnings continue to grow.
30
<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--Discontinued Operations
Net income from discontinued operations increased 14.7% to $16.6 million in
1995 from $14.5 million in 1994. Net interest income decreased $2 million, or
2.8%, during 1995, while earning assets increased 7.4% to $1.6 billion. The
decline in net interest income was attributable to the decline in the tax
equivalent net interest margin to 4.38% in 1995 from 4.88% in 1994. The
decrease in the net interest margin was generally reflective of the increased
cost of interest-bearing deposits and borrowings and a shift from lower cost
interest-bearing demand deposits and savings accounts to time deposits and
borrowed funds.
Net income from discontinued operations increased 17.3% to $14.5 million in
1994 from $12.4 million in 1993. Net interest income increased $4.6 million,
or 7%, during 1994, primarily because earning assets increased 13%. The
increase in earning assets was partially offset by a decline in the net
interest margin.
The provision for loan losses decreased $3.3 million to $4.1 million in 1995
from $7.4 million in 1994. The ratio of net charge-offs to average total loans
also decreased to 0.26% in 1995 from 0.41% in 1994. The provision for loan
losses decreased $3.1 million to $7.4 million in 1994 from $10.5 million in
1993. The ratio of net charge-offs to average total loans also decreased from
0.57% in 1993 to 0.41% in 1994.
Noninterest income increased 10.2% to $14.2 million in 1995 from $12.9
million in 1994. Service charges increased $253,000, or 3.5%, to $7.5 million
in 1995 from 1994, primarily as a result of increases in retail and merchant
credit card service charges. Trust fees grew to $3.5 million in 1995, an
increase of $444,000, or 14.3%, over 1994 trust fees of $3.1 million. The
increase was attributable to increased employee benefit, land trust and
exchange trust revenues. In February 1995, the Bank completed an acquisition
of approximately 1,000 land trust accounts from a financial institution
located in the Chicago metropolitan area. Fees received from the sale of
insurance and brokerage related activities decreased $253,000, or 45.2%, in
1995 from 1994. This decrease was primarily attributable to the outsourcing
during 1995 of retail branch sales of insurance and financial services
products.
Mortgage banking income, which is comprised of gains and losses on loans
originated for sale and loan servicing income, increased to $1.7 million in
1995 from $694,000 in 1994. The increase in 1995 mortgage banking income was
primarily attributable to the adoption of SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which resulted in $895,000 of additional income.
In addition, 1995 income benefited from a $487,000 gain on a bulk sale of
mortgage servicing rights, offset by a decline in loan servicing income.
Noninterest income decreased $2.5 million, or 16.4%, to $12.9 million in
1994 from $15.4 million in 1993, primarily because 1993 included a $2.4
million legal settlement. The legal settlement related to certain equipment
leases purchased in December 1986 and was the result of a lawsuit filed
against the seller claiming breach of contract and fraud. Service charge
income increased $252,000, or 3.6%, as a result of a change in processing
overdraft items. Fees received from the sale of insurance and brokerage
related activities decreased $322,000, or 36.5%, from 1993 as a result of
personnel losses and changes experienced at the Bank in that business line.
Mortgage banking income in 1993 consisted primarily of loan servicing income.
The $369,000 increase in mortgage banking income in 1994 over 1993 resulted
from increased servicing volume. Gains from sales of investment securities
totaled $8,000 in 1994 as compared to $565,000 in 1993.
Noninterest expense increased less than 1% to $57.1 million in 1995 from
$56.6 million in 1994. FDIC deposit insurance decreased $1.2 million as a
result of the reductions in the premium rates assessed. Computer processing
fees increased $268,000, or 18.6%, in 1995 over 1994 as a result of the
increased cost of retail credit card processing and charges for phone lines
associated with the Bank's wide area computer network. Advertising and public
relations decreased $602,000, or 25.2%, in 1995 due to reduced amounts of
television and radio
31
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
advertisements relating to the Bank's "Sweat Equity" marketing campaign. Legal
expenses increased $634,000, or 53.6%, as a result of increased litigation
costs associated with various legal actions concluded in 1995. Furniture and
equipment expenses increased $270,000, or 11.2%, as a result of increased
depreciation charges, primarily related to technology enhancements.
Noninterest expense increased $2.0 million, or 3.7%, to $56.6 million in 1994
from $54.6 million in 1993. Salaries and benefits increased $1.3 million, or
4.4%. FDIC insurance expense increased $246,000, or 10.3%, as a result of the
increased level of deposits.
LIQUIDITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Company's ability to meet withdrawals either on demand or at contractual
maturity, to repay borrowings as they mature and to make new loans and
investments as opportunities arise. Liquidity is actively managed, enabling
senior management to effectively monitor changes in liquidity and react
appropriately to fluctuations in market conditions.
The Company's purchase of sales finance contracts are primarily financed with
issuance of commercial paper, funds drawn pursuant to the senior secured
revolving credit agreement, cash flow from maturing sales finance contracts and
other borrowings (including subordinated borrowings). The Company began issuing
commercial paper in 1995. Commercial paper issuances must meet the borrowing
base requirements, as contained in the revolving credit facility described
previously, as that facility also serves as the commercial paper backup
facility.
As indicated above, the Finance Company has financed its operations to date
primarily through intercompany loans, bank loans and commercial paper sources.
After the split-off, the Company's current sources of funds may not be adequate
to fully support the Company's growth plans. Consequently, the Company is
actively pursuing new sources of funds, such as securitizations of automobile
loans or public or private offerings of debt securities.
A significant portion of the Company's funding is obtained from commercial
paper with maturities of 270 days or less. Because the Company's finance
receivables 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 continued ability to obtain sufficient financing
to fund its purchases of finance contracts.
Cash inflows from operating activities exceeded operating outflows by $18.1
million in 1995, $17.4 million in 1994 and $10.7 million in 1993. Interest
received net of interest paid is the principal source of operating cash inflows
in each of the above periods. Management of investing and financing activities,
and market conditions, determine the level and the stability of net interest
cash flows.
Net cash outflows from investing activities were $141.7 million in 1995 as
compared to $90.0 million in 1994 and $23.4 million in 1993. In each of the
aforementioned years, the majority of the net cash outflows from investing
activities were the result of new loan volume.
Net cash inflows from financing activities were $122.8 million in 1995 as
compared to $77.8 million in 1994 and $8.5 million in 1993. All cash inflows
from financing activities were primarily the result of borrowings for the
purpose of funding new loan volume.
32
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COLE TAYLOR FINANCIAL GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
The Company's ability to pay dividends to its stockholders is limited
pursuant to its revolving credit agreement unless the written consent of the
Lender is obtained prior to dividend payment. While it is the Company's
intention to continue to pay cash dividends on its common stock, there is no
assurance that dividends will be paid in the future.
EFFECTS OF INFLATION
A financial service organization's assets and liabilities are primarily
monetary. Therefore, a financial service organization does not necessarily
gain or lose due to the effects of inflation. Moreover, changes in interest
rates, which are a major determinant of a financial service organization's
profitability, do not necessarily correspond to changes in the prices of goods
and services. An analysis of a financial service organization's asset and
liability structure provides the best indication of how a financial services
organization is positioned to respond to changing interest rates and maintain
profitability.
The financial statements have been prepared primarily on an historical basis
which is mandated by generally accepted accounting principles. Fluctuations in
the relative value of money due to inflation or recession generally are not
considered.
ADDITIONAL ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS No. 121"), is effective for fiscal years beginning after December 31,
1995. SFAS No. 121 requires entities to review assets to be held and used in
the business for impairment and an impairment loss, if any, to be recognized
if the carrying amount of the asset exceeds the fair value of the asset as
defined in the pronouncement. The Company does not believe SFAS No. 121 will
have a material impact on its financial condition and results of operations.
Statement of Financial Accounting Standards No. 123, Accounting and
Disclosure of Stock-Based Compensation ("SFAS No. 123"), is effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 encourages, but
does not require, entities to recognize expense for stock-based awards based
on their fair value on the date of grant. Under SFAS No. 123, entities may
continue following the existing accounting rules (the intrinsic value method,
which often results in no compensation expense), provided that pro forma
disclosures are made of what net income and earnings per share would have been
had the new fair value method been used. To do this, the fair value of options
and similar awards will have to be calculated using complex valuation
techniques. Additionally, this new standard requires entities to make
significantly more disclosures regarding employee stock options than are now
required. Management's evaluation of the impact of this pronouncement will be
concluded subsequent to the split-off transaction when the full impact of the
transaction's effect on the outstanding stock options is known.
Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS 125") was issued in June 1996, and is effective for fiscal years
beginning after December 31, 1996. SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on a consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. Under the
financial-components approach, after a transfer of financial assets, an entity
recognizes all financial and servicing assets it controls and liabilities it
has incurred and derecognizes financial assets it no longer controls and
liabilities that have been extinguished. If a transfer does not meet the
criteria for a sale, then the transfer is accounted for as a secured borrowing
with pledge of collateral. Management is currently evaluating the impact of
this pronouncement as it applies to the Finance Company's future potential
securitization of automobile loans.
33
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
Cole Taylor Financial Group, Inc.
(Registrant)
/s/ J. Christopher Alstrin
By: _________________________________
J. Christopher Alstrin
Chief Financial Officer
Date: October 10, 1996
34
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