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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

Commission File No. 0-50034

 

 

TAYLOR CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-4108550

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

9550 West Higgins Road

Rosemont, IL 60018

(Address, including zip code, of principal executive offices)

(847) 653-7978

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer     ¨       Accelerated filer       ¨
Non-accelerated filer     ¨       (Do not check if smaller reporting company.)     Smaller reporting company       x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of outstanding shares of each of the issuer’s classes of common stock, as of the latest practicable date: At November 6, 2009, there were 11,078,011 shares of Common Stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

TAYLOR CAPITAL GROUP, INC.

INDEX

 

          Page
PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Consolidated Balance Sheets (unaudited) - September 30, 2009 and December 31, 2008    1
   Consolidated Statements of Operations (unaudited) - For the three and nine months ended September 30, 2009 and 2008    2
   Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - For the nine months ended September 30, 2009 and 2008    3
   Consolidated Statements of Cash Flows (unaudited) - For the nine months ended September 30, 2009 and 2008    4
   Notes to Consolidated Financial Statements (unaudited)    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    28
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    71
Item 4.    Controls and Procedures    71
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    72
Item 1A.    Risk Factors    72
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    72
Item 3.    Defaults Upon Senior Securities    72
Item 4.    Submission of Matters to a Vote of Security Holders    72
Item 5.    Other Information    72
Item 6.    Exhibits    73
   Signatures    75


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollars in thousands, except per share data)

 

     September 30,
2009
    December 31,
2008
 
ASSETS     

Cash and cash equivalents:

    

Cash and due from banks

   $ 47,484      $ 52,762   

Federal funds sold

     —          200   

Short-term investments

     49        50   
                

Total cash and cash equivalents

     47,533        53,012   

Investment securities:

    

Available-for-sale, at fair value

     1,306,098        1,094,569   

Held-to-maturity, at amortized cost (fair value of $25 at December 31, 2008)

     —          25   

Loans held for sale, at lower of cost or market

     102,765        —     

Loans, net of allowance for loan losses of $107,132 and $128,548 at September 30, 2009 and December 31, 2008, respectively

     2,904,357        3,104,713   

Premises, leasehold improvements and equipment, net

     15,742        17,124   

Investments in Federal Home Loan Bank and Federal Reserve Bank stock, at cost

     35,741        29,630   

Other real estate and repossessed assets, net

     20,313        13,179   

Other assets

     52,532        76,637   
                

Total assets

   $ 4,485,081      $ 4,388,889   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Noninterest-bearing

   $ 615,590      $ 470,990   

Interest-bearing

     2,437,139        2,660,056   
                

Total deposits

     3,052,729        3,131,046   

Other borrowings

     327,692        275,560   

Accrued interest, taxes and other liabilities

     56,440        71,286   

Notes payable and other advances

     617,000        462,000   

Junior subordinated debentures

     86,607        86,607   

Subordinated notes, net

     55,593        55,303   
                

Total liabilities

     4,196,061        4,081,802   
                

Stockholders’ equity:

    

Preferred stock, $.01 par value, 10,000,000 shares authorized at September 30, 2009 and December 31, 2008:

    

Series A, 8% non-cumulative convertible perpetual, 2,400,000 shares issued and outstanding at September 30, 2009 and December 31, 2008, $25.00 liquidation value

     60,000        60,000   

Series B, 5% fixed rate cumulative perpetual, 104,823 shares issued and outstanding at September 30, 2009 and December 31, 2008, $1,000 liquidation value

     98,474        97,314   

Common stock, $.01 par value; 45,000,000 shares authorized at September 30, 2009 and December 31, 2008; 12,030,679 and 12,068,604 shares issued at September 30, 2009 and December 31, 2008, respectively; 11,078,011 and 11,115,936 shares outstanding at September 30, 2009 and December 31, 2008, respectively

     120        121   

Surplus

     225,951        224,872   

Accumulated deficit

     (104,708     (69,294

Accumulated other comprehensive income, net

     33,819        18,710   

Treasury stock, at cost, 952,668 shares at September 30, 2009 and December 31, 2008

     (24,636     (24,636
                

Total stockholders’ equity

     289,020        307,087   
                

Total liabilities and stockholders’ equity

   $ 4,485,081      $ 4,388,889   
                

See accompanying notes to consolidated financial statements (unaudited)

 

1


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(dollars in thousands, except per share data)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2009     2008     2009     2008  

Interest income:

        

Interest and fees on loans

   $ 40,749      $ 40,069      $ 119,668      $ 117,047   

Interest and dividends on investment securities:

        

Taxable

     13,921        8,664        42,179        27,019   

Tax-exempt

     1,360        1,449        4,203        4,387   

Interest on cash equivalents

     3        582        15        1,371   
                                

Total interest income

     56,033        50,764        166,065        149,824   
                                

Interest expense:

        

Deposits

     16,629        23,456        54,911        65,035   

Other borrowings

     2,210        2,364        6,618        7,454   

Notes payable and other advances

     1,718        1,298        4,956        4,045   

Junior subordinated debentures

     1,477        1,715        4,618        5,320   

Subordinated notes

     1,624        33        4,861        33   
                                

Total interest expense

     23,658        28,866        75,964        81,887   
                                

Net interest income

     32,375        21,898        90,101        67,937   

Provision for loan losses

     15,539        52,700        70,609        113,805   
                                

Net interest income (loss) after provision for loan losses

     16,836        (30,802     19,492        (45,868
                                

Noninterest income:

        

Service charges

     2,892        2,256        8,481        6,677   

Trust and investment management fees

     332        894        1,341        2,736   

Mortgage banking, net

     (1,351     —          (1,305     23   

Gains on investment securities

     378        —          8,637        —     

Other derivative income

     108        154        1,380        1,106   

Other noninterest income

     1,017        (84     2,322        810   
                                

Total noninterest income

     3,376        3,220        20,856        11,352   
                                

Noninterest expense:

        

Salaries and employee benefits

     10,440        14,948        31,976        37,747   

Occupancy of premises

     2,017        1,943        6,079        5,773   

Furniture and equipment

     531        830        1,625        2,498   

FDIC assessment

     2,314        779        8,213        1,891   

Legal fees, net

     1,430        1,841        4,225        3,195   

Non-performing asset expense

     2,295        1,398        3,273        4,877   

Early extinguishment of debt

     —          412        527        1,606   

Other noninterest expense

     3,489        5,150        11,470        14,153   
                                

Total noninterest expense

     22,516        27,301        67,388        71,740   
                                

Loss before income taxes

     (2,304     (54,883     (27,040     (106,256

Income tax expense

     144        25,653        1,481        3,436   
                                

Net loss

     (2,448     (80,536     (28,521     (109,692

Preferred dividends and discounts

     (2,873     —          (8,603     —     

Implied non-cash preferred dividends

     —          (16,680     —          (16,680
                                

Net loss applicable to common shareholders

   $ (5,321   $ (97,216   $ (37,124   $ (126,372
                                

Basic loss per common share

   $ (0.51   $ (9.30   $ (3.54   $ (12.10

Diluted loss per common share

     (0.51     (9.30     (3.54     (12.10

See accompanying notes to consolidated financial statements (unaudited)

 

2


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(dollars in thousands, except per share data)

 

    Preferred
Stock,
Series A
    Preferred
Stock,
Series B
  Common
Stock
    Surplus     Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Total  

Balance at December 31, 2008

  $ 60,000     $ 97,314   $ 121      $ 224,872      $ (69,294   $ 18,710      $ (24,636   $ 307,087   

Adoption of FSP FAS115-2 and 124-2, effective April 1, 2009

    —          —       —          —          1,710        (1,033     —          677   

Preferred stock issuance cost, Series B

    —          —       —          (27     —          —          —          (27

Amortization of stock based compensation awards

    —          —       (1     1,628        —          —          —          1,627   

Tax benefit on stock awards

    —          —       —          (522     —          —          —          (522

Comprehensive loss:

               

Net loss

    —          —       —          —          (28,521     —          —          (28,521

Change in unrealized gains on available-for-sale investment securities, net of income taxes and reclassification adjustment

    —          —       —          —          —          19,232        —          19,232   

Changes in deferred gain from termination of cash flow hedging instruments, net of income taxes

    —          —       —          —          —          (3,090     —          (3,090
                     

Total comprehensive loss

                  (12,379
                     

Preferred stock dividends declared, Series A-$1.50 per share

    —          —       —          —          (3,600     —          —          (3,600

Preferred stock dividends accumulated, Series B

    —          1,160     —          —          (5,003     —          —          (3,843
                                                             

Balance at September 30, 2009

  $ 60,000      $ 98,474   $ 120      $ 225,951      $ (104,708   $ 33,819      $ (24,636   $ 289,020   
                                                             

Balance at December 31, 2007

  $ —        $ —     $ 115      $ 197,214      $ 75,145      $ 6,418      $ (24,636   $ 254,256   

Issuance of preferred stock, net of issuance costs

    60,000        —       —          (3,652     —          —          —          56,348   

Discount from preferred stock beneficial conversion feature

    (16,680     —       —          16,680        —          —          —          —     

Implied non-cash preferred dividend for beneficial conversion feature

    16,680        —       —          —          (16,680     —          —          —     

Issuance of warrants to purchase common stock, net of issuance costs

    —          —       —          4,692        —          —          —          4,692   

Amortization of stock based compensation awards

    —          —       —          1,483        —          —          —          1,483   

Issuance of restricted stock grants

    —          —       5        (5     —          —          —          —     

Exercise of stock options

    —          —       —          30        —          —          —          30   

Tax benefit on stock options exercised and stock awards

    —          —       —          (183     —          —          —          (183

Comprehensive income (loss):

               

Net loss

    —          —       —          —          (109,692     —          —          (109,692

Change in unrealized gains and losses on available-for-sale investment securities, net of income taxes

    —          —       —          —          —          (7,905     —          (7,905

Change in unrealized gains and losses from cash flow hedging instruments, net of income taxes

    —          —       —          —          —          1,393        —          1,393   

Changes in deferred gains and losses from termination of cash flow hedging instruments, net of income taxes

    —          —       —          —          —          (760     —          (760
                     

Total comprehensive loss

                  (116,964
                     

Common stock dividends—$0.10 per share

    —          —       —          —          (1,081     —          —          (1,081
                                                             

Balance at September 30, 2008

  $ 60,000     $ —     $ 120      $ 216,259      $ (52,308   $ (854   $ (24,636   $ 198,581   
                                                             

See accompanying notes to consolidated financial statements (unaudited)

 

3


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(dollars in thousands)

 

     For the Nine Months Ended
September 30
 
     2009     2008  

Cash flows from operating activities:

    

Net loss

   $ (28,521   $ (109,692

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Other derivative income

     (1,380     (1,106

Gains on investment sales

     (8,637     —     

Amortization of premiums and discounts, net

     (70     (660

Deferred loan fee amortization

     (3,495     (1,593

Provision for loan losses

     70,609        113,805   

Loans purchased

     (76,829     —     

Proceeds from loan sales

     2,803        —     

Depreciation and amortization

     1,779        2,443   

Deferred income tax expense

     5,862        17,841   

Losses on other real estate

     1,243        770   

Tax expense on stock options exercised or stock awards

     (522     (183

Excess tax benefit on stock options exercised and stock awards

     403        155   

Cash received on termination of derivative instruments

     6,630        3,934   

Other, net

     125        (1,333

Changes in other assets and liabilities:

    

Accrued interest receivable

     150        1,812   

Other assets

     6,117        (15,378

Accrued interest, taxes and other liabilities

     (14,196     16,859   
                

Net cash (used by) provided by operating activities

     (37,929     27,674   
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (708,879     (40,044

Proceeds from principal payments and maturities of available-for-sale securities

     249,924        125,280   

Proceeds from principal payments and maturities of held-to-maturity securities

     25        —     

Proceeds from sales of available-for-sale securities

     276,657        —     

Net (increase) decrease in loans

     86,953        (598,876

Net additions to premises, leasehold improvements and equipment

     (397     (3,575

Net cash paid on sale of branch

     —          (6,444

Additions to foreclosed property

     (342     (810

Net proceeds from sales of other real estate

     9,515        3,281   
                

Net cash used by investing activities

     (86,544     (521,188
                

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     (80,052     649,158   

Net increase (decrease) in other borrowings

     52,132        (83,824

Proceeds from notes payable and other advances

     155,000        157,000   

Repayments of notes payable and other advances

     —          (215,000

Net proceeds from issuance of subordinated debt

     —          58,908   

Net proceeds from issuance of preferred stock

     (27     56,348   

Proceeds from exercise of employee stock options

     —          30   

Excess tax benefit on stock options exercised and stock awards

     (403     (155

Dividends paid

     (7,656     (2,136
                

Net cash provided by financing activities

     118,994        620,329   
                

Net (decrease) increase in cash and cash equivalents

     (5,479     126,815   

Cash and cash equivalents, beginning of period

     53,012        83,561   
                

Cash and cash equivalents, end of period

   $ 47,533      $ 210,376   
                

Consolidated Statements of Cash Flows continued on the next page

See accompanying notes to consolidated financial statements (unaudited)

 

4


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS – (unaudited) (Continued)

(dollars in thousands)

 

     For the Nine Months Ended
September 30
 
     2009     2008  

Supplemental disclosure of cash flow information:

    

Cash paid (received) during the period for:

    

Interest

   $ 84,580      $ 78,835   

Income taxes

     (14,969     264   

Supplemental disclosures of noncash investing and financing activities:

    

Change in fair value of available-for-sale investments securities, net of tax

   $ 19,232      $ (7,905

Loans transferred to other real estate and held for sale

     46,289        4,752   

See accompanying notes to consolidated financial statements (unaudited)

 

5


Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation:

These consolidated financial statements contain unaudited information as of September 30, 2009 and for the three and nine month periods ended September 30, 2009 and September 30, 2008. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America are not included herein. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with the Company’s audited consolidated financial statements and the related notes. The statement of operations data for the three and nine month periods ended September 30, 2009 is not necessarily indicative of the results that the Company may achieve for the full year.

Amounts in the prior years’ consolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation.

2. Investment Securities:

The amortized cost and estimated fair values of investment securities at September 30, 2009 and December 31, 2008 were as follows:

 

     September 30, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (in thousands)

Available-for-sale:

          

U.S. government sponsored agency securities

   $ 69,985    $ 1,648    $ —        $ 71,633

Mortgage-backed securities:

          

Residential

     781,611      26,724      (4,644     803,691

Commercial

     160,467      5,362      (63     165,766

Collateralized mortgage obligations

     109,522      3,877      (1,444     111,955

State and municipal obligations

     128,742      5,596      (30     134,308

Other debt securities

     16,785      1,960      —          18,745
                            

Total available-for-sale 821

     1,267,112      45,167      (6,181     1,306,098
                            

Held-to-maturity:

          

Other debt securities

     —        —        —          —  
                            

Total held-to-maturity

     —        —        —          —  
                            

Total

   $ 1,267,112    $ 45,167    $ (6,181   $ 1,306,098
                            

 

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Table of Contents
     December 31, 2008
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (in thousands)

Available-for-sale:

          

U.S. government sponsored agency securities

   $ 64,993    $ 1,992    $ —        $ 66,985

Mortgage-backed securities:

          

Residential

     704,684      22,182      (3,933     722,933

Commercial

     —        —        —          —  

Collateralized mortgage obligations

     152,198      2,174      (2,669     151,703

State and municipal obligations

     137,958      1,347      (1,130     138,175

Other debt securities

     14,563      210      —          14,773
                            

Total available-for-sale

     1,074,396      27,905      (7,732     1,094,569
                            

Held-to-maturity:

          

Other debt securities

     25      —        —          25
                            

Total held-to-maturity

     25      —        —          25
                            

Total

   $ 1,074,421    $ 27,905    $ (7,732   $ 1,094,594
                            

As of September 30, 2009, the Company had $1.08 billion of mortgage related investment securities which consisted of residential and commercial mortgage-backed securities and collateralized mortgage obligations. Residential mortgage-backed securities include securities collateralized by 1-4 family residential mortgage loans, while commercial mortgage-backed securities include securities collateralized by mortgage loans on multifamily properties. Of the total mortgage related investment securities, $1.05 billion, or 97.5%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac, and the remaining $27.5 million were private-label mortgage related securities. Other debt securities at September 30, 2009 includes a $16.5 million investment in a single issuer trust preferred security issued by a large money center bank, which was sold at a $2.3 million gain in November 2009, and $2.3 million of asset backed securities collateralized by student loans.

The following table shows the contractual maturities of debt securities, categorized by amortized cost and estimated fair value, at September 30, 2009.

 

     Amortized
Cost
   Estimated
Fair Value
     (in thousands)

Available-for-sale:

     

Due in one year or less

   $ 1,770    $ 1,772

Due after one year through five years

     74,638      76,318

Due after five years through ten years

     26,285      27,511

Due after ten years

     112,819      119,085

Collateralized mortgage obligations

     109,522      111,955

Residential mortgage-backed securities

     781,611      803,691

Commercial mortgage-backed securities

     160,467      165,766
             

Total

   $ 1,267,112    $ 1,306,098
             

During the third quarter and first nine months of 2009, the Company had gross realized gains of $388,000 and $8.6 million, respectively, on the sale of available-for-sale investment securities. Gross realized losses totaling $10,000 were realized during the third quarter and during the first nine months of 2009. The Company did not have any gross realized gains or losses on the sale of investment securities during the third quarter or first nine months of 2008.

 

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The following table summarizes, for investment securities with unrealized losses as of September 30, 2009 and December 31, 2008, the amount of the unrealized loss and the related fair value of investment securities with unrealized losses. The unrealized losses have been further segregated by investment securities that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months.

 

     September 30, 2009  
     Length of Continuous Unrealized Loss Position  
     Less than 12 months     12 months or longer     Total  
     Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
 
     (in thousands)  

Available-for-sale:

               

Mortgage-backed securities:

               

Residential

   $ 35,089      (236   $ 6,654    $ (4,408   $ 41,743    $ (4,644

Commercial

     11,507      (63     —        —          11,507      (63

Collateralized mortgage obligations

     7,140      (80     13,739      (1,364 )     20,879      (1,444

State and municipal obligations

     —        —          979      (30 )     979      (30
                                             

Temporarily impaired securities – Available-for-sale

   $ 53,736    $ (379   $ 21,372    $ (5,802   $ 75,108    $ (6,181
                                             
     December 31, 2008  
     Length of Continuous Unrealized Loss Position  
     Less than 12 months     12 months or longer     Total  
     Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
 
     (in thousands)  

Available-for-sale:

               

Mortgage-backed securities:

               

Residential

   $ 6,948    $ (2,762   $ 3,828    $ (1,171   $ 10,776    $ (3,933

Collateralized mortgage obligations

     16,009      (391     11,840      (2,278 )     27,849      (2,669

State and municipal obligations

     45,312      (1,084     2,935      (46 )     48,247      (1,130
                                             

Temporarily impaired securities – Available-for-sale

   $ 68,269    $ (4,237   $ 18,603    $ (3,495   $ 86,872    $ (7,732
                                             

At September 30, 2009, the Company had seven investment securities in an unrealized loss position for more than 12 months and had a total unrealized loss of $5.8 million. Of the seven securities in an unrealized loss position, two securities were from the Company’s state and municipal obligation portfolio and five securities were from its portfolio of private-label residential mortgage-backed securities and collateralized mortgage obligations.

The total unrealized loss for the two state and municipal securities at September 30, 2009 totaled $30,000, or about 3.0% of the total amortized cost of these securities. In addition to

 

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severity and duration of loss, the Company considered the current credit rating, changes in ratings, and any credit enhancements in the form of insurance. Since the amount of impairment on each of these securities was less than 3% of amortized cost, the Company believes the decline in fair value was related to changes in market interest rates and was not credit related.

Of the five private-label residential mortgage related securities that were in an unrealized loss position for more than 12 months, one was in an unrealized loss position of less than 1% of amortized cost. Because of the small level of impairment, the Company believes the decline in fair value was not credit related. The other four private-label residential mortgage related securities had a total unrealized loss of $5.8 million. As part of our normal procedures, these securities were subject to further review for other-than-temporary impairment.

For any securities that had been in an unrealized loss position that was greater than 10% and for more than 12 months, additional testing is performed to evaluate other-than-temporary impairment. For the four private-label securities, we obtained fair value estimates from a separate independent source and performed a cash flow analysis, considering default rates, loss severities based upon the location of the collateral and estimated prepayments. Each of the private-label mortgage related securities had credit enhancements in the form of different investment tranches which impact how cash flows are distributed. The higher level tranches will receive cash flows first and as a result, the lower level tranches will absorb the losses, if any, from collateral shortfalls. The Company purchased the private-label securities that were either of the highest or one of the highest investment grades, as rated by nationally recognized credit rating agencies. The cash flow analysis takes into account the Company’s tranche and the current level of support provided by the lower tranches. The Company believes that market illiquidity has impacted the values of these private-label securities because of the lack of active trading in these securities. None of these securities contain subprime mortgage loans, but do include Alt-A loans, adjustable rate mortgages with initial interest only periods, and loans that are secured by collateral in geographic areas adversely impacted by the housing downturn. If this analysis shows that the Company does not expect to recover its entire investment, an other-than-temporary impairment charge would be recorded for the amount of the credit loss. Previously, one of the four securities had other-than-temporary impairment recognized for the amount of the credit loss. The independent cash flow analysis performed at September 30, 2009 indicated that there was no additional credit loss on this security. For the other three private-label securities reviewed, the independent cash flow analysis showed that the Company expects to recover its entire investment and, therefore, the decline in fair value was not due to credit, but was most likely caused by illiquidity in the market, and no other-than-temporary impairment charge was recorded.

Effective April 1, 2009, the Company adopted FASB Staff Position FAS No. 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”). FSP FAS 115-2 amends ASC Topic 320 (Investments-Debt & Equity Securities) by modifying the requirements for recognizing other-than-temporary impairment and changes the model used to determine the amount of impairment. Under FSP FAS 115-2, declines in fair value of investment securities below their amortized cost basis that are deemed to be other-than-temporary are reflected in earnings as a realized loss to the extent the impairment is related to credit loss. The amount of impairment related to other factors is recognized in other

 

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comprehensive income. Upon adoption of FSP FAS 115-2, the Company recorded the cumulative effect of initial application as an adjustment to the opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive income for one private label mortgage-related security for which other-than-temporary impairment was previously recognized through earnings. The amount of the anticipated credit loss on this investment security was $488,000 upon adoption and no additional credit loss has been recorded since the adoption of FSP FAS 115-2. The effect of the adoption as of April 1, 2009 is presented in the table below.

 

     Before Application
of the FSP
    Adjustments     After Application
of the FSP
 
     (in thousands)  

Investment securities available-for-sale, at amortized cost

   $ 1,292,180      $ 1,710      $ 1,293,890   

Unrealized gains (losses) on securities

     29,400        (1,710     27,690   

Investment securities available-for-sale, at fair value

     1,321,580        —          1,321,580   

Other assets

     74,475        677        75,152   

Total assets

     4,596,701        677        4,597,378   

Accumulated deficit

     (74,974     1,710        (73,264

Accumulated other comprehensive income, net

     27,888        (1,033     26,855   

Total stockholders’ equity

     311,425        677        312,102   

Investment securities do not include the Bank’s investment in Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank stock. At September 30, 2009, the Company had a $27.3 million investment in FHLBC stock, compared to $22.5 million at December 31, 2008. These investments are required for membership and are carried at cost. The Bank must maintain a specified level of investment in FHLBC stock based upon the amount of its outstanding FHLBC borrowings. The stock of the FHLBC is viewed as a long-term asset and its value is based upon the ultimate recoverability of the par value. In determining the recoverability of this investment, the Company considered the following:

 

   

Although the market value of the FHLBC net assets had declined, transactions of stock continued to occur with the FHLBC at par value during 2009. During the first nine months of 2009, the Company increased its investment in the FHLBC by $4.8 million, largely to support the increased level of borrowings from the FHLBC. In addition, while limited, redemptions of stock by other institutions took place at par during the year.

 

   

The structure of the entire FHLB system, which enables the regulator of the FHLBs to reallocate debt among the members, so each individual FHLB has a potential obligation to repay the consolidated obligations issued by other FHLB members.

 

   

Regulatory changes during 2008 which established a new regulator for the FHLB system that continues to oversee changes to management, management practices and balance sheet management at the FHLBC.

 

   

The liquidity position of the FHLBC was strengthened with the support of the U.S. Treasury, which established a lending facility designed to provide secured funding on an as-needed basis to housing government sponsored enterprise, such as the FHLBC.

The Company continues to monitor this investment for recoverability, but as of September 30, 2009 believed that it would ultimately recover the par value of the FHLBC stock.

 

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3. Loans:

Loans classified by type at September 30, 2009 and December 31, 2008 were as follows:

 

Loans:

   Sept. 30,
2009
    Dec. 31,
2008
 
     (in thousands)  

Commercial and industrial

   $ 1,292,091      $ 1,485,673   

Commercial real estate secured

     1,156,114        1,058,930   

Real estate-construction

     407,920        531,452   

Residential real estate mortgages

     58,872        53,859   

Home equity loans and lines of credit

     87,448        92,085   

Consumer

     8,256        9,163   

Other loans

     796        2,115   
                

Gross loans

     3,011,497        3,233,277   

Less: Unearned discount

     (8     (16
                

Total loans

     3,011,489        3,233,261   

Less: Allowance for loan losses

     (107,132     (128,548
                

Net Loans

   $ 2,904,357      $ 3,104,713   
                

Loans Held for Sale

   $ 102,765      $ —     
                

The following table sets forth information about our nonaccrual and impaired loans. Impaired loans include all nonaccrual loans as well as accruing loans judged to have higher risk of noncompliance with the present contractual repayment schedule.

 

     Sept. 30,
2009
   Dec. 31,
2008
     (in thousands)

Nonaccrual loans

   $ 163,830    $ 200,227

Restructured loans not included in nonperforming loans

     4,825      —  

Recorded balance of impaired loans:

     

With related allowance for loan loss

   $ 121,743    $ 120,973

With no related allowance for loan loss

     41,243      85,732
             

Total recorded balance of impaired loans

   $ 162,986    $ 206,705
             

Allowance for loan losses related to impaired loans

   $ 35,453    $ 41,451
             

 

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4. Interest-Bearing Deposits:

Interest-bearing deposits at September 30, 2009 and December 31, 2008 were as follows:

 

     September 30,
2009
   December 31,
2008
     (in thousands)

NOW accounts

   $ 213,668    $ 218,451

Savings accounts

     41,534      42,275

Money market deposits

     465,847      394,043

Time deposits:

     

Certificates of deposit

     774,082      870,183

CDARS time deposits

     145,889      5,670

Out-of-local-market certificates of deposit

     95,990      136,470

Brokered certificates of deposit

     622,039      908,133

Public time deposits

     78,090      84,831
             

Total time deposits

     1,716,090      2,005,287
             

Total

   $ 2,437,139    $ 2,660,056
             

At September 30, 2009, time deposits in amount of $100,000 or more totaled $569.7 million compared to $484.4 million at December 31, 2008.

The Bank participates in the Certificate of Deposit Account Registry Service network (“CDARS”), which allows the Bank to accommodate depositors with large cash balances who are seeking the full deposit insurance protection, by placing these funds in CDs issued by other banks in the network. Through a matching system, the Bank will receive funds back for CDs that it issues for other banks in the network, thus allowing the Bank to retain the full amount of the original deposit.

Brokered CDs are carried net of the related broker placement fees and fair value adjustments at the date those brokered CDs were no longer accounted for as fair value hedges. The broker placement fees and fair value adjustments totaled $1.7 million and $3.5 million at September 30, 2009 and December 31, 2008, respectively, and are amortized to the maturity date of the related brokered CDs. The amortization is included in deposit interest expense. Certain brokered CDs had an option that allowed the Company to call the CD before its stated maturity. The Company exercised this option when the prevailing interest rate on the CD was substantially higher than current market interest rates. When a brokered CD is called, any unamortized broker placement fees and fair value adjustments are written off and included in noninterest expense on the statement of operations. During the first quarter of 2009, the Company incurred $527,000 of expense associated with $29.0 million of brokered CDs that were called before their stated maturity. In comparison, expense associated with the early extinguishment of brokered CDs totaled $412,000 and $1.6 million in the third quarter of 2008 and the first nine months of 2008, respectively. As of September 30, 2009, the Company did not have any brokered CDs that could be called before maturity.

 

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5. Other Borrowings:

Other borrowings at September 30, 2009 and December 31, 2008 consisted of the following:

 

     September 30, 2009     December 31, 2008  
     Amount
Borrowed
   Weighted-
Average
Rate
    Amount
Borrowed
   Weighted-
Average
Rate
 
     (dollars in thousands)  

Securities sold under agreements to repurchase:

          

Overnight

   $ 25,115    0.17   $ 21,017    0.18

Term

     200,000    4.05        200,000    4.05   

Federal funds purchased

     100,901    0.35        54,482    0.36   

U.S. Treasury tax and loan note option

     1,676    0.00        61    0.00   
                  

Total

   $ 327,692    2.60   $ 275,560    3.03
                          

6. Notes Payable and Other Advances:

Notes Payable and other advances at September 30, 2009 and December 31, 2008 consisted of the following:

 

     Sept. 30,
2009
   Dec. 31,
2008
     (in thousands)

Taylor Capital Group, Inc.:

     

Revolving Credit Facility – $15.0 million maximum available; interest, at the Company’s election, at the prime rate or LIBOR plus 4.00%, with a minimum interest rate of 5.00%; interest rate at September 30, 2009 was 5.00%; matures March 31, 2010

   $ 12,000    $ 12,000
             

Total notes payable

     12,000      12,000
             

Cole Taylor Bank:

     

Federal Reserve Bank Term Auction Facility – 0.25%, due within 90 days

     400,000      —  

FHLB overnight advance, weighted average rate of 0.43% at September 30, 2009 and 0.26% at December 31, 2008

     70,000      315,000

FHLB advance – 4.83%, due February 1, 2011, callable after January 8, 2004

     25,000      25,000

FHLB advance – 4.59%, due April 5, 2010, callable after April 4, 2008

     25,000      25,000

FHLB advance – 2.29%, due April 7, 2011, callable after April 7, 2009

     25,000      25,000

FHLB advance – 2.84%, due July 14, 2011, callable after July 14, 2009

     17,500      17,500

FHLB advance – 2.57%, due April 8, 2013, callable after April 7, 2010

     25,000      25,000

FHLB advance – 3.26%, due July 15, 2013, callable after July 14, 2010

     17,500      17,500
             

Total other advances

     605,000      450,000
             

Total notes payable and other advances

   $ 617,000    $ 462,000
             

At September 30, 2009 and December 31, 2008, the Company had a $15.0 million revolving credit facility, of which $12.0 million was outstanding at September 30, 2009 and December 31, 2008. The notes payable under the revolver require compliance with certain defined financial covenants. As of September 30, 2009, the Company was in compliance with all of the covenants.

 

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At September 30, 2009, the Company also had borrowings under the Federal Reserve Bank’s Term Auction Facility of $400.0 million. As of September 30, 2009, the Company had pledged $566.0 million of commercial loans as collateral for these borrowings and had additional maximum borrowing capacity of $147.3 million. The Company did not have advances from the Federal Reserve Bank at December 31, 2008.

At September 30, 2009, the FHLBC advances were collateralized by $334.7 million of investment securities and a blanket lien on $82.4 million of qualified first-mortgage residential and home equity loans. Based on the value of collateral pledged at September 30, 2009, the Bank had additional borrowing capacity at the FHLBC of $209.1 million. In comparison, at December 31, 2008, the FHLBC advances were collateralized by $499.4 million of investment securities and a blanket lien on $155.2 million of qualified first-mortgage residential and home equity loans.

7. Income Taxes:

Despite a pre-tax loss, the Company recorded income tax expense of $1.5 million for the first nine months of 2009. Because of the valuation allowance maintained on the deferred tax asset, the Company does not expect to be able to record an income tax benefit during 2009 related to the pre-tax loss incurred.

Income tax expense was different from the amounts computed by applying the federal statutory rate of 35% for the nine month period ended September 30, 2009 to the loss before income taxes due to the following:

 

     September 30,
2009
 

Federal income tax expense (benefit) at statutory rate

   $ (9,464

Increase (decrease) in income taxes resulting from:

  

Increase in valuation allowance

     10,062   

Residual tax effect

     2,028   

Other, net

     (1,145
        

Total income tax expense

   $ 1,481   
        

A current income tax benefit that would normally result from a pre-tax loss was offset by additional deferred tax expense due to an increase in the valuation allowance. Additional contributing factors to the income tax expense recorded in 2009 primarily relate to the release of the residual tax effects of changes in the beginning of the year valuation allowance previously allocated to other comprehensive income. These residual tax effects resulted from changes in the deferred tax liability associated with deferred gains on terminated cash flow hedges recorded in other comprehensive income. The Company expects additional expense of $510,000 during the last three months of 2009 associated with the release of these residual tax effects.

The valuation allowance increased $5.2 million during the first nine months of 2009 to $51.6 million at September 30, 2009 as compared to $46.4 million at December 31, 2008. The year-to-date increase in the valuation allowance of $5.2 million primarily resulted from an increase in the net deferred tax asset which was partly offset by a reduction related to changes in the beginning of the year valuation allowance solely attributable to identifiable events recorded

 

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in other comprehensive income, primarily changes in unrealized gains on the available-for-sale investment portfolio, the tax effects of which were therefore allocated to other comprehensive income. The net deferred tax asset before the valuation allowance, including the tax effect of items recorded in other comprehensive income, increased to $54.1 million at September 30, 2009 as compared to $53.3 million at December 31, 2008. The largest deferred tax asset relates to the allowance for loan losses. After considering the valuation allowance, the net deferred tax asset totaled $2.5 million at September 30, 2009 compared to $6.9 million at December 31, 2008. The net deferred tax asset in excess of the valuation allowance was supported by remaining carry backs to income taxes paid in prior years and available tax planning strategies.

Generally, the provision for income taxes is determined by applying an estimated annual effective income tax rate to income before income taxes. The rate is based on the most recent annualized forecast of pretax income, permanent book versus tax differences and tax credits. The Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 740-270-30-18 (Income Taxes-Interim Reporting-Initial Measurement) provides that, when a reliable estimate of the annual effective tax rate cannot be made, the actual effective tax rate for the year-to-date period may be used. During 2009, the Company concluded that a reliable estimate of the annual effective tax rate could not be made primarily due to the volatility experienced in its provision for loan losses and the impact of such on its forecasts of pre-tax income or loss. Accordingly, the Company has determined that the actual effective tax rate for the year-to-date period is the best estimate of the effective tax rate. The Company will re-evaluate the combined federal and state income tax rates each quarter. Therefore, the current projected effective tax rate for the entire year may change.

8. Other Comprehensive Income:

The following table presents other comprehensive income (loss) for the periods indicated:

 

     For the Three Months Ended
September 30, 2009
    For the Three Months Ended
September 30, 2008
 
     Before
Tax
Amount
    Tax
Effect
    Net of
Tax
    Before
Tax
Amount
    Tax
Effect
    Net of
Tax
 
     (in thousands)  

Unrealized gains from securities:

            

Change in unrealized gains on available-for-sale securities

   $ 24,921      $ (1,937   $ 22,984      $ (6,209   $ 2,453      $ (3,756

Less: reclassification adjustment for gains included in net loss

     (378     151        (227     —          —          —     
                                                

Change in unrealized gains on available-for-sale securities, net of reclassification adjustment

     24,543        (1,786     22,757        (6,209     2,453        (3,756

Change in net unrealized gain from cash flow hedging instruments

     —          —          —          1,482        (586     896   

Change in deferred gains and losses from termination of cash flow hedging instruments

     (1,369     543        (826     (1,364     538        (826
                                                

Other comprehensive income (loss)

   $ 23,174      $ (1,243   $ 21,931      $ (6,091   $ 2,405      $ (3,686
                                                

 

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     For the Nine Months Ended
September 30, 2009
    For the Nine Months Ended
September 30, 2008
 
     Before
Tax
Amount
    Tax
Effect
    Net of
Tax
    Before
Tax
Amount
    Tax
Effect
    Net of
Tax
 
     (in thousands)  

Unrealized gains from securities:

            

Change in unrealized gains on available-for-sale securities

   $ 29,160      $ (4,713   $ 24,447      $ (13,068   $ 5,163      $ (7,905

Less: reclassification adjustment for gains included in net loss

     (8,637     3,422        (5,215     —          —          —     
                                                

Change in unrealized gains on available-for-sale securities, net of reclassification adjustment

     20,523        (1,291     19,232        (13,068     5,163        (7,905

Change in net unrealized gain/(loss) from cash flow hedging instruments

     —          —          —          2,303        (910     1,393   

Change in net deferred gain/(loss) from termination of cash flow hedging instruments

     (5,118     2,028        (3,090     (1,230     470        (760
                                                

Other comprehensive income (loss)

   $ 15,405      $ 737      $ 16,142      $ (11,995   $ 4,723      $ (7,272
                                                

The tax effects of changes in the beginning of the year deferred tax asset valuation allowance solely attributable to identifiable events recorded in other comprehensive income, primarily changes in unrealized gains on the available-for-sale investment portfolio, were allocated to other comprehensive income in accordance with ASC Topic 740 (Income Taxes).

9. Earnings Per Share:

The following table sets forth the computation of basic and diluted loss per common share for the periods indicated. Due to the net loss for both the three and nine month periods ended September 30, 2009, all common stock equivalents, which consisted of 594,118 options outstanding to purchase shares of common stock, 2,862,647 warrants to purchase shares of common stock, and the convertible Series A Preferred stock which could be converted into 6,000,000 shares of common stock, were considered antidilutive and not included in the computation of diluted earnings per share. For both the three and nine month periods ended September 30, 2008, 615,239 options outstanding to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (dollars in thousands, except per share amounts)  

Net loss

   $ (2,448   $ (80,536   $ (28,521   $ (109,692

Preferred dividends and discounts

     (2,873     (16,680     (8,603     (16,680
                                

Net loss available to common stockholders

   $ (5,321   $ (97,216   $ (37,124   $ (126,372
                                

Weighted-average common shares outstanding

     10,502,844        10,456,544        10,489,165        10,447,264   

Dilutive effect of common stock equivalents

     —          —          —          —     
                                

Diluted weighted-average common shares outstanding

     10,502,844        10,456,544        10,489,165        10,447,264   
                                

Basic loss per common share

   $ (0.51   $ (9.30   $ (3.54   $ (12.10

Diluted loss per common share

     (0.51     (9.30     (3.54     (12.10
                                

 

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10. Stock-Based Compensation:

The Company’s Incentive Compensation Plan (the “Plan”) allows for the granting of stock options and stock awards. Under the Plan, the Company has only issued nonqualified stock options and restricted stock to employees and directors.

Stock options, generally, are granted with an exercise price equal to the last reported sales price of the common stock on the Nasdaq Global Select Market on the date of grant. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options issued to employees and directors. Compensation expense associated with stock options is recognized over the vesting period, or until the employee or director becomes retirement eligible if that time period is shorter.

The following is a summary of stock option activity for the nine month period ended September 30, 2009:

 

     Shares     Weighted-
Average
Exercise Price

Outstanding at January 1, 2009

   716,642      $ 23.85

Granted

   —          —  

Exercised

   —          —  

Forfeited

   (13,059     30.64

Expired

   (109,465     22.72
        

Outstanding at September 30, 2009

   594,118        23.91
        

Exercisable at September 30, 2009

   517,471        23.58
        

As of September 30, 2009, the total compensation cost related to nonvested stock options that have not yet been recognized totaled $420,000 and the weighted-average period over which these costs are expected to be recognized is approximately 1.7 years.

Generally, the Company grants restricted stock awards that vest upon completion of future service requirements. The fair value of these awards is equal to the last reported sales price of the Company’s common stock on the date of grant. The Company recognizes stock-based compensation expense for these awards over the vesting period based upon the number of awards ultimately expected to vest.

 

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The following table provides information regarding nonvested restricted stock for the nine month period ended September 30, 2009:

 

Nonvested Restricted Stock

   Shares     Weighted-
Average
Grant-Date
Fair Value

Nonvested at January 1, 2009

   656,181      $ 16.21

Granted

   —          —  

Vested

   (44,031     28.25

Forfeited

   (37,846     18.92
        

Nonvested at September 30, 2009

   574,304        15.11
        

As of September 30, 2009, the total compensation cost related to nonvested restricted stock that has not yet been recognized totaled $6.6 million and the weighted-average period over which these costs are expected to be recognized is approximately 3.3 years.

11. Derivative Financial Instruments:

The Company uses derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. The Company has used interest rate exchange agreements, or swaps, and interest rate floors and collars to help manage its interest rate risk. At September 30, 2009, all of the Company’s interest rate swap derivatives related to customer loans. In addition, the Company used forward loan sale contracts to manage interest rate risk associated with its loans held for sale. The following table describes the derivative instruments outstanding at September 30, 2009:

 

Product

   Balance
Sheet/Income
Statement Location
   Notional
Amount
   Interest Rates   Wt. Avg.
Maturity
   Fair
Value
 
     (dollars in thousands)  

Non-hedging derivative instruments:

             

Interest Rate Swap—pay fixed/receive variable

   Other Liabilities/
Noninterest Income
   $ 187,029    Pay 4.29%

Receive 0.508%

  3.4 yrs    $ (11,502

Interest Rate Swap—receive fixed/pay variable

   Other Assets/Noninterest
Income
     187,029    Receive 4.29%

Pay 0.508%

  3.4 yrs      11,575   

Forward loan sale contracts

   Other Liabilities/

Noninterest Income

     81,200    Wt. Avg.
interest rate 5.1%
  Oct. 2009      (497
                 

Total

      $ 455,258        
                 

In January 2009, the Company terminated a $100.0 million notional amount interest rate swap that was not designated as an accounting hedge. The Company discontinued hedge accounting in December 2008 when it determined the hedge would no longer be effective. The unrealized gain of $6.4 million upon de-designation, which had accumulated in other

 

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comprehensive income (net of tax), is being amortized to loan interest income over what would have been the life of the hedge. Changes in fair value of the swap from the period that hedge designations were removed until the swap was sold, in January 2009, were included in other derivative income in noninterest income. Other derivative income during 2009 included a $33,000 loss because of a decrease in fair value until the date the swap was sold.

12. Fair Value:

On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) (FASB ASC 820-10). On January 1, 2009, the Company adopted FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). In accordance with FSP 157-2, the Company delayed application of SFAS 157 for non-financial assets, such as the Company’s other real estate owned assets, and non-financial liabilities until 2009. The impact of the adoption of SFAS 157 and FSP 157-2 was not material.

On January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (SFAS 159”) (FASB ASC 825-10), however, the Company did not elect the fair value option for any financial assets or liabilities as of that date, nor for any asset acquired or liability incurred subsequent to January 1, 2008.

Fair Value Measurement

In accordance with SFAS No. 157 (FASB ASC 820-35), the Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair values:

Available-for-sale investment securities: For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, including credit spreads and current ratings from credit rating agencies and the bond’s terms and conditions, among other things. The Company has determined that these valuations are classified in Level 2 of the fair value hierarchy.

 

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The Company does not have subprime loans in its mortgage related investment securities portfolio. As of September 30, 2009, the Company had $1.08 billion of mortgage related investment securities which consisted of mortgage-backed securities and collateralized mortgage obligations. Of the total mortgage related investment securities, $1.05 billion, or 97.5%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac. In comparison, of the $874.6 million of mortgage related investment securities at December 31, 2008, $843.9 million, or 96.5%, were issued by government sponsored enterprises. The mortgage related portfolio also includes $27.5 million of private-label mortgage related securities at September 30, 2009 that has received heightened monitoring because the Company believes the fair values of these securities have been impacted by illiquidity in the market place. While none of these securities contain subprime mortgage loans, the portfolio does include Alt-A loans, adjustable rate mortgages with initial interest only periods, and loans that are secured by collateral in geographic areas adversely impacted by the housing downturn. While the fair value of these securities has been impacted by market illiquidity, the Company does not modify the fair value determined by the independent pricing service, but takes additional steps to review for other-than-temporary impairment. See “Application of Critical Accounting Policies – Valuation of Investment Securities” for additional details of the evaluation of other-than-temporary impairment.

Assets held in employee deferred compensation plans: Assets held in employee deferred compensation plans are recorded at fair value and included in “other assets” on the Company’s consolidated balance sheets. The assets associated with these plans are invested in mutual funds and classified as Level 1 as the fair value measurement is based upon available quoted prices. The Company also records a liability included in accrued interest, taxes and other liabilities on its consolidated balance sheets for the amount due to employees related to these plans.

Derivatives: The Company has determined that its interest rate swap derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis of the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. To comply with the provisions of No. 157 (FASB ASC 820-10), the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The fair value of forward loan sale contracts are based upon quoted prices for similar assets in active markets and are classified in Level 2 of the hierarchy.

 

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Loans and Loans Held for Sale: The Company does not record loans or loans held for sale at their fair value on a recurring basis. The Company evaluates certain loans for impairment when it is probable the payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan has been determined to be impaired, it is measured to establish the amount of the impairment, if any, based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, less cost to sell. If the measure of the impaired loan is less than the recorded investment in the loan, a valuation allowance is recognized. At September 30, 2009, a portion of the Company’s total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157 (FASB ASC 820-10), only impaired loans for which an allowance for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy. As a result, a portion, but not all, of the Company’s impaired loans are classified in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or an estimate of fair value from an independent third-party real estate professional, the Company classifies the impaired loan as nonrecurring Level 2 in the fair value hierarchy. When an independent valuation is not available or there is no observable market price and fair value is based upon Management’s assessment of liquidation of collateral, the Company classifies the impaired loan as nonrecurring Level 3 in the fair value hierarchy.

At September 30, 2009, loans held for sale consists primarily of residential mortgage loans that the Company plans to securitize and sell to third party investors to the extent it can do so on acceptable terms. Loans held for sale also includes commercial loans that the Company has the intent to sell. Since loans held for sale are recorded on the consolidated balance sheets at the lower of cost or fair value, these assets are not recorded at fair value on a recurring basis. Only the portion of these loans that are recorded at fair value are classified in the fair value hierarchy. For the residential mortgage loans held for sale, the fair value is based upon quoted market prices for similar assets in active markets and is also classified in Level 2 of the fair value hierarchy. For the commercial loans held for sale, the fair value is determined based upon the expected sales price, less cost to sell, provided by an independent third party broker that the Company has contracted with to market these assets and are classified in Level 2 of the fair value hierarchy.

Other Real Estate Owned and Repossessed Assets: The Company does not record other real estate owned (“OREO”) and repossessed assets at their fair value on a recurring basis. At foreclosure or obtaining possession of the assets, OREO and repossessed assets are recorded at the lower of the amount of the loan balance or the fair value of the collateral, less estimated costs to sell. Generally, the fair value of real estate is determined through the use of a current appraisal and the fair value of other repossessed assets is based upon the estimated net proceeds from the sale or disposition of the underlying collateral. Only assets that are recorded at fair value, less estimated cost to sell, are classified under the fair value hierarchy. When the fair value of the collateral is based upon an observable market price or an estimate of fair value from an independent third-party real estate professional, the Company classifies the OREO and repossessed asset as nonrecurring Level 2 in the fair value hierarchy. When an independent valuation is not available or there is no observable market price and fair value is based upon Management’s assessment of liquidation of collateral, the Company classifies the other real estate owned and repossessed assets as nonrecurring Level 3 in the fair value hierarchy.

 

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Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below.

 

     As of September 30, 2009
     Total Fair
Value
   Quoted
Prices in
Active
Markets
(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
     (in thousands)

Assets:

           

Available for sale securities

   $ 1,306,098    $ —      $ 1,306,098    $ —  

Assets held in employee deferred compensation plans

     3,247      3,247      —        —  

Derivative instruments

     11,575         11,575      —  

Liabilities:

           

Derivative instruments

     11,999         11,999      —  
     As of December 31, 2008
     Total Fair
Value
   Quoted
Prices in
Active
Markets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
     (in thousands)

Assets:

           

Available for sale securities

   $ 1,094,569    $ —      $ 1,094,569    $ —  

Assets held in employee deferred compensation plans

     4,161      4,161      —        —  

Derivative instruments

     18,578      —        18,578      —  

Liabilities:

           

Derivative instruments

     11,940      —        11,940      —  

 

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Assets Measured on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis are summarized below. The Company may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis. These assets generally consist of loans considered impaired that may require periodic adjustment to the lower of cost or fair value.

 

     As of September 30, 2009
     Total Fair
Value
   Quoted
Prices in
Active
Markets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
     (in thousands)

Assets:

           

Loans and loans held for sale

   $ 111,751    $ —      $ 96,671    $ 15,080

Other real estate and repossessed assets

     17,603      —        17,603   
     As of December 31, 2008
     Total Fair
Value
   Quoted
Prices in
Active
Markets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
     (in thousands)

Assets:

           

Loans

   $ 79,522    $ —      $ 43,624    $ 35,898

Other real estate and repossessed assets

     11,523      —        11,523      —  

All of the assets classified as Level 3 as of September 30, 2009 related to loans considered impaired and other real estate and repossessed assets and recorded at fair value on a nonrecurring basis. We did not transfer any of these loans measured on a nonrecurring basis to Level 3 from any other level during the period.

At September 30, 2009, the Company had $15.1 million of impaired loans measured at fair value on a nonrecurring basis and classified in Level 3 in the fair value hierarchy. The carrying value of these impaired loans totaled $21.8 million and was written down to fair value of $15.1 million through a provision for loan loss of $6.7 million which was included in earnings during the first nine months of 2009.

The methods and assumptions used to determine fair values for each significant class of financial instruments are presented below:

Cash and Cash Equivalents: The carrying amounts of cash, due from banks, interest-bearing deposits with banks or other financial institutions, federal funds sold, and securities purchased under agreement to resell with original maturities less than 90 days approximate fair value since their maturities are short-term.

 

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Investment Securities: The fair value measurements of investment securities consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, including credit spreads and current ratings from credit rating agencies and the bond’s terms and conditions, among other things.

Loans held for sale: For commercial loans held for sale, the fair value has been determined based upon the estimated net sales price as provided by an independent third party broker who is currently marketing these loans for sale. For the residential mortgage loans held for sale, the fair value has been determined based upon quoted market prices for similar assets in active markets.

Loans: The fair values of loans have been estimated by the present value of future cash flows, using current rates at which similar loans would be made to borrowers with the same remaining maturities, less a valuation adjustment for general portfolio risks. However, certain loans are accounted for at fair value when it is probable the payment of interest and principal will not be made in accordance with the contractual terms and impairment exists. In these cases, the fair value is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, less cost to sell.

Investment in FHLB and Federal Reserve Bank Stock: The fair value of these investments in FHLB and Federal Reserve Bank Stock equals its book value as these stocks can only be sold back to the FHLB, Federal Reserve Bank, or other member banks at their par value per share.

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates fair value since its maturity is short-term.

Derivative Financial Instruments: The carrying amount and fair value of interest rate swap derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. The fair value of the forward loan sales is based upon quoted market prices for similar assets in active markets. On the Company’s Consolidated Balance Sheets, instruments that have a positive fair value are included in other assets and those instruments that have a negative fair value are included in accrued interest, taxes, and other liabilities.

 

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Other Assets: Financial instruments in other assets consist of assets in the Company’s nonqualified deferred compensation plan, and are carried at fair value based upon quoted market prices.

Deposit Liabilities: Deposit liabilities with stated maturities have been valued at the present value of future cash flows using rates which approximate current market rates for similar instruments; unless this calculation results in a present value which is less than the book value of the reflected deposit, in which case the book value would be utilized as an estimate of fair value. Fair values of deposits without stated maturities equal the respective amounts due on demand.

Other Borrowings: The carrying amount of overnight securities sold under agreements to repurchase, federal funds purchased, and the U.S. Treasury tax and loan note option, approximates fair value, as the maturities of these borrowings are short-term. Securities sold under agreements to repurchase with original maturies over one year have been valued at the present values of future cash flows using rates which approximate current market rates for instruments of like maturities.

Notes Payable and Other Advances: Notes payable and FHLB advances have been valued at the present value of estimated future cash flows using rates which approximate current market rates for instruments of like maturities.

Accrued Interest Payable: The carrying amount of accrued interest payable approximates fair value since its maturity is short-term.

Junior Subordinated Debentures: The fair value of the fixed rate junior subordinated debentures issued to TAYC Capital Trust I is computed based upon the publicly quoted market prices of the underlying trust preferred securities issued by the Trust. The fair value of the floating rate junior subordinated debentures issued to TAYC Capital Trust II has been valued at the present value of estimated future cash flows using current market rates and credit spreads for an instrument with a like maturity.

Subordinated Notes: The subordinated notes issued by the Bank in 2008 have been valued at the present value of estimated future cash flows using current market rates and credit spreads for an instrument with a like maturity.

Off-Balance Sheet Financial Instruments: The fair value of commercial loan commitments to extend credit is not material as they are predominantly floating rate, subject to material adverse change clauses, cancelable and not readily marketable. The carrying value and the fair value of standby letters of credit represent the unamortized portion of the fee paid by the customer. A reserve for unfunded commitments is established if it is probable that a liability has been incurred by the Company under a standby letter of credit or a loan commitment that has not yet been funded.

 

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The estimated fair values of the Company’s financial instruments are as follows:

 

     September 30, 2009    December 31, 2008
     Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value
     (in thousands)

Financial Assets:

           

Cash and cash equivalents

   $ 47,533    $ 47,533    $ 53,012    $ 53,012

Investments

     1,306,098      1,306,098      1,094,594      1,094,594

Loans held for sale

     102,765      103,554      —        —  

Loans, net of allowance

     2,904,357      2,856,432      3,104,713      3,113,565

Investment in FHLB and Federal Reserve Bank stock

     35,741      35,741      29,630      29,630

Accrued interest receivable

     17,509      17,509      17,659      17,659

Derivative financial instruments

     11,575      11,575      18,578      18,578

Other assets

     3,247      3,247      4,162      4,162
                           

Total financial assets

   $ 4,428,825    $ 4,381,689    $ 4,322,348    $ 4,331,200
                           

Financial Liabilities:

           

Deposits without stated maturities

   $ 1,336,639    $ 1,336,639    $ 1,125,759    $ 1,125,759

Deposits with stated maturities

     1,716,090      1,751,169      2,005,287      2,053,784

Other borrowings

     327,692      344,131      275,560      296,744

Notes payable and other advances

     617,000      621,958      462,000      464,844

Accrued interest payable

     10,566      10,566      19,631      19,631

Derivative financial instruments

     11,999      11,999      11,940      11,940

Junior subordinated debentures

     86,607      45,081      86,607      70,274

Subordinated notes

     55,593      54,194      55,303      58,956
                           

Total financial liabilities

   $ 4,162,186    $ 4,175,737    $ 4,042,087    $ 4,101,932
                           

Off-Balance-Sheet Financial Instruments:

           

Unfunded commitments to extend credit

   $ 3,194    $ 3,194    $ 2,917    $ 2,917

Standby letters of credit

     351      351      269      269
                           

Total off-balance-sheet financial instruments

   $ 3,545    $ 3,545    $ 3,186    $ 3,186
                           

The remaining balance sheet assets and liabilities of the Company are not considered financial instruments and have not been valued differently than is required under historical cost accounting. Since assets and liabilities that are not financial instruments are excluded above, the difference between total financial assets and financial liabilities does not, nor is it intended to, represent the market value of the Company. Furthermore, the estimated fair value information may not be comparable between financial institutions due to the wide range of valuation techniques permitted, and assumptions necessitated, in the absence of an available trading market.

 

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13. Subsequent Events:

Events subsequent to the balance sheet date of September 30, 2009 have been evaluated for potential recognition or disclosure in these financial statements that would provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company has determined that there was no additional evidence about conditions that existed at the date of the balance sheet or any new nonrecognized subsequent event that would need to be disclosed to keep the financial statements from being misleading through the date these financial statements were filed.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

We are a bank holding company headquartered in Rosemont, Illinois, a suburb of Chicago. We derive substantially all of our revenue from our wholly-owned subsidiary, Cole Taylor Bank. We provide a range of banking services to our customers, with a primary focus on serving closely-held businesses in the Chicago metropolitan area and the people who own and manage them.

The following discussion and analysis presents our consolidated financial condition and results of operations as of and for the dates and periods indicated. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this document. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and forward-looking statements as a result of certain factors, including those discussed in the section captioned “Risk Factors” in our 2008 Annual Report on Form 10-K filed with the SEC on March 11, 2009.

Application of Critical Accounting Policies

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and general reporting practices within the financial services industry. Our accounting policies are described in the section captioned “Notes to Consolidated Financial Statements–Summary of Significant Accounting and Reporting Policies” in our 2008 Annual Report on Form 10-K.

The preparation of financial statements in conformity with these accounting principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available to us as of the date of the consolidated financial statements and, accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. The estimates, assumptions and judgments made by us are based upon historical experience or other factors that we believe to be reasonable under the circumstances. Certain accounting policies inherently have greater reliance on the use of estimates, assumptions and judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. We consider our policies for the allowance for loan losses, the valuation of deferred tax assets and establishment of tax liabilities and the valuation of financial instruments such as investment securities and derivatives to be critical accounting policies.

The following accounting policies materially affect our reported earnings and financial condition and require significant estimates, assumptions and judgments.

 

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Allowance for Loan Losses

We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in our loan portfolio. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include a general allowance computed by applying loss factors to categories of loans outstanding in the portfolio, specific allowances for identified problem loans and portfolio segments, and an unallocated allowance. We maintain our allowance for loan losses at a level considered adequate to absorb probable losses inherent in our portfolio as of the balance sheet date. In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and criticized loans. In addition, we use information about specific borrower situations, including their financial position, work-out plans and estimated collateral values under various liquidation scenarios to estimate the risk and amount of loss on loans to those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions, duration of the current business cycle, the impact of competition on our underwriting terms, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. Our estimates of risk of loss and amount of loss on any loan are complicated by the uncertainties surrounding not only our borrowers’ probability of default, but also the fair value of the underlying collateral. The current illiquidity in the real estate market has increased the uncertainty with respect to real estate values. Because of the degree of uncertainty and the sensitivity of valuations to the underlying assumptions regarding holding period until sale and the collateral liquidation method, our actual losses may materially vary from our current estimates.

As a business bank, our loan portfolio is comprised primarily of commercial loans to businesses. These loans are inherently larger in amount than loans to individual consumers and, therefore, have higher potential losses on an individual loan basis. The individually larger commercial loans can cause greater volatility in our reported credit quality performance measures, such as total impaired or nonperforming loans. Our current credit risk rating and loss estimate with respect to a single sizable loan can have a material impact on our reported impaired loans and related loss estimates. Because our loan portfolio contains a significant number of commercial loans with relatively large balances, the deterioration of any one or a few of these loans can cause a significant increase in uncollectible loans and, therefore, our allowance for loan losses. We review our estimates on a quarterly basis and, as we identify changes in estimates, our allowance for loan losses is adjusted through the recording of a provision for loan losses.

Income Taxes

We have maintained significant net deferred tax assets for deductible temporary differences, the largest of which relates to the allowance for loan losses. For income tax return purposes, only net charge-offs are deductible, not the provision for loan losses. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more

 

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likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. We consider both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Positive evidence includes the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods, while negative evidence includes a cumulative loss in the current year and prior two years and general business and economic trends. We currently maintain a valuation allowance against significantly all of our deferred tax asset because it is more likely than not that all of this deferred tax asset will not be realized. This determination was based, largely, on the negative evidence of a cumulative loss in the most recent three year period caused primarily by the significant loan loss provisions made during recent periods. In addition, general uncertainty surrounding future economic and business conditions have increased the likelihood of volatility in our future earnings.

At times, we apply different tax treatment for selected transactions for tax return purposes than for income tax financial reporting purposes. The different positions result from the varying application of statutes, rules, regulations, and interpretations, and our accruals for income taxes include reserves for these differences in position. Our estimate of the value of these reserves contains assumptions based upon our past experience and judgments about potential actions by taxing authorities, and we believe that the level of these reserves is reasonable. We initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examinations. Subsequently, the reserves are then utilized or reversed when we determine the more likely than not threshold is no longer met, once the statute of limitations has expired, or the tax matter is effectively settled. However, because reserve balances are estimates that are subject to uncertainties, the ultimate resolution of these matters may be greater or less than the amounts we have accrued.

Derivative Financial Instruments

We use derivative financial instruments (derivatives), including interest rate exchange, floor and collar agreements, and forward loan sale commitments to either accommodate individual customer needs or to assist in our interest rate risk management. All derivatives are measured and reported at fair value on our consolidated balance sheet as either an asset or a liability. For derivatives that are designated and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the effective portion of the hedged risk, are recognized in current earnings during the period of the change in the fair values. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For all hedging relationships, derivative gains and losses that are not effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings during the period of the change in fair value. Similarly, the changes in the fair value of derivatives that do not qualify for hedge accounting or are not designated as an accounting hedge are also reported currently in earnings.

 

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At the inception of a hedge and quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivatives have been highly effective in offsetting the changes in the fair values or cash flows of the hedged item and whether they are expected to be highly effective in the future. If it is determined that derivatives are not highly effective as a hedge, hedge accounting is discontinued for the period. Once hedge accounting is terminated, all changes in fair value of the derivatives flow through the consolidated statements of operations in other noninterest income, which results in greater volatility in our earnings.

The estimates of fair values of our interest rate swap, floors, and collar derivatives are calculated using independent valuation models to estimate market-based valuations. The valuations are determined using widely accepted valuation techniques, including discounted cash flow analysis of the expected cash flow of each derivative. This analysis reflects the contractual terms of the derivative and uses observable market-based inputs, including interest rate curves and implied volatilities. In addition, the fair value estimate also incorporates a credit valuation adjustment to reflect the risk of nonperformance by both us and our counterparties in the fair value measurement. The resulting fair values produced by these proprietary valuation models are in part theoretical and, therefore, can vary between derivative dealers and are not necessarily reflective of the actual price at which the derivative contract could be traded. Small changes in assumptions can result in significant changes in valuation. The risks inherent in the determination of the fair value of a derivative may result in volatility in our statement of operations.

Valuation of Investment Securities

The fair value of our investment portfolio is determined in accordance with generally accepted accounting principals, which requires that we classify financial assets and liabilities measured at fair value into a three-level fair value hierarchy. The determination of fair value is highly subjective and requires management to rely on estimates, assumptions, and judgments that can affect amounts reported in our financial statements. We obtain the fair value of investment securities from an independent pricing service. We review the pricing methodology for each significant class of assets used by this third party pricing service to assess the compliance with accounting standards for fair value measurement and classification in the fair value measurement hierarchy. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, including credit spreads and current rating from credit rating agencies, and the bond’s terms and conditions, among other things. We have determined that these valuations are classified in Level 2 of the fair value hierarchy.

While we use an independent pricing service to obtain the fair values of our investment portfolio, we do employ certain control procedures to determine the reasonableness of the valuations. We validate the overall reasonableness of the fair values by comparing information obtained from our independent pricing service to other third party valuation sources for selected assets and review the valuations and any differences in valuations with members of management who have the relevant technical expertise to assess the results. We do not alter the fair values provided by our independent pricing service.

 

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Our investment portfolio includes $1.08 billion of mortgage related investment securities which consisted of mortgage-backed securities and collateralized mortgage obligations. We do not have subprime loans in this portfolio. Of the total mortgage related investment securities, $1.05 billion, or 97.5%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac. The mortgage related portfolio included $27.5 million of private-label mortgage related securities that has received heightened monitoring because the Company believe the fair values of these securities have been impacted by illiquidity in the market place because of a lack of active trading in these securities. While none of these securities contain subprime mortgage loans, the portfolio does include Alt-A loans, adjustable rate mortgages with initial interest only periods, and loans that are secured by collateral in geographic areas adversely impacted by the housing downturn. While the fair value of these securities has been impacted by market illiquidity, the Company does not modify the fair value determined by the independent pricing but takes additional steps to review for other-than-temporary impairment.

Each quarter we review our investment securities portfolio to determine whether unrealized losses are temporary or other than temporary, based on an evaluation of the creditworthiness of the issuers/guarantors, as well as the underlying collateral, if applicable. Our analysis includes an evaluation of the type of security, the length of time and extent to which the fair value has been less than the security’s carrying value, the characteristics of the underlying collateral, the degree of credit support provided by subordinate tranches within the total issuance, independent credit ratings, changes in credit ratings and a cash flow analysis, considering default rates, loss severities based upon the location of the collateral, and estimated prepayments. Those securities with unrealized losses for more than 12 months and for more than 10% of their carrying value are subjected to further analysis to determine if we expect to receive all the contractual cash flows. We utilize other independent pricing sources to obtain fair values and perform discounted cash flow analysis for selected securities. When the discounted cash flow analysis we obtain from those independent pricing sources indicates that we expect all future principal and interest payments would be received in accordance with their original contractual terms, we do not intend to sell the security, and we more-likely-than-not will not be required to sell the security before recovery, the unrealized loss is deemed temporary. If such analysis shows that we expect not to be able to recover our entire investment, then an other-than-temporary impairment charge would be recorded in current earnings for the amount of the credit loss. The amount of impairment that related to factors other than the credit loss is recognized in other comprehensive income. Our assessments of creditworthiness and the resultant expected cash flows are complicated by the significant uncertainties surrounding not only the specific security and its underlying collateral but also the severity of the current overall economic downturn. Our cash flow estimates for mortgage related securities are based on estimates of mortgage default rates, severity of loss, and prepayments, which are difficult to predict. Changes in assumptions can result in material changes in expected cash flows. Therefore, unrealized losses that we have determined to be temporary may at a later date be determined to be other-than-temporary and have a material impact on our statement of operations.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Management Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q constitute forward-looking statements. We have tried to identify these forward-looking statements by using words including “may,” “might,” “expect,” “plan,” “predict,” “potential,” “should,” “will,” “expect,” “anticipate,” “believe,” “intend,” “could” and “estimate” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities in 2009 and beyond to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include, without limitation:

 

   

the risk that our allowance for loan losses may prove insufficient to absorb probable losses in our loan portfolio;

 

   

possible volatility in loan charge-offs and recoveries between periods;

 

   

negative developments and disruptions in the credit and lending markets, including the impact of the ongoing credit crisis on our business and on the businesses of our customers as well as other banks and lending institutions with which we have commercial relationships;

 

   

the decline in residential real estate sales volume and the likely potential for continuing illiquidity in the real estate market, including within the Chicago metropolitan area;

 

   

the risks associated with the high concentration of commercial real estate loans in our portfolio;

 

   

costs, risks and effects of deficiencies in or impairments of mortgage loans acquired from other financial institutions;

 

   

uncertainty in estimating the fair value of residential mortgage loans held for sale by us based upon quoted market prices;

 

   

the possibility that we will not be able to securitize the residential mortgages held for sale by us on terms acceptable to us;

 

   

the uncertainties in estimating the fair value of developed real estate and undeveloped land in light of declining demand for such assets and continuing illiquidity in the real estate market;

 

   

the risks associated with implementing our business strategy and managing our growth effectively, including our ability to preserve and access sufficient capital to execute on our strategy;

 

   

the risks associated with management changes, employee turnover and our commercial banking growth initiative, including our expansion of our asset-based lending operations and our entry into new geographical markets;

 

   

the effect on our profitability if interest rates fluctuate as well as the effect of our customers’ changing use of our deposit products;

 

   

the possibility that our wholesale funding sources may prove insufficient to replace deposits at maturity and support our growth;

 

   

a continuation of the unprecedented volatility in the capital markets;

 

   

the effectiveness of our hedging transactions and their impact on our future results of operations;

 

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changes in general economic and capital market conditions, interest rates, our debt credit ratings, deposit flows, loan demand, including loan syndication opportunities and competition;

 

   

changes in legislation or regulatory and accounting principles, policies or guidelines affecting our business; and

 

   

other economic, competitive, governmental, regulatory and technological factors impacting our operations.

For further information about these and other risks, uncertainties and factors, please review the disclosure included in the section captioned “Risk Factors” in our December 31, 2008 Annual Report on Form 10-K filed with the SEC on March 11, 2009. You should not place undue reliance on any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements or risk factors, whether as a result of new information, future events, changed circumstances or any other reason after the date of this press release.

RESULTS OF OPERATIONS

Overview

We reported a net loss applicable to common stockholders of $5.3 million, or $0.51 per diluted common share outstanding, for the third quarter of 2009, compared to a net loss applicable to common stockholders of $97.2 million, or $9.30 per diluted common share, in the third quarter of 2008. The lower net loss applicable to common stockholders in the third quarter of 2009 was due to a $37.2 million decrease in the provision for loan losses and $25.5 million decrease in income tax expense, largely due to a $47.3 million non-cash charge recorded in the third quarter of 2008 to establish a valuation allowance against our deferred tax asset. In addition, in connection with the completion of our private placement of 8% non-cumulative convertible perpetual preferred stock, Series A, in the third quarter of 2008, we recorded a $16.7 million implied non-cash dividend to the holders of this preferred stock to reflect the beneficial conversion feature, as the market value of our common stock at the date of the stock purchase agreement exceeded the $10.00 conversion price per share. In addition, a $10.5 million increase in net interest income and a $4.8 million decrease in noninterest expense also contributed to the lower net loss applicable to common stockholders during the third quarter of 2009.

For the first nine months of 2009, we reported a net loss applicable to common stockholders of $37.1 million, or $3.54 per diluted common share, compared to a net loss applicable to common stockholders of $126.4 million, or $12.10 per diluted share, during the first nine months of 2008. The lower net loss applicable to common stockholders resulted from a $43.2 million decrease in the provision for loan losses, a $22.2 million increase in net interest income, a $9.5 million increase in noninterest income, and a decrease in noninterest expense of $4.4 million.

Throughout 2009, we have taken additional steps in an effort to improve our operating results by increasing the level of net interest income and noninterest income while holding the level of noninterest expense relatively flat with prior periods. In both the third quarter and

 

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year-to-date period ending September 30, 2009, our net interest income increased over the comparable periods in 2008. These increases were due to both higher interest-earning asset volumes and a declining cost of funds.

We have also focused on improving our loan pricing, including the use of interest rate floors in new loan originations, and increased the size and duration of our investment portfolio to take advantage of higher yields. On the liability side, we continue to strengthen our liquidity position by obtaining more funding from core customers and reducing our reliance on more costly brokered deposits. Noninterest income also increased in both the third quarter and year-to-date period in 2009, as an increase in service charge revenue was partly offset by lower trust and investment management fees. In addition, noninterest expense has decreased in both the three month and year-to-date periods ended September 30, 2009 as compared to the same periods in 2008. Despite the significant increase in deposit insurance premiums, we have instituted a number of cost control measures to reduce our noninterest expense, such as salaries and benefit costs and certain other overhead expenses.

Net Interest Income

Net interest income is the difference between total interest income and fees earned on interest-earning assets, including investment securities and loans, and total interest expense paid on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is our principal source of earnings. The amount of net interest income is affected by changes in the volume and mix of earning assets and interest-bearing liabilities, the level of rates earned or paid on those assets and liabilities and the amount of loan fees earned.

Quarter Ended September 30, 2009 Compared to the Quarter Ended September 30, 2008

Net interest income was $32.4 million for the third quarter of 2009, an increase of $10.5 million, or 47.8%, from $21.9 million of net interest income in the third quarter of 2008. With an adjustment for tax-exempt income, our consolidated net interest income for the third quarter of 2009 was $33.1 million, compared to $22.7 million for the same quarter a year ago. This non-GAAP presentation is discussed in a following section captioned “Tax-Equivalent Adjustments to Yields and Margins”. Net interest income for the third quarter of 2009 increased due to higher interest-earning asset levels and an increase in net interest margin.

Net interest margin is determined by dividing taxable equivalent net interest income by average interest-earning assets. For the third quarter of 2009, our net interest margin was 2.92%, compared to 2.35% for the same quarter a year ago, an increase of 57 basis points. As market interest rates decreased between the third quarter of 2008 and the third quarter of 2009, our net interest margin increased in the third quarter of 2009 because the decrease in our cost of funds outpaced the reductions in our earning asset yields. On the asset side, the yield on our interest-earning assets decreased 31 basis points from 5.32% during the third quarter of 2008 to 5.01% during the third quarter of 2009. Between the third quarter of 2009 and the third quarter of 2008, the yield on our loan portfolio decreased 39 basis points from 5.48% in the third quarter of 2008 to 5.09% in the third quarter of 2009. Declining interest rates primarily caused the decrease in yield as approximately 64% of our loan portfolio is based upon a floating or variable rate. In addition, the impact of higher nonaccrual loans also contributed to the lower loan yield.

 

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Our funding costs declined 93 basis points to 2.61% during the third quarter of 2009 from 3.54% during the same quarter a year ago. The lower funding cost was a result of the decline in market interest rates between the two periods. Our deposit costs have decreased as our term deposits continue to reprice to the lower current market rates and from the increase in lower-costing core deposits, which has allowed us to reduce our reliance on brokered deposits. Our overall funding cost also declined because we have increased our use of attractively priced short-term funding opportunities provided by the Federal Home Loan Bank and the Federal Reserve Bank’s Term Auction Facility.

Our average interest-earning assets during the third quarter of 2009 were $4.51 billion, an increase of $648.8 million, or 16.8%, as compared to the same quarter in 2008. A $496.5 million, or 59.9%, increase in average investment portfolio and a $271.2 million or 9.3% increase in average loan balances combined to produce the higher interest-earning assets. The higher average investment securities primarily resulted from the purchase of mortgage-related investment securities during the past twelve months as we increased the size of the investment portfolio to take advantage of higher yields on longer duration securities. Average loans outstanding increased to $3.18 billion during the third quarter of 2009, compared to $2.91 billion during the third quarter of 2008. The increase in loans is a result of a growth strategy implemented in 2008 in which we hired a new management team, increased our lending staff, and enhanced certain of our credit support functions.

Our net interest margin has increased in each of the last four quarterly periods as we have taken additional steps to increase our net interest margin. We have changed the mix of our funding as our core in-market deposits increased, enabling us to reduce our reliance on higher costing brokered deposits. In addition, we have increased the size of our investment securities portfolio, and we are continuing our attempts to improve our loan pricing, including the use of interest rate floors, in an effort to increase our earning asset yields. See the section of this discussion and analysis captioned “Quantitative and Qualitative Disclosure About Market Risks” for further discussion of the impact of changes in interest rates on our results of operations.

Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

Net interest income was $90.1 million for the first nine months of 2009, compared to $67.9 million during the same nine month period a year ago, an increase of $22.2 million, or 32.6%. With an adjustment for tax-exempt income, our consolidated net interest income for the first nine months of 2009 was $92.5 million, compared to $70.4 million for the first nine months of 2008. This non-GAAP presentation is discussed in a following section captioned “Tax-Equivalent Adjustments to Yields and Margins”. Net interest income for the first nine months of 2009 benefited from both an $894.1 million increase in average interest-earning assets and a 14 basis point increase in the net interest margin.

 

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Our net interest margin was 2.76% during the first nine months of 2009 as compared to 2.62% during the first nine months of 2008. Our net interest margin through September 30, 2009, increased as the interest-bearing funding costs decreased more than the decrease in our earning asset yields. The total earning asset yield during the first nine months of 2009 was 5.02%, compared to 5.67% during the first nine months of 2008, a decrease of 65 basis points. At the same time, the cost of our interest-bearing liabilities decreased 85 basis points to 2.83% during the first nine months of 2009, from 3.68% during the first nine months of 2008. On the asset side, as market interest rates decreased our portfolio of variable rate loans also adjusted downward. On the liability side, our cost of funds has decreased with the low interest rate environment. Our term deposits continue to reprice to current market interest rates, and we have funded asset growth by taking advantage of low cost short-term funding opportunities, primarily from the FHLB and the Federal Reserve Bank.

Our average interest-earning assets during the first nine months of 2009 were $4.47 billion, an increase of $894.1 million, or 25.0%, as compared to the $3.58 billion of average interest-earning assets during the first nine months of 2008. The growth strategy implemented in 2008 caused the $550.2 million, or 20.7%, increase in average loan balances between the two year-to-date periods. In addition, the increase in the size of the investment portfolio that occurred during the last twelve months caused average investment securities to increase by $422.1 million, or 49.6%, in the first nine months of 2009 as compared to the same nine month period a year ago. This increase in investment securities was largely funded with additional short-term borrowings.

Rate vs. Volume Analysis of Net Interest Income

The following table presents for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a tax-equivalent basis using a tax rate of 35.0%.

 

     Quarter Ended Sept. 30, 2009 Over
Quarter Ended Sept. 30, 2008
Increase/(Decrease)
    Nine Months Ended Sept. 30, 2009 Over
Nine Months Ended Sept. 30, 2008
Increase/(Decrease)
 
     VOLUME     RATE     NET     VOLUME     RATE     DAY(1)     NET  
     (in thousands)  

INTEREST EARNED ON:

              

Investment securities

   $ 5,789      $ (669   $ 5,120      $ 15,586      $ (710   $ —        $ 14,876   

Cash equivalents

     (326     (253     (579     (874     (477     (5     (1,356

Loans

     3,602        (2,924     678        22,385        (19,344     (428     2,613   
                          

Total interest-earning assets

         5,219              16,133   
                          

INTEREST PAID ON:

              

Interest-bearing deposits

     (1,197     (5,630     (6,827     7,114        (17,001     (237     (10,124

Total borrowings

     3,630        (2,011     1,619        10,692        (6,429     (62     4,201   
                          

Total interest-bearing liabilities

         (5,208           (5,923
                                                        

Net interest income, tax-equivalent

   $ 5,397      $ 5,030      $ 10,427      $ 20,085      $ 2,105      $ (134   $ 22,056   
                                                        

 

(1) The nine months ended September 30, 2009 had 273 days compared to 274 days in the nine months ended September 30, 2008.

 

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Tax-Equivalent Adjustments to Yields and Margins

As part of our evaluation of net interest income, we review our consolidated average balances, our yield on average interest-earning assets and the costs of average interest-bearing liabilities. Such yields and costs are derived by dividing annualized income or expense by the average balance of assets or liabilities. Because management reviews net interest income on a tax-equivalent basis, the analysis contains certain non-GAAP financial measures. In these non-GAAP financial measures, investment interest income, loan interest income, total interest income and net interest income are adjusted to reflect tax-exempt interest income on a tax-equivalent basis assuming a tax rate of 35.0%. This assumed rate may differ from our actual effective income tax rate. In addition, the earning asset yield, net interest margin, and the net interest rate spread are adjusted to a fully taxable equivalent basis. We believe that these measures and ratios present a more meaningful measure of the performance of interest-earning assets because they provide a better basis for comparison of net interest income regardless of the mix of taxable and tax-exempt instruments.

The following table reconciles the tax-equivalent net interest income to net interest income as reported on the consolidated statements of operations. In addition, the earning asset yield, net interest margin and net interest spread are shown with and without the tax-equivalent adjustment.

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2009     2008     2009     2008  
     (dollars in thousands)  

Net interest income as stated

   $ 32,375      $ 21,898      $ 90,101      $ 67,937   

Tax equivalent adjustment-investments

     732        780        2,263        2,363   

Tax equivalent adjustment-loans

     29        31        86        94   
                                

Tax equivalent net interest income

   $ 33,136      $ 22,709      $ 92,450      $ 70,394   
                                

Yield on earning assets without tax adjustment

     4.94     5.24     4.95     5.58

Yield on earning assets - tax equivalent

     5.01     5.32     5.02     5.67

Net interest margin without tax adjustment

     2.86     2.26     2.69     2.53

Net interest margin - tax equivalent

     2.92     2.35     2.76     2.62

Net interest spread without tax adjustment

     2.34     1.70     2.12     1.90

Net interest spread - tax equivalent

     2.40     1.78     2.19     1.99

The following table presents, for the periods indicated, certain information relating to our consolidated average balances and reflect our yield on average interest-earning assets and costs of average interest-bearing liabilities. The table contains certain non-GAAP financial measures to adjust tax-exempt interest income on a tax-equivalent basis assuming a tax rate of 35.0%.

 

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     For the Three Months Ended September 30,  
     2009     2008  
     AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
    AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
 
     (dollars in thousands)  

INTEREST-EARNING ASSETS:

              

Investment securities (1):

              

Taxable

   $ 1,194,787      $ 13,921    4.66   $ 689,074      $ 8,664    5.03

Tax-exempt (tax-equivalent) (2)

     130,935        2 ,092    6.39        140,132        2,229    6.36   
                                  

Total investment securities

     1,325,722        16,013    4.83        829,206        10,893    5.25   
                                  

Cash Equivalents

     2,637        3    0.45        121,498        582    1.87   
                                  

Loans (2) (3):

              

Commercial and commercial real estate

     2,968,296        37,841    4.99        2,751,485        37,661    5.36   

Residential real estate mortgages

     109,413        1,380    5.05        54,872        781    5.69   

Home equity and consumer

     103,283        1,069    4.11        103,442        1,291    4.97   

Fees on loans

     —          488        —          367   
                                  

Net loans (tax-equivalent) (2)

     3,180,992        40,778    5.09        2,909,799        40,100    5.48   
                                  

Total interest-earning assets (2)

     4,509,351        56,794    5.01        3,860,503        51,575    5.32   
                                  

NON-EARNING ASSETS:

              

Allowance for loan losses

     (139,074          (108,041     

Cash and due from banks

     65,365             60,530        

Accrued interest and other assets

     107,549             105,839        
                          

TOTAL ASSETS

   $ 4,543,191           $ 3,918,831        
                          

INTEREST-BEARING LIABILITIES:

              

Interest-bearing deposits:

              

Interest-bearing demand deposits

   $ 640,074        1,981    1.23      $ 722,104        2,824    1.56   

Savings deposits

     41,839        10    0.09        43,924        10    0.09   

Time deposits

     1,845,048        14,638    3.15        1,933,260        20,622    4.24   
                                  

Total interest-bearing deposits

     2,526,961        16,629    2.61        2,699,288        23,456    3.46   
                                  

Other borrowings

     358,507        2,210    2.41        309,960        2,364    2.98   

Notes payable and other advances

     573,872        1,718    1.17        146,238        1,298    3.47   

Junior subordinated debentures

     86,607        1,477    6.82        86,607        1,715    7.93   

Subordinated notes

     55,547        1,624    11.69        1,200        33    10.76   
                                  

Total interest-bearing liabilities

     3,601,494        23,658    2.61        3,243,293        28,866    3.54   
                                  

NONINTEREST-BEARING LIABILITIES:

              

Noninterest-bearing deposits

     598,760             404,580        

Accrued interest, taxes, and other liabilities

     69,433             49,564        
                          

Total noninterest-bearing liabilities

     668,193             454,144        
                          

STOCKHOLDERS’ EQUITY

     273,504             221,394        
                          

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,543,191           $ 3,918,831        
                          

Net interest income (tax-equivalent) (2)

     $ 33,136        $ 22,709   
                      

Net interest spread (tax-equivalent) (2) (4)

        2.40        1.78
                      

Net interest margin (tax-equivalent) (2) (5)

        2.92        2.35
                      

 

(1) Investment securities average balances are based on amortized cost.
(2) Calculations are computed on a tax-equivalent basis using a tax rate of 35%.
(3) Nonaccrual loans are included in the above stated average balances.
(4) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin is determined by dividing tax-equivalent net interest income by average interest-earning assets.
(6) Yield/Rates are annualized.

 

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     For the Nine Months Ended September 30,  
     2009     2008  
     AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
    AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
 
     (dollars in thousands)  

INTEREST-EARNING ASSETS:

              

Investment securities (1):

              

Taxable

   $ 1,138,195      $ 42,179    4.94   $ 710,142      $ 27,019    5.07

Tax-exempt (tax-equivalent) (2)

     135,137        6,466    6.38        141,070        6,750    6.38   
                                  

Total investment securities

     1,273,332        48,645    5.09        851,212        33,769    5.29   
                                  

Cash Equivalents

     1,880        15    1.05        80,075        1,371    2.25   
                                  

Loans (2) (3):

              

Commercial and commercial real estate

     3,027,149        112,541    4.90        2,487,419        108,689    5.74   

Residential real estate mortgages

     72,587        2,936    5.39        57,626        2,492    5.77   

Home equity and consumer

     102,476        3,235    4.22        106,977        4,520    5.64   

Fees on loans

     —          1,042        —          1,440   
                                  

Net loans (tax-equivalent) (2)

     3,202,212        119,754    5.00        2,652,022        117,141    5.90   
                                  

Total interest-earning assets (2)

     4,477,424        168,414    5.02        3,583,309        152,281    5.67   
                                  

NON-EARNING ASSETS:

              

Allowance for loan losses

     (135,611          (76,917     

Cash and due from banks

     60,820             56,035        

Accrued interest and other assets

     113,772             95,430        
                          

TOTAL ASSETS

   $ 4,516,405           $ 3,657,857        
                          

INTEREST-BEARING LIABILITIES:

              

Interest-bearing deposits:

              

Interest-bearing demand deposits

   $ 653,336        5,537    1.13      $ 783,618        11,288    1.92   

Savings deposits

     42,067        26    0.08        46,183        50    0.14   

Time deposits

     1,884,317        49,348    3.50        1,599,124        53,697    4.49   
                                  

Total interest-bearing deposits

     2,579,720        54,911    2.85        2,428,925        65,035    3.58   
                                  

Other borrowings

     362,115        6,618    2.41        316,896        7,454    3.09   

Notes payable and other advances

     500,136        4,956    1.31        139,642        4,045    3.81   

Junior subordinated debentures

     86,607        4,618    7.11        86,607        5,320    8.19   

Subordinated notes

     55,449        4,861    11.69        403        33    10.76   
                                  

Total interest-bearing liabilities

     3,584,027        75,964    2.83        2,972,473        81,887    3.68   
                                  

NONINTEREST-BEARING LIABILITIES:

              

Noninterest-bearing deposits

     565,614             396,774        

Accrued interest, taxes, and other liabilities

     71,349             45,030        
                          

Total noninterest-bearing liabilities

     636,963             441,804        
                          

STOCKHOLDERS’ EQUITY

     295,415             243,580        
                          

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,516,405           $ 3,657,857        
                          

Net interest income (tax-equivalent) (2)

     $ 92,450        $ 70,394   
                      

Net interest spread (tax-equivalent) (2) (4)

        2.19        1.99
                      

Net interest margin (tax-equivalent) (2) (5)

        2.76        2.62
                      

 

(1) Investment securities average balances are based on amortized cost.
(2) Calculations are computed on a tax-equivalent basis using a tax rate of 35%.
(3) Nonaccrual loans are included in the above stated average balances.
(4) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin is determined by dividing tax-equivalent net interest income by average interest-earning assets.
(6) Yield/Rates are annualized.

 

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Noninterest Income

The following table presents, for the periods indicated, our major categories of noninterest income:

 

     For the Three Months Ended     For the Nine Months Ended
     Sept. 30,
2009
    Sept. 30,
2008
    Sept. 30,
2009
    Sept. 30,
2008

Service charges

   $ 2,892      $ 2,256      $ 8,481      $ 6,677

Trust and investment management fees

     332        894        1,341        2,736

Mortgage banking, net

     (1,351     —          (1,305     23

Gains on investment sales

     378        —          8,637        —  

Other derivative income

     108        154        1,380        1,106

Standby letter of credit fees

     591        77        1,305        254

Other noninterest income

     426        (161     1,017        556
                              

Total noninterest income

   $ 3,376      $ 3,220      $ 20,856      $ 11,352
                              

Quarter Ended September 30, 2009 Compared to the Quarter Ended September 30, 2008

Total noninterest income was $3.4 million during the third quarter of 2009, compared to $3.2 million in the third quarter of 2008, an increase of $156,000, or 4.8%. Increases in service charges, standby letter of credit fees, and gains on investment securities sales were partially offset by a loss in mortgage banking activities and lower trust and investment management fees.

Service charges, principally from deposit accounts, were $2.9 million during the third quarter of 2009, compared to $2.3 million during the third quarter in 2008, an increase of $636,000, or 28.2%. The increase in service charge revenue in the quarter was caused by higher gross activity charges, primarily resulting from the success in obtaining commercial banking clients in connection with the growth strategy implemented in 2008, a decrease in the amount of fee waivers and refunds given to customers, and lower earnings credit rate given to customers on their collected account balances. Our earnings credit rate was approximately 45 basis points lower on average during the third quarter of 2009 as compared to the third quarter of 2008.

Trust and investment management fees declined to $332,000 in the third quarter of 2009 from $894,000 in the same quarter of 2008. Trust fees declined because of a reduced volume of business and a decrease in the spread income we earn on invested trust funds. During the second quarter of 2009, we expanded our strategic partnership with the third-party investment management firm that had been providing sub-advisory services to the Bank’s clients. This third party investment management firm became the primary investment advisor and assumed all portfolio management responsibilities for our wealth management and retirement services customers going forward.

During the third quarter of 2009, we recorded a $1.4 million loss from mortgage banking activities associated with economic hedges on our residential mortgage loans held for sale. In order to mitigate interest rate risk associated with these loans held for sale, we entered into

 

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forward loan sale commitments in the third quarter. The loss resulted from a realized settlement loss on matured forward loan sale commitments and an unrealized $497,000 loss on the unsettled outstanding forward loan sales.

Gains on the sale of available-for-sale investment securities totaled $378,000 during the third quarter of 2009. There were no gains in the third quarter of 2008. See “Financial Condition – Investment Securities” following for further details.

Standby letter of credit fees totaled $591,000 during the third quarter of 2009, compared to $77,000 during the same quarter a year ago. An increase in fees from our expanded asset based lending operations primarily caused the increase in fee revenue during the quarterly 2009 period.

Other noninterest income includes fees for non-customer usage of our automated teller machines, gains (losses) from equity or partnership investments, changes in the market value of the assets in our employees’ deferred compensation plans, and other miscellaneous items. Most of the increase in other noninterest income during the third quarter of 2009 as compared to the third quarter of 2008 was due to an increase in the market value of assets in our employees’ deferred compensation plans.

Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

Total noninterest income was $20.9 million during the first nine months of 2009, compared to $11.4 million in the first nine months of 2008. Noninterest income was higher during the first nine months of 2009 due to $8.6 million of gains on the sale of investment securities and higher services charges and standby letter of credit fees. These increases were partly offset by lower trust and investment management fees and the loss on mortgage banking activities

Service charges were $8.5 million during the first nine months of 2009, as compared to $6.7 million during the first nine months of 2008. An increase in gross activity charges and lower earnings credit rate given to customers on their collected account balances primarily produced the increase.

Trust and investment management fees in first nine months of 2009 decreased $1.4 million to $1.3 million as compared to $2.7 million in the same nine month period in 2008. Trust fees declined because of a reduced volume of business and a decrease in the spread income we earn on invested trust funds, and fewer assets under management caused the decrease in revenues from investment management services.

Gains on the sale of available-for-sale investment securities were $8.6 million in the first nine months of 2009, while no gains were recorded in the first nine months of 2008. See “Financial Condition – Investment Securities” following for further details.

Standby letter of credit fees totaled $1.3 million during the first nine months of 2009, as compared to $254,000 during the first nine months of 2008 due to higher fees from our expanded asset based lending operations.

 

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Other noninterest income increased to $1.0 million during the first nine months of 2009 as compared to $556,000 during the first nine months of 2008 primarily due to an increase in the market value of the assets in our employees’ deferred compensation plans.

Noninterest Expense

The following table presents, for the periods indicated, the major categories of noninterest expense:

 

     For the Three Months Ended     For the Nine Months Ended  
     Sept. 30,
2009
    Sept. 30,
2008
    Sept. 30,
2009
    Sept. 30,
2008
 
     (dollars in thousands)  

Salaries and employee benefits:

        

Salaries, employment taxes, and medical insurance

   $ 9,580      $ 9,413      $ 28,654      $ 27,163   

Sign-on bonuses and severance

     13        3,079        292        4,962   

Incentives, commissions, and retirement benefits

     847        2,456        3,030        5,622   
                                

Total salaries and employee benefits

     10,440        14,948        31,976        37,747   

Occupancy of premises, furniture and equipment

     2,548        2,773        7,704        8,271   

FDIC assessment

     2,314        779        8,213        1,891   

Legal fees, net

     1,430        1,841        4,225        3,195   

Nonperforming asset expense

     2,295        1,398        3,273        4,877   

Early extinguishment of debt

     —          412        527        1,606   

Other noninterest expense

     3,489        5,150        11,470        14,153   
                                

Total noninterest expense

   $ 22,516      $ 27,301      $ 67,388      $ 71,740   
                                

Efficiency Ratio

     63.65     108.69     65.86     90.48
                                

Quarter Ended September 30, 2009 Compared to the Quarter Ended September 30, 2008

Noninterest expense decreased $4.8 million, or 17.5%, to $22.5 million in the third quarter of 2009, as compared to $27.3 million during the third quarter of 2008. The lower level of noninterest expense during the third quarter of 2009 was primarily due to a $4.5 million decrease in salaries and benefits and a decrease in legal fees and other noninterest expenses. These decreases were partly offset by higher Federal Deposit Insurance Corporation (“FDIC”) insurance assessments and higher nonperforming asset expense.

Total salaries and employee benefits expense during the third quarter of 2009 was $10.4 million compared to $14.9 million during the third quarter of 2008, a decrease of $4.5 million or 30.2%. Most of this decrease was due to lower sign-on bonuses and severance and a decrease in incentives, commissions, and retirement benefits. In 2008, our total salaries and benefit expense was higher as a result of our growth strategy, in which we hired a new senior executive team and added new commercial relationship managers. In addition to an increase in base salaries during 2008 we offered cash sign-on bonuses and stock-based awards to attract these new executives and managers. While the additional hiring throughout 2008 caused an increase in base salaries, we reduced the number of full time equivalent employees by eliminating certain positions at the end of 2008 and the beginning of 2009 to control expenses. The number of full-time equivalent employees increased from 418 at the December 31, 2007 to 451 at December 31, 2008, but has been reduced to 421 at September 30, 2009.

 

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Total salaries, employment taxes, and medical insurance expenses were $9.6 million in the third quarter of 2009 as compared to $9.4 million for the third quarter of 2008. The $167,000, or 1.9%, increase resulted from an increase in the market value of assets held in the employee deferred compensation plan, partly offset by a decrease in base salaries.

Sign-on bonuses and severance expense totaled $13,000 for the third quarter of 2009 compared to $3.1 million for the third quarter a year ago. The expense in the third quarter of 2008 resulted from signing bonuses to attract new employees and severance related to change in senior management and certain of our supporting staff.

Incentives, commissions, and retirement benefits decreased to $847,000 during the third quarter of 2009 from $2.5 million during the third quarter of 2008. The higher expense during 2008 resulted from accruals for our annual cash-based employee incentive programs and guaranteed incentive awards to new employees.

FDIC insurance premiums were $2.3 million in the third quarter of 2009, compared to $779,000 in the same quarter a year ago, an increase of $1.5 million. A general increase in rates imposed by the FDIC paid by all depository institutions primarily produced the increase in expense between the two quarters. In addition, we have also elected to participate in the FDIC’s Transaction Account Guarantee Program, which has and will continue to cause an increase in our insurance premiums.

Legal fees were $1.4 million in the third quarter of 2009, compared to $1.8 million in the same quarter in 2008. The decrease was primarily due to lower legal fees associated with general corporate and employee-related matters, partly offset by higher legal fees associated with more nonperforming assets and loans in our work-out area.

Nonperforming asset expenses totaled $2.3 during the third quarter of 2009, compared to $1.4 million during the third quarter of 2008, an increase of $897,000. Higher losses on the disposition of other real estate owned assets during the third quarter of 2009, along with an increase in expense associated with the higher number of assets currently in our work-out area combined to produce the increase in expense during 2009. We expect that our nonperforming asset expense will continue to be significant in future periods because of the current high level of nonperforming assets and other real estate owned.

Other noninterest expense principally includes external audit and tax services, business development and entertainment expenses, computer software license fees, and other operating expenses such as telephone, postage, office supplies and printing. Other noninterest expense was $3.5 million in the third quarter of 2009, a decrease of $1.7 million as compared to the $5.2 million of expense during the third quarter of 2008. The decline in expense during third quarter of 2009 was largely due to lower advertising, professional fees, business development, operational losses, lending expenses, and decreases in other overhead expense categories as we focused on controlling these costs in an effort to improve operating results.

 

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Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

For the first nine months of 2009, noninterest expense was $67.4 million, a decrease of $4.4 million, or 6.1%, as compared to $71.7 million of noninterest expense during the first nine months of 2008. Between these year-to-date periods, a decrease in salaries and benefits, nonperforming asset expense, charges for early extinguishment of debt, and other noninterest expense, were partly offset by an increase in FDIC insurance assessments and legal fees.

For the first nine months of 2009, total salaries and employee benefits expense totaled $32.0 million, as compared to $37.7 million during the first nine months of 2008, a decrease of $5.8 million, or 15.3%. Similar to the quarterly comparison, the growth strategy initiated in 2008 significantly impacted salaries and benefits expense.

Total salaries, employment taxes, and medical insurance expenses increased $1.5 million, or 5.5%, to $28.7 million for the first nine months of 2009, as compared to $27.2 million for the first nine months of 2008. Approximately half of the increase during the first nine months of 2009 was due to higher base salaries associated with our growth strategy, since most of the hiring occurring over the second and third quarters of 2008. The remainder of the increase was caused by an increase in the market value of assets held in employees’ deferred compensation plan.

Sign-on bonuses and severance expense was $292,000 in the first nine months of 2009, as compared to $5.0 million for the first nine months of 2008. The higher expense in 2008 was mostly due to signing bonuses to attract new employees and severance related to changes in senior management and certain of our supporting staff.

Incentives, commissions, and retirement benefits also decreased during the first nine months of 2009 to $3.0 million, as compared to $5.6 million during the first nine months of 2008. The lower expense in 2009 was caused by a decrease in employee benefit plan accruals and expense in the first nine months of 2009, including accruals for our cash-based employee incentive program.

Our FDIC insurance premium increased in 2009, compared to 2008 because the FDIC imposed an industry wide special assessment and a general increase in premiums for all financial institutions, as well as our election to participate in the FDIC’s Transaction Account Guarantee Program. FDIC assessments were $8.2 million for the first nine months of 2009 compared to $1.9 million during the same nine month period in 2008, an increase of $6.3 million. FDIC insurance premiums in 2009 included an industry-wide special assessment to help recapitalize the FDIC’s Deposit Insurance Fund, which amounted to $2.1 million for our Bank.

Legal fees were $4.2 million in the first nine months of 2009, compared to $3.2 million in the first nine months of 2008. Higher legal fees were incurred due to the increase of assets managed by our work-out group.

 

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For the first nine months of 2009, nonperforming asset expense was $3.3 million, as compared to $4.9 million during the first nine months of 2008, a decrease of $1.6 million. The decrease was primarily due to a $2.6 million lower expense in 2009 associated with our liability for unfunded commitments as compared to 2008. This decrease was partly offset by higher provisions and losses on the disposition of other real estate owned assets.

During the first nine months of 2009, we incurred $527,000 of expense for the early redemption of approximately $29.0 million of above market rate brokered certificates of deposits, compared to $1.6 million of expense for the early redemption of approximately $151 million of above market rate brokered certificates of deposits in the first nine months of 2008. The unamortized issuance costs and fair value adjustments on these deposits were written off at the time of redemption. As of September 30, 2009, we do not have any additional brokered CDs that we can call at our option.

For the first nine months of 2009, other noninterest expense was $11.5 million, compared to $14.2 million during the first nine months of 2008, a decrease of $2.7 million, or 19%. The decline in expense during 2009 was largely due to lower advertising, professional fees, business development, and decreases in other overhead expense categories as we focused on controlling costs in an effort to improve operating results.

Efficiency Ratio

The efficiency ratio is calculated by dividing total noninterest expense by total revenues (net interest income and noninterest income, less gains on the sale of investment securities). Generally, a lower efficiency ratio indicates that the entity is operating more efficiently. Our efficiency ratio was 63.65% in the third quarter of 2009 compared to an efficiency ratio of 108.69% during the third quarter of 2008. The lower ratio in 2009 was primarily a result of an increase in total net interest income and lower noninterest expense.

Our efficiency ratio was 65.86% during the first nine months of 2009 compared to an efficiency ratio of 90.48% during the first nine months of 2008. The lower ratio in 2009 was also produced by the increase in total net interest income and lower noninterest expense.

Income Taxes

Despite a pre-tax loss, we recorded income tax expense of $144,000 during the third quarter of 2009 and $1.5 million during the first nine months of 2009. Because of the valuation allowance on our deferred tax asset, we do not expect to be able to record an income tax benefit during 2009 related to the pre-tax loss incurred.

A current income tax benefit that would normally result from a pre-tax loss was offset by additional deferred tax expense due to an increase in the required valuation allowance. Additional contributing factors to the income tax expense recorded in 2009 primarily include the release of the residual tax effects of changes in the beginning of the year valuation allowance previously allocated to other comprehensive income. These residual tax effects resulted from changes in the deferred tax liability associated with deferred gains on terminated cash flow

 

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hedges recorded in other comprehensive income. We expect additional expense of $510,000 during the last three months of 2009 associated with the release of these residual tax effects.

Since the third quarter of 2008, we have maintained a valuation allowance on our deferred tax assets as we have concluded that based upon the weight of all available evidence, it was “more likely than not” that not all of the deferred tax asset would be realized. We evaluate the valuation allowance each period taking into account our inventory of deferred tax assets and liabilities, including those recorded on items included in equity as other comprehensive income, which are recorded net of tax. The valuation allowance increased $5.2 million during the first nine months of 2009 to $51.6 million at September 30, 2009 as compared to $46.4 million at December 31, 2008. At September 30, 2009, the net deferred tax asset, after considering the $51.6 million valuation allowance, was $2.5 million, which were supported by available tax planning strategies. See “Notes to Consolidated Financial Statements – Income Taxes” for additional details.

Similarly, during the third quarter of 2008, we recorded income tax expense of $25.7 million, despite a pre-tax loss of $54.9 million. In addition, for the first nine month of 2008, we reported income tax expense of $3.4 million, notwithstanding the $106.3 million pre-tax loss during that period. Income tax expense in the third quarter of 2008 included the initial establishment of a $47.3 million valuation allowance against our net deferred tax asset. Excluding the $47.3 million charge for the deferred tax asset valuation allowance during 2008, we recorded income tax benefits in both the quarterly and year-to-date periods in recognition of our ability to carry back the current loss to recover taxes paid in prior years.

 

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FINANCIAL CONDITION

Overview

Total assets increased $96.2 million, or 2.2%, to $4.49 billion at September 30, 2009 from total assets of $4.39 billion at December 31, 2008, primarily as a result of an increase in investment securities. Investment securities totaled $1.31 billion at September 30, 2009, an increase of $211.5 million, or 19.3%, from year-end 2008. Net loans decreased $97.6 million, or 3.1%, to $3.01 billion at September 30, 2009. During the first nine months of 2009, total deposits decreased $78.3 million, or 2.5%, to $3.05 billion at September 30, 2009. In addition, notes payable and other advances increased $155.0 million during the first nine months of 2009. Total stockholders’ equity at September 30, 2009 was $289.0 million, compared to $307.1 million at December 31, 2008, a decrease of $18.1 million, or 5.9%.

Investment Securities

Investment securities totaled $1.31 billion at September 30, 2009, compared to $1.09 billion at December 31, 2008, an increase of $211.5 million, or 19.3%. During the first nine months of 2009, we increased our investment portfolio in an effort to increase interest-earning assets and enhance our net interest margin by extending the duration of the portfolio. Since year-end 2008, we purchased $708.9 million of investment securities, including $60.0 million of government agency securities and $644.7 million of mortgage-backed securities, primarily issued by government sponsored enterprises. A portion of the securities purchased were funded with sales of securities and proceeds from principal payments and maturities. We also used additional short-term borrowings to fund these investment securities purchases. During the first nine months of 2009, we sold $276.7 million of investment securities, resulting in a gain of $8.6 million. Most of this gain was in the second quarter when we realized a gain of $7.6 million on the sale of $207 million of mortgage-backed securities that had been experiencing higher than anticipated prepayments and that were no longer consistent with our asset and liability management strategy. In the third quarter, we realized a gain of $378,000 on the sale of $21.8 million of U.S. government agency securities and municipal obligations which had short expected maturities. The overall weighted-average life of our investment portfolio at September 30, 2009 was approximately 6.6 years, compared to approximately 6.0 years at December 31, 2008.

As of September 30, 2009, mortgage-related securities comprised approximately 83% of our investment portfolio, of which, over 97% were securities issued by government and government-sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac. We do not have subprime loans in our mortgage related investment securities portfolio. While none of these securities contain subprime mortgage loans, the portfolio does include Alt-A loans, adjustable rate mortgages with initial interest only periods, and loans that are secured by collateral in geographic areas adversely impacted by the housing downturn. While the fair value of these securities has been impacted by market illiquidity, we do not modify the fair value determined by the independent pricing service, but take additional steps to review for other-than-temporary impairment. The following table shows the composition of our mortgage-related securities as of September 30, 2009 by type of issuer.

 

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     Amortized Cost    Fair Value
     Pass Thru
Securities
   CMOs    Total    Pass Thru
Securities
   CMOs    Total
     (in thousands)

Government and government sponsored-enterprise securities

   $ 931,015    $ 87,199    $ 1,018,214    $ 962,802    $ 91,076    $ 1,053,878

Private Issuers

     11,063      22,323      33,386      6,655      20,879      27,534
                                         
   $ 942,078    $ 109,522    $ 1,051,600    $ 969,457    $ 111,955    $ 1,081,412
                                         

At September 30, 2009, we had a net unrealized gain of $39.0 million in our available-for-sale investment portfolio, which was comprised of $45.2 million of gross unrealized gains and $6.2 million of gross unrealized losses. The gross unrealized losses at September 30, 2009 related to 13 investment securities with a carrying value of $75.1 million. Each quarter we analyze each of these securities to determine if other-than-temporary impairment has occurred. The factors we consider include the magnitude of the unrealized loss in comparison to the security’s carrying value, the length of time the security has been in an unrealized loss position and the current independent bond rating for the security. Those securities with unrealized losses for more than 12 months and for more than 10% of their carrying value are analyzed further to determine if it is probable that not all the contractual cash flows will be received. We obtain fair value estimates from additional independent sources and perform cash flow analysis to determine if other-than-temporary impairment has occurred. Of the 13 securities with gross unrealized losses at September 30, 2009, seven securities have been in a loss position for 12 months or more, including one security for which we have previously recognized other-than temporary impairment for the amount of the anticipated credit loss. Our analysis as September 30, 2009, indicated that these seven securities did not have other-than-temporary impairment or did not have any additional other-than-temporary impairment. See “Notes to Consolidated Financial Statements – Investment Securities” for additional details.

On April 1, 2009, we adopted FASB Staff Position FAS No. 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. This FSP amends ASC Topic 320-10-65 (Investment-Debt & Equity Securities – Overall – Transition & Open Effective Date Information) to provide other-than-temporary impairment guidance and require the retroactive application, as an adjustment through retained earnings, for any security for which other-than-temporary impairment had been recognized in the consolidated statement of operations for the cumulative effect of applying this FSP with a corresponding adjustment to accumulated other comprehensive income. See “Notes to Consolidated Financial Statements – Investment Securities” for additional details. We did not recognize any additional credit loss on this private-label mortgage-related security or any other investment security in our portfolio since adoption.

As a member of Federal Home Loan Bank (“FHLB”), we are required to hold FHLB stock, based on the Bank’s asset size and the amount of borrowings from the FHLB. In recent quarters, the Bank has increased its use of FHLB advances to support asset growth, and we have

 

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been required to increase our stock holdings. At September 30, 2009, we held $27.3 million of FHLB stock and maintained $205.0 million of FHLB advances. Currently, we do not have any FHLB debt securities in our investment portfolio. The FHLB of Chicago is under a formal written agreement with its regulator requiring the regulator’s prior approval for the payment of dividends or redemptions of capital stock. We have assessed the ultimate recoverability of our FHLB stock and we believe no impairment has occurred. See “Notes to Consolidated Financial Statements – Investment Securities” for additional details.

Loans

During the first nine months of 2009, total portfolio loans decreased $221.8 million, or 6.9%, to $3.01 billion at September 30, 2009. Commercial loans, which includes commercial and industrial (“C&I”), commercial real estate secured, and real estate-construction loans, decreased $219.9 million, or 7.1%, while consumer-oriented loans decreased slightly. The decrease in commercial loans during the first nine months of 2009 consisted of a $193.6 million, or 13.0%, decrease in C&I loans, a $102.6 million, or 29.3%, decrease in residential construction and land loans and a $20.9 million, or 11.5%, decrease in commercial construction and land loans. These decreases were partly offset by a $97.2 million, or 9.2%, increase in commercial real estate secured loans.

The composition of our loan portfolio as of September 30, 2009 and December 31, 2008 was as follows:

 

     September 30, 2009     December 31, 2008  
     Amount    Percentage
of Gross
Loans
    Amount    Percentage
of Gross
Loans
 
     (dollars in thousands)  

Commercial and industrial

   $ 1,292,091    43   $ 1,485,673    46

Commercial real estate secured

     1,156,114    39        1,058,930    33   

Residential construction & land

     247,386    8        349,998    11   

Commercial construction & land

     160,534    5        181,454    5   

Consumer-oriented loans

     155,372    5        157,222    5   
                          

Gross loans

   $ 3,011,497    100   $ 3,233,277    100
                          

At September 30, 2009, C&I loans accounted for 43% of the loan portfolio and totaled $1.29 billion, a decrease of $193.6 million, or 13.0%, compared to $1.49 billion at December 31, 2008. C&I loans include all loans for commercial purposes (other than real estate