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EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - TAYLOR CAPITAL GROUP INCdex321.htm
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 March 31, 2010

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 (Section 232.405 of this chapter)) 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 May 6, 2010, there were 11,076,197 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) - March 31, 2010 and December 31, 2009    1
   Consolidated Statements of Operations (unaudited) - For the three months ended March 31, 2010 and 2009    2
   Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - For the three months ended March 31, 2010 and 2009    3
   Consolidated Statements of Cash Flows (unaudited) - For the three months ended March 31, 2010 and 2009    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    62
Item 4.    Controls and Procedures    62
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    63
Item 1A.    Risk Factors    63
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    63
Item 3.    Defaults Upon Senior Securities    63
Item 4.    (Removed and Reserved)    63
Item 5.    Other Information    63
Item 6.    Exhibits    64
   Signatures    65


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollars in thousands, except per share data)

 

     March 31,
2010
    December 31,
2009
 
ASSETS     

Cash and cash equivalents:

    

Cash and due from banks

   $ 38,617      $ 48,420   

Short-term investments

     49        49   
                

Total cash and cash equivalents

     38,666        48,469   

Investment securities:

    

Available-for-sale, at fair value

     1,369,109        1,271,271   

Held-to-maturity (fair value of $39.1 million at March 31, 2010)

     39,131        —     

Loans, held for sale ($4.2 million at fair value at March 31, 2010)

     28,492        81,853   

Loans, net of allowance for loan losses of $100,151 and $106,185 at March 31, 2010 and December 31, 2009, respectively

     2,878,128        2,847,290   

Premises, leasehold improvements and equipment, net

     14,951        15,515   

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

     36,484        31,210   

Other real estate and repossessed assets, net

     27,355        26,231   

Other assets

     81,864        81,663   
                

Total assets

   $ 4,514,180      $ 4,403,502   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Noninterest-bearing

   $ 587,402      $ 659,146   

Interest-bearing

     2,370,318        2,317,654   
                

Total deposits

     2,957,720        2,976,800   

Other borrowings

     633,422        337,669   

Accrued interest, taxes and other liabilities

     51,830        60,925   

Notes payable and other advances

     475,000        627,000   

Junior subordinated debentures

     86,607        86,607   

Subordinated notes, net

     55,801        55,695   
                

Total liabilities

     4,260,380        4,144,696   
                

Stockholders’ equity:

    

Preferred stock, $0.01 par value, 10,000,000 shares authorized:

    

Series A, 8% non-cumulative convertible perpetual, 2,400,000 shares issued and outstanding, $25.00 liquidation value

     60,000        60,000   

Series B, 5% fixed rate cumulative perpetual, 104,823 shares issued and outstanding, $1,000 liquidation value

     99,221        98,844   

Common stock, $0.01 par value; 45,000,000 shares authorized, 12,028,865 and 12,029,375 shares issued at March 31, 2010 and December 31, 2009, respectively; 11,076,197 and 11,076,707 shares outstanding at March 31, 2010 and December 31, 2009, respectively

     120        120   

Surplus

     227,022        226,398   

Accumulated deficit

     (124,251     (110,617

Accumulated other comprehensive income, net

     16,324        8,697   

Treasury stock, at cost, 952,668 shares

     (24,636     (24,636
                

Total stockholders’ equity

     253,800        258,806   
                

Total liabilities and stockholders’ equity

   $ 4,514,180      $ 4,403,502   
                

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 March 31,
 
     2010     2009  

Interest income:

    

Interest and fees on loans

   $ 38,211      $ 39,367   

Interest and dividends on investment securities:

    

Taxable

     13,446        13,513   

Tax-exempt

     1,229        1,427   

Interest on cash equivalents

     1        10   
                

Total interest income

     52,887        54,317   

Interest expense:

    

Deposits

     12,442        20,059   

Other borrowings

     2,285        2,176   

Notes payable and other advances

     1,624        1,519   

Junior subordinated debentures

     1,438        1,600   

Subordinated notes

     1,631        1,617   
                

Total interest expense

     19,420        26,971   
                

Net interest income

     33,467        27,346   

Provision for loan losses

     21,130        15,563   
                

Net interest income after provision for loan losses

     12,337        11,783   
                

Noninterest income:

    

Service charges

     2,857        2,821   

Trust and investment management fees

     347        534   

Mortgage origination revenue

     303        —     

Loss on disposition of bulk purchased mortgage loans

     (2,022     —     

Gain on sales of investment securities

     1,433        664   

Other derivative income

     209        1,119   

Other noninterest income

     1,247        205   
                

Total noninterest income

     4,374        5,343   
                

Noninterest expense:

    

Salaries and employee benefits

     11,613        10,532   

Occupancy of premises

     2,042        2,049   

Furniture and equipment

     512        568   

Nonperforming asset expense

     4,938        754   

FDIC assessment

     2,213        1,531   

Legal fees, net

     819        1,140   

Early extinguishment of debt

     —          527   

Other noninterest expense

     5,015        4,064   
                

Total noninterest expense

     27,152        21,165   
                

Loss before income taxes

     (10,441     (4,039

Income tax expense (benefit)

     306        (1,221
                

Net loss

     (10,747     (2,818

Preferred dividends and discounts

     (2,887     (2,862
                

Net loss applicable to common stockholders

   $ (13,634   $ (5,680
                

Basic loss per common share

   $ (1.30   $ (0.54

Diluted loss per common share

     (1.30     (0.54

See accompanying notes to consolidated financial statements (unaudited)

 

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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     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Total  

Balance at December 31, 2009

  $ 60,000   $ 98,844   $ 120   $ 226,398      $ (110,617   $ 8,697      $ (24,636   $ 258,806   

Amortization of stock based compensation awards

    —       —       —       624        —          —          —          624   

Comprehensive loss:

               

Net loss

    —       —       —       —          (10,747     —          —          (10,747

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

    —       —       —       —          —          8,653        —          8,653   

Change in deferred gains and losses recorded in other comprehensive income, net of income taxes

    —       —       —       —          —          (1,026     —          (1,026
                     

Total comprehensive loss

                  (3,120
                     

Preferred stock dividends declared, Series A-$0.50 per share

    —       —       —       —          (1,200     —          —          (1,200

Preferred stock dividends accumulated, Series B

    —       377     —       —          (1,687     —          —          (1,310
                                                         

Balance at March 31, 2010

  $ 60,000   $ 99,221   $ 120   $ 227,022      $ (124,251   $ 16,324      $ (24,636   $ 253,800   
                                                         

Balance at December 31, 2008

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

Preferred stock issuance cost, Series B

    —       —       —       (27     —          —          —          (27

Amortization of stock based compensation awards

    —       —       —       583        —          —          —          583   

Tax benefit of stock awards

    —       —       —       (155     —          —          —          (155

Comprehensive income:

               

Net loss

    —       —       —       —          (2,818     —          —          (2,818

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

    —       —       —       —          —          10,450        —          10,450   

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

    —       —       —       —          —          (1,272     —          (1,272
                     

Total comprehensive income

                  6,360   
                     

Preferred stock dividends declared, Series A-$0.50 per share

    —       —       —       —          (1,200     —          —          (1,200

Preferred stock dividends accumulated, Series B

    —       439     —       —          (1,662     —          —          (1,223
                                                         

Balance at March 31, 2009

  $ 60,000   $ 97,753   $ 121   $ 225,273      $ (74,974   $ 27,888      $ (24,636   $ 311,425   
                                                         

See accompanying notes to consolidated financial statements (unaudited)

 

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Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(dollars in thousands)

 

     For the Three Months Ended
March 31,
 
     2010     2009  

Cash flows from operating activities:

    

Net loss

   $ (10,747   $ (2,818

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

    

Provision for loan losses

     21,130        15,563   

Other derivative income

     (209     (1,119

Gain on sales of investment securities

     (1,433     (664

Amortization of premiums and discounts, net

     634        (387

Deferred loan fee amortization

     (1,358     (815

Loans originated for sale

     (7,107     —     

Proceeds from loan sales

     10,201        —     

Depreciation and amortization

     569        601   

Deferred income tax benefit

     (1,791     (206

Losses on other real estate

     4,003        661   

Tax benefit on stock options exercised or stock awards

     —          (155

Excess tax benefit on stock options exercised and stock awards

     98        175   

Cash received on termination of derivative instruments

     —          6,630   

Other, net

     2,847        2,630   

Changes in other assets and liabilities:

    

Accrued interest receivable

     (1,194     (313

Other assets

     1,593        (1,607

Accrued interest, taxes and other liabilities

     (9,095     (9,968
                

Net cash provided by operating activities

     8,141        8,208   
                

Cash flows from investing activities:

    

Purchase of available-for-sale securities

     (231,454     (302,577

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

     62,489        51,954   

Proceeds from sales of available-for-sale securities

     42,847        47,947   

Purchases of FHLB and FRB stock

     (5,274     (4,361

Net increase in loans

     (13,702     (839

Net additions to premises, leasehold improvements and equipment

     (5     (80

Proceeds from sales of other real estate

     5,258        1,537   

Capital improvements to other real estate owned

     —          (261
                

Net cash used in investing activities

     (139,841     (206,680
                

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     (19,248     15,631   

Net increase in other borrowings

     295,753        140,648   

Repayments of notes payable and other advances

     (162,000     —     

Proceeds from notes payable and other advances

     10,000        40,000   

Preferred stock issuance costs

     —          (27

Excess tax benefit on stock options exercised and stock awards

     (98     (175

Dividends paid

     (2,510     (2,636
                

Net cash provided by financing activities

     121,897        193,441   
                

Net decrease in cash and cash equivalents

     (9,803     (5,031

Cash and cash equivalents, beginning of period

     48,469        53,012   
                

Cash and cash equivalents, end of period

   $ 38,666      $ 47,981   
                

Consolidated Statements of Cash Flows continued on the next page

See accompanying notes to consolidated financial statements (unaudited)

 

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Table of Contents

TAYLOR CAPITAL GROUP, INC.

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

(dollars in thousands)

 

     For the Three Months Ended
March 31,
     2010    2009

Supplemental disclosure of cash flow information:

     

Cash paid during the period for:

     

Interest

   $ 22,047    $ 31,278

Income taxes

     6      5

Supplemental disclosures of noncash investing and financing activities:

     

Transfer of available-for-sale investment securities to held-to-maturity investment securities

   $ 39,131    $ —  

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

     8,653      10,450

Transfer of held-for-sale loans to portfolio loans

     41,745      —  

Non-cash acquisition of available-for-sale investment securities

     —        14,057

Loans transferred to other real estate and repossessed assets

     10,385      6,990

 

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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 March 31, 2010 and for the three month periods ended March 31, 2010 and March 31, 2009. 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 month period ended March 31, 2010 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 March 31, 2010 and December 31, 2009 were as follows:

 

     March 31, 2010
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (in thousands)

Available-for-sale:

          

U.S. government sponsored agency securities

   $ 46,970    $ 307    $ (319   $ 46,958

Mortgage-backed securities:

          

Residential

     874,570      18,235      (5,879     886,926

Commercial

     164,019      4,591      (49     168,561

Collateralized mortgage obligations

     138,302      4,728      (52     142,978

State and municipal obligations

     119,871      1,683      (241     121,313

Other debt securities

     2,227      146      —          2,373
                            

Total available-for-sale

     1,345,959      29,690      (6,540     1,369,109
                            

Held-to-maturity:

          

Residential mortgage-backed securities

     39,131      —        —          39,131
                            

Total held-to-maturity

     39,131      —        —          39,131
                            

Total

   $ 1,385,090    $ 29,690    $ (6,540   $ 1,408,240
                            

 

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Table of Contents
     December 31, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (in thousands)

Available-for-sale:

          

U.S. government sponsored agency securities

   $ 44,956    $ 202    $ (64 )   $ 45,094

Mortgage-backed securities

          

Residential

     803,516      15,591      (9,075     810,032

Commercial

     159,688      2,249      (544     161,393

Collateralized mortgage obligations

     127,641      4,071      (1,614     130,098

State and municipal obligations

     120,716      1,787      (196     122,307

Other debt securities

     2,220      127      —          2,347
                            

Total available-for-sale

   $ 1,258,737    $ 24,027    $ (11,493   $ 1,271,271
                            

As of March 31, 2010, the Company had $1.24 billion of mortgage related investment securities which consisted of residential and commercial mortgage-backed securities and collateralized mortgage obligations. Residential mortgage-backed securities and collateralized mortgage obligations includes 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, $1.23 billion, or 99.5%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac, and the remaining $6.7 million were private-label mortgage related securities. Other debt securities at March 31, 2010 include $2.2 million of asset backed securities collateralized by student loans.

Investment securities with an approximate book value of $1.0 billion and $674 million at March 31, 2010 and December 31, 2009, respectively, were pledged to collateralize certain deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes as required or permitted by law.

During the first quarter 2010, the Company realized gross gains of $1.4 million on the sale of available-for-sale investment securities, compared to gross gains of $664,000 in the first quarter 2009.

 

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Table of Contents

The following table summarizes, for investment securities with unrealized losses as of March 31, 2010 and December 31, 2009, 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.

 

     March 31, 2010  
     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:

               

U.S. government sponsored agency securities

   $ 16,681    $ (319   $ —      $ —        $ 16,681    $ (319

Mortgage-backed securities:

               

Residential

     316,034      (2,699     6,699      (3,180     322,733      (5,879

Commercial

     7,683      (49     —        —          7,683      (49

Collateralized mortgage obligations

     10,024      (52     —        —          10,024      (52

State and municipal obligations

     16,816      (161     928      (80 )     17,744      (241
                                             

Temporarily impaired securities – Available-for-sale

   $ 367,238    $ (3,280   $ 7,627    $ (3,260   $ 374,865    $ (6,540
                                             

 

     December 31, 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:

               

U.S. government sponsored agency securities

   $ 14,906    $ (64   $ —      $ —        $ 14,906    $ (64

Mortgage-backed securities:

               

Residential

     278,252      (5,365     6,602      (3,710     284,854      (9,075

Commercial

     62,802      (544     —        —          62,802      (544

Collateralized mortgage obligations

     26,131      (166     8,475      (1,448     34,606      (1,614

State and municipal obligations

     14,521      (117     930      (79 )     15,451      (196
                                             

Temporarily impaired securities – Available-for-sale

   $ 396,612    $ (6,256   $ 16,007    $ (5,237   $ 412,619    $ (11,493
                                             

At March 31, 2010, the Company had five securities in its investment portfolio that have been in an unrealized loss position for twelve or more months, with a total unrealized loss of $3.3 million. Of the five securities in an unrealized loss position, two securities were from the Company’s state and municipal obligation portfolio and three securities were from its portfolio of private-label residential mortgage-backed securities.

The total unrealized loss for the two state and municipal securities at March 31, 2010 totaled $80,000, or about 8% of the total amortized cost of these securities. In addition to severity and duration of loss, the Company considered the current credit rating, changes in ratings, and any credit enhancements in the form of insurance in making its determination of other-than-temporary impairment. The Company believes the decline in fair value was related to changes in market interest rates and was not credit related.

 

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Of the three 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 7% of amortized cost. As part of its normal process, the Company reviewed the security, considering the severity and duration of the loss and current credit ratings, and believes that the decline in fair value was not credit related but related to changes in interest rates and current illiquidity in the market for these types of securities. The other two private-label residential mortgage related securities had a total unrealized loss of $2.9 million, and 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 two private-label residential mortgage-backed securities, the Company 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 continues to impact the values of these private-label securities because of the continued lack of active trading. 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, the Company had recognized an other-than-temporary impairment loss on one of these two securities. The independent cash flow analysis performed at March 31, 2010 indicated that there was no additional credit loss on this security. For the other private-label security 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.

 

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The following table shows the contractual maturities of debt securities, categorized by amortized cost and estimated fair value, at March 31, 2010.

 

     Amortized
Cost
   Estimated
Fair Value
     (in thousands)

Available-for-sale:

     

Due in one year or less

   $ 835    $ 836

Due after one year through five years

     18,592      18,774

Due after five years through ten years

     49,344      49,960

Due after ten years

     100,297      101,074

Residential mortgage-backed securities

     874,570      886,926

Commercial mortgage-backed securities

     164,019      168,561

Collateralized mortgage obligations

     138,302      142,978
             

Total available-for-sale

   $ 1,345,959    $ 1,369,109

Held-to-maturity:

     

Residential mortgage-backed securities

   $ 39,131    $ 39,131
             

Total debt securities

   $ 1,385,090    $ 1,408,240
             

Investment securities do not include the Bank’s investment in Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank (“FRB”) stock of $36.5 million at March 31, 2010 and $31.2 million at December 31, 2009. 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 outstanding FHLB borrowings. At March 31, 2010, the Company had a $27.5 million investment in FHLBC stock, compared to $22.3 million at December 31, 2009. Since 2007, the FHLBC has been under a cease and desist order with its regulators that requires prior regulatory approval to declare dividends and to redeem member capital stock other than excess capital stock under limited circumstances. 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 considers factors such as the severity and duration of declines in the market value of its net assets relative to its capital amount, its recent operating performance, its commitment to make required payments and the structure of the FHLB system which enables the regulator of the FHLBs to reallocate debt among the FHLB entities, the impact of legislative and regulatory changes on the FHLBC and its operations, and its ability to continue to provide liquidity and funding to its members.

As of March 31, 2010, after evaluating these factors, considering that transactions of FHLBC stock in first quarter 2010 continue to occur at par value and that the Company’s redemption of $5.0 million of FHLBC stock in the fourth quarter of 2009 occurred at par, the Company believes that it will ultimately recover the par value of the FHLBC stock.

 

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3. Loans:

Loans classified by type at March 31, 2010 and December 31, 2009 were as follows:

 

     March 31,
2010
    December 31,
2009
 

Portfolio Loans

    

Commercial and industrial

   $ 1,263,210      $ 1,264,369   

Commercial real estate secured

     1,180,988        1,171,777   

Residential construction and land

     206,727        221,859   

Commercial construction and land

     142,845        142,584   

Residential real estate mortgages

     87,400        57,887   

Home equity loans and lines of credit 88,784

     88,784        86,227   

Consumer

     7,791        8,221   

Other loans

     538        557   
                

Gross loans

     2,978,283        2,953,481   

Less: Unearned discount

     (4     (6
                

Total loans

     2,978,279        2,953,475   

Less: Allowance for loan losses

     (100,151     (106,185
                

Portfolio Loans, net

   $ 2,878,128      $ 2,847,290   
                

Loans Held for Sale

    

Commercial and bulk purchased mortgage loans (at lower of cost or fair value)

   $ 24,293      $ 81,853   

Originated mortgage loans (at fair value)

     4,199        —     
                

Total Loans Held for Sale

   $ 28,492      $ 81,853   
                

The total amount of loans transferred to third parties as loan participations at March 31, 2010 was $377.3 million, all of which has been derecognized as a sale under the applicable accounting guidance in effect at the time of the transfers of the financial assets. The Company continues to have involvement with these loans through relationship management and all servicing responsibilities.

At March 31, 2010, loans held for sale included $4.2 million of residential mortgage loans originated by our new residential origination unit for which the Company has elected to account for under the fair value options in accordance with ASC 825 – Financial Instruments. The unpaid principal balance associated with these loans was $4.0 million at March 31, 2010 and the resulting unrealized gain of $187,000 was included in mortgage origination revenues in noninterest income on the Consolidated Statements of Operations. None of these loans are 90 days or more past due or on a nonaccrual status. Interest income on these loans is included in net interest income and is not considered part of the change in fair value.

The bulk purchased mortgage loans and the commercial loans held for sale are accounted for at the lower of cost or fair value.

 

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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 repayment schedule.

 

     March 31,
2010
   December 31,
2009
     (in thousands)

Recorded balance of loans contractually past due 90 days or more but still accruing interest

   $ 58    $ 59

Nonaccrual loans

     141,132      141,403
             

Total nonperforming loans

   $ 141,190    $ 141,462
             

Restructured loans not included in nonperforming loans

   $ 1,247    $ 1,196

Recorded balance of impaired loans:

     

With related allowance for loan loss

   $ 101,364    $ 95,936

With no related allowance for loan loss

     31,547      45,761
             

Total recorded balance of impaired loans

   $ 132,911    $ 141,697
             

Allowance for loan losses related to impaired loans

   $ 24,341    $ 33,640

4. Interest-Bearing Deposits:

Interest-bearing deposits at March 31, 2010 and December 31, 2009 were as follows:

 

     March 31,
2010
   December  31,
2009
     (in thousands)

NOW accounts

   $ 227,981    $ 307,025

Savings accounts

     40,903      41,479

Money market deposits

     489,948      445,418

Time deposits:

     

Certificates of deposit

     784,108      775,663

Out-of-local-market certificates of deposit

     105,384      79,015

CDARS time deposits

     163,025      116,256

Brokered certificates of deposit

     483,799      484,035

Public time deposits

     75,170      68,763
             

Total time deposits

     1,611,486      1,523,732
             

Total

   $ 2,370,318    $ 2,317,654
             

As of March 31, 2010, time deposits in the amount of $100,000 or more totaled $642.4 million compared to $539.1 million at December 31, 2009.

Brokered CDs are carried net of the related broker placement fees and fair value adjustments of $1.3 million at March 31, 2010 and $1.4 million at December 31, 2009. Broker placement fees are amortized to the maturity date of the related brokered CDs, and are included in deposit interest expense. Certain brokered CDs had an option that allowed the Company to call the CD before its stated maturity. When a brokered CD is called, any unamortized broker placement fee and fair value adjustment are written off and included in noninterest expense on the Consolidated Statements of Operations. At March 31, 2010, the Company had no brokered CDs that could be called before maturity. During the first quarter of 2009, the Company wrote-off $527,000 of unamortized broker placement fees and fair value adjustment.

 

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5. Other Borrowings:

Other borrowings at March 31, 2010 and December 31, 2009 consisted of the following:

 

     March 31, 2010     December 31, 2009  
     Amount
Borrowed
   Weighted
Average
Rate
    Amount
Borrowed
   Weighted
Average
Rate
 
     (dollars in thousands)  

Securities sold under agreements to repurchase:

          

Overnight

   $ 36,488    0.16   $ 45,453    0.16

Term

     387,695    2.32        200,000    4.05   

Federal funds purchased

     207,200    0.47        89,384    0.35   

U.S. Treasury tax and loan note option

     2,039    0.00        2,832    0.00   
                  

Total

   $ 633,422    1.58   $ 337,669    2.52
                          

Overnight repurchase agreements are collateralized financing transactions primarily executed with local Bank customers and with overnight maturities. Term repurchase agreements are collateralized financing transactions executed with broker/dealer counterparties with terms longer than overnight. As of March 31, 2010 and December 31, 2009, the term repurchase agreements consisted of the following:

 

     March 31,
2010
   December 31,
2009
     (in thousands)

Term Repurchase Agreements:

     

Repurchase agreement - rate 0.30%, matured April 1, 2010

   $ 48,329    $ —  

Repurchase agreement - rate 0.30%, matured April 1, 2010

     51,814      —  

Repurchase agreement - rate 0.28%, matured April 5, 2010

     52,552      —  

Repurchase agreement - rate 1.29%, due January 26, 2012

     10,000      —  

Repurchase agreement - rate 1.24%, due March 2, 2012

     25,000      —  

Repurchase agreement - rate 4.08%, due September 13, 2010, callable after December 13, 2007

     40,000      40,000

Repurchase agreement - rate 4.02%, due October 11, 2010, callable after January 10, 2008

     40,000      40,000

Repurchase agreement - rate 3.20%, due December 13, 2012, callable after March 13, 2008

     20,000      20,000

Structured repurchase agreement - rate 4.41%, due August 31, 2012, callable after August 31, 2009, with embedded double interest rate caps on the 3 month LIBOR at 5.58% and a floor of 0.00%

     40,000      40,000

Structured repurchase agreement - rate 4.31%, due September 27, 2012, callable after September 27, 2009, with embedded double interest rate caps on the 3 month LIBOR at 5.20% and a floor of 0.00%

     40,000      40,000

Structured repurchase agreement - rate 3.70%, due December 13, 2012, callable after December 13, 2009, with embedded double interest rate caps on the 3 month LIBOR at 5.11% and a floor of 0.00%

     20,000      20,000
             

Total term repurchase agreements

   $ 387,695    $ 200,000
             

 

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6. Notes Payable and Other Advances:

Notes payable and other advances at March 31, 2010 and December 31, 2009 consisted of the following:

 

     March 31,
2010
   Dec. 31,
2009
     (in thousands)

Taylor Capital Group, Inc.:

     

Revolving credit facility – matured March 31, 2010; $15.0 million maximum available at December 31, 2009, interest rate at December 31, 2009 was 5.00%

   $ —      $ 12,000
             

Total notes payable

     —        12,000
             

Cole Taylor Bank:

     

Federal Reserve Bank Term Auction Facility 0.25%, matured January 14, 2010

     —        460,000

FHLB overnight advance – 0.21% at March 31, 2010

     310,000      —  

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

     25,000      25,000

FHLB advance – 0.62%, due November 10, 2010

     10,000      10,000

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

     25,000      25,000

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

     25,000      25,000

FHLB advance – 0.91%, due June 1, 2011

     10,000      10,000

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

     17,500      17,500

FHLB advance – 1.39%, due January 11, 2012

     10,000      —  

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

     475,000      615,000
             

Total notes payable and other advances

   $ 475,000    $ 627,000
             

The Company had a $15.0 million revolving credit facility, which was repaid prior to its March 31, 2010 maturity.

At March 31, 2010, the FHLB advances were collateralized by $782.4 million of investment securities and a blanket lien on $206.8 million of qualified first-mortgage residential and home equity loans. Based on the value of collateral pledged at March 31, 2010, the Bank had additional borrowing capacity at the FHLB of $389.6 million. In comparison, at December 31, 2009, the FHLB advances were collateralized by $352.0 million of investment securities and a blanket lien on $143.0 million of qualified first-mortgage residential and home equity loans with additional borrowing capacity of $278.7 million.

The Bank participates in the FRB’s Borrower In Custody (“BIC”) program. At March 31, 2010, the Bank pledged $773.0 million of commercial loans as collateral for an available $466.2 million borrowing capacity at the FRB. At December 31, 2009, the Bank also participated in the FRB’s Term Auction Facility. At December 31, 2009, the Bank pledged $85.3 million of securities and $790.8 million of commercial loans for these borrowings at the FRB. During the first quarter of 2010, the Bank replaced its borrowing under the Term Auction Facility as the FRB plans to phase out the program.

 

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7. Stockholders’ Equity:

In March 2010, the Company announced its intention to increase its capital levels to provide additional liquidity to continue to act as a source of strength for the Bank, to better align the Company’s capital position to its peers and to support future growth plans.

The Company has made a tender offer to holders of its Series A convertible preferred stock to convert their shares into common equity. Shares of the Series A preferred is currently convertible into 6.0 million shares of Company common stock. The Company has offered to issue up to an additional 1.2 million common shares to induce holders of the Series A preferred to convert to common shares. If all holders accept the offer and convert to common shares, the Company would issue a total of 7.2 million shares of common stock and would have converted $60.0 million of preferred stock into common equity. The transaction would increase common stock and surplus for the fair value of the 1.2 million shares issued as an inducement. The fair value of the 1.2 million common shares issued would also be considered a non-cash implied dividend to holders of the Series A preferred that would reduce retained earnings and result in no net impact to total stockholders’ equity. In the period in which the inducement shares are issued, the non-cash implied dividends would be a deduction from net income or loss in arriving at net income or loss applicable to common stockholders on the Consolidated Statement of Operations and would be considered in the determination of basic and diluted earnings or loss per share.

The Company is also in the process of a private placement of $30 million of convertible preferred stock and $30 million of subordinated notes issued at the holding company level. We anticipate completing the private placement and the conversion of the Series A preferred into common equity during the second quarter of 2010. The conversion of the Series A preferred is expected to occur during the second quarter of 2010. Effective immediately after the payment of the quarterly dividend on April 15, 2010, the Company does not expect to declare or pay dividends on the Series A preferred stock.

The terms of the Series B Preferred require the Company to obtain consent, under certain circumstances, before paying dividends on common shares, and the terms of the junior subordinated debentures and Series A Preferred place defined restrictions on the Company’s ability to pay common dividends in the event of deferral of the payment of interest or dividends on those securities. Consistent with past practice, the Company provides notice to its regulators before the payment of any dividends on the Series A and Series B preferred stock.

 

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8. Other Comprehensive Income:

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

 

     For the Three Months Ended
March 31, 2010
    For the Three Months Ended
March 31, 2009
 
     Before
Tax
Amount
    Tax
Effect
    Net of
Tax
    Before
Tax
Amount
    Tax
Effect
   Net of
Tax
 
     (in thousands)  

Change in unrealized gains on available-for-sale securities

   $ 12,049      $ (2,530   $ 9,519      $ 9,891      $ 960    $ 10,851   

Less: reclassification adjustment for gains included in net loss

     (1,433     567        (866     (664     263      (401
                                               

Change in net unrealized gains on available-for-sale securities

     10,616        (1,963     8,653        9,227        1,223      10,450   

Change in deferred gains and losses recorded in other comprehensive income

     (1,701     675        (1,026     (2,106     834      (1,272
                                               

Other comprehensive income

   $ 8,915      $ (1,288   $ 7,627      $ 7,121      $ 2,057    $ 9,178   
                                               

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 - Income Taxes.

 

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9. Earnings (Loss) 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 the three month period ended March 31, 2010, all common stock equivalents, consisting of 951,371 stock options 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 loss per share. For the three month period ended March 31, 2009, stock options to purchase 680,209 common shares, 2,862,647 warrants to purchase shares of common stock and the convertible Series A preferred stock which would be converted into 6,000,00 shares of common stock were not included in the computation of diluted loss per share because the effect would have been antidilutive.

 

     For the Three Months
Ended March 31,
 
     2010     2009  
    

(dollars in thousands,

except per share amounts.)

 

Net loss

   $ (10,747   $ (2,818

Preferred dividends and discounts

     (2,887     (2,862
                

Net loss available to common stockholders

   $ (13,634   $ (5,680
                

Weighted average common shares outstanding

     10,515,668        10,471,516   

Dilutive effect of common stock equivalents

     —          —     
                

Diluted weighted average common shares outstanding

     10,515,668        10,471,516   
                

Basic loss per common share

   $ (1.30   $ (0.54

Diluted loss per common share

     (1.30     (0.54

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. The stock options granted during the first quarter of 2010 had a weighted average grant date fair value of $4.44 per share. The weighted average assumptions used in the determination of the grant date fair value included a risk-free interest rate of 2.587%, an expected stock price volatility of 55.00%, an expected dividend payout of 0.00% and an expected option life of 5.25 years. The stock options granted in the first quarter of 2010 vest over a four-year term (vesting 25% per year) and expire eight years following the grant date. 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 three month period ended March 31, 2010:

 

     Shares     Weighted-
Average
Exercise Price

Outstanding at January 1, 2010

   813,099      $ 18.76

Granted

   172,450        8.75

Exercised

   —          —  

Forfeited

   (480     32.60

Expired

   (33,698     24.08
        

Outstanding at March 31, 2010

   951,371        16.75
        

Exercisable at March 31, 2010

   494,970        23.88
            

 

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As of March 31, 2010, the total compensation cost related to nonvested stock options that has not yet been recognized totaled $1.7 million and the weighted average period over which these costs are expected to be recognized is approximately 3.4 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.

The following table provides information regarding nonvested restricted stock for the three month period ended March 31, 2010:

 

Nonvested Restricted Stock

   Shares     Weighted-
Average
Grant-Date
Fair Value

Nonvested at January 1, 2010

   572,322      $ 15.06

Granted

   —          —  

Vested

   (19,530     21.39

Forfeited

   (510     18.53
        

Nonvested at March 31, 2010

   552,282        14.83
            

As of March 31, 2010, the total compensation cost related to nonvested restricted stock that has not yet been recognized totaled $5.7 million and the weighted average period over which these costs are expected to be recognized is approximately 2.9 years.

 

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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 manage the interest rate risk associated with its commercial loan portfolio and its brokered CDs. The following table describes the derivative instruments outstanding at March 31, 2010 (dollars in thousands):

 

Product

   Notional
Amount
   Strike Rates    Maturity    Balance
Sheet/Income
Statement Location
   Fair
Value
 

Fair value hedging derivative instruments:

              

Brokered CD Interest Rate Swap—pay variable/receive fixed

   $ 31,000    Receive 3.03%
Pay 0.251%
   5.0 yrs    Other assets/
Noninterest income
   $ 339   
                  

Total hedging derivative instruments

   $ 31,000            

Non-hedging derivative instruments:

              

Customer Interest Rate Swap—pay fixed/receive variable

   $ 201,227    Pay 4.16%
Receive 0.515%
   3.0 yrs    Other liabilities/
Noninterest income
     (11,216

Customer Interest Rate Swap—receive fixed/pay variable

     201,227    Receive 4.16%
Pay 0.515%
   3.0 yrs    Other assets/
Noninterest income
     11,038   
                  

Total non-hedging derivative instruments

     402,454            
                  

Total derivative instruments

   $ 433,454            
                  

During the first quarter of 2010, the Company entered into $31.0 million of notional amount interest rate swap agreements that are designated as fair value hedges against certain brokered CDs. The CD swaps are used to convert the fixed rate paid on the brokered CDs to a variable rate based upon 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. Total ineffectiveness on the interest rate swap was $10,000 and was recorded in other derivative income in noninterest income.

12. Fair Value:

On January 1, 2008, the Company adopted FASB ASC 820 - Fair Value Measurements and Disclosures. On January 1, 2010, the Company elected to account for all residential mortgage loans originated by its new residential mortgage loan operations and currently held for sale at fair value under the fair value option in accordance with ASC 825 – Financial Instruments. The Company has not elected the fair value option for any other financial asset or liability.

Fair Value Measurement

In accordance with FASB ASC 820, 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.

 

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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.

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 derivative instrument 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. In accordance with accounting guidance of fair value measurements, 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 held for sale:

At March 31, 2010, loans held for sale included of $4.2 million residential mortgage loans that have been originated by the Company and for which the Company has elected to account for on a recurring basis under the fair value option.

In addition, the Company has certain residential mortgage loans that it acquired in a bulk purchase transaction and nonaccrual commercial loans classified as held for sale. These loans are recorded at the lower of cost or fair value and are recorded at fair value on a nonrecurring basis. 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 classified in Level 2 of the fair value hierarchy. The fair value of the commercial loans was initially determined based upon the estimated net contracted sales price, less cost to sell and was classified in Level 2 of the fair value hierarchy. During the first quarter of 2010, the Company transferred these commercial loans to portfolio at the lower of cost or fair value with a charge to nonperforming asset expense in noninterest expense in the Consolidated Statements of Operations.

Loans:

The Company does not record loans 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 established. At March 31, 2010, a portion of the Company’s total impaired loans were evaluated based on the fair value of the collateral. In accordance with fair value measurements, 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 the liquidation value of collateral, the Company classifies the impaired loan as nonrecurring Level 3 in 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.

 

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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.

Assets and Liabilities Measured on a Recurring Basis

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

 

     As of March 31, 2010
     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 investment securities

   $ 1,369,109    $ —      $ 1,369,109    $ —  

Loans held for sale accounted for at fair value

     4,199      —        4,199      —  

Assets held in employee deferred compensation plans

     2,290      2,290      —        —  

Derivative instruments

     11,377      —        11,377      —  

Liabilities:

           

Derivative instruments

     11,216      —        11,216      —  
     As of December 31, 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 investment securities

   $ 1,271,271    $ —      $ 1,271,271    $ —  

Assets held in employee deferred compensation plans

     2,461      2,461      —        —  

Derivative instruments

     10,630      —        10,630      —  

Liabilities:

           

Derivative instruments

     10,216      —        10,216      —  

 

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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, loans held for sale accounted for at the lower of cost or fair value, and other real estate owned and repossessed assets.

 

     As of March 31, 2010
     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

   $ 77,023    $ —      $ 64,243    $ 12,780

Other real estate owned and repossessed assets

     23,474      —        7,113      16,361

 

     As of December 31, 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

   $ 83,868    $ —      $ 68,269    $ 15,599

Other real estate owned and repossessed assets

     18,064      —        7,725      10,339

At March 31, 2010, the Company had $12.8 million of impaired loans and $16.4 million of other real estate and repossessed assets measured at fair value on a nonrecurring basis and classified in Level 3 in the fair value hierarchy. The carrying value of the impaired loans totaled $17.3 million and was written down to fair value of $12.8 million through a provision for loan loss of $4.5 million which was included in earnings in the first quarter of 2010. During the first quarter of 2010, impaired loans classified as Level 3 was reduced by $2.8 million because of sales, payments or net charge-offs. No additional impaired loans were classified as Level 3 during the first quarter of 2010. The carrying value of the other real estate and repossessed assets totaled $18.3 million and was written down to fair value of $16.4 million, resulting in a loss of $1.9 million which was included in earnings in the first quarter of 2010 as either nonperforming asset expense or as additional loan loss provision for assets recently transferred from the loan portfolio. During the first quarter of 2010, $7.9 million of other real estate owned assets were added to Level 3, while $1.9 million of sales or write-downs reduced other real estate owned assets classified as Level 3.

 

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Fair Value of Financial Instruments

The Company is required to provide certain disclosures of the estimated fair value of its financial instruments. A portion of the Company’s assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available, or readily determinable, trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. The Company can use significant estimations and present value calculations for the purposes of estimating fair values. Accordingly, fair values are based on various factors relative to current economic conditions, risk characteristics, and other factors. The assumptions and estimates used in the fair value determination process are subjective in nature and involve uncertainties and significant judgment and, therefore, fair values cannot be determined with precision. Changes in assumptions could significantly affect these estimated values.

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 amount 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.

Investment Securities:

The Company obtains fair value measurements from an independent pricing service. These 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 the residential mortgage loans held for sale, the fair value has been determined based upon quoted market prices for similar assets in active markets. For commercial loans held for sale, the fair value has been determined based upon the estimated net contracted sales prices, less cost to sell.

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. This method of estimating fair value does not incorporate the exit price concept of fair value prescribed by ASC “Fair Value Measurements and Disclosures, (Topic 820).” 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

 

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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 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 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 posting 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.

Other Assets:

Financial instruments in other assets consist of assets in the Company’s nonqualified deferred compensation plan. The carrying value of these assets approximates their fair value and is 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.

 

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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 other 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 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:

 

     March 31, 2010    December 31, 2009
     Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value
     (in thousands)

Financial Assets:

           

Cash and cash equivalents

   $ 38,666    $ 38,666    $ 48,469    $ 48,469

Investments

     1,408,240      1,408,240      1,271,271      1,271,271

Loans held for sale

     28,492      28,842      81,853      82,104

Loans, net of allowance

     2,878,128      2,838,587      2,847,290      2,799,863

Investment in FHLB and Federal Reserve Bank stock

     36,484      36,484      31,210      31,210

Accrued interest receivable

     17,847      17,847      16,653      16,653

Derivative financial instruments

     11,377      11,377      10,630      10,630

Other assets

     2,290      2,290      2,461      2,461
                           

Total financial assets

   $ 4,421,524    $ 4,382,333    $ 4,309,837    $ 4,262,661
                           

Financial Liabilities:

           

Deposits without stated maturities

   $ 1,346,234    $ 1,346,234    $ 1,453,069    $ 1,453,069

Deposits with stated maturities

     1,611,486      1,639,783      1,523,731      1,554,230

Other borrowings

     633,422      645,927      337,669      352,352

Notes payable and other advances

     475,000      478,563      627,000      630,709

Accrued interest payable

     8,669      8,669      11,457      11,457

Derivative financial instruments

     11,216      11,216      10,216      10,216

Junior subordinated debentures

     86,607      59,245      86,607      50,583

Subordinated notes, net

     55,801      53,777      55,695      53,792
                           

Total financial liabilities

   $ 4,228,435    $ 4,243,414    $ 4,105,444    $ 4,116,408
                           

Off-Balance-Sheet Financial Instruments:

           

Unfunded commitments to extend credit

   $ 3,796    $ 3,796    $ 3,485    $ 3,485

Standby letters of credit

     266      266      307      307
                           

Total off-balance-sheet financial instruments

   $ 4,062    $ 4,062    $ 3,792    $ 3,792
                           

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.

13. Subsequent Events

Events subsequent to the balance sheet date of March 31, 2010 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 (“the 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. We also provide asset-based lending and residential mortgage origination services outside our Chicagoland region through offices in other geographic markets.

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 2009 Annual Report on Form 10-K filed with the SEC on March 29, 2010.

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 2009 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 realizability of deferred tax assets and the valuation of financial instruments such as investment securities and derivatives to be critical accounting policies.

 

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

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 categories, 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; changes in the size 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.

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 for each loan. These larger 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 for any one loan may 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 an 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 maintained 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 deferred tax asset valuation allowance is required to be recognized if it is “more 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

 

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concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. We consider both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Examples of positive evidence may include the existence, if any, of taxes paid in available carry-back years and the likelihood that taxable income will be generated in future periods. Examples of negative evidence may include a cumulative loss in the current year and prior two years and negative general business and economic trends. We currently maintain a valuation allowance against substantially all of our deferred tax asset because it is more likely than not that all of these deferred tax assets 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 loan loss provisions made during those periods. In addition, general uncertainty surrounding future economic and business conditions has increased the likelihood of volatility in our future earnings.

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.

At the inception of a formally designated hedge and quarterly thereafter, an assessment is made 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 certain of our derivative instruments, such as 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

 

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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

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 use other independent pricing sources to obtain fair value estimates and perform discounted cash flow analysis for selected securities. When the discounted cash flow analysis obtained from those independent pricing sources indicates that we expect all future principal and interest payments will 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 will be recorded in current earnings for the amount of the credit loss component. 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 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.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements under “Management Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K constitute forward-looking statements. These forward looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act reflect our current expectations and projections about our future results, performance, prospects and opportunities. We have tried to identify these forward-looking statements by using words

 

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including “may,” “might,” “expect,” “plan,” “predict,” “potential,” “contemplate,” “should,” “will,” “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 2010 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 we will not be able to complete any offer to issue shares of common stock to the holders of our Series A Preferred to induce them to convert their shares of Series A Preferred into common stock on terms acceptable to us, if at all;

 

   

the risk that we will not be able to raise the announced private placement of $30 million of convertible preferred stock and $30 million of subordinated notes on terms that are acceptable to us, if at all;

 

   

the risk that our regulators could require us to maintain regulatory capital in excess of the levels needed to be considered well capitalized;

 

   

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 volume of loans secured by commercial real estate in our portfolio;

 

   

uncertainty in estimating the fair value of loans held for sale and the possibility that we will not be able to dispose of these assets 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 risks associated with the establishment of our new residential loan origination line of business, including the expansion 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 recent unprecedented volatility in the capital markets;

 

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

 

   

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, including those relating to capital requirements; 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 sections captioned “Risk Factors” in our December 31, 2009 Annual Report on Form 10-K filed with the SEC on March 29, 2010. 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

For the first quarter of 2010, we reported a net loss applicable to common stockholders of $13.6 million, or ($1.30) per diluted share outstanding, compared to a net loss applicable to common stockholders of $5.7 million, or ($0.54) per diluted share, in the first quarter of 2009. The increase in the credit related costs, including the provision for loan losses and nonperforming asset expense, primarily produced the higher net loss applicable to common stockholders in the first quarter of 2010 as compared to the first quarter of 2009.

During the first quarter of 2010, pre-tax, pre-provision earnings from core operations were $14.2 million, as compared to $11.6 million during the first quarter of 2009, an increase of $2.6 million, or 22.2%. The increase in pre-tax, pre-provision earnings from core operations was due to a $6.1 million increase in net interest income, partly offset by higher noninterest expense. Our accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and general practice within the banking industry. Management does use certain non-GAAP financial measures to evaluate the Company’s financial performance such as the non-GAAP measure of pre-tax, pre-provision earnings from core operations. In this non-GAAP financial measure, the provision for loan losses, nonperforming asset expense and certain non-recurring items, such as gains and losses on investment securities, are excluded from the determination of operating results. Management believes that this measure is useful because it provides a more comparable basis for evaluating financial performance from core operations period to period. The following table reconciles the loss before income taxes to pre-tax, pre-provision earnings from core operations as of the dates indicated.

 

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     For the Three Months
Ended March 31,
 
     2010     2009  
     (dollars in thousands)  

Loss before income taxes

   $ (10,441   $ (4,039

Add back (subtract):

    

Provision for loan losses

     21,130        15,563   

Nonperforming asset expense

     4,938        754   

Gain on sales of investment securities

     (1,433     (664
                

Pre-tax, pre-provision earnings from core operations

   $ 14,194      $ 11,614   
                

During the first quarter of 2010, we announced plans to increase our capital. We have made a tender offer to holders of our Series A convertible preferred stock to convert their shares into common equity. The Series A preferred stock could be converted into 6.0 million shares of common stock. We offered to issue up to an additional 1.2 million common shares to induce holders of the Series A preferred to convert to common shares. If all holders accept the offer and convert to common shares, we will have issued a total of 7.2 million shares of common stock and will have converted $60.0 million of preferred stock into common equity. We are also undertaking a private placement of $30 million of convertible preferred stock and $30 million of subordinated notes issued at the holding company level. The proceeds from this private placement would be used to provide additional liquidity at the holding company to continue to act as a source of strength for our Bank, to better align our capital position to our peers and to support our future growth plans. We anticipate completing the private placement and the conversion of the Series A preferred into common equity during the second quarter of 2010.

In December 2009, we established a new residential mortgage origination line of business by hiring a team of individuals with extensive mortgage banking experience. This unit began originating loans during the first quarter of 2010, and we expect that origination volumes will increase as operations continue to grow. We anticipate that this unit will have offices in several states, with production coming from established relationships with mortgage brokers, retail originations and production from our Bank’s branch locations. We expect that this new line of business will be a source of fee income for us and provide additional earnings diversification.

Net Interest Income

Net interest income is our principal source of earnings and is the difference between total interest income and fees generated by interest-earning assets and total interest expense incurred on interest-bearing liabilities. The amount of net interest income is affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities and the level of rates earned or incurred on those assets and liabilities.

 

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Quarter Ended March 31, 2010 as Compared to the Quarter Ended March 31, 2009

Net interest income was $33.5 million for the first quarter of 2010, an increase of $6.1 million, or 22.4%, from $27.3 million of net interest income in the first quarter of 2009. With an adjustment for tax-exempt income, our consolidated net interest income for the first quarter of 2010 was $34.2 million, compared to $28.1 million for the same quarter a year ago. This non-GAAP presentation is discussed further below.

Our net interest margin is determined by dividing taxable equivalent net interest income by average interest-earning assets, and was 3.15% for the first quarter of 2010, compared to 2.58% for the first quarter of 2009, an increase of 57 basis points. Net interest margin increased in the first quarter of 2010 from the first quarter of 2009 primarily due to a decrease in our cost of funds. Our cost of funds in the first quarter of 2010 was 2.21%, compared to 3.09% during the first quarter of 2009, a decrease of 88 basis points. Between those two quarterly periods, our cost of funds benefited from the continued repricing of term deposits to lower current rates and the reduced reliance on more costly out-of-market funds, such as brokered certificates of deposits (“CDs”). The average cost of time deposits was 2.69% during the first quarter of 2010 as compared to 3.88% during the first quarter of 2009. In addition, an increase in noninterest-bearing deposit balances from customers and the use of available low cost short-term funding opportunities also contributed to the lower cost of funds between the two periods.

At the same time, our interest earning asset yield declined 12 basis points from 5.07% in the first quarter of 2009 to 4.95% in the first quarter of 2010. The decrease in the yield was largely due to changes in the investment portfolio, which caused the yield earned on investment to decrease from 5.46% during the first quarter of 2009 to 4.54% during the first quarter of 2010. Throughout 2009 and into the first quarter of 2010, we have taken steps to increase the size of our investment portfolio in an effort to increase average interest-earning assets and net interest income. These purchases, partly offset by repayments and maturities of higher yield investment securities and the sale of securities, largely produced the lower investment yield. This decrease was partly offset by an increase in the yield earned on loans, which increased 20 basis points from 4.93% during the first quarter of 2009 to 5.13% during the first quarter of 2010. The increase in the loan yield was due to efforts to improve loan pricing, including the use of interest rate floors.

Average interest-earning assets during the first quarter of 2010 were $4.48 billion as compared to $4.43 billion during the first quarter of 2009. Between those two quarterly periods, average investment balances increased while average loan balances decreased. During the first quarter of 2010, average investment securities were $1.35 billion, an increase of $201.1 million, or 17.5%, as compared to average investment securities in the first quarter of 2009. Average loan balances also decreased $215.7 million to $3.02 billion in the first quarter of 2010 as compared to $3.24 billion during the first quarter of 2009. Average loan balances decreased between the two quarterly periods because of our repositioning of our loan portfolio to reduce exposure to industries and sectors we no longer considered economically desirable, gross loan charge-offs, and lower line usage by our customers. On the liability side, average interest-bearing deposits decreased $320.3 million, or 12.2%, to $2.31 billion during the first quarter of 2010 as compared to $2.63 billion in the first quarter of 2009. A $362.3 million decrease in average time deposit balances between the two quarterly periods resulted in the decrease in average interest bearing deposits. This decrease was offset by an increase in average other borrowings and notes payable and other advances.

 

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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.

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%.

 

     INCREASE/(DECREASE)
Quarter Ended March 31, 2010
As Compared to Quarter Ended
March 31, 2009
 
     VOLUME     RATE     NET  
     (in thousands)  

INTEREST EARNED ON:

      

Investment securities

   $ 2,353      $ (2,724   $ (371

Cash equivalents

     (8     (1     (9

Loans

     (2,734     1,574        (1,160
            

Total interest-earning assets

         (1,540
            

INTEREST PAID ON:

      

Interest-bearing deposits

     (2,945     (4,672     (7,617

Total borrowings

     1,349        (1,283     66   
            

Total interest-bearing liabilities

         (7,551
                        

Net interest income, tax-equivalent

   $ (337   $ 6,348      $ 6,011   
                        

 

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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%. 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 March 31,
 
     2010     2009  
     (dollars in thousands)  

Net interest income as stated

   $ 33,467      $ 27,346   

Tax equivalent adjustment-investments

     662        768   

Tax equivalent adjustment-loans

     25        29   
                

Tax equivalent net interest income

   $ 34,154      $ 28,143   
                

Yield on earning assets without tax adjustment

     4.88     5.00

Yield on earning assets - tax equivalent

     4.95     5.07

Net interest margin without tax adjustment

     3.09     2.51

Net interest margin - tax equivalent

     3.15     2.58

Net interest spread without tax adjustment

     2.67     1.91

Net interest spread - tax equivalent

     2.74     1.98

 

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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%.

 

     For the Three Months Ended March 31,  
     2010     2009  
     AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
    AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
 
     (dollars in thousands)  

INTEREST-EARNING ASSETS:

              

Investment securities (1):

              

Taxable

   $ 1,231,724      $ 13,446    4.37   $ 1,012,630      $ 13,513    5.34

Tax-exempt (tax equivalent) (2)

     119,987        1,891    6.30        137,957        2,195    6.37   
                                  

Total investment securities

     1,351,711        15,337    4.54        1,150,587        15,708    5.46   
                                  

Cash equivalents

     294        1    1.36        2,473        10    1.62   
                                  

Loans (2) (3):

              

Commercial and commercial real estate

     2,801,126        35,659    5.09        3,082,591        37,218    4.83   

Residential real estate mortgages

     122,616        1,383    4.51        53,846        777    5.77   

Home equity and consumer

     99,091        1,036    4.24        102,100        1,090    4.33   

Fees on loans

       158          311   
                                  

Net loans (tax equivalent) (2)

     3,022,833        38,236    5.13        3,238,537        39,396    4.93   
                                  

Total interest-earning assets (2)

     4,374,838        53,574    4.95        4,391,597        55,114    5.07   
                                  

NON-EARNING ASSETS:

              

Allowance for loan losses

     (111,348          (131,235     

Cash and due from banks

     74,160             58,452        

Accrued interest and other assets

     141,845             115,479        
                          

TOTAL ASSETS

   $ 4,479,495           $ 4,434,293        
                          

INTEREST-BEARING LIABILITIES:

              

Interest-bearing deposits:

              

Interest-bearing demand deposits

   $ 708,216        2,045    1.17      $ 665,091        1,628    0.99   

Savings deposits

     41,050        8    0.08        42,139        8    0.08   

Time deposits

     1,563,384        10,389    2.69        1,925,731        18,423    3.88   
                                  

Total interest-bearing deposits

     2,312,650        12,442    2.18        2,632,961        20,059    3.09   
                                  

Other borrowings

     481,034        2,285    1.90        340,419        2,176    2.56   

Notes payable and other advances

     622,178        1,624    1.04        427,189        1,519    1.42   

Junior subordinated debentures

     86,607        1,438    6.64        86,607        1,600    7.39   

Subordinated notes

     55,749        1,631    11.70        55,350        1,617    11.69   
                                  

Total interest-bearing liabilities

     3,558,218        19,420    2.21        3,542,526        26,971    3.09   
                                  

NONINTEREST-BEARING LIABILITIES:

              

Noninterest-bearing deposits

     606,604             519,187        

Accrued interest, taxes and other liabilities

     50,085             67,469        
                          

Total noninterest-bearing liabilities

     656,689             586,656        
                          

STOCKHOLDERS’ EQUITY

     264,588             305,111        
                          

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,479,495           $ 4,434,293        
                          

Net interest income (tax equivalent) (2)

     $ 34,154        $ 28,143   
                      

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

        2.74        1.98
                      

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

        3.15        2.58
                      

 

(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  
     March 31,
2010
    March 31,
2009
 
     (in thousands)  

Service charges

   $ 2,857      $ 2,821   

Trust and investment management fees

     347        534   

Mortgage origination revenue

     303        —     

Loss on disposition of bulk purchased mortgage loans

     (2,022     —     

Gain on sales of investment securities

     1,433        664   

Letter of credit & other loan fees

     1,008        206   

Change in market value of employee deferred compensation plan

     15        (242

Other derivative income

     209        1,119   

Other noninterest income

     224        241   
                

Total noninterest income

   $ 4,374      $ 5,343   
                

Quarter Ended March 31, 2010 Compared to the Quarter Ended March 31, 2009

Total noninterest income was $4.4 million during the first quarter of 2010, a decrease of $969,000, or 18.1%, as compared to the $5.3 million of noninterest income for the first quarter of 2009. An increase in the losses from the disposition of bulk purchased mortgage loans was partly offset by an increase in letter of credit and other loan fees and higher gains from the sale of investment securities.

Service charges, principally derived from deposit accounts, were $2.9 million during the first quarter of 2010, essentially the same as the $2.8 million during the first quarter of 2009. An increase in service charges from commercial accounts was largely offset by lower overdraft and service charges from personal accounts.

During April 2010, we completed the sale of our trust business to a third party. After the sale, trust revenues will be eliminated, but we also expect a reduction in noninterest expense, primarily in salaries and benefits, from sale of these operations.

During the first quarter of 2010, our new residential mortgage origination group began operations. This unit originates new, prime residential mortgages through a number of channels and then immediately sells those mortgages in the markets. Total revenues from this mortgage origination group were $303,000 during the first quarter of 2010, and we expect that revenues from this unit will increase in the future as lending volumes increase.

We incurred a $2.0 million loss during first quarter of 2010 associated with our disposition of bulk purchased mortgage loans. This loss was largely due to losses on hedges placed on these single-family loans held for sale and write-downs on the transfer of some of these loans to the loan portfolio. While we classified these loans for sale at December 31, 2009, we have re-evaluated our disposition strategy and transferred certain loans to the loan portfolio where we believe we could obtain the highest economic value for these loans. We completed a sale of approximately $7 million of these loans during the first quarter of 2010 at a small gain.

 

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We recorded a gain on the sale of available-for-sale investment securities of $1.4 million during the first quarter of 2010, as compared to $664,000 during the first quarter of 2009. During the first quarter of 2010, we sold approximately $43 million of mortgage-related securities, at a gain of $1.4 million to take advantage of tightening spreads in the marketplace and to reduce our exposure to certain private label mortgage related securities.

Standby letters of credit and other loan fees totaled $1.0 million during the first quarter of 2010, compared to $206,000 during the first quarter of 2009. The increase in fees was primarily due to our expanded asset based lending operations.

Other derivative income is primarily attributable to recording the initial fair value from the offering of derivative instruments to our customers. Other derivative income was $209,000 during the first quarter of 2010 compared to $1.1 million during the first quarter of 2009. The decrease in revenue was primarily due to a decline in the volume of new swaps.

Noninterest Expense

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

 

     For the Three Months Ended  
     March 31,
2010
    March 31,
2009
 
     (dollars in thousands)  

Salaries and employee benefits:

    

Salaries, employment taxes, and medical insurance

   $ 10,462      $ 9,363   

Sign-on bonuses and severance

     171        259   

Incentives, commissions, and retirement benefits

     980        910   
                

Total salaries and employee benefits

     11,613        10,532   

Occupancy of premises, furniture and equipment

     2,554        2,617   

Nonperforming asset expense

     4,938        754   

FDIC assessment

     2,213        1,531   

Legal fees, net

     819        1,140   

Early extinguishment of debt

     —          527   

Other professional services

     685        306   

Other noninterest expense

     4,330        3,758   
                

Total noninterest expense

   $ 27,152      $ 21,165   
                

Efficiency ratio

     74.58     66.09
                

Quarter Ended March 31, 2010 Compared to the Quarter Ended March 31, 2009

Noninterest expense during the first quarter of 2010 increased $6.0 million, or 28.3%, to $27.2 million, as compared to $21.2 million during the same quarter in 2009. A $4.2 million increase in nonperforming asset expense, a $1.1 million increase in salaries and benefits, and higher Federal Deposit Insurance Corporation (“FDIC”) assessments combined to produce a higher level of noninterest expense in the first quarter of 2010.

 

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Total salaries and employee benefits expense during the first quarter of 2010 increased $1.1 million, or 10.3%, to $11.6 million, as compared to $10.5 million during the first quarter a year ago. Most of the increase was due to higher salaries, employment taxes, and medical insurance, which increased by $1.1 million to $10.5 million during the first quarter of 2010 as compared to $9.4 million during the first quarter of 2009. This increase was primarily due to higher base salaries, mainly caused by an increase in the number of employees associated with the new mortgage loan originations unit, and an increase in employment taxes and costs associated with employee benefit plans. The number of full time equivalent employees increased to 473 at March 31, 2010 as compared to 421 at March 31, 2009. During 2010, we expect that our total salaries and employee benefits expense and the number of full time equivalent employees to increase as our mortgage loan business grows.

Nonperforming asset expenses totaled $4.9 million during the first quarter of 2010 as compared to $754,000 during the first quarter of 2009, an increase of $4.2 million. Nonperforming asset expense during the first quarter of 2010 included a $3.2 million write-down associated with the transfer of certain nonperforming commercial loans held for sale to the loan portfolio. The transfer occurred at the lower of cost or fair value. In addition, an $1.1 million increase in the estimated liability for probable losses on unfunded credit commitments also contributed to the increase in expense during the first quarter of 2010.

FDIC insurance premiums increased to $2.2 million during the first quarter of 2010 as compared to $1.5 million during the first quarter of 2009. The increase was primarily due to higher insurance assessment that went into effect during 2009 for all financial institutions.

Legal fees declined to $819,000 during the first quarter of 2010 as compared to $1.1 million during the first quarter 2009, a decrease of $321,000 or 28.2%. Lower legal fees associated with fees for general corporate matters and loans in our work-out area primarily resulted in the decrease in expense.

During the first quarter of 2009, we incurred $527,000 of expense for the early redemption of approximately $29 million of above market rate brokered CDs. The unamortized issuance costs and fair value adjustments on these deposits were written off at the time of redemption. We incurred no such expense during the first quarter of 2010.

Other noninterest expense principally includes external audit and tax services, advertising, business development and entertainment expenses, consulting, corporate insurance, computer software license fees, and other operating expenses such as telephone, postage, office supplies and printing. Other noninterest expense increased to $4.3 million in the first quarter of 2010, as compared to $3.8 million of other expense in the same quarter in 2009, largely due to higher corporate insurance, operational costs, and computer software and processing.

 

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Efficiency Ratio

An efficiency ratio is calculated by dividing total noninterest expense by total revenues (net interest income and noninterest income, adjusted for gains or losses on investment securities). The lower the efficiency ratio, the more efficient the entity is operating. Our efficiency ratio was 74.58% in the first quarter of 2010, compared to 66.09% in the first quarter in 2009. The higher ratio in the first quarter of 2010 was primarily due to a $4.2 million increase in nonperforming asset expense. Without considering the increase in nonperforming asset expense, our efficiency ratio during the first quarter of 2010 would have been lower than in the first quarter of 2009 largely due to a $6.1 million increase in net interest income.

Income Taxes

During first quarter of 2010, despite a pre-tax loss of $10.4 million, we recorded total income tax expense of $306,000. Because of the valuation allowance on our deferred tax asset, we were not able to record an income tax benefit 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. The expense recorded in the first quarter of 2010 was mostly due 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. We expect income tax expense of $1.3 million during 2010 associated with the release of the residual tax effects.

We recorded a tax benefit of $1.2 million during first quarter of 2009 based upon the annual effective tax rate expected at that time.

FINANCIAL CONDITION

Overview

Total assets increased $110.7 million, or 2.5%, to $4.51 billion at March 31, 2010 from total assets of $4.40 billion at December 31, 2009, largely the result of a $137.0 million increase in investment securities. Total investment securities increased to $1.41 billion at March 31, 2010, compared to $1.27 billion at December 31, 2009. Total loans decreased $22.5 million to $2.91 billion at March 31, 2010, compared to $2.93 billion at December 31, 2009. Total deposits decreased by $19.1 million to $2.96 billion at March 31, 2010, compared to $2.98 billion at December 31, 2009. In addition, during the first three months of 2010, other borrowings increased by $295.8 million to $633.4 million at March 31, 2010 while notes payable and other advances decreased by $152.0 million. Total stockholders’ equity at March 31, 2010 was $253.8 million, as compared to $258.8 million at December 31, 2009.

 

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Investment Securities

Investment securities totaled $1.41 billion at March 31, 2010, compared to $1.27 billion at December 31, 2009, an increase of $137.0 million, or 10.8%. During the first quarter of 2010, we increased our investment portfolio in an effort to increase interest earning assets and enhance our net interest margin. During the first three months of 2010, we purchased approximately $231.5 million of investment securities, mostly mortgage-related securities. We also sold $42.8 million of mortgage-related securities, at a gain of $1.4 million. The overall weighted average life of our investment portfolio at March 31, 2010 was approximately 5.8 years, compared to approximately 6.0 years at December 31, 2009. At March 31, 2010, we transferred $39.1 million of mortgage-related securities from available-for-sale to our held-to-maturity portfolio.

As of March 31, 2010, mortgage-related securities comprised 87.9% of our investment portfolio, of which, over 99% were securities issued by government and government-sponsored enterprises.

The following table shows the composition of our mortgage-related securities as of March 31, 2010 by type of issuer.

 

     Amortized Cost    Fair Value
     Ginnie Mae,
Fannie Mae,
Freddie Mac
   Private
Issuers
   Total    Ginnie Mae,
Fannie Mae,
Freddie Mac
   Private
Issuers
   Total
     (in thousands)

Available-for-sale:

                 

Mortgage-backed securities

   $ 1,028,710    $ 9,879    $ 1,038,589    $ 1,048,788    $ 6,699    $ 1,055,487

Collateralized mortgage obligations

     138,302      —        138,302      142,978      —        142,978
                                         
     1,167,012      9,879      1,176,891      1,191,766      6,699    $ 1,198,465

Held-to-maturity:

                 

Mortgage-backed securities

     39,131      —        39,131      39,131      —        39,131
                                         
   $ 1,206,143    $ 9,879    $ 1,216,022    $ 1,230,897    $ 6,699    $ 1,237,596
                                         

During the first quarter of 2010, we took advantage of pricing opportunities in the market to reduce our exposure to the private-label mortgage-related securities and sold $21.4 million of private-label, collateralized mortgage obligations at a gain of $396,000.

At March 31, 2010, we had a net unrealized gain of $23.2 million in our available-for-sale investment portfolio, which was comprised of $29.7 million of gross unrealized gains and $6.5 million of gross unrealized losses. In comparison, at December 31, 2009, we had a net unrealized gain of $12.5 million, which was comprised of $24.0 million of gross unrealized gains and $11.5 million of gross unrealized losses. The gross unrealized losses at March 31, 2010 related to 45 investment securities with a carrying value of $374.9 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 or for more than 10% of their carrying value are subjected to further

 

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analysis 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-then-temporary impairment has occurred. Of the 57 securities with gross unrealized losses at March 31, 2010, only 5 securities have been in a loss position for 12 months or more and none had additional other-than-temporary impairment.

As a member of Federal Home Loan Bank (“FHLB”), we are required to hold FHLB stock. The amount of required FHLB stock is based on the Bank’s asset size and the amount of borrowings from the FHLB. At March 31, 2010, we held $27.5 million of FHLB stock and maintained $475.0 million of FHLB advances. Currently, 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 believe no impairment has occurred.

Loans

Total loans held for portfolio increased $30.8 million to $2.88 billion at March 31, 2010, from total loans of $2.85 billion at December 31, 2009. Commercial loans, which includes commercial and industrial (“C&I”), commercial real estate secured, and real estate-construction loans, decreased $6.8 million, or 0.2%, while consumer-oriented loans increased $31.6 million. The decline in total commercial loans was primarily due to a decrease of $15.1 million, or 6.8%, in residential construction and land loans. This decrease was partly offset by a $9.2 million, or 0.8%, increase in commercial real estate loans. The increase in consumer loans was primarily due to the transfer of certain mortgage loans from held-for-sale.

The composition of our loan portfolio as of March 31, 2010 and December 31, 2009 was as follows:

 

     March 31, 2010     December 31, 2009  
     Amount     Percentage
of Gross
Loans
    Amount     Percentage
of Gross
Loans
 
     (dollars in thousands)  

Loans Held for Portfolio:

        

Commercial and industrial

   $ 1,263,210      42   $ 1,264,369      43

Commercial real estate secured

     1,180,988      40        1,171,777      39   

Residential construction and land

     206,727      7        221,859      8   

Commercial construction and land

     142,845      5        142,584      5   
                            

Total commercial loans

     2,793,770      94        2,800,589      95   

Consumer-oriented loans

     184,513      6        152,892      5   
                            

Gross loans

     2,978,283      100     2,953,481      100

Less: Unearned discount

     (4       (6  
                    

Total loans

     2,978,279          2,953,475     

Less: Allowance for loan losses

     (100,151       (106,185  
                    

Portfolio loans, net

   $ 2,878,128        $ 2,847,290     
                    

Loans Held for Sale

   $ 28,492        $ 81,853     
                    

 

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Total C&I loans were relatively unchanged at $1.26 billion at both March 31, 2010 and December 31, 2009 and account for 42% of our total loan portfolio. C&I loans include all loans for commercial purposes (other than real estate construction) that are either unsecured or secured by collateral other than commercial real estate. These loans are generally made to operating companies in a variety of businesses, excluding commercial real estate investment. While we continue to actively develop new relationships and originate loans, historically low levels of line utilization by our customers has limited growth in this portfolio.

Our commercial real estate secured loans increased $9.2 million, or 0.8%, to $1.18 billion at March 31, 2010, as compared to $1.17 billion at December 31, 2009. Most of the increase was due to increases in loans secured by owner occupied commercial properties. Approximately 88% of the total commercial real estate secured portfolio is loans secured by owner and non-owner occupied commercial properties. The remainder of this portfolio consists of loans secured by residential income properties. The following table presents the composition of our commercial real estate portfolio as of the dates indicated:

 

     March 31, 2010     December 31, 2009  
     Balance    Percentage of
Total
Commercial
Real Estate

Loans
    Balance    Percentage of
Total
Commercial
Real Estate

Loans
 
     (dollars in thousands)  

Commercial non-owner occupied:

          

Retail strip centers or malls

   $ 211,933    18   $ 211,817    18

Office/mix use property

     145,139    12        149,951    13   

Commercial properties

     144,415    12        144,745    12   

Specialized – other

     125,726    11        121,530    10   

Other commercial properties

     66,228    6        64,602    6   
                          

Subtotal commercial non-owner occupied

     693,441    59        692,645    59   

Commercial owner occupied

     341,106    29        334,744    29   

Multi-family properties

     146,441    12        144,388    12   
                          

Total commercial real estate secured

   $ 1,180,988    100   $ 1,171,777    100
                          

 

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Our real estate construction and land loans consist primarily of loans to professional real estate developers for the construction of single-family homes, town-homes, and condominium conversions and commercial properties. Our residential construction and land loans decreased by $15.1 million, or 6.8%, to $206.7 million at March 31, 2010, as compared to $221.9 million at December 31, 2009. Because of the slowdown in the residential real estate markets and reduced real estate valuations, we have been actively reducing our exposure to this portion of the loan portfolio. The composition of our residential real estate construction and land portfolio as of the date indicated was as follows:

 

     March 31, 2010     December 31, 2009  
     Balance    Percentage of
Total
Construction
Loans
    Percentage of
Gross Loans
    Balance    Percentage of
Total
Construction
Loans
    Percentage of
Gross Loans
 
     (dollars in thousands)  

Residential properties:

              

Single family attached and detached housing

   $ 48,949    24   2   $ 55,849    25   2

Condo (new & conversions)

     57,252    27      2        54,424    25      2   

Multi-family

     51,216    25      2        51,191    23      2   

Completed for sale

     10,311    5      *        11,968    5      1   
                                      

Total residential construction

     167,728    81      6        173,432    78      7   

Land – unimproved & farmland

     27,440    13      1        37,317    17      1   

Land – improved & entitled

     1,999    1      *        2,271    1      *   

Land – under development

     9,560    5      *        8,839    4      *   
                                      

Total land

     38,999    19      1        48,427    22      1   
                                      

Total residential construction and land

   $ 206,727    100   7   $ 221,859    100   8
                                      

 

* Represents less than 1%

Commercial construction and land loans totaled $142.8 million at March 31, 2010 as compared to $142.6 million at December 31, 2009, an increase of $261,000.

Total consumer-oriented loans, which include residential real estate mortgages, home equity loans and lines of credit, and other consumer loans, increased $31.6 million, or 20.7%, to $184.5 million at March 31, 2010. The increase was primarily due to the transfer of $33.7 million of certain mortgage loans held-for-sale to the loan portfolio.

Loans Held for Sale

At March 31, 2010, we held $28.5 million loans classified as held for sale, as compared to $81.9 million at December 31, 2009. At March 31, 2010, the held for sale portfolio consisted of both originated and bulk purchased residential loans. At December 31, 2009, the held for sale portfolio consisted of bulk purchased residential mortgage loans and certain nonaccrual commercial loans.

At March 31, 2010, we had $24.3 million of bulk purchased residential mortgage loans classified as held for sale. In 2009, we purchased a participation interest in 20 pools of residential single family mortgages that were to have been pooled into pass-through certificates to be issued by a mortgage originator and guaranteed by the Government National Mortgage Association, otherwise known as Ginnie Mae, and sold to third party investors. However, the mortgage loan originator was not able to securitize all the single family loans because Ginnie Mae removed the originator from its list of eligible issuers, so we took possession of the underlying collateral and we continue to work on disposing of those loans. In the first quarter 2010, we sold $7.2 million of these loans without retaining servicing rights. We also moved a portion of these loans to the loan portfolio as we have re-evaluated our disposition strategy in order to the highest economic value for these loans.

 

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At March 31, 2010, we had $4.2 million of mortgage loans held for sale that were originated by our new mortgage loan origination unit. These loans will be sold shortly after closing with no servicing rights retained. The Company has elected to account for these loans at fair value. The unpaid principal balance associated with these loans was $4.0 million at March 31, 2010 and the resulting unrealized gain of $187,000 was included in mortgage origination revenues in noninterest income on the Consolidated Statements of Operations.

At December 31, 2009, in addition to the bulk purchased mortgage loans, we also had certain commercial nonaccrual loans that we were in negotiations to sell. In first quarter 2010, the pending transaction to sell these loans did not close, and we transferred these loans to the loan portfolio. This transfer occurred at the lower of cost or fair value and we recorded an additional write-down of $3.2 million in nonperforming asset expense in noninterest expense on the Consolidated Statements of Operations. At March 31, 2010, we no longer had any commercial loans classified as held for sale.

Loan Quality and Nonperforming Assets

The following table sets forth the amounts of nonperforming assets as of the dates indicated:

 

     Mar. 31,
2010
    Dec. 31,
2009
    Mar. 31,
2009
 
     (dollars in thousands)  

Loans contractually past due 90 days or more but still accruing interest

   $ 58      $ 59      $ 95   

Nonaccrual loans:

      

Commercial and industrial

     25,310        26,687        25,472   

Commercial real estate secured

     34,863        36,420        35,154   

Residential construction and land

     57,320        62,795        100,558   

Commercial construction and land

     14,171        4,245        17,117   

All other loan types

     9,468        11,256        5,901   
                        

Total nonaccrual loans

     141,132        141,403        184,202   
                        

Total nonperforming loans

     141,190        141,462        184,297   

Other real estate owned and repossessed assets

     27,355        26,231        18,232   
                        

Total nonperforming assets

   $ 168,545      $ 167,693      $ 202,529   
                        

Restructured loans not included in nonperforming assets

   $ 1,247      $ 1,196      $ —     

Nonperforming loans to total loans

     4.70     4.66     5.73

Nonperforming assets to total loans plus repossessed property

     5.55     5.48     6.27

Nonperforming assets to total assets

     3.73     3.81     4.41

Nonperforming assets were $168.5 million, or 3.73% of total assets on March 31, 2010, compared to $167.7 million, or 3.81% of total assets on December 31, 2009, and $202.5 million, or 4.41% of total assets on March 31, 2009. During the first quarter of 2010, $27.2 million of nonperforming commercial loans were charged-off and $10.4 million of loans were transferred to other real estate owned and repossessed assets. These decreases in nonperforming assets were partly offset by new nonaccrual loans.

 

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Nonperforming loans:

Nonperforming loans include nonaccrual loans and interest-accruing loans that are contractually past due 90 days or more. We evaluate all loans on which principal or interest is contractually past due 90 days or more to determine if they are adequately secured and in the process of collection. If sufficient doubt exists as to the full collection of principal and interest on a loan, we place it on nonaccrual and we discontinue recognizing interest income. After a loan is placed on nonaccrual status, any current period interest previously accrued but not yet collected is reversed against current income. Interest is included in income subsequent to the date the loan is placed on nonaccrual status only as interest is received and so long as management is satisfied that there is a high probability that principal will be collected in full. The loan is returned to accrual status only when the borrower has made required payments for a minimum length of time and demonstrates the ability to make future payments of principal and interest as scheduled.

Residential construction and land loans continue to be the largest category of nonaccrual loans and comprise approximately 41% of all nonaccrual loans. The decrease in residential construction and land loans was primarily due to charge-offs and transfers to other real estate owned. These decreases were partly offset by new nonaccrual loans. Commercial construction and land nonaccrual loans increased to $14.2 million at March 31, 2010 from $4.2 million at December 31, 2009, primarily due to one new nonaccrual loan.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets totaled $27.4 million at March 31, 2010 as compared to $26.2 million at December 31, 2009 and $18.2 million at March 31, 2009. The following table provides a rollforward, for the periods indicated, of other real estate and repossessed assets:

 

     For the Period Ended  
     March 31,
2010
    March 31,
2009
 

Balance at beginning of period

   $ 26,231      $ 13,179   

Transfers from loans

     10,385        6,990   

Additional investment in foreclosed properties

     —          261   

Dispositions

     (5,025     (1,438

Additional impairment

     (4,236     (760
                

Balance at end of period

   $ 27,355      $ 18,232   
                

During first quarter 2010, we transferred $10.4 million of loans into other real estate and repossessed assets. The loans transferred primarily consisted of $8.5 million from our residential construction and land portfolio and $1.1 million from our commercial construction and land portfolio. During first quarter of 2010, we also received net proceeds of $5.3 million on the sale of other real estate owned assets that had a carrying value of $5.0 million, resulting in a net gain of $232,000, which reduced nonperforming asset expense in noninterest expense. We also

 

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reduced the carrying value of certain other real estate owned and repossessed assets by $4.2 million during first quarter 2010 to reflect a decrease in the estimated fair value of those assets. This decrease was recorded as either additional nonperforming asset expense or provision for loan losses for assets recently transferred from the loan portfolio. The level of other real estate owned and repossessed assets have increased during 2010 and we expect that these assets may continue to increase in the future as we work through the elevated level of nonperforming assets.

Impaired loans:

At March 31, 2010, impaired loans totaled $132.9 million, compared to $141.7 million at December 31, 2009. Total impaired loans were $191.8 million at March 31, 2009.

The balance of impaired loans and the related allowance for loan losses for impaired loans is as follows:

 

     March 31,
2010
   Dec. 31,
2009
   March 31,
2009
     (in thousands)

Impaired loans:

        

Commercial and industrial

   $ 25,310    $ 31,447    $ 31, 372

Commercial real estate secured

     34,863      36,420      35,153

Residential construction and land

     57,320      68,389      108,128

Commercial construction and land

     14,171      4,245      17,116

Consumer-oriented

     1,247      1,196      —  
                    

Total impaired loans

   $ 132,911    $ 141,697    $ 191,769
                    

Recorded balance of impaired loans:

        

With related allowance for loan losses

   $ 101,364    $ 95,936    $ 175,085

With no related allowance for loan losses

     31,547      45,761      16,684
                    

Total impaired loans

   $ 132,911    $ 141,697    $ 191,769
                    

Allowance for losses on impaired loans:

        

Commercial and industrial

   $ 5,961    $ 10,085    $ 10,670

Commercial real estate secured

     3,589      4,485      3,591

Residential construction and land

     10,095      19,070      30,502

Commercial construction and land

     4,696      —        4,797

Consumer-oriented

     —        —        —  
                    

Total allowance for losses on impaired loans

   $ 24,341    $ 33,640    $ 49,560
                    

The decrease in impaired loans during the first quarter of 2010 primarily resulted from net charge-offs and transfers into other real estate owned, partially offset by additions to impaired loans during the period. The allowance for loan losses related to impaired loans decreased during 2010 and totaled $24.3 million at March 31, 2010 as compared to $33.6 million at December 31, 2009 and $49.6 million at March 31, 2009. The decrease in the allowance for losses on impaired loans in 2010 was primarily due to net charge-offs during the period, partially offset by an increase in the estimated impairment on these loans. Residential construction and land loans comprise approximately 40% of all impaired loans and comprised 42% of the allowance for loan losses on impaired loans.

 

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Through an individual impairment analysis, at March 31, 2010, we determined that $101.4 million of our impaired loans had a specific measure of impairment and required a related allowance for loan losses of $24.3 million. We also held $31.5 million of impaired loans, for which the individual analysis did not result in a measure of impairment, and so no related allowance for loan losses was provided. Once we determine the loan is impaired, we perform an individual analysis to establish the amount of the related allowance for loan losses, if any, based upon 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 upon the fair value of the collateral, less cost to sell. Generally, since the majority of our impaired loans are collateral-dependent real estate loans, the fair value is determined by a current appraisal. The individual impairment analysis also takes into account available and reliable borrower guarantees and any cross-collateralization agreements. Certain other loans are collateralized by business assets, such as equipment, inventory, and accounts receivable. The fair value of these loans is based upon estimates of realizability and collectability of the underlying collateral. While impaired loans exhibit weaknesses that may inhibit repayment in compliance with the original note terms, the impairment analysis may not result in a related allowance for loan losses for each individual loan.

Impaired loans include all nonaccrual loans, accruing loans judged to have higher risk of noncompliance with the present contractual repayment schedule for both interest and principal, as well as troubled debt restructurings. Unless modified in a troubled-debt restructuring, certain homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment and are, therefore, excluded from impaired loans. In addition, we have modified certain consumer-orientated loans, primarily home equity loans, with a remaining total principal balance of $1.2 million, which were considered troubled-debt restructurings. These loans are reported as impaired loans and evaluated for impairment.

At March 31, 2010, we held $5.7 million of loans classified as a troubled debt restructuring. Total troubled debt restructurings included consumer loans of $1.2 million and commercial loans of $4.5 million. The commercial loans are considered nonaccrual and included in nonperforming loans. At March 31, 2010, we did not have additional commitments to lend on loans considered troubled debt restructurings.

A reconciliation of nonaccrual and impaired loans as of March 31, 2010 is presented below:

 

     Nonaccrual
Loans
   Impaired
Loans
     (dollars in thousands)

Commercial nonaccrual loans

   $ 131,664    $ 131,664

Commercial loans on accrual but impaired

     n/a      —  

Consumer-oriented loans

     9,468      1,247
             
   $ 141,132    $ 132,911
             

n/a - not applicable

 

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Potential Problem Loans

As part of our standard credit administration process, we risk rate our commercial loan portfolio. As part of this process, loans that are rated with a higher level of risk are monitored more closely. We internally identify certain loans in our loan risk ratings that we have placed on heightened monitoring because of certain weaknesses that may inhibit the borrower’s ability to perform under the contractual terms of the loan agreement but have not reached the status of nonaccrual loans. As of March 31, 2010, these potential problem loans totaled $72.9 million. Of these potential problem loans at March 31, 2010, $34.1 million were in our commercial and industrial portfolio, $22.5 million were in our residential construction and land portfolio and $16.2 million were in our commercial real estate portfolio. In comparison, potential problem loans at December 31, 2009 totaled $75.6 million. The largest categories of potential problem loans at December 31, 2009 included $30.7 million of residential construction and land loans and $30.0 million of commercial and industrial loans, and the remaining $14.9 million were loans secured by commercial real estate. We do not necessarily expect to realize losses on potential problem loans, but we recognize potential problem loans can carry a higher probability of default and may require additional attention by management.

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 the loan portfolio. Our methodology for measuring the appropriate level of the allowance includes identifying problem loans, estimating the amount of probable loss related to those loans, estimating probable losses from specific portfolio segments and evaluating the impact on our loan portfolio of a number of economic and qualitative factors. Although management believes that the allowance for loan losses is adequate to absorb probable losses on existing loans that may become uncollectible at this point in time, there can be no assurance that our allowance will prove sufficient to cover actual loan losses in the future.

 

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The following table includes an analysis of our allowance for loan losses and other related data for the periods indicated:

 

     For Three Months Ended
March 31,
 
     2010     2009  
     (dollars in thousands)  

Average total loans

   $ 3,022,833      $ 3,238,537   
                

Total loans at end of period

   $ 3,006,771      $ 3,214,096   
                

Allowance for loan losses:

    

Allowance at beginning of period

   $ 106,185      $ 128,548   

Net (charge-offs) recoveries:

    

Commercial and commercial real estate

     (8,439     (5,312

Real estate – construction

     (17,605     (8,448

Residential real estate mortgages and consumer loans

     (1,120     (69
                

Total net charge-offs

     (27,164     (13,829

Provision for loan losses

     21,130        15,563   
                

Allowance at end of period

   $ 100,151      $ 130,282   
                

Annualized net charge-offs to average total loans

     3.59     1.71

Allowance to total loans at end of period

     3.33     4.05

Allowance to nonperforming loans

     70.93     70.69

Our allowance for loan losses was $100.2 million at March 31, 2010, or 3.33% of end-of-period loans and 70.93% of nonperforming loans. At March 31, 2009, the allowance for loan losses was $130.3 million, which represented 4.05% of end-of-period loans and 70.69% of nonperforming loans. Net charge-offs during the first quarter of 2010 were $27.2 million, or 3.59% of average loans on an annualized basis. In comparison, net charge-offs during the first quarter of 2009 were $13.8 million, or 1.71% of average loans on an annualized basis. Net charge-offs have increased as we continue to work through our nonperforming assets and impaired loans.

Provision for Loan Losses

We determine a provision for loan losses that we consider sufficient to maintain an allowance covering probable losses inherent in our portfolio as of the balance sheet date. Our provision for loan losses was $21.1 million for the first quarter of 2010, compared to $15.6 million for the first quarter of 2009. An increase in the level of net charge-offs during the first quarter of 2010 primarily produced the higher loan loss provision as compared to the first quarter of 2009. During the first quarter of 2010, the total allowance for loan losses decreased as net charge-offs exceeded the provision for loan losses. While charge-offs continue to be elevated, the portion of the allowance for loan losses related to impaired loans decreased from $33.6 million at December 31, 2009 to $24.3 million at March 31, 2010.

Deposits

Total deposit balances at March 31, 2010 decreased $19.1 million to $2.96 billion as compared to $2.98 billion at year-end 2009. During the first quarter of 2010, our total in-market deposits decreased $44.6 million, or 1.9% to $2.36 billion at March 31, 2010. At the same time, our out-of-market deposits increased by $25.5 million, or 4.5% to $595.9 million at March 31, 2010.

 

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Total in-market deposits were $2.36 billion at March 31, 2010 as compared to $2.41 billion at December 31, 2009. Noninterest-bearing deposits decreased $71.7 million to $587.4 million at March 31, 2010, primarily due to a $38.9 million decrease in trust deposits as compared to December 31, 2009, and seasonal factors as first quarter noninterest-bearing deposits typically decrease from year-end balances. Lower NOW accounts, which decreased $79.0 million primarily due to a decrease in balances from one customer, also contributed to the decrease. In addition, these decreases were partly offset by time deposits maintained through the CDARS network which increased by $46.8 million and money market accounts which increased $45.1 million. Total out-of-market deposits increased by $25.5 million to $595.9 million at March 31, 2010 from $570.4 million at year-end 2009, with most of the increase occurring in out-of-local market CDs which increased by $26.4 million.

The following table sets forth the period-end balances of total deposits as of each of the dates indicated, as well as categorizes our deposits as “in-market” and “out-of-market” deposits:

 

     Mar. 31,
2010
   Dec. 31,
2009
     (in thousands)

In-market deposits:

     

Non-interest bearing deposits

   $ 587,402    $ 659,146

NOW accounts

     227,981      307,025

Savings accounts

     40,903      41,479

Money market accounts

     483,209      438,080

Customer certificates of deposit

     784,108      775,663

CDARS time deposits

     163,025      116,256

Public time deposits

     75,170      68,763
             

Total in-market deposits

     2,361,798      2,406,412

Out-of-market deposits:

     

Brokered money market deposits

     6,739      7,338

Out-of-local-market certificates of deposit

     105,384      79,015

Brokered certificates of deposit

     483,799      484,035
             

Total out-of-market deposits

     595,922      570,388
             

Total deposits

   $ 2,957,720    $ 2,976,800
             

Average deposits for the first three months of 2010 decreased $232.9 million, or 7.4%, to $2.92 billion, compared to $3.15 billion for the first three months of 2009. Total time deposits decreased $362.3 million, with a $345.5 million decrease in average brokered CDs accounting for most of that decrease. This decrease was partly offset by an $87.4 million, or 16.8%, increase in noninterest-bearing demand deposits and higher money market account balances of $30.0 million. Since 2009, we focused on changing our funding mix by obtaining more funding from core customers and increasing noninterest-bearing deposits and reducing our reliance on higher costing out-of-market deposits, such as brokered CDs.

 

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The following table sets forth, for the periods indicated, the distribution of our average deposit account balances and average cost of funds in each category of deposits:

 

     For the Three Months Ended
March 31, 2010
    For the Three Months Ended
March 31, 2009
 
     Average
Balance
   Percent of
Deposits
    Rate     Average
Balance
   Percent of
Deposits
    Rate  
     (dollars in thousands)  

Noninterest-bearing demand deposits

   $ 606,604    20.8   —     $ 519,187    16.5   —  

NOW accounts

     243,649    8.3      1.52        230,573    7.3      1.52   

Money market accounts

     464,567    15.9      0.99        434,518    13.8      0.71   

Savings deposits

     41,050    1.4      0.08        42,139    1.3      0.08   

Time deposits:

              

Certificates of deposit

     779,963    26.7      2.59        862,203    27.4      3.85   

Out-of-local-market certificates of deposit

     85,822    2.9      2.44        121,909    3.9      3.99   

Brokered certificates of deposit

     498,665    17.1      3.44        844,125    26.7      4.07   

CDARS time deposits

     124,558    4.3      1.58        28,258    0.9      1.32   

Public Funds

     74,376    2.6      0.90        69,236    2.2      2.81   
                                      

Total time deposits

     1,563,384    53.6      2.69        1,925,731    61.1      3.88   
                              

Total deposits

   $ 2,919,254    100.0     $ 3,152,148    100.0  
                              

Other Borrowings

Other borrowings include securities sold under agreements to repurchase, federal funds purchased and U.S. Treasury tax and loan note option borrowings. Period-end other borrowings increased $295.8 million to $633.4 million at March 31, 2010, as compared to $337.7 million at December 31, 2009. Most of the increase resulted from higher Federal fund purchased balances of $117.8 million and a $187.7 million increase in term repurchase agreements. We increased these borrowings to help fund investment securities purchased in the first quarter of 2010 and to replace borrowing under the FRB’s Term Auction Facility when we exited this program during the first quarter of 2010.

At March 31, 2010, subject to available collateral and current borrowings, the Bank had available pre-approved repurchase agreement lines of $483 million and pre-approved overnight federal funds borrowing lines of $68 million. In comparison, at December 31, 2009, we had available pre-approved repurchase agreement lines of $830 million and pre-approved overnight federal funds borrowing lines of $130 million.

Notes Payable and Other Advances

Borrowings from the FHLBC increased $320.0 million during the first three months of 2010 to $475.0 million at March 31, 2010, compared to $155.0 million as of December 31, 2009. We increased borrowings from the FHLBC during the first quarter to replace funds we had borrowed under the FRB’s Term Auction Facility. At March 31, 2010, the borrowings from the FHLBC are collateralized by $782.4 million of securities and $206.8 million of qualified first-mortgage residential and home equity loans and we have additional borrowing capacity of $389.6 million. At December 31, 2009, we maintained collateral of $352.0 million of securities and $143.0 million on qualified first-mortgage residential and home equity loans and had additional borrowing capacity of $278.7 million.

 

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During the first quarter of 2010, we exited the FRB’s Term Auction Facility program. At December 31, 2009, we had $460.0 million of borrowings from the FRB Term Auction Facility. We continue to participate in the FRB’s Borrower In Custody (“BIC”) program. At March 31, 2010 the Bank pledged $773.0 of commercial loans as collateral and had available $466.2 million of borrowing capacity at the FRB.

During the first quarter of 2010, we repaid the $12.0 million that was outstanding under our $15 million revolving credit facility prior to its March 31, 2010 maturity. At December 31, 2009, $12.0 million was outstanding under this facility.

Junior Subordinated Debentures

At March 31, 2010, we had $86.6 million of junior subordinated debentures comprised of $45.4 million issued to TAYC Capital Trust I and $41.2 million issued to TAYC Capital Trust II. The junior subordinated debentures issued by each trust are currently callable at par, at our option. At March 31, 2010, unamortized issuance costs relating to TAYC Capital Trust I were $2.3 million and $380,000 related to TAYC Capital Trust II. Unamortized issuance costs would be recognized as noninterest expense if the debentures were called by us.

Subordinated Notes

In September 2008, the Bank issued $60.0 million of eight year, 10% subordinated notes, pre-payable at the Bank’s option after three years. The notes were issued with detachable warrants to purchase up to 900,000 shares of our common stock at an exercise price of $10.00 per share. At March 31, 2010, the subordinated notes reported on the Consolidated Balance Sheet totaled $55.8 million, which was net of $4.3 million of unamortized discount. The discount consists primarily of the fair value allocated to the warrants and was reported as an addition to surplus in the equity portion of the Consolidated Balance Sheet. The discount is being amortized as an additional interest expense of the subordinated notes, over the remaining contractual life of the notes.

 

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CAPITAL RESOURCES

At March 31, 2010 and December 31, 2009, both the Company and Cole Taylor Bank were considered “well capitalized” under capital guidelines for bank holding companies and banks. The Company’s and Cole Taylor Bank’s capital ratios were as follows as of the dates indicated:

 

     ACTUAL     FOR CAPITAL
ADEQUACY
PURPOSES
    TO BE WELL
CAPITALIZED UNDER
PROMPT
CORRECTIVE ACTION
PROVISIONS
 
     AMOUNT    RATIO     AMOUNT    RATIO     AMOUNT    RATIO  
     (dollars in thousands)  

As of March 31, 2010:

               

Total Capital (to Risk Weighted Assets)

               

Taylor Capital Group, Inc.

   $ 420,650    12.34   >$272,740    >8.00   >$340,925    >10.00

Cole Taylor Bank

     412,621    12.12      >272,388    >8.00      >340,485    >10.00   

Tier I Capital (to Risk Weighted Assets)

               

Taylor Capital Group, Inc.

     316,635    9.29      >136,370    >4.00      >204,555    >6.00   

Cole Taylor Bank

     313,502    9.21      >136,194    >4.00      >204,291    >6.00   

Leverage (to average assets)

               

Taylor Capital Group, Inc.

     316,635    7.07      >179,180    >4.00      >223,975    >5.00   

Cole Taylor Bank

     313,502    7.01      >178,893    >4.00      >223,617    >5.00   

As of December 31, 2009:

               

Total Capital (to Risk Weighted Assets)

               

Taylor Capital Group, Inc.

   $ 433,197    12.72   >$272,411    >8.00   >$340,514    >10.00

Cole Taylor Bank

     395,869    11.64      >272,030    >8.00      >340,038    >10.00   

Tier I Capital (to Risk Weighted Assets)

               

Taylor Capital Group, Inc.

     333,479    9.79      >136,205    >4.00      >204,308    >6.00   

Cole Taylor Bank

     296,839    8.73      >136,015    >4.00      >204,023    >6.00   

Leverage (to average assets)

               

Taylor Capital