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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - TAYLOR CAPITAL GROUP INCdex311.htm
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - TAYLOR CAPITAL GROUP INCdex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) - TAYLOR CAPITAL GROUP INCdex312.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 June 30, 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 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 August 10, 2010, there were 18,312,772 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) - June 30, 2010 and December 31, 2009    1
   Consolidated Statements of Operations (unaudited) - For the second quarter and six months ended June 30, 2010 and 2009    2
   Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - For the six months ended June 30, 2010 and 2009    3
   Consolidated Statements of Cash Flows (unaudited) - For the six months ended June 30, 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    31
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    67
Item 4.    Controls and Procedures    67
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings    69
Item 1A.    Risk Factors    69
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    69
Item 3.    Defaults Upon Senior Securities    69
Item 4.    (Removed and Reserved)    69
Item 5.    Other Information    69
Item 6.    Exhibits    70
   Signatures    72


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollars in thousands, except per share data)

 

     June 30,
2010
    December 31,
2009
 
ASSETS     

Cash and cash equivalents:

    

Cash and due from banks

   $ 57,459      $ 48,420   

Short-term investments

     1,051        49   
                

Total cash and cash equivalents

     58,510        48,469   

Investment securities:

    

Available-for-sale, at fair value

     1,365,136        1,271,271   

Held-to-maturity, at amortized cost (fair value of $67.7 million at June 30, 2010)

     65,283        —     

Loans held for sale ($43.0 million accounted for at fair value at June 30, 2010)

     78,437        81,853   

Loans, net of allowance for loan losses of $100,500 and $106,185 at June 30, 2010 and December 31, 2009, respectively

     2,858,727        2,847,290   

Premises, leasehold improvements and equipment, net

     14,616        15,515   

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

     36,484        31,210   

Other real estate and repossessed assets, net

     28,169        26,231   

Other assets

     79,868        81,663   
                

Total assets

   $ 4,585,230      $ 4,403,502   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Noninterest-bearing

   $ 570,423      $ 659,146   

Interest-bearing

     2,472,543        2,317,654   
                

Total deposits

     3,042,966        2,976,800   

Other borrowings

     586,960        337,669   

Accrued interest, taxes and other liabilities

     55,575        60,925   

Notes payable and other advances

     445,000        627,000   

Junior subordinated debentures

     86,607        86,607   

Subordinated notes, net

     85,367        55,695   
                

Total liabilities

     4,302,475        4,144,696   
                

Stockholders’ equity:

    

Preferred stock, $.01 par value, 10,000,000 shares authorized:

    

Series A, 8% non-cumulative convertible perpetual, no shares issued and outstanding at June 30, 2010, 2,400,000 shares issued and outstanding at December 31, 2009, $25.00 liquidation value

     —          60,000   

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

     99,603        98,844   

Series C, 8% non-cumulative, convertible perpetual, 1,500,000 shares authorized, 1,276,480 issued and outstanding at June 30, 2010, $25.00 liquidation value, no shares issued and outstanding at December 31, 2009

     31,912        —     

Common stock, $.01 par value; 45,000,000 shares authorized; 19,265,440 and 12,029,375 shares issued at June 30, 2010 and December 31, 2009, respectively; 18,312,772 and 11,076,707 shares outstanding at June 30, 2010 and December 31, 2009, respectively

     193        120   

Surplus

     306,703        226,398   

Accumulated deficit

     (172,583     (110,617

Accumulated other comprehensive income, net

     41,563        8,697   

Treasury stock, at cost, 952,668 shares

     (24,636     (24,636
                

Total stockholders’ equity

     282,755        258,806   
                

Total liabilities and stockholders’ equity

   $ 4,585,230      $ 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 Second Quarter
Ended June 30,
    For the Six Months
Ended June 30,
 
     2010     2009     2010     2009  

Interest income:

        

Interest and fees on loans

   $ 38,260      $ 39,552      $ 76,471      $ 78,919   

Interest and dividends on investment securities:

        

Taxable

     14,209        14,745        27,655        28,258   

Tax-exempt

     1,212        1,416        2,441        2,843   

Interest on cash equivalents

     1        2        2        12   
                                

Total interest income

     53,682        55,715        106,569        110,032   
                                

Interest expense:

        

Deposits

     11,994        18,223        24,436        38,282   

Other borrowings

     2,469        2,232        4,754        4,408   

Notes payable and other advances

     1,174        1,719        2,798        3,238   

Junior subordinated debentures

     1,446        1,541        2,884        3,141   

Subordinated notes

     1,921        1,620        3,552        3,237   
                                

Total interest expense

     19,004        25,335        38,424        52,306   
                                

Net interest income

     34,678        30,380        68,145        57,726   

Provision for loan losses

     43,946        39,507        65,076        55,070   
                                

Net interest income (loss) after provision for loan losses

     (9,268     (9,127     3,069        2,656   
                                

Noninterest income:

        

Service charges

     2,781        2,768        5,638        5,589   

Trust and investment management fees

     235        475        582        1,009   

Mortgage origination revenue

     1,892        —          2,195        —     

Loss on disposition of bulk purchased mortgage loans

     (5     —          (2,027     —     

Gains on investment securities

     142        7,595        1,575        8,259   

Other derivative income (loss)

     (42     153        167        1,272   

Other noninterest income

     1,155        1,146        2,402        1,351   
                                

Total noninterest income

     6,158        12,137        10,532        17,480   
                                

Noninterest expense:

        

Salaries and employee benefits

     12,246        11,004        23,859        21,536   

Occupancy of premises

     2,208        2,013        4,250        4,062   

Furniture and equipment

     545        526        1,057        1,094   

Non-performing asset expense

     4,055        224        8,993        978   

FDIC assessment

     1,970        4,368        4,183        5,899   

Legal fees, net

     1,427        1,655        2,246        2,795   

Early extinguishment of debt

     —          —          —          527   

Other noninterest expense

     5,016        3,917        10,031        7,981   
                                

Total noninterest expense

     27,467        23,707        54,619        44,872   
                                

Loss before income taxes

     (30,577     (20,697     (41,018     (24,736

Income tax expense

     306        2,558        612        1,337   
                                

Net loss

     (30,883     (23,255     (41,630     (26,073

Preferred dividends and discounts

     (1,693     (2,868     (4,580     (5,730

Implied non-cash preferred dividend

     (15,756     —          (15,756     —     
                                

Net loss applicable to common stockholders

   $ (48,332   $ (26,123   $ (61,966   $ (31,803
                                

Basic loss per common share

   $ (3.35   $ (2.49   $ (4.97   $ (3.03

Diluted loss per common share

     (3.35     (2.49     (4.97     (3.03

See accompanying notes to consolidated financial statements (unaudited)

 

2


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(dollars in thousands, except per share data)

 

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

Balance at December 31, 2009

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

Conversion of Series A preferred to common stock

    (60,000     —       —       60     59,919        —          —          —          (21

Implied non-cash preferred dividend

    —          —       —       12     15,744        (15,756     —          —          —     

Issuance of preferred stock, Series C, net of issuance costs

    —          —       31,912     —       (979     —          —          —          30,933   

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

    —          —       —       —       4,367        —          —          —          4,367   

Issuance of restricted stock grants

    —          —       —       1     —          —          —          —          1   

Amortization of stock based compensation awards

    —          —       —       —       1,254        —          —          —          1,254   

Comprehensive loss:

                 

Net loss

    —          —       —       —       —          (41,630     —          —          (41,630

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

    —          —       —       —       —          —          34,939        —          34,939   

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

    —          —       —       —       —          —          (2,073     —          (2,073
                       

Total comprehensive loss

                    (8,764
                       

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

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

Preferred stock dividends and discounts accumulated, Series B

    —          759     —       —       —          (3,380     —          —          (2,621
                                                                 

Balance at June 30, 2010

  $ —        $ 99,603   $ 31,912   $ 193   $ 306,703      $ (172,583   $ 41,563      $ (24,636   $ 282,755   
                                                                 

Balance at December 31, 2008

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

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

    —          —       —       —       —          1,709        (1,033     —          676   

Preferred stock issuance cost, Series B

    —          —       —       —       (27     —          —          —          (27

Amortization of stock based compensation awards

    —          —       —       —       1,140        —          —          —          1,140   

Tax benefit on stock awards

    —          —       —       —       (447     —          —          —          (447

Comprehensive loss:

                 

Net loss

    —          —       —       —       —          (26,073     —          —          (26,073

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

    —          —       —       —       —          —          (3,525     —          (3,525

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

    —          —       —       —       —          —          (2,264     —          (2,264
                       

Total comprehensive loss

                    (31,862
                       

Preferred stock dividends declared, Series A-$1.00 per share

    —          —       —       —       —          (2,400     —          —          (2,400

Preferred stock dividends accumulated, Series B

    —          796     —       —       —          (3,328     —          —          (2,532
                                                                 

Balance at June 30, 2009

  $ 60,000      $ 98,110   $ —     $ 121   $ 225,538      $ (99,386   $ 11,888      $ (24,636   $ 271,635   
                                                                 

See accompanying notes to consolidated financial statements (unaudited)

 

3


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(dollars in thousands)

 

     For the Six Months Ended
June 30
 
     2010     2009  

Cash flows from operating activities:

    

Net loss

   $ (41,630   $ (26,073

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

    

Other derivative income

     (167     (1,272

Gains on sales of investment securities

     (1,575     (8,259

Amortization of premiums and discounts, net

     1,270        (429

Deferred loan fee amortization

     (2,744     (2,170

Provision for loan losses

     65,076        55,070   

Loans originated for sale

     (84,390     —     

Proceeds from loan sales

     73,439        —     

Depreciation and amortization

     1,130        1,190   

Deferred income tax expense

     (11,046     2,286   

Losses on other real estate

     6,598        666   

Tax expense on stock options exercised or stock awards

     —          (447

Excess tax benefit on stock options exercised and stock awards

     135        372   

Cash received on termination of derivative instruments

     —          6,630   

Other, net

     136        4,914   

Changes in other assets and liabilities:

    

Accrued interest receivable

     (755     3   

Other assets

     12,748        11,343   

Accrued interest, taxes and other liabilities

     (4,150     (8,304
                

Net cash provided by operating activities

     14,075        35,520   
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (267,057     (618,208

Purchases of held-to-maturity securities

     (10,472     —     

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

     107,484        193,048   

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

     846        —     

Proceeds from sales of available-for-sale securities

     48,120        254,820   

Net increase in loans

     (76,978     (8,928

Net additions to premises, leasehold improvements and equipment

     (231     (163

Purchases of FHLB and FRB stock

     (5,274     (6,111

Additions to foreclosed property

     —          (342

Net proceeds from sales of other real estate

     9,040        5,714   
                

Net cash used by investing activities

     (194,522     (180,170
                

Cash flows from financing activities:

    

Net increase in deposits

     64,544        72,199   

Net increase in other borrowings

     249,291        39,684   

Proceeds from notes payable and other advances

     10,000        55,000   

Repayments of notes payable and other advances

     (192,000     —     

Net proceeds from issuance of subordinated debt

     32,897        —     

Proceeds from preferred stock issuance, net of costs

     30,933        (27

Common stock issuance costs

     (21     —     

Excess tax benefit on stock options exercised and stock awards

     (135     (372

Dividends paid

     (5,021     (5,146
                

Net cash provided by financing activities

     190,488        161,338   
                

Net increase in cash and cash equivalents

     10,041        16,688   

Cash and cash equivalents, beginning of period

     48,469        53,012   
                

Cash and cash equivalents, end of period

   $ 58,510      $ 69,700   
                

Consolidated Statements of Cash Flows continued on the next page

See accompanying notes to consolidated financial statements (unaudited)

 

4


Table of Contents

TAYLOR CAPITAL GROUP, INC.

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

(dollars in thousands)

 

     For the Six Months  Ended
June 30
 
     2010     2009  

Supplemental disclosure of cash flow information:

    

Cash paid (received) during the period for:

    

Interest

   $ 39,466      $ 56,678   

Income taxes

     (4,851     (14,968

Supplemental disclosures of noncash investing and financing activities:

    

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

   $ 55,633      $ —     

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

     34,939        (3,525

Transfer of portfolio loans to held-for-sale loans

     33,659        —     

Transfer of held-for-sale loans to portfolio loans

     41,745        —     

Available-for-sale investment securities, acquired, not yet settled

     —          36,595   

Loans transferred to other real estate and repossessed assets

     17,576        15,929   

See accompanying notes to consolidated financial statements (unaudited)

 

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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 June 30, 2010 and for the second quarter and six month periods ended June 30, 2010 and June 30, 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 second quarter and six month periods ended June 30, 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 June 30, 2010 and December 31, 2009 were as follows:

 

     June 30, 2010
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Estimated
Fair Value
     (in thousands)

Available-for-sale:

          

U.S. government sponsored agency securities

   $ 46,971    $ 315    $ —        $ 47,286

Mortgage-backed securities:

          

Residential

     858,078      36,145      (2,887     891,336

Commercial

     158,238      9,779      —          168,017

Collateralized mortgage obligations

     131,633      4,771      —          136,404

State and municipal obligations

     117,125      2,656      (69     119,712

Other debt securities

     2,235      146      —          2,381
                            

Total available-for-sale

     1,314,280      53,812      (2,956     1,365,136
                            

Held-to-maturity:

          

Mortgage-backed securities:

          

Residential

     65,283      2,431      —          67,714
                            

Total held-to-maturity

     65,283      2,431      —          67,714
                            

Total

   $ 1,379,563    $ 56,243    $ (2,956   $ 1,432,850
                            

 

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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 June 30, 2010, the Company had $1.26 billion of mortgage related investment securities that consisted of residential and commercial mortgage-backed securities and collateralized mortgage obligations. Residential mortgage-backed securities include securities collateralized by 1-4 family residential mortgage loans, while commercial mortgage-backed securities include securities collateralized by mortgage loans on multifamily properties. Of the total mortgage related investment securities, $1.25 billion, or 99.5%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac, and the remaining $6.3 million were private-label mortgage related securities. Other debt securities at June 30, 2010 include $2.4 million of asset backed securities collateralized by student loans.

Investment securities with an approximate book value of $992 million at June 30, 2010 and $674 million at December 31, 2009, 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 second quarter and first six months of 2010, the Company had gross realized gains of $142,000 and $1.6 million, respectively, on the sale of available-for-sale investment securities compared to gross realized gains on the sale of available-for-sale investment securities of $7.6 million and $8.3 million, respectively, in the second quarter and first six months of 2009. No gross realized losses were recognized during the second quarter or first six months of 2010 or 2009.

 

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The following table summarizes, for investment securities with unrealized losses as of June 30, 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.

 

     June 30, 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:

               

Mortgage-backed securities:

               

Residential

   $ —      $ —        $ 6,262    $ (2,887   $ 6,262    $ (2,887

State and municipal obligations

     4,378      (56     358      (13 )     4,736      (69
                                             

Temporarily impaired securities – Available-for-sale

   $ 4,378    $ (56   $ 6,620    $ (2,900   $ 10,998    $ (2,956
                                             
     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 June 30, 2010, the Company had four investment securities in an unrealized loss position for more than 12 months and had a total unrealized loss of $2.9 million. Of the four securities in an unrealized loss position, one security was 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 state and municipal security which was in an unrealized loss position for more than 12 months at June 30, 2010, totaled $13,000, or about 3.5% 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, and 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 5% of amortized cost. Because of the small level of impairment, the Company believes the decline in fair value was not credit related. The other two private-label residential mortgage related securities had a total unrealized loss of $2.7 million. As part of the Company’s normal procedures, these securities were subject to further review for other-than-temporary impairment.

For any securities that had been in an unrealized loss position that was greater than 10% and for more than 12 months, additional testing was performed to evaluate other-than-temporary impairment. For the two private-label securities, the Company obtained fair value estimates from a separate independent source that performed a cash flow analysis considering default rates, loss severities based upon the location of the collateral and estimated prepayments. Each of the private-label mortgage related securities had credit enhancements in the form of different investment tranches which impact how cash flows are distributed. The higher level tranches will receive cash flows first and as a result the lower level tranches will absorb the losses, if any, from collateral shortfalls. The Company purchased the private-label securities that were either of the highest or one of the highest investment grades, as rated by nationally recognized credit rating agencies. The cash flow analysis takes into account the Company’s tranche and the current level of support provided by the lower tranches. The Company believes that market illiquidity has impacted the values of these private-label securities because of the lack of active trading in these securities. None of these securities contain subprime mortgage loans, but do include Alt-A loans, adjustable rate mortgages with initial interest only periods, and loans that are secured by collateral in geographic areas adversely impacted by the housing downturn. If this analysis shows that the Company does not expect to recover its entire investment, an other-than-temporary impairment charge would be recorded for the amount of the credit loss. Previously, one of the two securities had other-than-temporary impairment recognized for the amount of the credit loss. The independent cash flow analysis performed at June 30, 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 June 30, 2010.

 

     Amortized
Cost
   Estimated
Fair Value
     (in thousands)

Available-for-sale:

     

Due in one year or less

   $ 840    $ 841

Due after one year through five years

     18,544      18,657

Due after five years through ten years

     51,549      52,859

Due after ten years

     95,398      97,022

Residential mortgage-backed securities

     858,078      891,336

Commercial mortgage-backed securities

     158,238      168,017

Collateralized mortgage obligations

     131,633      136,404
             

Total available-for-sale

     1,314,280      1,365,136
             

Held-to-maturity:

     

Residential mortgage-backed securities

     65,283      67,714
             

Total held-to-maturity

     65,283      67,714
             

Total investment securities

   $ 1,379,563    $ 1,432,850
             

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 June 30, 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 its outstanding FHLBC borrowings. At June 30, 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 June 30, 2010, after evaluating these factors, considering that transactions of FHLBC stock in first half 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 June 30, 2010 and December 31, 2009 were as follows:

 

     June 30,
2010
    Dec. 31,
2009
 
     (in thousands)  

Portfolio Loans:

    

Commercial and industrial

   $ 1,335,411      $ 1,264,369   

Commercial real estate secured

     1,164,800        1,171,777   

Residential construction and land

     146,494        221,859   

Commercial construction and land

     140,473        142,584   

Residential real estate mortgages

     69,967        57,887   

Home equity loans and lines of credit

     82,850        86,227   

Consumer

     7,410        8,221   

Other loans

     11,826        557   
                

Gross loans

     2,959,231        2,953,481   

Less: Unearned discount

     (4     (6
                

Total loans

     2,959,227        2,953,475   

Less: Allowance for loan losses

     (100,500     (106,185
                

Portfolio Loans, net

   $ 2,858,727      $ 2,847,290   
                

Loans Held for Sale:

    

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

   $ 35,404      $ 81,853   

Originated mortgage loans (at fair value)

     43,033        —     
                

Loans Held for Sale

   $ 78,437      $ 81,853   
                

The total amount of loans transferred to third parties as loan participations at June 30, 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 June 30, 2010, loans held for sale included $43.0 million of residential mortgage loans originated by Cole Taylor Mortgage, the Company’s new residential mortgage 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 $41.7 million at June 30, 2010 and the resulting unrealized gain of $1.3 million 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:

 

     June 30,
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

     154,320      141,403
             

Total nonperforming loans

   $ 154,378    $ 141,462
             

Performing restructured loans

   $ 18,826    $ 1,196

Recorded balance of impaired loans:

     

With related allowance for loan loss

   $ 119,344    $ 95,936

With no related allowance for loan loss

     48,155      45,761
             

Total recorded balance of impaired loans

   $ 167,499    $ 141,697
             

Allowance for loan losses related to impaired loans

   $ 41,622    $ 33,640

4. Interest-Bearing Deposits:

Interest-bearing deposits at June 30, 2010 and December 31, 2009 were as follows:

 

     June 30,
2010
   December 31,
2009
     (in thousands)

NOW accounts

   $ 294,605    $ 307,025

Savings account

     40,672      41,479

Money market deposits

     582,494      445,418

Time deposits:

     

Certificates of deposit

     775,298      775,663

CDARS time deposits

     167,117      116,256

Out-of-local-market certificates of deposit

     100,173      79,015

Brokered certificates of deposit

     464,500      484,035

Public time deposits

     47,684      68,763
             

Total time deposits

     1,554,772      1,523,732
             

Total

   $ 2,472,543    $ 2,317,654
             

At June 30, 2010, time deposits in amount of $100,000 or more totaled $635.1 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 $1.7 million and $1.4 million at June 30, 2010 and 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 June 30, 2010 and June 30, 2009, the Company

 

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had no brokered CDs that could be called before maturity. During the first six months of 2009, the Company wrote-off $527,000 of unamortized broker placement fees and fair value adjustments.

5. Other Borrowings:

Other borrowings at June 30, 2010 and December 31, 2009 consisted of the following:

 

     June 30, 2010     December 31, 2009  
     Amount
Borrowed
   Weighted-
Average
Rate
    Amount
Borrowed
   Weighted-
Average
Rate
 
     (dollars in thousands)  

Securities sold under agreements to repurchase:

          

Overnight

   $ 25,213    0.17   $ 45,453    0.16

Term

     418,553    2.23        200,000    4.05   

Federal funds purchased

     141,521    0.47        89,384    0.35   

U.S. Treasury tax and loan note option

     1,673    0.00        2,832    0.00   
                  

Total

   $ 586,960    1.71   $ 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 June 30, 2010 and December 31, 2009, the term repurchase agreements consisted of the following:

 

     June 30,
2010
   December 31,
2009
     (in thousands)

Term Repurchase Agreements:

     

Repurchase agreement - rate 0.38%, matured July 1, 2010

   $ 101,032    $      —  

Repurchase agreement - rate 0.38%, matured July 6, 2010

     52,521    —  

Repurchase agreement - rate 0.60%, due June 1, 2011

     30,000    —  

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

   $ 418,553    $200,000
           

 

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6. Notes Payable and Other Advances:

Notes payable and other advances at June 30, 2010 and December 31, 2009 consisted of the following:

 

     June 30,
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, 0.17% at June 30, 2010

     305,000      —  

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

     —        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

     445,000      615,000
             

Total notes payable and other advances

   $ 445,000    $ 627,000
             

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

At June 30, 2010, the FHLBC advances were collateralized by $732.0 million of investment securities and blanket liens on $193.5 million of qualified first-mortgage residential and home equity loans and $63.5 million in commercial real estate. Based on the value of collateral pledged at June 30, 2010, the Bank had additional borrowing capacity at the FHLBC of $395.7 million. In comparison, at December 31, 2009, the FHLBC 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 June 30, 2010, the Bank pledged $785.7 million of commercial loans as collateral for an available $483.3 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. Subordinated Notes:

In May 2010, the Company issued $33.9 million of 8% subordinated notes. The subordinated notes pay interest quarterly at an annual rate of 8% and will mature on May 28, 2020, but may be prepaid at the Company’s option on or after May 28, 2012. In addition, for every $1,000 in principal amount of the subordinated notes, investors received a warrant to purchase 25 shares of the Company’s common stock at an exercise price of $12.28 per share, which represents an aggregate of 848,450 shares of common stock. The warrants will not be exercisable until November 24, 2010 and the warrants will expire on May 28, 2015. The proceeds received from this transaction were allocated to the subordinated notes and the warrants based upon their relative fair values. The discount represents the portion of the proceeds allocated to the warrants and is being amortized as additional interest expense on the subordinated notes over the remaining contractual life of the notes. The fair value allocated to the warrants net of issuance costs, totaling $4.3 million at the issuance date in May 2010, was credited to surplus in stockholders’ equity on the Consolidated Balance Sheet. The subordinated notes qualify as Tier II capital for regulatory purposes.

8. Stockholders’ Equity:

In May 2010, the Company increased its capital 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 converted all of its Series A convertible Preferred stock totaling $60.0 million into common equity by issuing a total of 7.2 million shares of common stock, that included 1.2 million shares as an inducement to convert into common stock. The fair value of the 1.2 million common shares issued as an inducement, which totaled $15.8 million, was considered a noncash implied dividend to holders of the Series A Preferred reduced retained earnings and resulted in no net impact to total stockholders’ equity. In the second quarter of 2010, the period in which the inducement shares were issued, the noncash implied dividend of $15.8 million was an additional deduction in arriving at net loss applicable to common stockholders on the Consolidated Statement of Operations and were considered in the determination of basic and diluted loss per common share. Effective immediately after the payment of the quarterly dividend on April 15, 2010, the Company did not declare nor pay any further dividends on the Series A preferred stock.

In connection with a private placement in May 2010, the Company issued a total of 1,276,480 shares of 8% non-cumulative, convertible perpetual preferred stock, Series C Preferred with a purchase price and liquidation preference of $25.00 per share. Each share of Series C Preferred can be converted into 2.03583 shares of the Company’s common stock at a conversion price of $12.28 per common share. The Series C Preferred is convertible into an aggregate of 2,598,696 shares of the Company’s common stock at the option of the preferred stockholders at any time and is convertible at the Company’s option any time after the earlier of May 28, 2015 or the first date on which the volume-weighted average per share price of the Company’s common stock equals or has exceed 130% of the then applicable conversion price of the Series C Preferred for at least 20 trading days within any period of 30 consecutive trading days occurring after May 28, 2013.

 

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In connection with the issuance of $33.9 million of subordinated notes in May 2010, the Company issued detachable warrants to purchase an aggregate amount of 848,450 shares of the Company’s common stock. The exercise price of the warrants is $12.28 and they are exercisable on or after November 24, 2010 and will expire on May 28, 2015. The proceeds received from this transaction were allocated to the subordinated notes and the warrants based upon their relative fair values. The fair value allocated to the warrants net of issuance costs, totaling $4.4 million at the issuance date in May 2010, was credited to surplus in stockholders’ equity on the Consolidated Balance Sheet.

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 C 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 B Preferred or Series C Preferred .

9. Other Comprehensive Income (“OCI”):

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

 

     For the Quarter Ended
June 30, 2010
    For the Quarter Ended
June 30, 2009
 
     Before
Tax
Amount
    Tax
Effect
    Net of
Tax
    Before
Tax
Amount
    Tax
Effect
    Net of
Tax
 
     (in thousands)  

Unrealized gains from securities:

            

Change in unrealized gains on available-for-sale securities

   $ 27,847      $ (1,476   $ 26,371      $ (5,652   $ (3,737   $ (9,389

Less: reclassification adjustment for gains included in net loss

     (142     57        (85     (7,595     3,009        (4,586
                                                

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

     27,705        (1,419     26,286        (13,247     (728     (13,975

Changes in deferred loss on investments transferred to held to maturity from available-for-sale

     (532     211        (321     —          —          —     

Change in net unrealized loss from cash flow hedging instruments

     (1,010     400        (610     —          —          —     

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

     (195     79        (116     (1,642     650        (992
                                                

Other comprehensive income (loss)

   $ 25,968      $ (729   $ 25,239      $ (14,889   $ (78   $ (14,967
                                                

 

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     For the Six Months Ended
June 30, 2010
    For the Six Months Ended
June 30, 2009
 
     Before
Tax
Amount
    Tax
Effect
    Net of
Tax
    Before
Tax
Amount
    Tax
Effect
    Net of
Tax
 
     (in thousands)  

Unrealized gains from securities:

            

Change in unrealized gains on available-for-sale securities

   $ 39,896      $ (4,006   $ 35,890      $ 4,240      $ (2,778   $ 1,462   

Less: reclassification adjustment for gains included in net loss

     (1,575     624        (951     (8,259     3,272        (4,987
                                                

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

     38,321        (3,382     34,939        (4,019     494        (3,525

Changes in deferred loss on investments transferred to held to maturity from available-for-sale

     (532     211        (321     —          —          —     

Change in net unrealized loss from cash flow hedging instruments

     (1,010     400        (610     —          —          —     

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

     (1,896     754        (1,142     (3,749     1,485        (2,264
                                                

Other comprehensive income (loss)

   $ 34,883      $ (2,017   $ 32,866      $ (7,768   $ 1,979      $ (5,789
                                                

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

10. Earnings Per Share:

The following table sets forth the computation of basic and diluted loss per common share for the periods indicated. Due to the net loss for both the quarter and six month periods ended June 30, 2010, all common stock equivalents, which consisted of 937,963 options outstanding to purchase shares of common stock, 3,711,097 warrants to purchase shares of common stock, and the Series C Preferred which could be converted into 2,598,696 shares of common stock, were considered antidilutive and not included in the computation of diluted earnings per share. For both the quarter and six month periods ended June 30, 2009, 634,625 options outstanding to purchase shares of common stock, 2,862,647 warrants to purchase shares of common stock and the convertible Series A Preferred stock which could be converted into 6,000,000 shares of common stock were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

 

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     For the Quarter
Ended June 30,
    For the Six Months
Ended June 30,
 
     2010     2009     2010     2009  
     (dollars in thousands, except per share amounts)  

Net loss

   $ (30,883   $ (23,255   $ (41,630   $ (26,073

Preferred dividends and discounts

     (1,693     (2,868     (4,580     (5,730

Implied non-cash preferred dividend

     (15,756     —          (15,756     —     
                                

Net loss available to common stockholders

   $ (48,332   $ (26,123   $ (61,966   $ (31,803
                                

Weighted-average common shares outstanding

     14,408,469        10,492,789        12,472,822        10,482,212   

Dilutive effect of common stock equivalents

     —          —          —          —     
                                

Diluted weighted-average common shares outstanding

     14,408,469        10,492,789        12,472,822        10,482,212   
                                

Basic loss per common share

   $ (3.35   $ (2.49   $ (4.97   $ (3.03

Diluted loss per common share

     (3.35     (2.49     (4.97     (3.03

11. 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 2.5687%, 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 six month period ended June 30, 2010:

 

     Shares     Weighted-
Average
Exercise Price

Outstanding at January 1, 2010

   813,099      $ 18.76

Granted

   172,450        8.75

Exercised

   —          —  

Forfeited

   (3,980     11.63

Expired

   (43,606     25.23
        

Outstanding at June 30, 2010

   937,963        16.65
        

Exercisable at June 30, 2010

   495,410        23.91
        

 

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As of June 30, 2010, the total compensation cost related to nonvested stock options that have not yet been recognized totaled $1.5 million and the weighted-average period over which these costs are expected to be recognized is approximately 3.2 years.

Generally, the Company grants restricted stock awards that vest upon completion of future service requirements. However, for certain restricted stock awards granted in 2010, vesting will be dependent on completion of service requirements and the repayment of the Series B Preferred stock. 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 six month period ended June 30, 2010:

 

Nonvested Restricted Stock

   Shares     Weighted-
Average
Grant-Date
Fair Value

Nonvested at January 1, 2010

   572,322      $ 15.06

Granted

   36,575        12.03

Vested

   (36,500     27.13

Forfeited

   (510     18.53
        

Nonvested at June 30, 2010

   571,887        14.09
        

As of June 30, 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 2.7 years.

 

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12. 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, collars and corridors to manage the interest rate risk associated with its commercial loan portfolio, brokered CDs, and cash flows related to FHLB advances and repurchase agreements. The Company also has interest rate lock commitments and forward loan commitments associated with Cole Taylor Mortgage that are also considered derivatives. The following table describes the derivative instruments outstanding at June 30, 2010:

 

Product

   Notional
Amount
   Strike Rates   Maturity    Balance
Sheet/ Income
Statement Location
   Fair
Value
 
     (dollars in thousands)  

Fair value hedging derivative instruments:

             

Brokered CD Interest Rate Swaps—pay variable/receive fixed

   $ 45,837    Receive 2.93%
Pay 0.388%
  4.8 yrs    Other assets/

Noninterest income

   $ 1,860   

Cash flow hedging derivative instruments:

             

Interest Rate Corridors

     300,000    0.29%-1.29%   2.1 yrs    Other assets/OCI      2,505   
                 

Total hedging derivative instruments

   $ 345,837           

Non-hedging derivative instruments:

             

Customer Interest Rate Swap—pay fixed/receive variable

     197,499    Pay 4.13%

Receive 0.625%

  2.8 yrs    Other liabilities/

Noninterest income

     (12,848

Customer Interest Rate Swap—receive fixed/pay variable

     197,499    Receive 4.13%

Pay 0.625%

  2.8 yrs    Other assets/

Noninterest income

     12,568   

Interest Rate Lock Commitments

     104,136    NA   0.1 yrs    Other assets/
Noninterest income
     1,271   

Forward Loan Commitments

     78,386    NA   0.2 yrs    Other assets/
Noninterest income
     (916
                 

Total non-hedging derivative instruments

     577,520           
                 

Total derivative instruments

   $ 923,357           
                 

During the first six months of 2010, the Company entered into $45.8 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 swaps was $30,000 for the second quarter 2010 and $40,000 for the six months ended June 30, 2010, and was recorded in noninterest income.

 

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The Company also entered into $300.0 million of notional amount interest rate corridors during the first six months of 2010, which are designated as cash flow hedges against certain borrowings. The corridors are used to reduce the variability in the interest paid on the borrowings attributable to changes in 1 month LIBOR. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value is recorded in other comprehensive income. There was no ineffectiveness on the interest rate corridors for the first six months of 2010.

The Company enters into interest rate lock commitments and forward loan sales as a normal part of Cole Taylor Mortgage’s business. These non-hedging derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded in income currently in noninterest income.

13. 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 Cole Taylor Mortgage 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 defined as follows.

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

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

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

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

Available-for-sale investment securities:

For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, including credit

 

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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, except for the mortgage derivatives, 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.

Mortgage derivatives:

Mortgage derivatives include interest rate lock commitments to originate residential mortgage loans held for sale for individual customers and forward commitments to sell residential mortgage loans to various investors. The fair value of forward loan sale contracts is based upon quoted prices for similar assets in active market that the Company has the ability to access and is classified in Level 2 of the hierarchy. The Company uses an internal valuation model to estimate the fair value of its interest rate lock commitments which is based upon unobservable inputs that reflects management’s assumptions and specific information about each borrower transaction and is classified in Level 3 of the hierarchy.

Loans held for sale:

At June 30, 2010, loans held for sale included of $43.0 million residential mortgage loans that have been originated by Cole Taylor Mortgage 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

 

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may be 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 determined based upon the estimated net contracted sales price, less cost to sell and was classified in Level 2 of the fair value hierarchy.

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 June 30, 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 fair value on a recurring basis. At foreclosure or obtaining possession of the assets, OREO and repossessed assets are recorded at the lower of the amount of the loan balance or the fair value of the collateral, less estimated costs to sell. Generally, the fair value of real estate is determined through the use of a current appraisal and the fair value of other repossessed assets is based upon the estimated net proceeds from the sale or disposition of the underlying collateral. Only assets that are recorded at fair value, less estimated cost to sell, are classified under the fair value hierarchy. When the fair value of the collateral is based upon an observable market price or an estimate of fair value from an independent third-party real estate professional, the Company classifies the OREO and repossessed asset as nonrecurring Level 2 in the fair value hierarchy. When an independent valuation is not available or there is no observable market price and fair value is based upon Management’s assessment of liquidation of collateral, the Company classifies the OREO and repossessed assets as nonrecurring Level 3 in the fair value hierarchy.

 

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Assets and Liabilities Measured on a Recurring Basis

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

 

     As of June 30, 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

   $ 1,365,136    $ —      $ 1,365,136    $ —  

Loans held for sale accounted for at fair value

     43,033      —        43,033      —  

Assets held in employee deferred compensation plans

     2,336      2,336      —        —  

Derivative instruments

     16,933      —        16,933   

Mortgage derivative instruments

     1,271      —        —        1,271

Liabilities:

           

Derivative instruments

     12,848      —        12,848      —  

Mortgage derivative instruments

     916      —        916      —  

 

     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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The table below includes a rollforward of the Consolidated Balance Sheet amounts for the quarter and six months ended June 30, 2010 and 2009 (including the change in fair value) for financial instruments measured on a recurring basis and classified by the Company within Level 3 of the valuation hierarchy.

 

     For the Quarter Ended
June 30,
   For the Six Months Ended
June 30,
     2010    2009    2010    2009
     (dollars in thousands, except per share amounts)

Beginning Balance

           $   —              $   —            $   —              $   —  

Realized/unrealized gains/(losses) included in Net Income (Loss)

   —      —      —      —  

Purchases, issuances and settlements, net

   1,271    —      1,271    —  

Transfers in and/or out of Level 3

   —      —      —      —  
                   

Fair value at period end

   $1,271    $   —      $1,271    $   —  
                   
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 OREO and repossessed assets.

     As of June 30, 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

   $109,386    $   —      $97,668    $11,718

Other real estate and repossessed assets

   24,247    —      4,999    19,248
     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 and repossessed assets

   18,064    —      7,725    10,339

At June 30, 2010, the Company had $11.7 million of impaired loans and $19.2 million of OREO and repossessed assets measured at fair value on a nonrecurring basis and classified in Level 3 in the fair value hierarchy. The change in Level 3 carrying value of impaired loans

 

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Table of Contents

represents sales, payments or net chargeoffs of $3.7 million, an additional impaired loan with a fair value of $122,000 and a resulting charge to earnings of $227,000 to reduce this loan to fair value. The change in Level 3 OREO and repossessed assets during the first six months of 2010 included $14.6 million of additions, $4.0 million of sales and $1.7 million of net writedowns that were included in the Consolidated Results of Operations.

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 calculating 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 estimations

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 approximates 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 on 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.

 

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Table of Contents

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 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, such as interest rate swap, floors, collars, and corridors 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 Company also has derivative financial instruments associated with Cole Taylor Mortgage including forward loan sales and interest rate lock commitments. The fair value of the forward loan sales is based on quoted market prices for similar assets in active markets. The fair value of interest rate lock commitments is determined based on an internal valuation model using management assumptions and rate and pricing information from each loan commitment transaction. On the Company’s Consolidated Balance Sheets, instruments that have a positive fair value are included in other assets and those instruments that have a negative fair value are included in accrued interest, taxes and other liabilities.

 

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Other Assets:

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

Deposit Liabilities:

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

Other Borrowings:

The carrying amount of overnight securities sold under agreements to repurchase, federal funds purchased, and the U.S. Treasury tax and loan note option, approximates fair value, as the maturities of these borrowings are short-term. Securities sold under agreements to repurchase with original maturities 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.

 

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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.

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

 

     June 30, 2010    December 31, 2009
     Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value
     (in thousands)

Financial Assets:

           

Cash and cash equivalents

   $ 58,510    $ 58,510    $ 48,469    $ 48,469

Investments

     1,430,419      1,432,850      1,271,271      1,271,271

Loans held for sale

     78,437      79,097      81,853      82,104

Loans, net of allowance

     2,858,727      2,847,120      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

     17,408      17,408      16,653      16,653

Derivative financial instruments

     18,204      18,204      10,630      10,630

Other assets

     2,336      2,336      2,461      2,461
                           

Total financial assets

   $ 4,500,525    $ 4,492,009    $ 4,309,837    $ 4,262,661
                           

Financial Liabilities:

           

Deposits without stated maturities

   $ 1,488,194    $ 1,488,194    $ 1,453,069    $ 1,453,069

Deposits with stated maturities

     1,554,772      1,582,720      1,523,731      1,554,230

Other borrowings

     586,960      599,025      337,669      352,352

Notes payable and other advances

     445,000      448,797      627,000      630,709

Accrued interest payable

     10,059      10,059      11,457      11,457

Derivative financial instruments

     13,764      13,764      10,216      10,216

Junior subordinated debentures

     86,607      57,187      86,607      50,583

Subordinated notes

     85,367      80,139      55,695      53,792
                           

Total financial liabilities

   $ 4,270,723    $ 4,279,885    $ 4,105,444    $ 4,116,408
                           

Off-Balance-Sheet Financial Instruments:

           

Unfunded commitments to extend credit

   $ 4,418    $ 4,418    $ 3,485    $ 3,485

Standby letters of credit

     222      222      307      307
                           

Total off-balance-sheet financial instruments

   $ 4,640    $ 4,640    $ 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.

 

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14. Subsequent Events:

Events subsequent to the balance sheet date of June 30, 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.

 

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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 the Chicago region 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.

Recent Legislation Impacting the Financial Services Industry

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law. We expect the Dodd-Frank Act to significantly impact the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and holding companies. This new law requires adoption of new rules and regulation by various federal agencies and requires extensive additional reporting. The federal agencies are given significant discretion in drafting implementation rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

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.

 

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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.

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 and specific allowances for identified problem loans and portfolio categories. 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 on an individual loan basis. 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.

 

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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 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 our entire 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, collar and corridor agreements, as well as interest rate lock and forward loan sale commitments to either accommodate individual customer needs or to assist in 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

 

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

Valuation of Investment Securities

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 these selected securities. When the discounted cash flow analysis obtained from the independent pricing sources indicates that all future principal and interest payments are expected to 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

 

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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 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 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 further disruption in the credit and lending markets impacting our business and 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;

 

   

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;

 

   

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 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 attracting and retaining experienced and qualified personnel, including our senior management and other key personnel in our core business lines.

 

   

the risks associated with the establishment of our new residential loan origination line of business, including the expansion into new geographic markets;

 

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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;

 

   

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, including the Dodd-Frank Act, 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

We reported a net loss applicable to common stockholders of $48.3 million, or ($3.35) per diluted common share outstanding, for the second quarter of 2010, compared to a net loss applicable to common stockholders of $26.1 million, or ($2.49) per diluted common share, in the second quarter of 2009. For the quarter and six month periods ended June 30, 2010, the loss applicable to common stockholders of $62.0 million, or ($4.97) per diluted common share, compared to a net loss applicable to common stockholders of $31.8 million, or ($3.03) per diluted share, during the first six months of 2009. For the quarter and six month period ending June 30, 2010 loss applicable to common shareholders included a one-time, non-cash charge of $15.8 million, or $1.09 per diluted share, representing an inducement to the holders of all of the Company’s Series A preferred stock who converted their Series A preferred shares into common stock as part of the recently completed exchange offer. This non-cash charge and a higher provision for loan losses, coupled with lower noninterest income and higher noninterest expense, more than offset higher net interest income.

 

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Highlights

 

   

Pre-tax, pre-provision earnings from core operations increased 51.1% to $17.3 million for the quarter ended June 30, 2010, as compared to $11.4 million for the quarter ended June 30, 2009. During the first six months of 2010, pre-tax, pre-provision earnings from core operations increased by 36.5% to $31.5 million from $23.1 million.

 

   

In the second quarter of 2010, total revenue (net interest income plus noninterest income less security gains and losses) was $40.7 million up from $34.9 million for the second quarter 2009. For the six months ended June 2010, total revenue was $77.1 million, a 15.2% increase from $66.9 million for the same period in 2009.

 

   

Our net interest margin was 3.17% for the second quarter of 2010, compared to 2.76% for the second quarter of 2009, an increase of 41 basis points. Our net interest margin was 3.16% during the first six months of 2010 as compared to 2.67% during the first six months of 2009.

 

   

Noninterest expense increased $3.8 million to $27.5 million in the second quarter of 2010, as compared to $23.7 million during the second quarter of 2009. For the first six months of 2010, noninterest expense was $54.6 million, an increase of $9.7 million as compared to $44.9 million of noninterest expense during the first six months of 2009. Excluding nonperforming asset expense, noninterest expense was down slightly to $23.4 million for the second quarter of 2010 compared to $23.5 million for the second quarter 2009.

 

   

Nonperforming assets were $182.5 million, or 3.98% of total assets on June 30, 2010, compared to $167.7 million, or 3.81% of total assets on December 31, 2009. In addition, our provision for loan losses was $43.9 million for the second quarter of 2010 and $65.1 million during the first six months of 2010. In comparison, the provision for loan losses was $39.5 million for the second quarter of 2009 and $55.1 million during the first six months of 2009.

 

   

On July 15, 2010 the Company closed a bulk sale of nonperforming assets. The nonperforming asset figures in the preceding bullet are not adjusted for that loan sale. Adjusting for the sale, total nonaccrual and nonperforming assets would be lower by $18.2 million dollars and nonperforming assets as a percentage of total assets would drop to 3.60%

On May 28, 2010, we completed our previously announced capital transactions. The transactions provide additional liquidity in order for us 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. On one of these transactions, all of the holders of the $60 million Series A preferred stock agreed to convert their preferred shares into common equity. By its terms, the Series A preferred stock was convertible into 6.0 million shares of common stock. In addition, we issued an additional 1.2 million common shares to induce the Series A preferred holders to convert. In total, $60 million of preferred shares were converted to 7.2 million shares of common equity. The Company also raised $75 million in new capital which included a private placement of non-cumulative, convertible Series C Preferred stock and subordinated debt. Currently, $9.1 million of this amount is held in escrow pending regulatory approval.

 

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In January 2010, we established Cole Taylor Mortgage by hiring a team of individuals with extensive mortgage banking experience. This unit began originating loans during the first quarter of 2010 and had positive operating profit (revenues less noninterest expenses) during the second quarter of 2010. It is expected that this unit’s origination volumes will increase as operations continue to grow. Cole Taylor Mortgage does business in 11 states and recently expanded into the California broker market, which is the largest in the country. We anticipate loan production to come from relationships with mortgage brokers, retail originations and from our Bank’s branch locations. We expect that this new line of business to be a source of fee income for us and provide additional earnings diversification.

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.

 

     For the Quarter Ended     For the Six Months
Ended
 
     June 30,
2010
    June 30,
2009
    June 30,
2010
    June 30,
2009
 

Loss before income taxes

   $ (30,577   $ (20,697   $ (41,018   $ (24,736

Add back (subtract):

        

Provision for loan losses

     43,946        39,507        65,076        55,070   

Nonperforming asset expense

     4,055        224        8,993        978   

Gain on investment securities

     (142     (7,595     (1,575     (8,259
                                

Pre-tax, pre-provision earnings from core operations

   $ 17,282      $ 11,439      $ 31,476      $ 23,053   
                                

 

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Net Interest Income

Quarter Ended June 30, 2010 Compared to the Quarter Ended June 30, 2009

Net interest income was $34.7 million for the second quarter of 2010, an increase of $4.3 million, or 14.1%, from $30.4 million of net interest income in the second quarter of 2009. Net interest income for the second quarter of 2010, benefited from the low interest rate environment and resulted in a higher net interest margin.

Our net interest margin was 3.17% for the second quarter of 2010, compared to 2.76% for the second quarter of 2009, an increase of 41 basis points. Net interest margin is calculated by dividing taxable equivalent net interest income by average interest-earning assets. Net interest margin increased quarter over quarter primarily due to a decrease in our cost of funds. Our cost of funds in the second quarter of 2010 was 2.07%, compared to 2.82% during the second quarter of 2009, a decrease of 75 basis points. From the first quarter of 2010 to the second quarter of 2010, 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 2.41% during the second quarter of 2010 as compared to 3.47% during the second quarter of 2009.

Offsetting the lower cost of funds were lower interest earning asset yields, which declined 12 basis points from 5.00% in the second quarter of 2009 to 4.88% in the second quarter of 2010. The lower yield on interest-earning assets reflected the shift from higher yielding loan balances to lower yielding investments. Average loan balance fell nearly $150 million in the second quarter of 2010 compared to second quarter of 2009. The investment portfolio average balances grew to $1.3 billion for the second quarter 2010 from $1.2 billion for the second quarter of 2009. The lower rate environment negatively impacted the yields on the investment portfolio as rates declined 56 basis points from 4.89% in the second quarter of 2009 to 4.33% in the second quarter of 2010. These decreases were somewhat mitigated by higher yields on loans which are up to 5.06% in the second quarter of 2010 from 4.89% in the second quarter of 2009 as a result of our efforts to improve loan pricing, including the use of interest rate floors.

Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

Net interest income was $68.1 million for the first six months of 2010, compared to $57.7 million during the same six month period a year ago, an increase of $10.4 million, or 18.0%. Net interest income for the first six months of 2010 benefited from the lower interest rate environment, which resulted in a 49 basis point increase in the net interest margin.

Our net interest margin was 3.16% during the first six months of 2010 as compared to 2.67% during the first six months of 2009. This increase was largely due to lower interest- bearing funding cost which decreased to 2.14% for the six months ended June 30, 2010 from 2.95% for the six months ended June 30, 2009. Funding costs were lower in the six months ended June 30, 2010, due to a sizeable decrease in term deposit rates, which fell over 100 basis points from the six months ended June 30, 2009, as these deposits continue to reprice in the low interest rate environment to current market rates.

 

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Offsetting the lower cost of funds were fluctuations in rates and volume of our earning assets. Average loan volumes declined for the six month period ended June 30, 2010 to $3.0 billion from $3.2 billion for the same period a year ago, as we continue to reposition the loan portfolio to reduce exposure to certain industries and sectors along with loan charge-offs and lower customer line usage. The low rate environment also had a negative impact on our investment portfolio. For the six month period ended June 30, 2010, the yield on our investment securities was 4.35%, compared to 5.10% for the same period a year ago or a 75 basis point reduction.

Rate vs. Volume Analysis of Net Interest Income

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

 

     Quarter Ended June 30, 2010 Over
Quarter Ended June 30, 2009
Increase/(Decrease)
    Six Months Ended June 30, 2010 Over
Six Months Ended June 30, 2009
Increase/(Decrease)
 
     VOLUME     RATE     NET     VOLUME     RATE     NET  
     (in thousands)  

INTEREST EARNED ON:

            

Investment securities

   $ 960      $ (1,810   $ (850   $ 3,286      $ (4,508   $ (1,222

Cash equivalents

     —          (1     (1     (6     (4     (10

Loans

     (1,927     631        (1,296     (4,551     2,096        (2,455
                        

Total interest-earning assets

         (2,147         (3,687
                        

INTEREST PAID ON:

            

Interest-bearing deposits

     (1,618     (4,611     (6,229     (4,515     (9,331     (13,846

Total borrowings

     1,161        (1,263     (102     2,545        (2,581     (36
                        

Total interest-bearing liabilities

         (6,331         (13,882
                                                

Net interest income, tax-equivalent

   $ (1,271   $ 5,455      $ 4,184      $ (1,634   $ 11,829      $ 10,195   
                                                

Tax-Equivalent Adjustments to Yields and Margins

As part of the evaluation of net interest income, we analyze our consolidated average balances, our yield on average interest-earning assets and the costs of average interest-bearing liabilities. Such yields and costs are calculated by dividing annualized income or expense by the average balance of assets or liabilities. Because management analyzes net interest income on a tax-equivalent basis, the analysis contains certain non-GAAP financial measures. In these non-GAAP financial measures, investment interest income, loan interest income, total interest income and net interest income are adjusted to reflect tax-exempt interest income on a tax-equivalent basis, assuming a tax rate of 35.0%. This assumed tax 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.

 

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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 Quarter
Ended June 30,
    For the Six Months
Ended June 30,
 
     2010     2009     2010     2009  
     (dollars in thousands)  

Net interest income as stated

   $ 34,678      $ 30,380      $ 68,145      $ 57,726   

Tax equivalent adjustment-investments

     653        763        1,314        1,531   

Tax equivalent adjustment-loans

     25        29        50        57   
                                

Tax equivalent net interest income

   $ 35,356      $ 31,172      $ 69,509      $ 59,314   
                                

Yield on earning assets without tax adjustment

     4.82     4.93     4.85     4.96

Yield on earning assets - tax equivalent

     4.88     5.00     4.91     5.03

Net interest margin without tax adjustment

     3.11     2.69     3.10     2.60

Net interest margin - tax equivalent

     3.17     2.76     3.16     2.67

Net interest spread without tax adjustment

     2.74     2.11     2.71     2.01

Net interest spread - tax equivalent

     2.81     2.18     2.77     2.08

 

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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 35.0%.

 

     For the Quarter Ended June 30,  
     2010     2009  
     AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
    AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
 
     (dollars in thousands)  

INTEREST-EARNING ASSETS:

              

Investment securities (1):

              

Taxable

   $ 1,312,750      $ 14,209    4.33   $ 1,205,166      $ 14,745    4.89

Tax-exempt (tax-equivalent) (2)

     118,541        1,865    6.29        136,597        2,179    6.38   
                                  

Total investment securities

     1,431,291        16,074    4.49        1,341,763        16,924    5.05   
                                  

Cash Equivalents

     656        1    0.60        527        2    1.50   
                                  

Loans (2) (3):

              

Commercial and commercial real estate

     2,822,806        35,609    4.99        3,031,816        37,483    4.89   

Residential real estate mortgages

     114,189        1,249    4.38        53,892        779    5.78   

Home equity and consumer

     97,635        1,043    4.28        102,032        1,076    4.23   

Fees on loans

       384          243   
                                  

Net loans (tax-equivalent) (2)

     3,034,630        38,285    5.06        3,187,740        39,581    4.98   
                                  

Total interest-earning assets (2)

     4,466,577        54,360    4.88        4,530,030        56,507    5.00   
                                  

NON-EARNING ASSETS:

              

Allowance for loan losses

     (108,697          (136,438     

Cash and due from banks

     74,707             58,567        

Accrued interest and other assets

     140,443             118,375        
                          

TOTAL ASSETS

   $ 4,573,030           $ 4,570,534        
                          

INTEREST-BEARING LIABILITIES:

              

Interest-bearing deposits:

              

Interest-bearing demand deposits

   $ 809,481        2,244    1.11      $ 655,118      $ 1,928    1.18   

Savings deposits

     40,760        7    0.07        42,227        8    0.08   

Time deposits

     1,620,115        9,743    2.41        1,883,058        16,287    3.47   
                                  

Total interest-bearing deposits

     2,470,356        11,994    1.95        2,580,403        18,223    2.83   
                                  

Other borrowings

     589,684        2,469    1.66        387,221        2,232    2.28   

Notes payable and other advances

     462,439        1,174    1.00        497,735        1,719    1.37   

Junior subordinated debentures

     86,607        1,446    6.68        86,607        1,541    7.12   

Subordinated notes

     66,860        1,921    11.49        55,447        1,620    11.69   
                                  

Total interest-bearing liabilities

     3,675,946        19,004    2.07        3,607,413        25,335    2.82   
                                  

NONINTEREST-BEARING LIABILITIES:

              

Noninterest-bearing deposits

     584,246             578,020        

Accrued interest, taxes, and other liabilities

     43,482             77,124        
                          

Total noninterest-bearing liabilities

     627,728             655,144        
                          

STOCKHOLDERS’ EQUITY

     269,356             307,977        
                          

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,573,030           $ 4,570,534        
                          

Net interest income (tax-equivalent) (2)

     $ 35,356        $ 31,172   
                      

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

        2.81        2.18
                      

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

        3.17        2.76
                      

 

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

 

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     For the Six Months Ended June 30,  
     2010     2009  
     AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
    AVERAGE
BALANCE
    INTEREST    YIELD/
RATE
(%)(6)
 
     (dollars in thousands)  

INTEREST-EARNING ASSETS:

              

Investment securities (1):

              

Taxable

   $ 1,272,461      $ 27,655    4.35   $ 1,109,430      $ 28,258    5.10

Tax-exempt (tax-equivalent) (2)

     119,260        3,755    6.30        137,273        4,374    6.37   
                                  

Total investment securities

     1,391,721        31,410    4.51        1,246,703        32,632    5.24   
                                  

Cash Equivalents

     476        2    0.84        1,495        12    1.60   
                                  

Loans (2) (3):

              

Commercial and commercial real estate

     2,812,026        71,268    5.04        3,057,063        74,700    4.86   

Residential real estate mortgages

     118,379        2,632    4.45        53,869        1,556    5.78   

Home equity and consumer

     98,359        2,079    4.26        102,066        2,166    4.28   

Fees on loans

       542          554   
                                  

Net loans (tax-equivalent) (2)

     3,028,764        76,521    5.09        3,212,998        78,976    4.96   
                                  

Total interest-earning assets (2)

     4,420,961        107,933    4.91        4,461,196        111,620    5.03   
                                  

NON-EARNING ASSETS:

              

Allowance for loan losses

     (110,015          (133,851     

Cash and due from banks

     74,435             58,510        

Accrued interest and other assets

     141,139             116,935        
                          

TOTAL ASSETS

   $ 4,526,520           $ 4,502,790        
                          

INTEREST-BEARING LIABILITIES:

              

Interest-bearing deposits:

              

Interest-bearing demand deposits

   $ 759,128      $ 4,289    1.14      $ 660,077      $ 3,556    1.09   

Savings deposits

     40,904        15    0.07        42,183        16    0.08   

Time deposits

     1,591,906        20,132    2.55        1,904,277        34,710    3.68   
                                  

Total interest-bearing deposits

     2,391,938        24,436    2.06        2,606,537        38,282    2.96   
                                  

Other borrowings

     535,659        4,754    1.77        363,949        4,408    2.41   

Notes payable and other advances

     541,867        2,798    1.03        462,657        3,238    1.39   

Junior subordinated debentures

     86,607        2,884    6.66        86,607        3,141    7.25   

Subordinated notes

     61,335        3,552    11.58        55,399        3,237    11.69   
                                  

Total interest-bearing liabilities

     3,617,406        38,424    2.14        3,575,149        52,306    2.95   
                                  

NONINTEREST-BEARING LIABILITIES:

              

Noninterest-bearing deposits

     595,363             548,766        

Accrued interest, taxes, and other liabilities

     46,766             72,323        
                          

Total noninterest-bearing liabilities

     642,129             621,089        
                          

STOCKHOLDERS’ EQUITY

     266,985             306,552        
                          

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,526,520           $ 4,502,790        
                          

Net interest income (tax-equivalent) (2)

     $ 69,509        $ 59,314   
                      

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

        2.77        2.08
                      

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

        3.16        2.67
                      

 

(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 Quarter Ended    For the Six Months Ended
     June 30,
2010
    June 30,
2009
   June 30,
2010
    June 30,
2009

Service charges

   $ 2,781      $ 2,768    $ 5,638      $ 5,589

Trust and investment management fees

     235        475      582        1,009

Mortgage origination revenue

     1,892        —        2,195        —  

Loss on disposition of bulk purchased mortgage loans

     (5     —        (2,027     —  

Gains on investment sales

     142        7,595      1,575        8,259

Other derivative income (loss)

     (42     153      167        1,272

Letter of credit and other loan fees

     979        507      1,987        713

Other noninterest income

     176        639      415        638
                             

Total noninterest income

   $ 6,158      $ 12,137    $ 10,532      $ 17,480
                             

Quarter Ended June 30, 2010 Compared to the Quarter Ended June 30, 2009

Total noninterest income was $6.2 million during the second quarter of 2010, compared to $12.1 million in the second quarter of 2009, a decrease of $5.9 million. Excluding the impact of gains on investment sales, noninterest income increased 32.5% from $4.5 million in second quarter 2009 to $6.0 million in the second quarter of 2010. The increase is mainly due to mortgage origination income generated from Cole Taylor Mortgage, which totaled $1.9 million during the second quarter of 2010. This increase is somewhat offset by lower trust fees as our corporate trust business was sold in April 2010.

Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

Total noninterest income was $10.5 million during the first six months of 2010, compared to $17.5 million in the first six months of 2009. Noninterest income decreased due to lower gains on investment security sales, which dropped from $8.3 million as of June 30, 2009 to $1.6 million as of June 30, 2010 and a loss on disposition of bulk purchased loans in the first quarter of 2010 of $2.0 million. Excluding the impact of those two items, noninterest income grew to $11.0 million for the first six months of 2010 from $9.2 million for the same period a year ago. Most of the increase was due to $2.2 million mortgage origination revenue from Cole Taylor Mortgage and higher standby letter of credit fees from our expanding asset based lending group, Cole Taylor Business Capital. This increase was somewhat offset by lower trust fees from the corporate trust business that was sold in April 2010, and lower derivative income.

 

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Noninterest Expense

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

 

     For the Quarter Ended     For the Six Months Ended  
     June 30,
2010
    June 30,
2009
    June 30,
2010
    June 30,
2009
 
     (dollars in thousands)  

Salaries and employee benefits:

        

Salaries, employment taxes, and medical insurance

   $ 10,799      $  9,711      $21,432      $19,074   

Sign-on bonuses and severance

     41      20      41      279   

Incentives, commissions, and retirement benefits

     1,406      1,273      2,386      2,183   
                          

Total salaries and employee benefits

     12,246      11,004      23,859      21,536   

Occupancy of premises, furniture and equipment

     2,753      2,539      5,307      5,156   

Nonperforming asset expense

     4,055      224      8,993      978   

FDIC assessment

     1,970      4,368      4,183      5,899   

Legal fees, net

     1,427      1,655      2,246      2,795   

Early extinguishment of debt

     —        —        —        527   

Other noninterest expense

     5,016      3,917      10,031      7,981   
                          

Total noninterest expense

   $ 27,467      $23,707      $54,619      $44,872   
                          

Efficiency Ratio

     67.50   67.89   70.84   67.03
                          

Quarter Ended June 30, 2010 Compared to the Quarter Ended June 30, 2009

Noninterest expense increased $3.8 million, or 15.9%, to $27.5 million in the second quarter of 2010, as compared to $23.7 million during the second quarter of 2009. The higher level of noninterest expense during the second quarter of 2010 is driven by higher salaries and employee benefits, nonperforming asset expense, and other noninterest expense was partially offset by lower Federal Deposit Insurance Corporation (“FDIC”) assessment related expenses.

Total salaries and employee benefits expense during the second quarter of 2010 was $12.2 million, compared to $11.0 million during the second quarter of 2009, an increase of $1.2 million or 10.9%. This increase is primarily driven by higher base salaries resulting from an increased number of employees mainly in Cole Taylor Mortgage as we have increased headcount to 521 as of June 30, 2010, compared to 432 as of June 30, 2009. We expect that this trend will continue as the unit continues to add branches and support staff commensurate with growth in originations. Cole Taylor Mortgage has 87 full time employees as of June 30, 2010, over half of which are compensated on a variable basis.

Nonperforming asset expense totaled $4.1 million during the second quarter of 2010, compared to $224,000 during the second quarter of 2009. Higher provisions and larger losses on the disposition of OREO assets, along with an increase in expense associated with the higher number of assets currently in our work-out area combined to produce the increase in expense. We expect that our nonperforming asset expense will continue to be significant in future periods because of the currently high level of nonperforming loans and OREO.

 

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Table of Contents

FDIC insurance premiums were $2.0 million for the second quarter of 2010, compared to $4.4 million in the second quarter of 2009, a decrease of $2.4 million. FDIC insurance premiums in the second quarter of 2009 included a one-time, industry-wide special assessment, including our portion which was $2.1 million.

Other noninterest expense primarily includes external audit and tax services, business development and entertainment expenses, computer software license fees, and other operating expenses such as insurance, telephone, postage, office supplies and printing. Other noninterest expense was $5.0 million in the second quarter of 2010, an increase of $1.1 million from $3.9 million of noninterest expense during the second quarter of 2009. This increase was largely due to higher accounting and audit fees, insurance, operational losses and lending expenses.

Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

For the first six months of 2010, noninterest expense was $54.6 million, an increase of $9.7 million as compared to $44.9 million of noninterest expense during the first six months of 2009. Between these year-to-date periods, increases in salaries and benefits, nonperforming asset expense, and other noninterest expenses were partly offset by lower FDIC insurance assessments, legal fees and reduced charges for early extinguishment of debt.

Total salaries and employee benefits expense totaled $23.9 million, as compared to $21.5 million during the first six months of 2009, an increase of $2.3 million. The launch of Cole Taylor Mortgage and the related headcount additions resulted in the increased salaries and benefits expenses.

For the first six months of 2010, nonperforming asset expense increased to $9.0 million from $1.0 million for the same period a year ago. Nonperforming asset expense during the first six months of 2010 included a $3.2 million write-down associated with the transfer to the loan portfolio of certain nonperforming commercial loans held for sale. The transfer occurred at the lower of cost or fair value. Also, in the first six months of 2010, the estimated liability for probable losses on unfunded credit commitments increased $1.9 million and provision on OREO increased $2.4 million when compared to the six months ended June 30, 2009.

Our FDIC insurance premium decreased for the six month period ended June 30, 2010, compared to 2009 primarily due to the FDIC special assessment in the second quarter of 2009 of $2.1 million.

Legal fees were $2.2 million in the first six months of 2010, compared to $2.8 million in the first six months of 2009. Lower legal fees reflect lower expenses incurred by the loan workout area.

For the first six months of 2010, other noninterest expense was $10.0 million, compared to $8.0 million during the first six months of 2009. The increase was largely due to higher operational losses, primarily related to the bulk purchased mortgage loans, outside services and insurance.

 

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Table of Contents

Efficiency Ratio

The efficiency ratio is calculated by dividing total noninterest expense by total revenues (net interest income and noninterest income, less gains on the sale of investment securities). Generally, a lower efficiency ratio indicates that the entity is operating more efficiently. Our efficiency ratio was 67.50% in the second quarter of 2010, compared to 67.89% during the second quarter of 2009. We were able to hold the efficiency ratio relatively flat despite the commencement of Cole Taylor Mortgage and higher nonperforming asset expense.

Our efficiency ratio was 70.84% during the first six months of 2010, compared to 67.03% during the first six months of 2009. The higher ratio in 2010 was largely the result of higher nonperforming asset expense on a period over period basis.

Income Taxes

Despite a pre-tax loss of $30.6 million, we recorded income tax expense of $306,000 during the second quarter of 2010 and $612,000 during the first six months of 2010. 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 valuation allowance. The expense recorded in the second quarter of 2010 and the first six months 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 to record income tax expense of $1.3 million during 2010 associated with the release of the residual tax effects.

FINANCIAL CONDITION

Overview

Total assets increased $181.7 million, or 4.1%, to $4.59 billion at June 30, 2010 from total assets of $4.40 billion at December 31, 2009, primarily as a result of an increase in investment securities. Investment securities totaled $1.43 billion at June 30, 2010, an increase of $159.1 million, or 12.5%, from year-end 2009. The total loan portfolio increased $8.0 million, or 0.3%, to $2.94 billion at June 30, 2010. During the first six months of 2010, total deposits increased $66.2 million, or 2.2%, to $3.04 billion at June 30, 2010, and other borrowings increased $249.3 million, or 73.8%. Notes payable and other advances decreased $182.0 million during the first six months of 2010. Subordinated notes increased $29.7 million, or 53.3%. Total stockholders’ equity at June 30, 2010 was $282.8 million, compared to $258.8 million at December 31, 2009, an increase of $23.9 million, or 9.3%.

 

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Table of Contents

Investment Securities

Investment securities totaled $1.43 billion at June 30, 2010, compared to $1.27 billion at December 31, 2009, an increase of $159.1 million, or 11.1%. During the first six months of 2010, we increased our investment portfolio to enhance our net interest margin. During the first six months of 2010, we purchased approximately $277.5 million of investment securities, primarily mortgage-related securities issued by government sponsored enterprises and, we sold $48.1 million of investment securities, resulting in gains of $1.6 million. The overall weighted-average life of our investment portfolio at June 30, 2010 was approximately 5.6 years, compared to approximately 6.0 years at December 31, 2009.

As of June 30, 2010, mortgage-related securities comprised approximately 88% of our investment portfolio. Almost all of the securities were issued by government and government-sponsored enterprises.

As of June 30, 2010, we had a net unrealized gain of $50.9 million in our available-for-sale investment portfolio, which was comprised of $53.8 million of gross unrealized gains and $3.0 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 June 30, 2010 related to seven investment securities with a carrying value of $14.0 million. Each quarter we analyze each of these securities to determine if other-than-temporary impairment has occurred. The factors we consider include the magnitude of the unrealized loss in comparison to the security’s carrying value, the length of time the security has been in an unrealized loss position and the current independent bond rating for the security. Those securities with unrealized losses for more than 12 months and for more than 10% of their carrying value are analyzed further to determine if it is probable that not all the contractual cash flows will be received. We obtain fair value estimates from additional independent sources and perform cash flow analysis to determine if other-than-temporary impairment has occurred. Of the seven securities with gross unrealized losses at June 30, 2010, four securities have been in a loss position for 12 months or more, including one security for which we have previously recognized other-than-temporary impairment for the amount of the anticipated credit loss. As of June 30, 2010, our analysis, including the utilization of independent, third party fair values estimates, indicated that these four securities did not have other-than-temporary impairment or did not have any additional other-than-temporary impairment. See “Notes to Consolidated Financial Statements – Investment Securities” for additional details.

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 June 30, 2010, we held $27.5 million of FHLB stock and maintained $445.0 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 we believe no impairment has occurred.

 

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Table of Contents

Loans

Total loans held for portfolio increased $11.4 million to $2.86 billion at June 30, 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 $13.4 million, or 0.5%, while consumer-oriented loans increased by $29.2 million, or 19.1%. The decrease in commercial loans during the first six months of 2010 consisted of a $75.4 million, or 34.0%, decrease in residential construction and land loans, a $7.0 million, or 0.6%, decrease in commercial real estate secured loans and a $2.1 million, or 1.5%, decrease in commercial construction and land loans. These decreases were partly offset by a $71.0 million, or 5.6%, increase in C&I loans.

The composition of our loan portfolio as of June 30, 2010 and December 31, 2009 was as follows:

 

     June 30, 2010     December 31, 2009  
     Amount     Percentage
of Gross
Loans
    Amount     Percentage
of Gross
Loans
 
     (dollars in thousands)