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EX-4.3 - NOTE ISSUED BY THE COMPANY TO PRAIRIE CAPITAL IV, L.P. - TAYLOR CAPITAL GROUP INCdex43.htm
EX-4.4 - NOTE ISSUED BY THE COMPANY TO PRAIRIE CAPITAL IV QP, L.P. - TAYLOR CAPITAL GROUP INCdex44.htm
EX-4.2 - WARRANT ISSUED BY THE COMPANY TO PRAIRIE CAPITAL IV QP, L.P. - TAYLOR CAPITAL GROUP INCdex42.htm
EX-4.1 - WARRANT ISSUED BY THE COMPANY TO PRAIRIE CAPITAL IV, L.P. - TAYLOR CAPITAL GROUP INCdex41.htm
EX-10.1 - EXCHANGE AGREEMENT - TAYLOR CAPITAL GROUP INCdex101.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - TAYLOR CAPITAL GROUP INCdex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - TAYLOR CAPITAL GROUP INCdex311.htm
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - TAYLOR CAPITAL GROUP INCdex321.htm
EX-10.2 - REGISTRATION RIGHTS AGREEMENT - TAYLOR CAPITAL GROUP INCdex102.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 September 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 November 10, 2010, there were 17,876,833 shares of Common Stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

 

TAYLOR CAPITAL GROUP, INC.

INDEX

 

         Page  
PART I. FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Consolidated Balance Sheets (unaudited) - September 30, 2010 and December 31, 2009      1   
  Consolidated Statements of Operations (unaudited) - For the third quarter and nine months ended September 30, 2010 and 2009      2   
  Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - For the nine months ended September 30, 2010 and 2009      3   
  Consolidated Statements of Cash Flows (unaudited) - For the nine months ended September 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      71   


Table of Contents

 

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollars in thousands, except per share data)

 

     September 30,
2010
    December 31,
2009
 
ASSETS     

Cash and cash equivalents:

    

Cash and due from banks

   $ 143,418      $ 48,420   

Short-term investments

     1,054        49   
                

Total cash and cash equivalents

     144,472        48,469   

Investment securities:

    

Available-for-sale, at fair value

     1,084,784        1,271,271   

Held-to-maturity, at amortized cost (fair value of $91.2 million at September 30, 2010)

     87,816        —     

Loans held for sale, at fair value

     134,508        81,853   

Loans, net of allowance for loan losses of $94,138 and $106,185 at September 30, 2010 and December 31, 2009, respectively

     2,804,293        2,847,290   

Premises, leasehold improvements and equipment, net

     14,862        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

     39,063        26,231   

Other assets

     312,533        81,663   
                

Total assets

   $ 4,658,815      $ 4,403,502   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Noninterest-bearing

   $ 588,204      $ 659,146   

Interest-bearing

     2,384,464        2,317,654   
                

Total deposits

     2,972,668        2,976,800   

Other borrowings

     506,857        337,669   

Accrued interest, taxes and other liabilities

     238,397        60,925   

Notes payable and other advances

     490,000        627,000   

Junior subordinated debentures

     86,607        86,607   

Subordinated notes, net

     85,545        55,695   
                

Total liabilities

     4,380,074        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 September 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

     99,992        98,844   

Series C, 8% non-cumulative, convertible perpetual, 1,500,000 shares authorized, 1,276,480 issued and outstanding at September 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; 19,239,510 and 12,029,375 shares issued at September 30, 2010 and December 31, 2009, respectively; 18,286,842 and 11,076,707 shares outstanding at September 30, 2010 and December 31, 2009, respectively

     192        120   

Surplus

     307,120        226,398   

Accumulated deficit

     (141,839     (110,617

Accumulated other comprehensive income, net

     6,000        8,697   

Treasury stock, at cost, 952,668 shares

     (24,636     (24,636
                

Total stockholders’ equity

     278,741        258,806   
                

Total liabilities and stockholders’ equity

   $ 4,658,815      $ 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 Third Quarter
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2010     2009     2010     2009  

Interest income:

        

Interest and fees on loans

   $ 38,821      $ 40,749      $ 115,292      $ 119,668   

Interest and dividends on investment securities:

        

Taxable

     12,007        13,921        39,662        42,179   

Tax-exempt

     1,148        1,360        3,589        4,203   

Interest on cash equivalents

     4        3        6        15   
                                

Total interest income

     51,980        56,033        158,549        166,065   
                                

Interest expense:

        

Deposits

     10,448        16,629        34,884        54,911   

Other borrowings

     2,097        2,210        6,851        6,618   

Notes payable and other advances

     1,200        1,718        3,998        4,956   

Junior subordinated debentures

     1,471        1,477        4,355        4,618   

Subordinated notes

     2,397        1,624        5,949        4,861   
                                

Total interest expense

     17,613        23,658        56,037        75,964   
                                

Net interest income

     34,367        32,375        102,512        90,101   

Provision for loan losses

     18,128        15,539        83,204        70,609   
                                

Net interest income after provision for loan losses

     16,239        16,836        19,308        19,492   
                                

Noninterest income:

        

Service charges

     2,783        2,892        8,421        8,481   

Trust and investment management fees

     109        332        691        1,341   

Mortgage origination revenue

     6,308        —          8,503        —     

Loss on disposition of bulk purchased mortgage loans

     (410     (1,351     (2,437     (1,305

Gains on sales of investment securities

     32,804        378        34,379        8,637   

Other derivative income

     1,127        108        1,294        1,380   

Other noninterest income

     1,421        1,017        3,823        2,322   
                                

Total noninterest income

     44,142        3,376        54,674        20,856   
                                

Noninterest expense:

        

Salaries and employee benefits

     13,806        10,440        37,665        31,976   

Occupancy of premises

     2,024        2,017        6,274        6,079   

Furniture and equipment

     644        531        1,701        1,625   

Nonperforming asset expense

     1,538        2,295        10,531        3,273   

FDIC assessment

     2,178        2,314        6,361        8,213   

Legal fees, net

     1,481        1,430        3,727        4,225   

Early extinguishment of debt

     378        —          378        527   

Other noninterest expense

     4,597        3,489        14,628        11,470   
                                

Total noninterest expense

     26,646        22,516        81,265        67,388   
                                

Income (loss) before income taxes

     33,735        (2,304     (7,283     (27,040

Income tax expense

     321        144        933        1,481   
                                

Net income (loss)

     33,414        (2,448     (8,216     (28,521

Preferred dividends and discounts

     (2,671     (2,873     (7,251     (8,603

Implied non-cash preferred dividend

     —          —          (15,756     —     
                                

Net income (loss) applicable to common stockholders

   $ 30,743      $ (5,321   $ (31,223   $ (37,124
                                

Basic income (loss) per common share

   $ 1.68      $ (0.51   $ (2.19   $ (3.54

Diluted income (loss) per common share

     1.57        (0.51     (2.19     (3.54

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, net of forfeitures

    —          —          —          —          —          —          —          —          —     

Amortization of stock based compensation awards

            1,671              1,671   

Comprehensive loss:

                 

Net loss

    —          —          —          —          —          (8,216     —          —          (8,216

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

    —          —          —          —          —          —          542        —          542   

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

    —          —          —          —          —          —          (3,239     —          (3,239
                       

Total comprehensive loss

                  $ (10,913
                       

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

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

Preferred stock dividends and discounts accumulated, Series B

    —          1,148        —          —          —          (5,079     —          —          (3,931

Preferred stock dividends declared, Series C- $0.76 per share

    —          —          —          —          —          (971     —          —          (971
                                                                       

Balance at September 30, 2010

  $ —        $ 99,992      $ 31,912        $192      $ 307,120        $(141,839     $   6,000      $ (24,636   $ 278,741   
                                                                       

Balance at December 31, 2008

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

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

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

Preferred stock issuance cost, Series B

    —          —          —          —          (27     —          —          —          (27

Amortization of stock based compensation awards

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

Tax benefit on stock awards

    —          —          —          —          (522     —          —          —          (522

Comprehensive loss:

                 

Net loss

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

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

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

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

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

Total comprehensive loss

                    (12,379
                       

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

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

Preferred stock dividends accumulated, Series B

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

Balance at September 30, 2009

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

See accompanying notes to consolidated financial statements (unaudited)

 

3


Table of Contents

 

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(dollars in thousands)

 

     For the Nine Months  Ended
September 30
 
     2010     2009  

Cash flows from operating activities:

    

Net loss

   $ (8,216   $ (28,521

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

    

Other derivative income

     (1,294     (1,380

Gains on sales of investment securities

     (24,578     (8,637

Amortization of premiums and discounts, net

     2,134        (70

Deferred loan fee amortization

     (4,576     (3,495

Provision for loan losses

     83,204        70,609   

Loans purchased

     —          (76,829

Loans originated for sale

     (329,320     —     

Proceeds from loan sales

     257,066        2,803   

Depreciation and amortization

     1,717        1,779   

Deferred income tax expense

     3,027        5,862   

Losses on other real estate

     7,123        1,243   

Tax expense on stock options exercised or stock awards

     —          (522

Excess tax benefit on stock options exercised and stock awards

     16        403   

Cash received on termination of derivative instruments

     —          6,630   

Other, net

     543        6,236   

Changes in other assets and liabilities:

    

Accrued interest receivable

     699        150   

Other assets

     (14,778     6,117   

Accrued interest payable, taxes and other liabilities

     (5,276     (14,196
                

Net cash used by operating activities

     (32,509     (31,818
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (625,841     (708,879

Purchases of held-to-maturity securities

     (34,862     —     

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

     213,413        249,924   

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

     2,728        25   

Proceeds from sales of available-for-sale securities

     532,753        276,657   

Net (increase) decrease in loans

     (46,783     86,953   

Net additions to premises, leasehold improvements and equipment

     (1,064     (397

Purchases of FHLB and FRB stock

     (5,274     (6,111

Additions to foreclosed property

     —          (342

Net proceeds from sales of other real estate

     10,796        9,515   
                

Net cash provided (used) by investing activities

     45,866        (92,655
                

Cash flows from financing activities:

    

Net decrease in deposits

     (7,005     (80,052

Net increase in other borrowings

     169,188        52,132   

Proceeds from notes payable and other advances

     10,000        155,000   

Repayments of notes payable and other advances

     (147,000     —     

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

     (16     (403

Dividends paid

     (6,330     (7,656
                

Net cash provided by financing activities

     82,646        118,994   
                

Net increase (decrease) in cash and cash equivalents

     96,003        (5,479

Cash and cash equivalents, beginning of period

     48,469        53,012   
                

Cash and cash equivalents, end of period

   $ 144,472      $ 47,533   
                

Consolidated Statements of Cash Flows continued on the next page

See accompanying notes to consolidated financial statements (unaudited)

 

4


Table of Contents

TAYLOR CAPITAL GROUP, INC.

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

(dollars in thousands)

 

 

     For the Nine Months  Ended
September 30
 
     2010     2009  

Supplemental disclosure of cash flow information:

    

Cash paid (received) during the period for:

    

Interest

   $ 59,518      $ 84,580   

Income taxes

     (4,851     (14,969

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

     542        19,232   

Transfer of portfolio loans to held for sale loans

     39,053        28,739   

Transfer of held for sale loans to portfolio loans

     52,967        —     

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

     182,977        —     

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

     219,189        —     

Loans transferred to other real estate and repossessed assets

     30,751        17,550   

See accompanying notes to consolidated financial statements (unaudited)

 

5


Table of Contents

 

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation:

These consolidated financial statements contain unaudited information as of September 30, 2010 and for the third quarter and nine months ended September 30, 2010 and September 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 United States of America generally accepted accounting principles (“GAAP”) 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 third quarter and nine months ended September 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 September 30, 2010 and December 31, 2009 were as follows:

 

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

Available-for-sale:

          

U.S. government sponsored agency securities

   $ 23,048       $ 200       $ (12   $ 23,236   

Mortgage-backed securities:

          

Residential

     756,842         8,167         (2,121     762,888   

Commercial

     146,190         5,940         —          152,130   

Collateralized mortgage obligations

     43,985         1,002         —          44,987   

State and municipal obligations

     97,940         3,618         (15     101,543   
                                  

Total available-for-sale

     1,068,005         18,927         (2,148     1,084,784   
                                  

Held-to-maturity:

          

Mortgage-backed securities:

          

Residential

     87,816         3,456         (53     91,219   
                                  

Total held-to-maturity

     87,816         3,456         (53     91,219   
                                  

Total

   $ 1,155,821       $ 22,383       $ (2,201   $ 1,176,003   
                                  

 

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     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 September 30, 2010, the Company had $1.05 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, $1.04 billion, or 99.4%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac, and the remaining $6.7 million were private-label mortgage related securities. Other debt securities at September 30, 2010 include $101.5 million of municipal obligations.

Investment securities with an approximate book value of $672.1 million at September 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 third quarter and nine months ended September 30, 2010, the Company had gross realized gains of $32.8 million and $34.4 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 $388,000 and $8.6 million, respectively, in the third quarter and nine months ended September 30, 2009. The Company had $4,000 gross realized losses during the third quarter and nine months ended September 30, 2010. Gross realized losses totaling $10,000 were recognized during the third quarter and nine months ended September 30, 2009.

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

 

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     September 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:

               

U.S. government sponsored agency securities

   $ 4,987       $ (12   $ —         $ —        $ 4,987       $ (12

Mortgage-backed securities:

               

Residential

     98,233         (217     6,738         (1,904     104,971         (2,121

State and municipal obligations

     969         (15     —           —          969         (15
                                                   

Temporarily impaired securities:
Available-for-sale

   $ 104,189       $ (244   $ 6,738       $ (1,904   $ 110,927       $ (2,148
                                                   
     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 September 30, 2010, the Company had three investment securities in an unrealized loss position for more than 12 months with a total unrealized loss of $1.9 million. All three securities were from its portfolio of private-label residential mortgage-backed securities.

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 loss level, 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 $1.8 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

 

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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. None 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 expected credit loss. Previously, one of the two securities had other-than-temporary impairment recognized for the amount of the expected credit loss. The independent cash flow analysis performed at September 30, 2010 indicated that there was no additional expected 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.

The following table shows the contractual maturities of debt securities, categorized by amortized cost and estimated fair value, at September 30, 2010.

 

     Amortized
Cost
     Estimated
Fair Value
 
     (in thousands)  

Available-for-sale:

     

Due in one year or less

   $ 1,135       $ 1,137   

Due after one year through five years

     2,522         2,533   

Due after five years through ten years

     36,646         37,878   

Due after ten years

     80,685         83,231   

Residential mortgage-backed securities

     756,842         762,888   

Commercial mortgage-backed securities

     146,190         152,130   

Collateralized mortgage obligations

     43,985         44,987   
                 

Total available-for-sale

     1,068,005         1,084,784   
                 

Held-to-maturity:

     

Residential mortgage-backed securities

     87,816         91,219   
                 

Total held-to-maturity

     87,816         91,219   
                 

Total investment securities

   $ 1,155,821       $ 1,176,003   
                 

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 September 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 on the amount of its outstanding FHLBC borrowings. At September 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 regulator 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 on the ultimate recoverability of the par value. In determining the recoverability of this investment, the Company considers factors such as the severity and

 

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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.

After evaluating these factors, considering that transactions of FHLBC stock in nine months ended September 30, 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.

3. Loans:

Loans classified by type at September 30, 2010 and December 31, 2009 were as follows:

 

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

Portfolio Loans:

    

Commercial and industrial

   $ 1,357,252      $ 1,264,369   

Commercial real estate secured

     1,128,290        1,171,777   

Residential construction and land

     119,219        221,859   

Commercial construction and land

     130,217        142,584   

Residential real estate mortgages

     74,276        57,887   

Home equity loans and lines of credit

     79,977        86,227   

Consumer

     6,814        8,221   

Other loans

     2,389        557   
                

Gross loans

     2,898,434        2,953,481   

Less: Unearned discount

     (3     (6
                

Total loans

     2,898,431        2,953,475   

Less: Allowance for loan losses

     (94,138     (106,185
                

Portfolio Loans, net

   $ 2,804,293      $ 2,847,290   
                

Loans Held for Sale:

    

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

   $ —        $ 81,853   

Originated mortgage loans (at fair value)

     134,508        —     
                

Loans Held for Sale

   $ 134,508      $ 81,853   
                

The total amount of loans transferred to third parties as loan participations at September 30, 2010 was $378.1 million, all of which has been derecognized as a sale under the applicable accounting guidance in effect at the time of the transfer. The Company continues to have involvement with these loans through relationship management and its servicing responsibilities.

At September 30, 2010, loans held for sale included $134.5 million of residential mortgage loans originated by Cole Taylor Mortgage, the Company’s residential mortgage origination unit. The Company has elected to account for these loans under the fair value option in accordance with ASC 825 – Financial Instruments. The unpaid principal balance associated with these loans was $130.5 million at September 30, 2010. An unrealized gain on these loans of $4.0 million was included in mortgage origination revenues in noninterest income on the Consolidated

 

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Statements of Operations at September 30, 2010. 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 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:

 

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

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

   $ 56       $ 59   

Nonaccrual loans

     118,363         141,403   
                 

Total nonperforming loans

   $ 118,419       $ 141,462   
                 

Performing restructured loans

   $ 26,548       $ 1,196   

Recorded balance of impaired loans:

     

With related allowance for loan loss

   $ 105,257       $ 95,936   

With no related allowance for loan loss

     28,404         45,761   
                 

Total recorded balance of impaired loans

   $ 133,661       $ 141,697   
                 

Allowance for loan losses related to impaired loans

   $ 31,757       $ 33,640   

4. Interest-Bearing Deposits:

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

 

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

NOW accounts

   $ 304,798       $ 307,025   

Savings account

     40,333         41,479   

Money market deposits

     575,429         445,418   

Time deposits:

     

Certificates of deposit

     741,372         775,663   

CDARS time deposits

     132,313         116,256   

Out-of-local-market certificates of deposit

     87,930         79,015   

Brokered certificates of deposit

     448,034         484,035   

Public time deposits

     54,255         68,763   
                 

Total time deposits

     1,463,904         1,523,732   
                 

Total

   $ 2,384,464       $ 2,317,654   
                 

At September 30, 2010, time deposits in the amount of $100,000 or more totaled $584.4 million compared to $539.1 million at December 31, 2009.

Brokered CDs are carried net of the related broker placement fees and fair value adjustments of $1.4 million at both September 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 have an option that allows the Company to

 

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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 September 30, 2010 and September 30, 2009, the Company had no brokered CDs that could be called before maturity. During the nine months ended September 30, 2009, the Company wrote-off $527,000 of unamortized broker placement fees and fair value adjustments.

5. Other Borrowings:

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

 

     September 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

   $ 15,641         0.15   $ 45,453         0.16

Term

     338,250         1.78        200,000         4.05   

Federal funds purchased

     151,353         0.50        89,384         0.35   

U.S. Treasury tax and loan note option

     1,613         0.00        2,832         0.00   
                      

Total

   $ 506,857         1.34   $ 337,669         2.52
                                  

Overnight repurchase agreements are collateralized financing transactions primarily executed with local Bank clients and with overnight maturities. Term repurchase agreements are collateralized financing transactions executed with broker/dealer counterparties with terms longer than overnight.

As of September 30, 2010 and December 31, 2009, the term repurchase agreements consisted of the following:

 

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

Term Repurchase Agreements:

     

Repurchase agreement - rate 0.33%, matured October 1, 2010

   $ 52,570       $       —     

Repurchase agreement - rate 0.34%, matured October 5, 2010

     52,190      

Repurchase agreement - rate 0.34%, matured October 1, 2010

     48,490         —     

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   

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

     —           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

     40,000         40,000   

Structured repurchase agreement - rate 4.31%, due September 27, 2012, callable after September 27, 2009

     40,000         40,000   

Structured repurchase agreement - rate 3.70%, due December 13, 2012, callable after December 13, 2009%

     20,000         20,000   
                 

Total term repurchase agreements

   $ 338,250       $ 200,000   
                 

 

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6. Notes Payable and Other Advances:

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

 

     Sept. 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, 0.23% at September 30, 2010

     350,000         —     

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

     490,000         615,000   
                 

Total notes payable and other advances

   $ 490,000       $ 627,000   
                 

At September 30, 2010, the FHLBC advances were collateralized by $443.8 million of investment securities and blanket liens on $127.1 million of qualified first-mortgage residential and home equity loans and $63.1 million in commercial real estate loans. Based on the value of collateral pledged at September 30, 2010, the Bank had additional borrowing capacity at the FHLBC of $58.0 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 September 30, 2010, the Bank pledged $782.0 million of commercial loans as collateral for an available $484.2 million borrowing capacity at the FRB. At December 31, 2009, the Bank also participated in the FRB’s Term Auction Facility. At December 31, 2009, the Bank pledged $85.3 million of securities and $790.8 million of commercial loans for these borrowings at the FRB. During the first quarter of 2010, the Bank replaced its borrowing under the Term Auction Facility as the FRB plans to phase out the program.

7. Subordinated Notes:

In May 2010, the Company issued $33.9 million of 8% subordinated notes. The subordinated notes pay interest quarterly 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, representing an aggregate of 848,450 shares of common stock. The warrants can be exercised on or after November 24, 2010

 

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and will expire on May 28, 2015. The proceeds from this transaction were allocated to the subordinated notes and the warrants based upon their relative fair values. The portion of the proceeds allocated to the warrants is being amortized as additional interest expense 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 raised 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.

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. As an inducement, the $15.8 million value attributed to the additional shares was considered a non-cash implied dividend to holders of the Series A Preferred and resulted in no net impact to total stockholders’ equity. In the second quarter of 2010, the period in which the additional 1.2 million 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 was considered in the determination of basic and diluted loss per common share. Effective immediately after the payment of the regular quarterly dividend on April 15, 2010, the Company did not declare nor pay any further dividends on the Series A Preferred.

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 exceeded 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.

In connection with the issuance of $33.9 million of subordinated notes in May 2010, the Company issued detachable warrants to purchase an aggregate 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.

 

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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.

 

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9. Other Comprehensive Income (“OCI”):

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

 

     For the Quarter Ended
September 30, 2010
    For the Quarter Ended
September 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

   $ (1,273   $ (13,317   $ (14,590   $ 24,921      $ (1,937   $ 22,984   

Less: reclassification adjustment for gains included in net income (loss)

     (32,804     12,997        (19,807     (378     151        (227
                                                

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

     (34,077     (320     (34,397     24,543        (1,786     22,757   

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

     33        (13     20        —          —          —     

Change in net unrealized loss from cash flow hedging instruments

     (1,331     527        (804     —          —          —     

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

     (633     251        (382     (1,369     543        (826
                                                

Other comprehensive income (loss)

   $ (36,008   $ 445      $ (35,563   $ 23,174      $ (1,243   $ 21,931   
                                                

 

     For the Nine Months Ended
September 30, 2010
    For the Nine Months Ended
September 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

   $ 38,623      $ (17,323   $ 21,300      $ 29,160      $ (4,713   $ 24,447   

Less: reclassification adjustment for gains included in net loss

     (34,379     13,621        (20,758     (8,637     3,422        (5,215
                                                

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

     4,244        (3,702     542        20,523        (1,291     19,232   

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

     (500     198        (302     —          —          —     

Change in net unrealized loss from cash flow hedging instruments

     (2,341     927        (1,414     —          —          —     

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

     (2,529     1,006        (1,523     (5,118     2,028        (3,090
                                                

Other comprehensive income (loss)

   $ (1,126   $ (1,571   $ (2,697   $ 15,405      $ 737      $ 16,142   
                                                

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 were allocated to other comprehensive income in accordance with ASC Topic 740 (Income Taxes). These changes were primarily changes in unrealized gains on the available-for-sale investment portfolio.

 

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10. Earnings Per Share:

The following table sets forth the computation of basic and diluted loss per common share for the periods indicated. Earnings per share for the quarter is calculated using the two-class method due to the profit for the quarter. Basic earnings per common share is computed by dividing the income available to common shareholders by the weighted-average number of common shares outstanding during the quarter, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards to the extent holders of these securities receive non-forfeitable dividends or dividend equivalents at the same rate as holders of the Company’s common stock. Diluted earnings per shares is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method for warrants and options and the if-converted method for convertible preferred shares. Due to the net loss for the nine month period ended September 30, 2010, all common stock equivalents, which consisted of 924,751 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 nine month periods ended September 30, 2009, 594,118 options outstanding to purchase shares of common stock, 2,862,647 warrants to purchase shares of common stock and the convertible Series A Preferred stock which could be converted into 6,000,000 shares of common stock were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

 

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

Net income (loss)

   $ 33,414      $ (2,448   $ (8,216   $ (28,521

Preferred dividends and discounts

     (2,671     (2,873     (7,251     (8,603

Implied non-cash preferred dividend

     —          —          (15,756     —     
                                

Net income (loss) available to common stockholders

   $ 30,743      $ (5,321   $ (31,223   $ (37,124
                                

Undistributed earnings allocated to common shares

   $ 29,803      $ (5,045   $ (30,047   $ (35.117

Undistributed earnings allocated to unvested restricted participating shares

     940        (276     (1,176     (2,007
                                

Undistributed earnings allocated to common shares and participating securities

   $ 30,743      $ (5,321   $ (31,223   $ (37,124
                                

Basic weighted-average common shares outstanding

     17,742,119        10,502,844        14,248,556        10,489,165   

Dilutive effect of common stock equivalents

     2,998,096        —          —          —     
                                

Diluted weighted-average common shares outstanding

     20,740,215        10,502,844        14,248,556        10,489,165   
                                

Basic loss per common share

   $ 1.68      $ (0.51   $ (2.19   $ (3.54

Diluted loss per common share

     1.57        (0.51     (2.19     (3.54

 

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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 nine month period ended September 30, 2010:

 

     Shares     Weighted-
Average
Exercise Price
 

Outstanding at January 1, 2010

     813,099      $ 18.76   

Granted

     172,450        8.75   

Exercised

     —          —     

Forfeited

     (14,702     8.05   

Expired

     (46,096     25.24   
          

Outstanding at September 30, 2010

     924,751        16.74   
          

Exercisable at September 30, 2010

     492,920        23.90   
          

As of September 30, 2010, the total compensation cost related to nonvested stock options that have not yet been recognized totaled $1.4 million and the weighted-average period over which these costs are expected to be recognized is approximately 3.0 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.

 

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The following table provides information regarding nonvested restricted stock activity for the nine month period ended September 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

     (38,535     27.30   

Forfeited

     (26,440     11.25   
          

Nonvested at September 30, 2010

     543,922        14.17   
          

As of September 30, 2010, the total compensation cost related to nonvested restricted stock that has not yet been recognized totaled $5.0 million and the weighted-average period over which these costs are expected to be recognized is approximately 2.5 years.

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 September 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

   $ 45,862        
 
Receive 2.93%
Pay 0.5516%
  
  
    4.5 yrs        

 

Other assets/

Noninterest income

  

  

   $ 2,994   

Cash flow hedging derivative instruments:

             

Interest rate corridors

     300,000         0.29%-1.29%        1.8 yrs         Other assets/OCI         1,078   
                   

Total hedging derivative instruments

     345,862              

Non-hedging derivative instruments:

             

Customer interest rate swap—pay fixed/receive variable

     229,461        

 

Pay 3.72%

Receive 0.460%

  

  

    2.7 yrs        

 

Other liabilities/

Noninterest income

  

  

     (14,483

Customer interest rate swap—receive fixed/pay variable

     229,461        

 

Receive 3.72%

Pay 0.460%

  

  

    2.7 yrs        

 

Other assets/

Noninterest income

  

  

     14,132   

Interest rate lock commitments

     280,435         NA        0.1 yrs        
 
Other assets/
Noninterest income
  
  
     3,596   

Forward loan sale commitments

     255,159         NA        0.2 yrs        
 
Other assets/
Noninterest income
  
  
     (733
                   

Total non-hedging derivative instruments

     994,516              
                   

Total derivative instruments

   $ 1,340,378              
                   

 

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During the nine months ended September 30, 2010, the Company entered into $45.9 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 $23,000 for the third quarter 2010 and $63,000 for the nine months ended September 30, 2010, and was recorded in noninterest income.

The Company also entered into $300.0 million of notional amount interest rate corridors during the nine months ended September 30, 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 OCI. Total ineffectiveness on the interest rate corridors was $4,000 for the third quarter and the nine months ended September 30, 2010.

The Company enters into interest rate lock and forward loan sale commitments 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.

 

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

Available-for-sale investment securities:

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

Assets held in employee deferred compensation plans:

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

Derivatives:

The Company has determined that its derivative instrument valuations, 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 commitments 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.

 

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Loans held for sale:

At September 30, 2010, loans held for sale included $134.5 million of 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 prior periods, the Company had certain residential mortgage loans that it acquired in a bulk purchase transaction and nonaccrual commercial loans classified as held for sale. These loans were recorded at the lower of cost or fair value and were recorded at fair value on a nonrecurring basis.

For all residential mortgage loans held for sale, the fair value is based on 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 on 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 estimated cost to sell. If the measure of the impaired loan is less than the recorded investment in the loan, a valuation allowance is established. 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 OREO 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

 

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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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Table of Contents

 

Assets and Liabilities Measured on a Recurring Basis

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

 

     As of September 30, 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

   $ 1,084,784       $ —         $ 1,084,784       $ —     

Loans held for sale accounted for at fair value

     134,508         —           134,508         —     

Assets held in employee deferred compensation plans

     2,372         2,372         —           —     

Derivative instruments

     18,204         —           18,204         —     

Mortgage derivative instruments

     3,596         —           —           3,596   

Liabilities:

           

Derivative instruments

     14,483         —           14,483         —     

Mortgage derivative instruments

     733         —           733         —     
     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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Table of Contents

 

The table below includes a rollforward of the Consolidated Balance Sheets amounts for the quarter and nine months ended September 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 September 30,
     For the Nine Months
Ended September 30,
 
     2010      2009      2010      2009  
     (dollars in thousands, except per share amounts)  

Beginning Balance

     $1,271         $    —           $    —           $    —     

Realized/unrealized gains/(losses) included in net income (loss)

     —           —           —           —     

Purchases, issuances and settlements, net

     2,325         —           3,596         —     

Transfers in and/or out of Level 3

     —           —           —           —     
                                   

Fair value at period end

     $3,596         $    —           $3,596         $    —     
                                   

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 September 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

     $68,661         $   —           $65,703         $2,958   

Other real estate and repossessed assets

     30,575         —           4,999         25,576   
     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 September 30, 2010, the Company had $3.0 million of impaired loans and $25.6 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 represents sales, payments or net charge-offs of $13.8 million, an additional impaired loan with a

 

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fair value of $1.2 million and a resulting charge to earnings of $1.5 million to reduce this loan to fair value. The change in Level 3 OREO and repossessed assets during the nine months ended September 30, 2010 included $22.3 million of additions, $5.2 million of sales and $2.1 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 value. Accordingly, fair value is 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 value cannot be determined with precision. Changes in assumptions could significantly affect these estimations.

The methods and assumptions used to determine fair value 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 estimated cost to sell.

 

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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 FRB stock equals its book value as these stocks can only be sold to the FHLB, FRB 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 on 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 sale and interest rate lock commitments. The fair value of the forward loan sale commitments 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 value 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:

 

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

Financial Assets:

           

Cash and cash equivalents

   $ 144,472       $ 144,472       $ 48,469       $ 48,469   

Available-for-sale investments

     1,084,784         1,084,784         1,271,271         1,271,271   

Held-to-maturity investments

     87,816         91,219         —           —     

Loans held for sale

     134,508         134,508         81,853         82,104   

Loans, net of allowance

     2,804,293         2,811,788         2,847,290         2,799,863   

Investment in FHLB and FRB stock

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

Accrued interest receivable

     15,954         15,954         16,653         16,653   

Derivative financial instruments

     21,800         21,800         10,630         10,630   

Other assets

     2,372         2,372         2,461         2,461   
                                   

Total financial assets

   $ 4,332,483       $ 4,343,381       $ 4,309,837       $ 4,262,661   
                                   

Financial Liabilities:

           

Deposits without stated maturities

   $ 1,508,764       $ 1,508,764       $ 1,453,069       $ 1,453,069   

Deposits with stated maturities

     1,463,904         1,493,897         1,523,731         1,554,230   

Other borrowings

     506,857         517,492         337,669         352,352   

Notes payable and other advances

     490,000         493,655         627,000         630,709   

Accrued interest payable

     7,372         7,372         11,457         11,457   

Derivative financial instruments

     15,216         15,216         10,216         10,216   

Junior subordinated debentures

     86,607         58,988         86,607         50,583   

Subordinated notes

     85,545         82,737         55,695         53,792   
                                   

Total financial liabilities

   $ 4,164,265       $ 4,178,121       $ 4,105,444       $ 4,116,408   
                                   

Off-Balance Sheet Financial Instruments:

           

Unfunded commitments to extend credit

   $ 3,417       $ 3,417       $ 3,485       $ 3,485   

Standby letters of credit

     296         296         307         307   
                                   

Total off-balance sheet financial instruments

   $ 3,713       $ 3,713       $ 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 September 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 Consolidated Balance Sheets, 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 Consolidated Balance Sheets 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 current bank regulation and affect the lending, deposit, investment, trading and operating activities of financial institutions and holding companies, as well as securities reporting. We expect that this new law will require adoption of numerous new rules and regulation by various federal agencies and requires extensive additional reporting. The federal agencies responsible for rule making 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 several months.

Application of Critical Accounting Policies

Our accounting and reporting policies conform to United States of America generally accepted accounting principles (“GAAP”) and 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 GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available to us as of the date of the consolidated financial statements and, accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. The estimates, assumptions and

 

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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, therefore, 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, including 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, criticized and impaired loans. In addition, we use information about specific loans and borrowers, 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. 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 our borrowers’ probability of default and the fair value of the underlying collateral. The current illiquidity in the Chicago 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 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 GAAP, 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, 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 assets because at this time 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 Sheets 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 value. 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 value or cash flows of the derivatives have been highly effective in offsetting the changes in the fair value or cash flows of the hedged item and whether they are expected to be highly effective in the future. If it is determined that derivatives are not highly effective as a hedge, hedge accounting is discontinued for the period. Once hedge accounting is terminated, all changes in fair value of the derivatives flow through the Consolidated Statements of Operations in other noninterest income, which results in greater volatility in our earnings.

 

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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 locks 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 a discounted cash flow analysis of the expected cash flows 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 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 result in material changes in expected cash flows. Therefore, unrealized losses that we have determined to be temporary may at a later date be determined to be other-than-temporary and have a material impact on our statement of operations.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements under “Management Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q constitute forward-looking statements. 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 continued 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;

 

   

the risks associated with the establishment of our new mortgage unit, including the expansion into new geographic markets;

 

   

the risks associated with attracting and retaining experienced and qualified personnel, including our senior management and other key personnel in our core business lines;

 

   

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

 

   

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

 

   

a continuation of the recent unprecedented volatility in the capital markets;

 

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

 

   

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

 

   

the impact 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 filing.

RESULTS OF OPERATIONS

Overview

We reported net income applicable to common stockholders of $30.7 million, or $1.57 per diluted common share outstanding for the third quarter of 2010, compared to a net loss applicable to common stockholders of $5.3 million, or ($0.51) per diluted common share, in the third quarter of 2009. For the nine month period ended September 30, 2010, the loss applicable to common stockholders of $31.2 million, or ($2.19) per diluted common share was lower when compared to a net loss applicable to common stockholders of $37.1 million, or ($3.54) per diluted share, during the nine months ended September 30, 2009. The increase for the nine month period ended September 30, 2010, was primarily the result of higher net interest income and noninterest income somewhat offset by a one-time, non-cash charge of $15.8 million, or $1.09 per diluted share, representing the value of the incremental 1.2 million shares of common stock issued in the aggregate to the holders of our Series A Preferred who exchanged their shares of Series A Preferred for shares of common stock in our May 2010 exchange offer, higher provision for loan losses and higher noninterest expense.

Highlights

 

   

Pre-tax, pre-provision earnings from core operations increased 35.5% to $20.6 million for the quarter ended September 30, 2010, as compared to $15.2 million for the quarter ended September 30, 2009. During the nine months ended September 30, 2010, pre-tax, pre-provision earnings from core operations increased by 36.3% to $52.1 million from $38.2 million.

 

   

In the third quarter of 2010, total revenue (net interest income plus noninterest income less gains on sales of investment securities) was $45.7 million up from $35.4 million for the third quarter of 2009. For the nine months ended September 30, 2010, total revenue was $122.8 million, a 20.0% increase from $102.3 million for the same period in 2009.

 

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Our net interest margin was 3.25% for the third quarter of 2010, compared to 2.92% for the third quarter of 2009, an increase of 33 basis points. Our net interest margin was 3.19% during the nine months ended September 30, 2010 as compared to 2.76% during the nine months ended September 30, 2009.

 

   

Noninterest income (including gains on sales of investment securities) rose sharply to $44.1 million for the third quarter 2010 from $3.4 million in the third quarter of 2009. For the nine months ended September 30, 2010, noninterest income was $54.7 million, an increase of $33.8 million as compared to $20.9 million of noninterest income during the nine months ended September 30, 2009.

 

   

Noninterest expense increased $4.1 million to $26.6 million in the third quarter of 2010, as compared to $22.5 million during the third quarter of 2009. For the nine months ended September 30, 2010, noninterest expense was $81.3 million, an increase of $13.9 million as compared to $67.4 million of noninterest expense during the nine months ended September 30, 2009.

 

   

Nonperforming assets were $157.5 million, or 3.38% of total assets on September 30, 2010, compared to $196.3 million, or 4.38% of total assets on September 30, 2009. In addition, our provision for loan losses was $18.1 million for the third quarter of 2010 and $83.2 million during the nine months ended September 30, 2010. In comparison, the provision for loan losses was $15.5 million for the third quarter of 2009 and $70.6 million during the nine months ended September 30, 2009.

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 third quarter of 2010 and for the nine months ended September 30, 2010. It is expected that this unit’s origination volumes will increase as operations continue to grow. Cole Taylor Mortgage operates in 17 states, adding Connecticut, Missouri and Wisconsin in the third quarter of 2010. We anticipate loan production to come from relationships with mortgage brokers, retail offices and from our Bank’s branch locations. We expect this new line of business to be a source of growing noninterest fee income for us and provide additional earnings and geographic diversification.

In May 2010, we completed our previously announced capital transactions. The transactions provide additional liquidity 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. In early May 2010, we completed an exchange offer in which we issued an aggregate of 7.2 million shares of our common stock in exchange for all of the outstanding shares of our Series A Preferred. The Series A Preferred had an aggregate liquidation preference of $60 million and a non-cumulative preferred dividend that accrued at 8% per annum. By its terms the Series A Preferred was convertible into 6.0 million shares of common stock.

On May 28, 2010, following the completion of the exchange offer, we raised $75 million in additional capital in a private placement of shares of non-cumulative, convertible Series C Preferred, subordinated debt and warrants. Of this amount, $9.1 million received from an

 

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existing institutional investor in the company was funded into an escrow account pending regulatory approval. In October 2010, we received the requisite regulatory approval to accept these escrowed funds, so long as the investor purchased non-voting securities (denominated as Series E Preferred) that otherwise had comparable economic terms to our Series C Preferred. We also entered into an exchange agreement with this same investor pursuant to which it agreed to exchange a portion of its existing shares of common stock into shares of a new series of preferred stock (Series D Preferred), which is a non-voting stock. Other than the voting rights, the terms of our Series D Preferred are substantially the same as common stock.

As we continue to grow our core businesses, as well as manage our loan portfolio, we will require additional capital, either from earnings retention or external sources. We continue to review and evaluate our capital plan in conjunction with our business strategy as well as the heightened focus on capital requirements by regulatory authorities and the investment community. The timing, amount and form of any such capital raise will depend on a number of factors, including the amount of earnings generated by the Bank, the opportunities for future growth, further loan losses, regulatory requirements and the state of the capital markets.

Our accounting and reporting policies conform to GAAP and general practice within the banking industry. Management uses certain non-GAAP financial measures to evaluate the Company’s financial performance such as the non-GAAP measures of pre-tax, pre-provision earnings from core operations and of revenue. 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. The non-GAAP measure of revenue is calculated as the sum of net interest income and noninterest income less gains and losses on investment securities. Management believes that these measures are useful because they provide 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 for the periods indicated.

 

     For the Three Months Ended      For the Nine Months
Ended
 
     Sept. 30,
2010
     June 30,
2010
     Mar. 31,
2010
     Dec. 31,
2009
     Sept. 30,
2009
     Sept. 30,
2010
     Sept. 30,
2009
 

Income (loss) before income taxes

     $ 33,735          $(30,577)         $(10,441)         $ (3,676)         $ (2,304)         $ (7,283)         $(27,040)   

Add back (subtract):

                    

Provision for loan losses

     18,128          43,946          21,130          19,002          15,539          83,204          70,609    

Nonperforming asset expense

     1,538          4,055          4,938          8,453          2,295          10,531          3,273    

Gains on sales of investment securities

     (32,804)         (142)         (1,433)         (8,958)         (378)         (34,379)         (8,637)   
                                                              

Pre-tax, pre-provision earnings from core operations

     $ 20,597          $ 17,282          $ 14,194          $14,821          $15,152          $52,073          $ 38,205    
                                                              

The following table reconciles net interest income to revenue for the periods indicated.

 

     For the Three Months Ended      For the Nine Months
Ended
 
     Sept. 30,
2010
     June 30,
2010
     Mar. 31,
2010
     Dec. 31,
2009
     Sept. 30,
2009
     Sept. 30,
2010
     Sept. 30,
2009
 

Net interest income

     $34,367          $34,678          $33,467          $32,810          $32,375          $102,512          $  90,101    

Add back (subtract):

                    

Noninterest income

     44,142          6,158          4,374          12,735          3,376          54,674          20,856    

Gains on sales of investment securities

     (32,804)         (142)         (1,433)         (8,958)         (378)         (34,379)         (8,637)   
                                                              

Revenues

     $45,705          $40,694          $36,408          $36,587          $35,373          $122,807          $102,320    
                                                              

 

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Net Interest Income

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

Net interest income was $34.4 million for the third quarter of 2010, an increase of $2.0 million, or 6.2%, from $32.4 million of net interest income in the third quarter of 2009. Net interest income for the third quarter of 2010 benefited from the low interest rate environment and resulted in a higher net interest margin.

Our net interest margin was 3.25% for the third quarter of 2010, compared to 2.92% for the third quarter of 2009, an increase of 33 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 third quarter of 2010 was 2.00%, compared to 2.61% during the third quarter of 2009, a decrease of 61 basis points. From the first quarter of 2010 to the third 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 2.22% during the third quarter of 2010 as compared to 3.15% during the third quarter of 2009.

Offsetting the lower cost of funds were lower interest-earning asset yields, which declined 13 basis points from 5.01% in the third quarter of 2009 to 4.88% in the third quarter of 2010 largely the result of the lower rate environment that negatively impacted yields on the investment portfolio and lower loan balances. The taxable investment portfolio rates fell 51 basis points to 4.15% in the third quarter of 2010 from 4.66% in the third quarter of 2009. Average loan balances fell $162.9 million in the third quarter of 2010, compared to third quarter of 2009. These decreases were somewhat mitigated by higher yields on loans which are up to 5.11% in the third quarter of 2010 from 5.09% in the third quarter of 2009 as a result of our efforts to improve loan pricing, including the use of interest rate floors.

Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009

Net interest income was $102.5 million for the nine months ended September 30, 2010, compared to $90.1 million during the same nine month period a year ago, an increase of $12.4 million, or 13.7%. Net interest income for the nine months ended September 30, 2010 benefited from the lower interest rate environment, which resulted in a 43 basis point increase in the net interest margin.

Our net interest margin was 3.19% during the nine months ended September 30, 2010 as compared to 2.76% during the nine months ended September 30, 2009. This increase was largely due to lower interest-bearing funding costs which decreased to 2.10% for the nine months ended September 30, 2010 from 2.83% for the nine months ended September 30, 2009.

 

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Funding costs were lower in the nine months ended September 30, 2010, due to a sizeable decrease in term deposit rates, which fell 106 basis points from the nine months ended September 30, 2009, as a result of continued repricing of deposits in the low interest rate environment to current market rates.

Offsetting the lower cost of funds were fluctuations in rates and volume of our earning assets. Average loan volumes declined for the nine month period ended September 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 nine month period ended September 30, 2010, the yield on our taxable investment securities was 4.29%, compared to 4.94% for the same period a year ago or a 65 basis point reduction.

Rate vs. Volume Analysis of Net Interest Income

Tax-Equivalent Adjustments to Yields and Margins

As part of our 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.

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

 

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     Quarter Ended September 30, 2010 Versus
Quarter Ended September 30, 2009
Increase/(Decrease)
    Nine Months Ended September 30, 2010 Versus
Nine Months Ended September 30, 2009
Increase/(Decrease)
 
     VOLUME     RATE     NET     VOLUME     RATE     NET  
     (in thousands)  

INTEREST EARNED ON:

            

Investment securities

   $ (723   $ (1,517   $ (2,240   $ 2,479      $ (5,940   $ (3,461

Cash equivalents

     (2     3        1        (10     1        (9

Loans

     (2,091     158        (1,933     (6,750     2,362        (4,388
                                                

Total interest-earning assets

     (2,816     (1,356     (4,172     (4,281     (3,577     (7,858
                                                

INTEREST PAID ON:

            

Interest-bearing deposits

     (1,960     (4,221     (6,181     (6,558     (13,469     (20,027

Total borrowings

     1,137        (1,002     135        3,675        (3,576     99   
                                                

Total interest-bearing liabilities

     (823     (5,223     (6,046     (2,883     (17,045     (19,928
                                                

Net interest income, tax-equivalent

   $ (1,993   $ 3,867      $ 1,874      $ (1,398   $ 13,468      $ 12,070   
                                                

 

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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 September 30,
    For the Nine Months
Ended September 30,
 
     2010     2009     2010     2009  
     (dollars in thousands)  

Net interest income as stated

   $ 34,367      $ 32,375      $ 102,512      $ 90,101   

Tax-equivalent adjustment-investments

     618        732        1,933        2,263   

Tax-equivalent adjustment-loans

     25        29        75        86   
                                

Tax-equivalent net interest income

   $ 35,010      $ 33,136      $ 104,520      $ 92,450   
                                

Yield on earning assets without tax adjustment

     4.82     4.94     4.84     4.95

Yield on earning assets - tax-equivalent

     4.88     5.01     4.90     5.02

Net interest margin without tax adjustment

     3.19     2.86     3.13     2.69

Net interest margin - tax-equivalent

     3.25     2.92     3.19     2.76

Net interest spread without tax adjustment

     2.82     2.34     2.74     2.12

Net interest spread - tax-equivalent

     2.88     2.40     2.80     2.19

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

 

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     For the Quarter Ended September 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

     $1,157,721        $12,007         4.15     $1,194,787        $13,921         4.66

Tax-exempt (tax-equivalent) (2)

     111,913        1,766         6.31        130,935        2,092         6.39   
                                      

Total investment securities

     1,269,634        13,773         4.34        1,325,722        16,013         4.83   
                                      

Cash Equivalents

     1,191        4         1.31        2,637        3         0.45   
                                      

Loans (2) (3):

              

Commercial and commercial real estate

     2,763,639        35,865         5.08        2,968,296        37,841         4.99   

Residential real estate mortgages

     164,086        1,798         4.38        109,413        1,380         5.05   

Home equity and consumer

     90,359        985         4.32        103,283        1,069         4.11   

Fees on loans

     —          197           —          488      
                                      

Net loans (tax-equivalent) (2)

     3,018,084        38,845         5.11        3,180,992        40,778         5.09   
                                      

Total interest-earning assets (2)

     4,288,909        52,622         4.88        4,509,351        56,794         5.01   
                                      

NON-EARNING ASSETS:

              

Allowance for loan losses

     (111,959          (139,074     

Cash and due from banks

     84,943             65,365        

Accrued interest and other assets

     185,528             107,549        
                          

TOTAL ASSETS

     $4,447,421             $4,543,191        
                          

INTEREST-BEARING LIABILITIES:

              

Interest-bearing deposits:

              

Interest-bearing demand deposits

     $874,559        2,204         1.00        $640,074        1,981         1.23   

Savings deposits

     40,545        9         0.09        41,839        10         0.09   

Time deposits

     1,474,122        8,235         2.22        1,845,048        14,638         3.15   
                                      

Total interest-bearing deposits

     2,389,226        10,448         1.73        2,526,961        16,629         2.61   
                                      

Other borrowings

     535,991        2,097         1.53        358,507        2,210         2.41   

Notes payable and other advances

     393,067        1,199         1.19        573,872        1,718         1.17   

Junior subordinated debentures

     86,607        1,471         6.79        86,607        1,477         6.82   

Subordinated notes

     85,460        2,397         11.22        55,547        1,624         11.69   
                                      

Total interest-bearing liabilities

     3,490,351        17,612         2.00        3,601,494        23,658         2.61   
                                      

NONINTEREST-BEARING LIABILITIES:

              

Noninterest-bearing deposits

     602,903             598,760        

Accrued interest, taxes, and other liabilities

     67,689             69,433        
                          

Total noninterest-bearing liabilities

     670,592             668,193        
                          

STOCKHOLDERS’ EQUITY

     286,478             273,504        
                          

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

     $4,447,421             $4,543,191        
                          

Net interest income (tax-equivalent) (2)

       $35,010             $33,136      
                          

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

          2.88          2.40
                          

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

          3.25          2.92
                          

 

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

 

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     For the Nine Months Ended September 30,  
     2010     2009  
     AVERAGE
BALANCE
    INTEREST      YIELD/
RATE
(%)(6)
    AVERAGE
BALANCE
    INTEREST      YIELD/
RATE
(%)(6)