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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File No. 0-50034

 

 

TAYLOR CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-4108550

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

9550 West Higgins Road

Rosemont, IL 60018

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

(847) 653-7978

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter)) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

 

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

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

Indicate the number of outstanding shares of each of the issuer’s classes of common stock, as of the latest practicable date: At May 4, 2011, there were 20,243,822 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 - March 31, 2011 (unaudited) and December 31, 2010      1   
  Consolidated Statements of Operations (unaudited) - For the three months ended March 31, 2011 and 2010      2   
  Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - For the three months ended March 31, 2011 and 2010      3   
  Consolidated Statements of Cash Flows (unaudited) - For the three months ended March 31, 2011 and 2010      4   
  Notes to Consolidated Financial Statements (unaudited)      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      67   

Item 4.

  Controls and Procedures      67   
PART II. OTHER INFORMATION   

Item 1.

  Legal Proceedings      68   

Item 1A.

  Risk Factors      68   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      68   

Item 3.

  Defaults Upon Senior Securities      68   

Item 4.

  (Removed and Reserved)      68   

Item 5.

  Other Information      68   

Item 6.

  Exhibits      69   
  Signatures      70   


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

     March 31,
2011
(unaudited)
    December 31,
2010
 
ASSETS     

Cash and cash equivalents:

    

Cash and due from banks

   $ 78,221      $ 80,273   

Short-term investments

     1,082        1,056   
                

Total cash and cash equivalents

     79,303        81,329   

Investment securities:

    

Available-for-sale, at fair value

     1,210,603        1,153,487   

Held-to-maturity (fair value of $94,784 million at March 31, 2011 and $101,751 at December 31, 2010)

     94,883        100,990   

Loans, held for sale, at fair value

     52,872        259,020   

Loans, net of allowance for loan losses of $114,966 and $124,568 at March 31, 2011 and December 31, 2010, respectively

     2,668,921        2,710,770   

Premises, leasehold improvements and equipment, net

     15,536        15,890   

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

     40,346        40,032   

Other real estate and repossessed assets, net

     38,165        31,490   

Other assets

     86,061        90,846   
                

Total assets

   $ 4,286,690      $ 4,483,854   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Noninterest-bearing

   $ 617,107      $ 633,300   

Interest-bearing

     2,459,750        2,393,606   
                

Total deposits

     3,076,857        3,026,906   

Other borrowings

     490,974        511,008   

Accrued interest, taxes and other liabilities

     54,183        56,697   

Notes payable and other advances

     260,000        505,000   

Junior subordinated debentures

     86,607        86,607   

Subordinated notes, net

     89,030        88,835   
                

Total liabilities

     4,057,651        4,275,053   
                

Stockholders’ equity:

    

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

    

Series B, 5% fixed rate cumulative perpetual, 104,823 shares issued and outstanding at March 31, 2011 and December 31, 2010, $1,000 liquidation value

     100,792        100,389   

Series C, 8% non-cumulative, convertible perpetual, 1,500,000 shares authorized; 1,276,480 issued and outstanding at March 31, 2011 and December 31, 2010, $25.00 liquidation value,

     31,912        31,912   

Series D, nonvoting, convertible; 860,378 shares authorized; 405,330 shares issued and outstanding at March 31, 2011 and December 31, 2010

     4        4   

Series E, 8% nonvoting, non-cumulative, convertible perpetual, 223,520 shares authorized; 223,520 shares issued and outstanding at March 31, 2011 and December 31, 2010

     5,588        5,588   

Series G, nonvoting, convertible; 1,350,000 shares authorized; 220,000 shares issued and outstanding at March 31, 2011 and no shares issued or outstanding at December 31, 2010

     2        —     

Common stock, $0.01 par value; 45,000,000 shares authorized; 21,542,807 shares issued at March 31, 2011 and 19,235,706 shares issued at December 31, 2010; 20,184,809 shares outstanding at March 31, 2011 and 17,877,708 shares outstanding at December 31, 2010

     215        192   

Surplus

     337,804        312,693   

Accumulated deficit

     (191,971     (189,895

Accumulated other comprehensive loss, net

     (25,722     (22,497

Treasury stock, at cost, 1,357,998 shares at March 31, 2011 and at December 31, 2010

     (29,585     (29,585
                

Total stockholders’ equity

     229,039        208,801   
                

Total liabilities and stockholders’ equity

   $ 4,286,690      $ 4,483,854   
                

See accompanying notes to consolidated financial statements (unaudited)

 

1


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(dollars in thousands, except per share data)

 

     For the Three Months
Ended March 31,
 
     2011     2010  

Interest income:

    

Interest and fees on loans

   $ 35,365      $ 38,211   

Interest and dividends on investment securities:

    

Taxable

     11,452        13,446   

Tax-exempt

     775        1,229   

Interest on cash equivalents

     3        1   
                

Total interest income

     47,595        52,887   

Interest expense:

    

Deposits

     8,624        12,442   

Other borrowings

     1,809        2,285   

Notes payable and other advances

     1,043        1,624   

Junior subordinated debentures

     1,443        1,438   

Subordinated notes

     2,489        1,631   
                

Total interest expense

     15,408        19,420   
                

Net interest income

     32,187        33,467   

Provision for loan losses

     10,241        21,130   
                

Net interest income after provision for loan losses

     21,946        12,337   
                

Noninterest income:

    

Service charges

     2,890        2,857   

Mortgage origination revenue

     1,517        303   

Gain (loss) on disposition of bulk purchased mortgage loans

     28        (2,022

Gain on sales of investment securities

     —          1,433   

Other derivative income

     753        209   

Other noninterest income

     1,697        1,594   
                

Total noninterest income

     6,885        4,374   
                

Noninterest expense:

    

Salaries and employee benefits

     14,689        11,613   

Occupancy of premises

     2,278        2,042   

Furniture and equipment

     612        512   

Nonperforming asset expense

     3,277        4,938   

FDIC assessment

     1,948        2,213   

Legal fees, net

     794        819   

Other noninterest expense

     4,951        5,015   
                

Total noninterest expense

     28,549        27,152   
                

Income (loss) before income taxes

     282        (10,441

Income tax expense (benefit)

     (106     306   
                

Net income (loss)

     388        (10,747

Preferred dividends and discounts

     (2,464     (2,887
                

Net loss applicable to common stockholders

   $ (2,076   $ (13,634
                

Basic loss per common share

   $ (0.12   $ (1.30

Diluted loss per common share

     (0.12     (1.30

See accompanying notes to consolidated financial statements (unaudited)

 

2


Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except per share data)

 

    Preferred
Stock,

Series A
    Preferred
Stock,

Series B
    Preferred
Stock,

Series C
    Preferred
Stock,

Series D
    Preferred
Stock,

Series E
    Preferred
Stock,
Series F
    Preferred
Stock,

Series G
    Common
Stock
    Surplus     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  

Balance at December 31, 2010

  $ —        $ 100,389      $ 31,912     $ 4     $ 5,588     $ —        $ —        $ 192      $ 312,693      $ (189,895   $ (22,497   $ (29,585   $ 208,801   

Issuance of Series F Preferred, net of issuance costs

    —          —          —          —          —          25,000        —          —          (650     —          —          —          24,350   

Conversion of Series F to Series G and common

    —          —          —          —          —          (25,000     2        23        24,975        —          —          —          —     

Issuance of restricted stock grants, net of forfeitures

    —          —          —          —          —          —          —          —          —          —          —          —          —     

Amortization of stock based compensation awards

    —          —          —          —          —          —          —          —          786        —          —          —          786   

Comprehensive loss:

                         

Net income

    —          —          —          —          —          —          —          —          —          388        —          —          388   

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

    —          —          —          —          —          —          —          —          —          —          (3,104     —          (3,104

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

    —          —          —          —          —          —          —          —          —          —          (121     —          (121
                               

Total comprehensive loss

                          $ (2,837

Preferred stock dividends and discounts accumulated, Series B

    —          403        —          —          —          —          —          —          —          (1,714     —          —          (1,311

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

    —          —          —          —          —          —          —          —          —          (638     —          —          (638

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

    —          —          —          —          —          —          —          —          —          (112     —          —          (112
                                                                                                       

Balance at March 31, 2011

  $ —        $ 100,792      $ 31,912      $ 4     $ 5,588      $ —        $ 2      $ 215      $ 337,804      $ (191,971   $ (25,722   $ (29,585   $ 229,039   
                                                                                                       

Balance at December 31, 2009

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

Amortization of stock based compensation awards

    —          —          —          —          —          —          —          —          624        —          —          —          624   

Comprehensive loss:

                         

Net loss

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

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

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

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

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

Total comprehensive loss

                          —        $ (3,120

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

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

Preferred stock dividends and discounts accumulated, Series B

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

Balance at March 31, 2010

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

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 Three Months Ended
March 31,
 
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ 388      $ (10,747

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Provision for loan losses

     10,241        21,130   

Other derivative income

     (753     (209

Gain on sales of investment securities

     —          (1,433

Amortization of premiums and discounts, net

     1,042        634   

Deferred loan fee amortization

     (1,240     (1,358

Loans originated for sale

     (255,830     (7,107

Proceeds from loan sales

     460,506        10,201   

Depreciation and amortization

     601        569   

Deferred income tax benefit

     (2,488     (1,791

Losses on other real estate

     1,292        4,003   

Excess tax benefit on stock options exercised and stock awards

     314        98   

Other, net

     675        2,847   

Changes in other assets and liabilities:

    

Accrued interest receivable

     292        (1,194

Other assets

     9,031        1,593   

Accrued interest, taxes and other liabilities

     (2,523     (9,095
                

Net cash provided by operating activities

     221,548        8,141   
                

Cash flows from investing activities:

    

Purchase of available-for-sale securities

     (83,052     (231,454

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

     19,654        62,489   

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

     6,131        —     

Proceeds from sales of available-for-sale securities

     —          42,847   

Purchases of FHLB and FRB stock

     (314     (5,274

Net (increase) decrease in loans

     25,701        (13,702

Net additions to premises, leasehold improvements and equipment

     (247     (5

Sales and settlements of other real estate and repossessed assets

     652        5,258   
                

Net cash used in investing activities

     (31,475     (139,841
                

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     50,951        (19,248

Net increase (decrease) in other borrowings

     (20,034     295,753   

Repayments of notes payable and other advances

     (245,000     (162,000

Proceeds from notes payable and other advances

     —          10,000   

Preferred stock issued, net of costs

     24,350        —     

Excess tax benefit on stock options exercised and stock awards

     (314     (98

Dividends paid

     (2,052     (2,510
                

Net cash provided by (used) financing activities

     (192,099     121,897   
                

Net decrease in cash and cash equivalents

     (2,026     (9,803

Cash and cash equivalents, beginning of period

     81,329        48,469   
                

Cash and cash equivalents, end of period

   $ 79,303      $ 38,666   
                

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 Three Months Ended
March 31,
 
     2011     2010  

Supplemental disclosure of cash flow information:

    

Cash paid (received) during the period for:

    

Interest

   $ 17,527      $ 22,047   

Income taxes

     (182     6   

Supplemental disclosures of noncash investing and financing activities:

    

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

     —          39,131   

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

     (3,104     8,653   

Transfer of held-for-sale loans to portfolio loans

     1,472        41,745   

Loans transferred to other real estate and repossessed assets

     8,619        10,385   

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 March 31, 2011 and for the three month periods ended March 31, 2011 and March 31, 2010. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America are not included herein. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with the Company’s audited consolidated financial statements and the related notes. The statement of operations data for the three month period ended March 31, 2011 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, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities at March 31, 2011 and December 31, 2010 were as follows:

 

     March 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (in thousands)  

Available-for-sale:

          

U.S. government sponsored agency securities

   $ 22,940       $ —         $ (1,238   $ 21,702   

Residential mortgage-backed securities

     930,991         2,066         (29,144     903,913   

Commercial mortgage-backed securities

     144,842         3,809         —          148,651   

Collateralized mortgage obligations

     63,033         58         (3,450     59,641   

State and municipal obligations

     75,297         1,557         (158     76,696   
                                  

Total available-for-sale

     1,237,103         7,490         (33,990     1,210,603   
                                  

Held-to-maturity:

          

Residential mortgage-backed securities

     94,883         1,197         (1,296     94,784   
                                  

Total held-to-maturity

     94,883         1,197         (1,296     94,784   
                                  

Total

   $ 1,331,986       $ 8,687       $ (35,286   $ 1,305,387   
                                  

 

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Table of Contents
     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (in thousands)  

Available-for-sale:

          

U.S. government sponsored agency securities

   $ 22,994       $ —         $ (975   $ 22,019   

Residential mortgage-backed securities

     863,353         2,100         (23,067     842,386   

Commercial mortgage-backed securities

     145,529         4,459         (266     149,722   

Collateralized mortgage obligations

     66,022         33         (4,153     61,902   

State and municipal obligations

     76,873         961         (376     77,458   
                                  

Total available-for-sale

     1,174,771         7,553         (28,837     1,153,487   
                                  

Held-to-maturity:

          

Residential mortgage-backed securities

     100,990         1,760         (999     101,751   
                                  

Total held-to-maturity

     100,990         1,760         (999     101,751   
                                  

Total

   $ 1,275,761       $ 9,313       $ (29,836   $ 1,255,238   
                                  

As of March 31, 2011, the Company had $1.21 billion (estimated fair value) of mortgage related investment securities which consisted of residential and commercial mortgage-backed securities and collateralized mortgage obligations. Residential mortgage-backed securities and collateralized mortgage obligations includes securities collateralized by 1-4 family residential mortgage loans, while commercial mortgage-backed securities include securities collateralized by mortgage loans on multifamily properties. Of the total mortgage related investment securities, $1.20 billion (estimated fair value), or 99.5%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac, and the remaining $6.1 million were private-label mortgage related securities.

Investment securities with an approximate book value of $913.6 million at March 31, 2011 and $968.6 million at December 31, 2010, were pledged to collateralize certain deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes as required or permitted by law.

During the first quarter of 2011, the Company did not sell any available-for-sale investment securities, compared to gains of $1.4 million on the sales of available-for-sale investment securities in the first quarter 2010.

 

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The following table summarizes, for investment securities with unrealized losses as of March 31, 2011 and December 31, 2010, the amount of the unrealized loss and the related fair value. The securities have been further segregated by those that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months.

 

    March 31, 2011  
    Length of Continuous Unrealized Loss Position  
    Less than 12 months     12 months or more     Total  
    Fair Value     Unrealized
Losses
    Fair Value     Unrealized
Losses
    Fair Value     Unrealized
Losses
 
    (in thousands)  

Available-for-sale:

           

U.S. government sponsored agency securities

  $ 21,702      $ (1,238   $ —        $ —        $ 21,702      $ (1,238

Residential mortgage-backed securities

    778,036        (27,472     6,139        (1,672     784,175        (29,144

Collateralized mortgage obligations

    52,538        (3,450     —          —          52,538        (3,450

State and municipal obligations

    7,965        (112     523        (46 )     8,488        (158
                                               

Temporarily impaired securities – Available-for-sale

  $ 860,241      $ (32,272   $ 6,662      $ (1,718   $ 866,903      $ (33,990
                                               

Held-to-maturity:

           

Residential mortgage-backed securities

  $ 37,981      $ (1,296   $ —        $ —        $ 37,981      $ (1,296
                                               

Temporarily impaired securities – Held-to-maturity

  $ 37,981      $ (1,296   $ —        $ —        $ 37,981      $ (1,296
                                               

 

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Table of Contents
    December 31, 2010  
    Length of Continuous Unrealized Loss Position  
    Less than 12 months     12 months or more     Total  
    Fair Value     Unrealized
Losses
    Fair Value     Unrealized
Losses
    Fair Value     Unrealized
Losses
 
    (in thousands)  

Available-for-sale:

           

U.S. government sponsored agency securities

  $ 22,019      $ (975   $ —        $ —        $ 22,019      $ (975

Residential mortgage-backed securities

    723,341        (21,330     6,541        (1,737     729,882        (23,067

Commercial mortgage-backed securities

    10,542        (266     —          —          10,542        (266

Collateralized mortgage obligations

    53,459        (4,153     —          —          53,459        (4,153

State and municipal obligations

    18,845        (376     —          —          18,845        (376
                                               

Temporarily impaired securities – Available-for-sale

  $ 828,206      $ (27,100   $ 6,541      $ (1,737   $ 834,747      $ (28,837
                                               

Held-to-maturity:

           

Residential mortgage-backed securities

  $ 38,591      $ (999   $ —        $ —        $ 38,591      $ (999
                                               

Temporarily impaired securities – Held-to-maturity

  $ 38,591      $ (999   $ —        $ —        $ 38,591      $ (999
                                               

At March 31, 2011, the Company had four securities in its investment portfolio that have been in an unrealized loss position for twelve or more months, with a total unrealized loss of $1.7 million. Of the four securities in an unrealized loss position, one security was from the Company’s state and municipal obligation portfolio and three securities were from its portfolio of private-label residential mortgage-backed securities.

The total unrealized loss for the state and municipal security at March 31, 2011 totaled $46,000, or about 9% of the total amortized cost of this security. In addition to severity and duration of loss, the Company considered the current credit rating, changes in ratings, and any credit enhancements in the form of insurance in making its determination of other-than-temporary impairment. The Company believes the decline in fair value was related to changes in market interest rates and was not credit related.

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 10% of amortized cost. As part of its normal process, the Company reviewed the security, considering the severity and duration of the loss and current credit ratings, and believes that the decline in fair value was not credit related but related to changes in interest rates and current illiquidity in the market for these types of securities. The other two private-label residential mortgage related securities had a total unrealized loss of $1.7 million, and were subject to further review for other-than-temporary impairment.

 

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For any securities that had been in an unrealized loss position that was greater than 10% and for more than 12 months, additional testing is performed to evaluate other-than-temporary impairment. For the two private-label residential mortgage-backed securities, the Company obtained fair value estimates from an independent source and performed a cash flow analysis, considering default rates, loss severities based upon the location of the collateral and estimated prepayments. Each of the private-label mortgage related securities had credit enhancements in the form of different investment tranches which impact how cash flows are distributed. The higher level tranches will receive cash flows first and, as a result, the lower level tranches will absorb the losses, if any, from collateral shortfalls. The Company purchased the private-label securities that were either of the highest or one of the highest investment grades, as rated by nationally recognized credit rating agencies. The cash flow analysis takes into account the Company’s tranche and the current level of support provided by the lower tranches. The Company believes that market illiquidity continues to impact the values of these private-label securities because of the continued lack of active trading. None of these securities contain subprime mortgage loans, but do include Alt-A loans, adjustable rate mortgages with initial interest only periods, and loans that are secured by collateral in geographic areas adversely impacted by the housing downturn. If this analysis shows that the Company does not expect to recover its entire investment, an other-than-temporary impairment charge would be recorded for the amount of the credit loss. Previously, the Company had recognized an other-than-temporary impairment loss on one of these two securities. The independent cash flow analysis performed at March 31, 2011 indicated that there was no additional credit loss on this security. For the other private-label security reviewed, the independent cash flow analysis showed that the Company expects to recover its entire investment and, therefore, the decline in fair value was not due to credit, but was most likely caused by illiquidity in the market, and no other-than-temporary impairment charge was recorded.

The following table shows the contractual maturities of debt securities, categorized by amortized cost and estimated fair value, at March 31, 2011.

 

     Amortized
Cost
     Estimated
Fair Value
 
     (in thousands)  

Available-for-sale:

     

Due in one year or less

   $ 585       $ 587   

Due after one year through five years

     2,395         2,450   

Due after five years through ten years

     41,067         41,241   

Due after ten years

     54,190         54,120   

Residential mortgage-backed securities

     930,991         903,913   

Commercial mortgage-backed securities

     144,842         148,651   

Collateralized mortgage obligations

     63,033         59,641   
                 

Total available-for-sale

   $ 1,237,103       $ 1,210,603   
                 

Held-to-maturity:

     

Residential mortgage-backed securities

   $ 94,883       $ 94,784   
                 

Total debt securities

   $ 94,883       $ 94,784   
                 

Investment securities do not include the Bank’s investment in Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank (“FRB”) stock of $40.3 million at March 31, 2011 and $40.0 million at December 31, 2010. These investments are required for membership and are carried at cost.

 

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The Bank must maintain a specified level of investment in FHLBC stock based upon the amount of outstanding FHLB borrowings. At March 31, 2011 and December 31, 2010, the Company had a $29.5 million investment in FHLBC stock. Since 2007, the FHLBC has been under a cease and desist order with its regulators that requires prior regulatory approval to declare dividends and to redeem member capital stock other than excess capital stock under limited circumstances. The stock of the FHLBC is viewed as a long-term asset and its value is based upon the ultimate recoverability of the par value. In determining the recoverability of this investment, the Company considers factors such as the severity and duration of declines in the market value of its net assets relative to its capital, its recent operating performance, its commitment to make required payments and the structure of the FHLB system which enables the regulator of the FHLBs to reallocate debt among the FHLB entities, the impact of legislative and regulatory changes on the FHLBC and its operations, and its ability to continue to provide liquidity and funding to its members.

As of March 31, 2011, after evaluating these factors and considering that transactions of FHLBC stock continued to be made at par value during 2011 and the FHLBC paid a nominal dividend in February 2011, the Company believes that it will ultimately recover the par value of the FHLBC stock.

3. Loans:

Loans classified by type at March 31, 2011 and December 31, 2010 were as follows:

 

     March 31,
2011
    December 31,
2010
 

Portfolio Loans:

  

Commercial and industrial

   $ 1,348,173      $ 1,351,862   

Commercial real estate secured

     1,095,681        1,120,361   

Residential construction and land

     87,180        104,036   

Commercial construction and land

     105,033        106,423   

Consumer

     147,821        152,657   
                

Gross loans

     2,783,888        2,835,339   

Less: Unearned discount

     (1     (1
                

Total loans

     2,783,887        2,835,338   

Less: Allowance for loan losses 1

     (114,966     (124,568
                

Portfolio Loans, net

   $ 2,668,921      $ 2,710,770   
                

Loans Held for Sale:

    

Total Loans Held for Sale

   $ 52,872      $ 259,020   
                

The total amount of loans transferred to third parties as loan participations at March 31, 2011 was $284.4 million, all of which has been derecognized as a sale under the applicable accounting guidance in effect at the time of the transfers of the financial assets. The Company continues to have involvement with these loans through relationship management and all servicing responsibilities.

 

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At March 31, 2011, loans held for sale included $52.9 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 $51.9 million at March 31, 2011. An unrealized gain on these loans of $990,000 was included in mortgage origination revenues in noninterest income on the Consolidated Statements of Operations. None of these loans are 90 days or more past due or on a nonaccrual status. Interest income on these loans is included in net interest income and is not considered part of the change in fair value.

Nonperforming loans include nonaccrual loans and interest-accruing loans contractually past due 90 days or more. Loans are placed on a nonaccrual basis for recognition of interest income when sufficient doubt exists as to the full collection of principal and interest. Generally, loans are to be placed on nonaccrual when principal and interest is contractually past due 90 days, unless the loan is adequately secured and in the process of collection.

The following table presents the aging of loans by class at March 31, 2011 and December 31, 2010:

 

     30-59
Days Past
Due
     60-89 Days
Past Due
     Greater
Than 90
Days Past
Due
     Total Past
Due
     Loans Not Past
Due
     Total  

March 31, 2011

                 

Commercial and industrial

   $ 5,188       $ —         $ 57,500       $ 62,688       $ 1,285,485       $ 1,348,173   

Commercial real estate secured

     10,974         1,305         76,135         88,414         1,007,267         1,095,681   

Residential construction and land

     3,530         125         13,599         17,254         69,926         87,180   

Commercial construction and land

     —           —           6,311         6,311         98,722         105,033   

Consumer

     4,367         2,852         14,665         21,884         178,808         200,692   
                                                     

Total loans

   $ 24,059       $ 4,282       $ 168,210       $ 196,551       $ 2,640,208       $ 2,836,759   
                                                     

December 31, 2010

                 

Commercial and industrial

   $ 782       $ 278       $ 71,438       $ 72,498       $ 1,279,364       $ 1,351,862   

Commercial real estate secured

     4,242         1,010         42,221         47,473         1,072,888         1,120,361   

Residential construction and land

     —           —           20,660         20,660         83,376         104,036   

Commercial construction and land

     —           —           12,734         12,734         93,689         106,423   

Consumer

     3,476         2,160         12,687         18,323         393,353         411,676   
                                                     

Total loans

   $ 8,500       $ 3,448       $ 159,740       $ 171,688       $ 2,922,670       $ 3,094,358   
                                                     

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company uses the following definitions for risk ratings:

 

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Pass. Loans in this category range from loans that are virtually risk free to those with borderline risk where the borrower has an unstable operating history containing losses or adverse trends have weakened its financial condition that have not currently impacted repayment ability, but may in the future, if not corrected.

Special Mention. Loans in this category have potential weaknesses which currently weaken the asset or inadequately protect the Bank’s credit position and if not immediately corrected will diminish repayment.

Substandard. Loans in this category have deteriorating financial condition and exhibit a number of well-defined weaknesses which currently inhibits normal repayment through normal operations. These loans require constant monitoring and supervision by Bank management.

Nonaccrual. Loans in this category exhibit the same weaknesses as substandard however, the situation is more pronounced and the loans are no longer accruing interest.

The following table presents the risk categories of loans by class at March 31, 2011 and December 31, 2010:

 

     Commercial and
Industrial
     CRE Secured      Residential
Construction and
Land
     Commercial
Construction and
Land
         Consumer                  Total          

March 31, 2011

                 

Pass

   $ 1,252,597       $ 973,888       $ 64,563       $ 67,123       $ 186,080       $ 2,544,251   

Special Mention

     14,617         33,048         5,487         30,087         —           83,239   

Substandard

     23,459         12,611         3,531         1,512         —           41,113   

Nonaccrual

     57,500         76,134         13,599         6,311         14,612         168,156   
                                                     

Total Loans

   $ 1,348,173       $ 1,095,681       $ 87,180       $ 105,033       $ 200,692       $ 2,836,759   
                                                     

December 31, 2010

                 

Pass

   $ 1,241,720       $ 988,072       $ 76,897       $ 72,070       $ 399,044       $ 2,777,803   

Special Mention

     18,461         40,235         2,948         20,107         —           81,751   

Substandard

     20,243         49,833         3,531         1,512         —           75,119   

Nonaccrual

     71,438         42,221         20,660         12,734         12,632         159,685   
                                                     

Total Loans

   $ 1,351,862       $ 1,120,361       $ 104,036       $ 106,423       $ 411,676       $ 3,094,358   
                                                     

 

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Table of Contents

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

 

     March 31,
2011
     Dec. 31,
2010
 
     (in thousands)  

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

   $ 54       $ 55   

Nonaccrual loans

     168,156         159,685   
                 

Total nonperforming loans

   $ 168,210       $ 159,740   
                 

Performing restructured loans

   $ 19,741       $ 29,786   

Recorded balance of impaired loans:

     

With related allowance for loan loss

   $ 122,891       $ 136,404   

With no related allowance for loan loss

     55,701         44,677   
                 

Total recorded balance of impaired loans

   $ 178,592       $ 181,081   
                 

Allowance for loan losses related to impaired loans

   $ 47,144       $ 59,857   

 

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The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011 and December 31, 2010:

 

     Unpaid
Principal
Balance
     Recorded
Balance
     Allowance
for Loan
Losses
Allocated
     YTD
Average
Balance
     Interest
Income
Recognized
 
     (in thousands)  

March 31, 2011

              

With no related allowance recorded:

              

Commercial and industrial

   $ 19,716       $ 10,572       $ —         $ 11,707       $ 50   

Commercial real estate secured

     46,451         31,253         —           27,050         —     

Residential construction and land

     7,056         4,699         —           6,083         —     

Commercial construction and land

     12,522         6,091         —           3,046         —     

Consumer

     3,890         3,086         —           2,304         19   

With an allowance recorded:

              

Commercial and industrial

     59,758         58,843         28,346         62,403         42   

Commercial real estate secured

     52,394         51,398         15,302         46,191         112   

Residential construction and land

     11,234         12,430         3,417         14,577         18   

Commercial construction and land

     220         220         79         6,477         —     

Consumer

     —           —           —           —           —     
                                            

Total impaired loans

   $ 213,241       $ 178,592       $ 47,144       $ 179,838       $ 241   
                                            

December 31, 2010

              

With no related allowance recorded:

              

Commercial and industrial

   $ 28,807       $ 12,841       $ —         $ 10,128      

Commercial real estate secured

     37,914         22,848         —           10,026      

Residential construction and land

     36,913         7,466         —           16,371      

Commercial construction and land

     —           —           —           2,475      

Consumer

     1,522         1,522         —           1,304      

With an allowance recorded:

              

Commercial and industrial

     70,725         65,963         35,258         28,298      

Commercial real estate secured

     48,897         40,983         10,940         45,602      

Residential construction and land

     16,768         16,724         5,189         27,988      

Commercial construction and land

     13,950         12,734         8,470         9,178      

Consumer

     —           —           —           —        
                                      

Total impaired loans

   $ 255,496       $ 181,081       $ 59,857       $ 151,370      
                                      

Credit risks tend to be geographically concentrated in that the majority of the Company’s customer base lies within the Chicago area. Approximately 51% of the Company’s loan portfolio involves loans that are to some degree secured by real estate properties located primarily within the Chicago area as of March 31, 2011, compared to 52% as of December 31, 2010.

 

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Activity in the allowance for loan losses for the periods ended March 31, 2011 and March 31, 2010 consisted of the following:

 

     March 31,
2011
    March 31,
2010
 
     (in thousands)  

Allowance for loan losses:

    

Allowance at beginning of period

   $ 124,568      $ 106,185   

Provision for loan losses

     10,241        21,130   

Loans charged-off

     (23,290     (28,649

Recoveries of loans previously charged-off

     3,447        1,485   
                

Net charge-offs

     (19,843     (27,164
                

Allowance at end of period

   $ 114,966      $ 100,151   
                

 

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Table of Contents

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by class and based on impairment method as of March 31, 2011:

 

     Commercial
& Industrial
    Commercial
Real Estate
Secured
    Residential
Construction
& Land
    Commercial
Construction
& Land
    Consumer     Total  

ALLOWANCE FOR CREDIT LOSSES:

            

Beginning balance as of December 31, 2010

   $ 61,499      $ 31,421      $ 15,246      $ 11,422      $ 4,980      $ 124,568   

Provision

     (714     10,963        70        (1,026     948        10,241   

Charge-offs

     (7,295     (6,660     (2,527     (6,367     (441     (23,290

Recoveries

     3,198        23        150        52        24        3,447   
                                                

Ending balance as of March 31, 2011

     56,688        35,747        12,939        4,081        5,511        114,966   
                                                

Ending balance individually evaluated for impairment

     27,919        14,865        3,154        —          —          45,938   

Ending balance collectively evaluated for impairment

     28,769        20,882        9,785        4,081        5,511        69,028   

LOANS:

            

Ending balance individually evaluated for impairment

     69,415        82,651        17,129        6,311        —          175,506   

Ending balance collectively evaluated for impairment

     —          —          —          —          3,086        3,086   
                                                

Ending balance

   $ 69,415      $ 82,651      $ 17,129      $ 6,311      $ 3,086      $ 178,592   
                                                

 

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Table of Contents

4. Interest-Bearing Deposits:

Interest-bearing deposits at March 31, 2011 and December 31, 2010 were as follows:

 

     March 31,
2011
     December 31,
2010
 
     (in thousands)  

NOW accounts

   $ 239,067       $ 248,662   

Savings accounts

     38,040         37,992   

Money market deposits

     612,140         589,197   

Time deposits:

     

Certificates of deposit

     704,234         715,030   

Out-of-local-market certificates of deposit

     122,808         99,313   

CDARS time deposits

     202,458         182,879   

Brokered certificates of deposit

     462,843         449,836   

Public time deposits

     78,160         70,697   
                 

Total time deposits

     1,570,503         1,517,755   
                 

Total

   $ 2,459,750       $ 2,393,606   
                 

As of March 31, 2011, time deposits in the amount of $100,000 or more totaled $693.2 million compared to $645.4 million at December 31, 2010.

Brokered CDs are carried net of mark-to-market adjustments when they are the hedged item in a fair value hedging relationship and of the related broker placement fees of $1.9 million at March 31, 2011 and $1.6 million at December 31, 2010. Broker placement fees are amortized to the maturity date of the related brokered CDs and are included in deposit interest expense. As of March 31, 2011, the Company did not have any brokered CDs that could be called before maturity. During the first quarter of 2011 and the first quarter of 2010, the Company did not incur any expense associated with brokered CDs that were called before their stated maturity as there were no brokered CDs that had an option to call the CD before its stated maturity.

5. Other Borrowings:

Other borrowings at March 31, 2011 and December 31, 2010 consisted of the following:

 

     March 31, 2011     December 31, 2010  
     Amount
Borrowed
     Weighted-
Average
Rate
    Amount
Borrowed
     Weighted-
Average
Rate
 
     (dollars in thousands)  

Securities sold under agreements to repurchase:

          

Overnight

   $ 24,491         0.15   $ 39,249         0.14

Term

     332,688         1.79        336,336         1.80   

Federal funds purchased

     131,736         0.42        132,561         0.51   

U.S. Treasury tax and loan note option

     2,059         0.00        2,862         0.00   
                      

Total

   $ 490,974         1.33   $ 511,008         1.33
                      

 

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

As of March 31, 2011 and December 31, 2010, the term repurchase agreements consisted of the following:

 

     March 31,
2011
     Dec. 31,
2010
 
     (in thousands)  

Term Repurchase Agreements:

  

Repurchase agreement – rate 0.39%, matured January 3, 2011, non-callable

   $ —         $ 52,471   

Repurchase agreement – rate 0.41%, matured January 3, 2011, non-callable

     —           48,575   

Repurchase agreement – rate 0.35%, matured January 5, 2011, non-callable

     —           50,290   

Repurchase agreement – rate 0.31%, matured April 1, 2011, non-callable

     50,557         —     

Repurchase agreement – rate 0.31%, matured April 1, 2011, non-callable

     46,409         —     

Repurchase agreement – rate 0.31%, matured April 5, 2011, non-callable

     50,722         —     

Repurchase agreement – rate 0.60%, matured June 1, 2011, non-callable

     30,000         30,000   

Structured repurchase agreement – rate 1.29%, due January 26, 2012, non-callable

     10,000         10,000   

Structured repurchase agreement – rate 1.24%, due March 2, 2012, non-callable

     25,000         25,000   

Structured 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

   $ 332,688       $ 336,336   
                 

6. Notes Payable and Other Advances:

Notes payable and other advances at March 31, 2011 and December 31, 2010 consisted of the following:

 

     March 31,
2011
     Dec. 31,
2010
 
     (in thousands)  

Cole Taylor Bank:

     

FHLB overnight advance – 0.18%, due January 3, 2011

   $ —         $ 375,000   

FHLB overnight advance – 0.13%, due April 1, 2011

     155,000         —     

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

     —           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 – 1.39%, due January 11, 2012, non-callable

     10,000         10,000   

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

     17,500         17,500   

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

     25,000         25,000   

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

     17,500         17,500   
                 

Total notes payable and other advances

   $ 260,000       $ 505,000   
                 

At March 31, 2011, the FHLB advances were collateralized by $459.4 million of investment securities and a blanket lien on $149.4 million of qualified first-mortgage residential, home equity and commercial real estate loans. Based on the value of collateral pledged at March 31, 2011,

 

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the Bank had additional borrowing capacity at the FHLB of $330.7 million. In comparison, at December 31, 2010, the FHLB advances were collateralized by $521.6 million of investment securities and a blanket lien on $175.5 million of qualified first-mortgage residential and home equity loans with additional borrowing capacity of $113.1 million.

The Bank participates in the FRB’s Borrower In Custody (“BIC”) program. At March 31, 2011, the Bank had pledged $822.0 million of commercial loans as collateral for an available $510.7 million of borrowing capacity at the FRB. At March 31, 2011, the Bank had no advances from the FRB. At December 31, 2010, the Bank pledged $813.1 million of commercial loans as collateral for available borrowing capacity of $504.9 million under the BIC program at the FRB, however, there were no advances from the FRB at December 31, 2010.

7. Stockholders’ Equity:

In connection with a private placement in March 2011, the Company issued 1,000,000 shares of 8% Non-Cumulative, Non-Voting, Contingent Convertible Preferred Stock, Series F (“Series F Preferred”) with a purchase price and liquidation preference of $25.00 per share.

After stockholder approval was obtained at a special meeting of the Company’s stockholders held on March 29, 2011, the Series F Preferred converted into 2,280,000 shares of the Company common stock and into 220,000 shares of the Company’s Non-Voting, Convertible Preferred Stock, Series G (“Series G Preferred”) at a conversion price of $10.00 per share. The Series G Preferred participates in any dividends paid to holders of the Company’s common stock. Each share of Series G Preferred will be automatically converted into one share of common stock immediately on any Widely Dispersed Offering or Conversion Event, as defined in the Certificate of Designation. The holders of Series G Preferred are entitled to notice of all stockholder meetings at which all holders of common shall be entitled to vote, but the Series G Preferred holders shall not be entitled to vote on any matter presented to the stockholders of the Company.

 

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8. Other Comprehensive Income:

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

 

     For the Three Months Ended
March 31, 2011
    For the Three Months Ended
March 31, 2010
 
     Before
Tax
Amount
    Tax
Effect
    Net of
Tax
    Before
Tax
Amount
    Tax
Effect
    Net of
Tax
 
     (in thousands)  

Change in unrealized gains (losses) on available-for-sale securities

   $ (5,216   $ 2,112      $ (3,104   $ 12,049      $ (2,530   $ 9,519   

Less: reclassification adjustment for gains included in net loss

     —          —          —          (1,433     567        (866
                                                

Change in net unrealized gains (losses) on available-for-sale securities

     (5,216     2,112        (3,104     10,616        (1,963     8,653   

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

     62        (19     43        (563     223        (340

Change in net unrealized loss from cash flow instruments

     272        (56     216        —          —          —     

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

     (630     250        (380     (1,138     452        (686
                                                

Other comprehensive income (loss)

   $ (5,512   $ 2,287      $ (3,225   $ 8,915      $ (1,288   $ 7,627   
                                                

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

9. Earnings Per Share:

The following table sets forth the computation of basic and diluted loss per common share for the periods indicated. Due to the net loss applicable to common stockholders for the periods ended March 31, 2011 and March 31, 2010, all common stock equivalents were considered antidilutive and were not included in the computation of diluted earnings per share. At March 31, 2011, the common stock equivalents consisted of 887,770 stock options outstanding to purchase shares of common stock, 3,800,147 warrants to purchase shares of common stock, convertible Series C preferred stock which could be converted into 2,598,697 shares of common, convertible Series D preferred stock which could be converted into 405,330 shares of common stock, convertible Series E preferred stock which could be converted into 455,049 shares of common stock and Series G preferred stock which could be converted into 220,000 shares of common stock. At March 31, 2010, the common stock equivalents consisted of 951,371 stock 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.

 

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     For the Three Months
Ended March 31,
 
     2011     2010  
    

(dollars in thousands,

except per share amounts)

 
                

Net income (loss)

   $ 388      $ (10,747

Preferred dividends and discounts

     (2,464     (2,887
                

Net income (loss) available to common stockholders

   $ (2,076   $ (13,634
                

Basic weighted-average common shares outstanding

     17,440,617        10,515,668   

Dilutive effect of common stock equivalents

     —          —     
                

Diluted weighted-average common shares outstanding

     17,440,617        10,515,668   
                

Basic income (loss) per common share

   $ (0.12   $ (1.30

Diluted income (loss) per common share

     (0.12     (1.30

10. Stock-Based Compensation:

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

Stock options, generally, are granted with an exercise price equal to the last reported sales price of the common stock on the Nasdaq Global Select Market on the date of grant. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options issued to employees and directors. No stock options were granted during the first quarter of 2011. Stock options previously granted vest over a four-year term (vesting 25% per year) and expire eight years following the grant date. Compensation expense associated with stock options is recognized over the vesting period, or until the employee or director becomes retirement eligible if that time period is shorter.

The following is a summary of stock option activity for the three month period ended March 31, 2011:

 

     Shares     Weighted-
Average
Exercise Price
 

Outstanding at January 1, 2011

     910,103      $ 16.82   

Granted

     —          —     

Exercised

     —          —     

Forfeited

     (200     30.33   

Expired

     (22,133     23.50   
          

Outstanding at March 31, 2011

     887,770        16.65   
          

Exercisable at March 31, 2011

     575,136        21.05   
          

As of March 31, 2011, the total compensation cost related to nonvested stock options that has not yet been recognized totaled $1.1 million and the weighted average period over which these costs are expected to be recognized is approximately 2.6 years.

 

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Generally, the Company grants restricted stock awards that vest upon completion of future service requirements. However, for certain restricted stock awards granted in 2010 and 2011, vesting will be dependent on completion of service requirements and the repayment of the Series B preferred stock. The fair value of these awards is equal to the last reported sales price of the Company’s common stock on the date of grant. The Company recognizes stock-based compensation expense for these awards over the vesting period based upon the number of awards ultimately expected to vest.

The following table provides information regarding nonvested restricted stock for the three month period ended March 31, 2011:

 

Nonvested Restricted Stock

   Shares     Weighted-
Average
Grant-Date
Fair Value
 

Nonvested at January 1, 2011

     538,461      $ 14.13   

Granted

     28,452        10.65   

Vested

     (78,609     17.03   

Forfeited

     (1,351     16.96   
          

Nonvested at March 31, 2011

     486,953        13.45   
          

As of March 31, 2011, the total compensation cost related to nonvested restricted stock that has not yet been recognized totaled $4.3 million and the weighted average period over which these costs are expected to be recognized is approximately 2.2 years.

 

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11. Derivative Financial Instruments:

The Company uses derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. The Company has used interest rate exchange agreements, or swaps, and interest rate corridors, floors and collars to manage the interest rate risk associated with its commercial loan portfolio and its brokered CDs. The following table describes the derivative instruments outstanding at March 31, 2011:

 

    As of March 31, 2011  
    Notional
Amount
     Strike Rates      Maturity      Balance Sheet/Income
Statement Location
    Fair
Value
 
    (dollars in thousands)  

Fair value hedging derivative instruments:

            

Interest rate swaps—pay variable/receive fixed

  $ 106,920        
 
Receive 2.27%
Pay 0.272%
  
 
     4.2 yrs        

 

Other assets/

Noninterest income

  

  

    1,023   

Cash flow hedging derivative instruments:

            

Interest rate corridors

    300,000         0.29%-1.29%         1.4 yrs         Other assets/OCI        1,003   
                  

Total hedging derivative instruments

    406,920              

Non-hedging derivative instruments:

            

Customer interest rate swaps—pay fixed/receive variable

    246,289        

 

Pay 3.56%

Receive 0.430%

 

  

     Wtd. avg 2.7 yrs        

 

Other liabilities/

Noninterest income

  

  

    (10,411

Customer interest rate swaps—receive fixed/pay variable

    246,289        

 

Receive 3.56%

Pay 0.430%

  

  

     Wtd. avg 2.7 yrs        

 

Other assets/

Noninterest income

  

  

    10,260   

Interest rate lock commitments

    153,387         NA         Wtd. avg 0.1 yrs        

 

Other assets/

Noninterest income

  

  

    931   

Forward loan sale commitments

    141,677         NA         Wtd. avg 0.2 yrs        

 

Other assets/

Noninterest income

  

  

    (675
                  

Total non-hedging derivative instruments

    787,642              
                  

Total derivative instruments

  $ 1,194,562              
                  

The Company has $106.9 million of notional amount interest rate swap agreements that are designated as fair value hedges against certain brokered CDs. These 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 these interest rate swaps was $14,000 and was recorded in other derivative income in noninterest income in the first quarter of 2011.

The Company also has $300.0 million of notional amount interest rate corridors 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. There was no ineffectiveness on the interest rate corridors for the quarter ended March 31, 2011.

We use derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. At March 31, 2011, $492.6 million of derivative instruments were interest rate exchange agreements related to customer transactions, which are not

 

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designated as hedges. As of March 31, 2011, we had notional amounts of $246.3 million of interest rate swaps with customers in which we agreed to receive a fixed interest rate and pay a variable interest rate. In addition, as of March 31, 2011, we had offsetting interest rate swaps with other counterparties with a notional amount of $246.3 million in which we agreed to receive a variable interest rate and pay a fixed interest rate.

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.

12. Fair Value:

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

Fair Value Measurement

In accordance with FASB ASC 820, the Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

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

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

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

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

Available-for-sale investment securities:

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

 

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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 on quoted prices for similar assets in active markets 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 on unobservable inputs that reflect management’s assumptions and specific information about each borrower transaction and is classified in Level 3 of the hierarchy.

Loans held for sale:

At March 31, 2011, loans held for sale included of $52.9 million residential mortgage loans that have been originated by Cole Taylor Mortgage and for which the Company has elected to account for on a recurring basis under the fair value option.

In 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

 

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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 upon quoted market prices for similar assets in active markets and is classified in Level 2 of the fair value hierarchy. The fair value of the commercial loans was determined based upon the estimated net contracted sales price, less estimated 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, except for mortgage loans originated by Cole Taylor Mortgage. 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. At March 31, 2011, a portion of the Company’s total impaired loans were evaluated based on the fair value of the collateral. In accordance with fair value measurements, only impaired loans for which an allowance for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy. As a result, a portion, but not all, of the Company’s impaired loans are classified in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or an estimate of fair value from an independent third-party real estate professional, the Company classifies the impaired loan as nonrecurring Level 2 in the fair value hierarchy. When an independent valuation is not available or there is no observable market price and fair value is based upon management’s assessment of the liquidation value of collateral, the Company classifies the impaired loan as nonrecurring Level 3 in the fair value hierarchy.

Other real estate owned and repossessed assets:

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

 

27


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 March 31, 2011  
     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

   $ 1,210,603       $ —         $ 1,210,603       $ —     

Loans

     1,471         —           1,471         —     

Loans held for sale

     52,872         —           52,872         —     

Assets held in employee deferred compensation plans

     2,764         2,764         —           —     

Derivative instruments

     12,286         —           12,286         —     

Mortgage derivative instruments

     931         —           —           931   

Liabilities:

           

Derivative instruments

     10,411         —           10,411         —     

Mortgage derivative instruments

     675         —           675         —     

 

     As of December 31, 2010  
     Total Fair
Value
     Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (in thousands)  

Assets:

           

Available-for-sale investment securities

   $ 1,153,487       $ —         $ 1,153,487       $ —     

Loans held for sale

     259,020         —           259,020         —     

Assets held in employee deferred compensation plans

     2,575         2,575         —           —     

Derivative instruments

     14,245         —           14,245         —     

Mortgage derivative instruments

     4,049         —           3,611         438   

Liabilities:

           

Derivative instruments

     11,630         —           11,630         —     

 

28


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The table below includes a rollforward of the Consolidated Balance Sheets amounts for the quarters ended March 31, 2011 and 2010 (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 March 31,
 
     2011      2010  

Beginning balance

   $ 438       $ —     

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

     —           —     

Purchases, issuances and settlements, net

     493         —     

Transfers in and/or out of Level 3

     —           —     
                 

Fair value at period end

   $ 931       $ —     
                 

Assets Measured on a Nonrecurring Basis

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

 

     As of March 31, 2011  
     Total Fair
Value
     Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (in thousands)  

Assets:

           

Held-to-maturity securities

   $ 94,784       $ —         $ 94,784       $ —     

Loans

     102,042         —           69,834         32,208   

Other real estate owned and repossessed assets

     27,073         —           4,521         22,552   
     As of December 31, 2010  
     Total Fair
Value
     Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (in thousands)  

Assets:

           

Held-to-maturity securities

   $ 101,751       $ —         $ 101,751       $ —     

Loans

     76,546         —           51,100         25,446   

Other real estate owned and repossessed assets

     25,590         —           4,521         21,069   

 

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At March 31, 2011, the Company had $32.2 million of impaired loans and $22.6 million of OREO and repossessed assets measured at fair value on a nonrecurring basis and classified in Level 3 of the fair value hierarchy. The change in Level 3 carrying value of impaired loans represents sales, payments or net charge-offs of $1.4 million, two additional impaired loans with fair value of $8.2 million and the related charge to earnings of $2.4 million to reduce these loans to fair value. The change in Level 3 OREO and repossessed assets during the quarter ended March 31, 2011 included $3.4 million of additions, $1.9 million of sales/settlements and write-downs reduced OREO assets classified as Level 3.

Fair Value of Financial Instruments

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

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

Cash and cash equivalents:

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

Investment securities:

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

 

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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 on the estimated net contracted sales prices, less estimated cost to sell.

Loans:

The fair value of loans has been estimated by the present value of future cash flows, using current rates at which similar loans would be made 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 estimated cost to sell.

Investment in FHLB and FRB 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.

Derivatives:

The carrying amount and fair value of derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral posting thresholds, mutual puts and guarantees. The 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 sales is based upon 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’s assumptions and rate and pricing information from each loan commitment

 

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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.

Other assets:

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

Deposit liabilities:

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

Other borrowings:

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

Notes payable and other advances:

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

Accrued interest payable:

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

Junior subordinated debentures:

The fair value of the fixed rate junior subordinated debentures issued to TAYC Capital Trust I is computed based on the publicly quoted market prices of the underlying trust preferred securities issued by this 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.

 

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Subordinated notes:

The subordinated notes issued by the Bank in 2008 and by the Company in 2010, have been valued at the present value of estimated future cash flows using current market rates and credit spreads for an instrument with a like maturity.

Off-balance sheet financial instruments:

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

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

 

     March 31, 2011      December 31, 2010  
     Carrying
Value
     Fair Value      Carrying
Value
     Fair Value  
     (in thousands)  

Financial Assets:

           

Cash and cash equivalents

   $ 79,303       $ 79,303       $ 81,329       $ 81,329   

Available-for-sale investments

     1,210,603         1,210,603         1,153,487         1,153,487   

Held-to-maturity investments

     94,883         94,784         100,990         101,751   

Loans held for sale

     52,872         52,872         259,020         259,020   

Loans, net of allowance

     2,668,921         2,656,745         2,710,770         2,704,051   

Investment in FHLB and FRB stock

     40,346         40,346         40,032         40,032   

Accrued interest receivable

     15,415         15,415         15,707         15,707   

Derivative financial instruments

     13,217         13,217         18,294         18,294   

Other assets

     2,764         2,764         2,575         2,575   
                                   

Total financial assets

   $ 4,178,324       $ 4,166,049       $ 4,382,204       $ 4,376,246   
                                   

Financial Liabilities:

           

Deposits without stated maturities

   $ 1,506,354       $ 1,506,354       $ 1,509,151       $ 1,509,151   

Deposits with stated maturities

     1,570,503         1,588,682         1,517,755         1,540,863   

Other borrowings

     490,974         499,526         511,008         520,202   

Notes payable and other advances

     260,000         262,078         505,000         507,607   

Accrued interest payable

     5,928         5,928         8,318         8,318   

Derivative financial instruments

     11,086         11,086         11,630         11,630   

Junior subordinated debentures

     86,607         35,571         86,607         62,254   

Subordinated notes, net

     89,030         82,139         88,835         82,649   
                                   

Total financial liabilities

   $ 4,020,482       $ 3,991,364       $ 4,238,304       $ 4,242,674   
                                   

Off-Balance-Sheet Financial Instruments:

           

Unfunded commitments to extend credit

   $ 6,028       $ 6,028       $ 5,417       $ 5,417   

Standby letters of credit

     13         13         348         348   
                                   

Total off-balance-sheet financial instruments

   $ 6,041       $ 6,041       $ 5,765       $ 5,765   
                                   

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

 

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difference between total financial assets and financial liabilities does not, nor is it intended to, represent the market value of the Company. Furthermore, the estimated fair value information may not be comparable between financial institutions due to the wide range of valuation techniques permitted, and assumptions necessitated, in the absence of an available trading market.

13. Subsequent Events

Events subsequent to the balance sheet date of March 31, 2011 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 had 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 through offices in other geographic markets.

The following discussion and analysis presents our consolidated financial condition and results of operations as of and for the dates and periods indicated. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this document. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and forward-looking statements as a result of certain factors, including those discussed in the section captioned “Risk Factors” in our 2010 Annual Report on Form 10-K filed with the SEC on March 22, 2011.

Recent Legislation Impacting the Financial Services Industry

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) was signed into law. The Dodd-Frank Act and the rules and regulation promulgated by various federal agencies to date have already significantly impacted current bank regulations and affected the lending, deposit, investment and operating activities of the Company and other financial institutions, as well as securities and other governmental reporting. The Dodd-Frank Act will require adoption of numerous additional new rules and regulations by many of the federal agencies responsible for rule-making, which were given significant discretion in drafting these rules and regulations. Consequently, many of these additional details and the full impact of the Dodd-Frank Act still may not be known for several months.

Application of Critical Accounting Policies

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and general reporting practices within the financial services industry. For additional details, see “Notes to Consolidated Financial Statements – Summary of Significant Accounting and Reporting Policies” in our 2010 Annual Report on Form 10-K.

The preparation of financial statements in conformity with these accounting principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available to us as of the date of the consolidated financial statements and, accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements.

 

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The estimates, assumptions and judgments made by us are based upon historical experience or other factors that we believe to be reasonable under the circumstances. Certain accounting policies inherently have greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. We consider the following policies to be critical accounting policies: the allowance for loan losses; the realizability of deferred tax assets; derivatives used in hedging; and the valuation of financial instruments, such as investment securities and derivatives.

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

Allowance for Loan Losses

We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in our loan portfolio. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include a general allowance computed by applying loss factors to categories of loans outstanding in the portfolio and specific allowances for identified problem loans and portfolio categories. We maintain our allowance for loan losses at a level considered adequate to absorb probable losses inherent in our portfolio as of the balance sheet date. In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including historical charge-off experience, changes in the size of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and criticized loans. In addition, we use information about specific borrower situations, including their financial position, work-out plans and estimated collateral values under various liquidation scenarios to estimate the risk and amount of loss on loans to those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions, duration of the current business cycle, the impact of competition on our underwriting terms, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. Our estimates of risk of loss and amount of loss on any loan are complicated by the uncertainties surrounding not only our borrowers’ probability of default, but also the fair value of the underlying collateral. The current illiquidity in the 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 inherently larger in amount than loans to individual consumers and, therefore, have the potential for higher losses for each loan. These larger loans can cause greater volatility in our reported credit quality performance measures, such as total impaired or nonperforming loans. Our current credit risk rating and loss estimate for any one loan may have a material impact on our reported impaired loans and related loss estimates. Because our loan portfolio contains a significant number of commercial loans with relatively large balances, the deterioration of any one or a few of these loans can cause an increase in uncollectible loans and, therefore, our allowance for loan losses. We review our estimates on a quarterly basis and, as we identify

 

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changes in estimates, our allowance for loan losses is adjusted through the recording of a provision for loan losses.

Income Taxes

We maintained net deferred tax assets for deductible temporary differences between book and taxable income, the largest of which relates to the allowance for loan losses. For income tax return purposes, only net charge-offs are deductible, not the provision for loan losses. Under generally accepted accounting principals (“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, the forecasts of future taxable income, applicable tax planning strategies, and assessments of current and future economic and business conditions. We consider both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Examples of positive evidence may include the existence, if any, of taxes paid in available carry-back years and the likelihood that taxable income will be generated in future periods. Examples of negative evidence may include a cumulative loss in the current year and prior two years and negative general business and economic trends. We currently maintain a valuation allowance against substantially all of our net deferred tax assets because it is more likely than not that all of these deferred tax assets will not be realized. This determination was based, largely, on the negative evidence of a cumulative loss in the most recent three year period caused primarily by the loan loss provisions made during those periods. In addition, general uncertainty surrounding future economic and business conditions has increased the likelihood of fluctuations in our future earnings.

Derivative Financial Instruments

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

At the inception of a formally designated hedge and quarterly thereafter, an assessment is made to determine whether changes in the fair values or cash flows of the derivatives have been

 

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

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

Valuation of Investment Securities

The fair value of our investment securities portfolio is determined in accordance with GAAP, which requires that we classify financial assets and liabilities measured at fair value into a three-level fair value hierarchy. The determination of fair value is highly subjective and requires management to rely on estimates, assumptions, and judgments that can affect amounts reported in our financial statements. We obtain the fair value of investment securities from an independent pricing service. We review the pricing methodology for each significant class of assets used by this third party pricing service to assess the compliance with accounting standards for fair value measurement and classification in the fair value measurement hierarchy. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, including credit spreads and current rating from credit rating agencies, and the bond’s terms and conditions, among other things. While we use an independent pricing service to obtain the fair values of our investment portfolio, we do employ certain control procedures to determine the reasonableness of the valuations. We validate the overall reasonableness of the fair values by comparing information obtained from our independent pricing service to other third party valuation sources for selected assets and review the valuations and any differences in valuations with members of management who have the relevant technical expertise to assess the results. However, we do not alter the fair values provided by our independent pricing service.

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

 

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements under “Management Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this 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,” “contemplate,” “plan,” “predict,” “potential,” “should,” “will,” “expect,” “anticipate,” “believe,” “intend,” “could” and “estimate” and similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities in 2011 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:

 

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the impact of the regulatory environment on our operations, including regulatory restrictions and liquidity constraints at the holding company level that could impair our ability to pay dividends or interest on our outstanding securities;

 

   

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;

 

   

adverse economic conditions and continued 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 uncertainties in estimating the fair value of underlying loan collateral, including the fair value of developed real estate and undeveloped land in light of declining demand for such assets and continuing illiquidity in the Chicago real estate market;

 

   

lending concentration risks, including the risks associated with the high volume of loans secured by commercial real estate in our portfolio;

 

   

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

 

   

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 area;

 

   

the effect on operations of our customers’ changing use of our deposit products and the possibility that our wholesale funding sources may prove insufficient to support our operations and future growth;

 

   

significant restrictions on our operations as a result of our participation in the TARP CPP;

 

   

the effect on our profitability if interest rates fluctuate, as well as the effect of changes in general economic conditions, continued volatility in the capital market, our debt credit ratings, deposit flows and loan demand;

 

   

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

 

   

the potential impact of certain operational risks, including, but not limited to, data processing system failures and errors and customer or employee fraud;

 

   

the conditions of the local economy in which we operate and continued weakness in the local economy;

 

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the impact of changes in legislation, including the Dodd-Frank Act, or regulatory and accounting principles, policies and guidelines affecting our business, including those relating to capital requirements;

 

   

the impact on our growth and profitability from competition from other financial institutions and other financial service providers;

 

   

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

 

   

the risks associated with the new products and services, including the expansion into new geographic markets;

 

   

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 ability to use net operating loss carry-forwards to reduce future tax payments if an ownership change of the Company is deemed to have occurred for tax purposes;

 

   

security risks relating to our internet banking activities that could damage our reputation and our business; and

 

   

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

For further information about these and other risks, uncertainties and factors, please review the disclosure included in the sections captioned “Risk Factors” in our December 31, 2010 Annual Report on Form 10-K filed with the SEC on March 22, 2011. 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 a net loss applicable to common stockholders of $2.1 million, or $0.12 per diluted common share outstanding, for the first quarter of 2011, compared to a net loss applicable to common stockholders of $13.6 million, or $1.30 per diluted common share, in the first quarter of 2010. A decrease in credit related costs, which includes the provision for loan losses and nonperforming asset expense, was primarily responsible for the lower net loss applicable to common stockholders in the first quarter of 2011 as compared to the first quarter of 2010.

 

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Highlights

 

   

Our provision for loan losses was $10.2 million for the first quarter of 2011. In comparison, the provision for loan losses was $21.1 million for the first quarter of 2010, amounting to a decrease of $10.9 million or 51.5%.

 

   

In the first quarter of 2011, total revenue (net interest income plus noninterest income less gains on sales of investment securities) was $39.1 million, up from $36.4 million for the first quarter of 2010.

 

   

Pre-tax, pre-provision earnings from core operations decreased slightly to $13.8 million for the quarter ended March 31, 2011, as compared to $14.2 million for the quarter ended March 31, 2010.

 

   

Our net interest margin was 3.07% for the first quarter of 2011, compared to 3.15% for the first quarter of 2010, a decrease of 8 basis points.

 

   

Commercial criticized and classified loans decreased by $90.3 million, or 24.5%, from $368.2 million at March 31, 2010 to $277.9 million at March 31, 2011.

 

   

Nonperforming assets were $206.4 million, or 4.81% of total assets on March 31, 2011, compared to $168.5 million, or 3.73%, of total assets on March 31, 2010.

During the first quarter of 2011, we issued $25 million of Series F Preferred. At a special meeting of our stockholders held on March 29, 2011, approval was obtained to convert Series F Preferred into common stock and Series G Preferred. The proceeds were used to increase the capital of the Bank.

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 the non-GAAP financial measure of pre-tax, pre-provision earnings from core operations, the provision for loan losses, nonperforming asset expense and certain non-recurring items, such as gains and losses on sales of 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 sales of 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.

 

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     For the Three Months Ended  
     Mar. 31,
2011
     Dec. 31,
2010
    Sep. 30,
2010
    June 30,
2010
    Mar. 31,
2010
 

Income (loss) before income taxes

   $ 282       $ (45,323   $ 33,735      $ (30,577   $ (10,441

Add back (subtract):

           

Provision for loan losses

     10,241         59,923        18,128        43,946        21,130   

Nonperforming asset expense

     3,277         9,259        1,538        4,055        4,938   

Gains on sales of investment securities

     —           (6,997     (32,804     (142     (1,433
                                         

Pre-tax, pre-provision earnings from core operations

   $ 13,800       $ 16,862      $ 20,597      $ 17,282      $ 14,194   
                                         

The following table details the components of revenue for the periods indicated.

 

     For the Three Months Ended  
     Mar. 31,
2011
     Dec. 31,
2010
    Sep. 30,
2010
    June 30,
2010
    Mar. 31,
2010
 

Net interest income

   $ 32,187       $ 33,562      $ 34,367      $ 34,678      $ 33,467   

Noninterest income

     6,885         18,009        44,142        6,158        4,374   

Add back (subtract):

           

Gains on sales of investment securities

     —           (6,997     (32,804     (142     (1,433
                                         

Revenues

   $ 39,072       $ 44,574      $ 45,705      $ 40,694      $ 36,408   
                                         

Net Interest Income

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

Net interest income was $32.2 million for the first quarter of 2011, a decrease of $1.3 million, or 3.8%, from $33.5 million in the first quarter of 2010. With an adjustment for tax-exempt income, our consolidated net interest income for the first quarter of 2011 was $32.6 million, compared to $34.2 million for the same quarter a year ago.

Net interest margin decreased from 3.15% in the first quarter of 2010 to 3.07% in the first quarter of 2011, a decrease of 8 basis points. Net interest margin is calculated by dividing taxable equivalent net interest income by average interest-earning assets. Net interest margin decreased due to lower average balances in our commercial and commercial real estate loan portfolios. The reduction in loan balances resulted in lower short-term funding needs, which generated a decrease in interest expense on interest-bearing liabilities. However, this decrease in funding costs did not offset the volume driven decrease in yield on interest-earning assets.

 

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The yield earned on loans declined to 4.89% in the first quarter of 2011 from 5.13% in the first quarter of 2010. In addition, the yield on the investment securities portfolio decreased from 4.54% in the first quarter of 2010 to 3.73% in the first quarter of 2011.

Average interest-earning assets during the first quarter of 2011 were $4.29 billion as compared to $4.37 billion during the first quarter of 2010, a decrease of $84.0 million, or 1.9%. Average investment balances remained essentially flat between those two quarterly periods and average loan balances decreased $88.9 million to $2.93 billion in the first quarter of 2011 as compared to $3.02 billion in the first quarter of 2010. Slow economic expansion in Chicago limited loan growth, as did our continued focus on maintaining pricing discipline and high credit standards. This decrease was partially offset by an increase in residential real estate mortgages originated by Cole Taylor Mortgage, which we launched in the first quarter of 2010.

Average interest-bearing deposit balances increased to $2.46 billion in the first quarter of 2011, compared to $2.31 billion in the first quarter of 2010, an increase of $148.3 million, or 6.4%, with the largest increase in money market accounts. Average noninterest-bearing deposits also increased, growing from $606.6 million in the first quarter of 2010 to $612.0 million in the first quarter of 2011.

See the section of this discussion and analysis captioned “Quantitative and Qualitative Disclosure About Market Risks” for further discussion of the impact of changes in interest rates on our results of operations.

Rate vs. Volume Analysis of Net Interest Income

The following table presents, for the periods indicated, a summary of the changes in interest earned and interest expense incurred resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a tax-equivalent basis using a tax rate of 35%.

 

     INCREASE/(DECREASE)
Quarter Ended March 31, 2011 As
Compared to

Quarter Ended March 31, 2010
 
     VOLUME     RATE     NET  
     (in thousands)  

INTEREST EARNED ON:

      

Investment securities

   $ (184   $ (2,509   $ (2,693

Cash equivalents

     2        —          2   

Loans

     (1,099     (1,748     (2,847
                        

Total interest-earning assets

     (1,281     (4,257     (5,538
                        

INTEREST PAID ON:

      

Interest-bearing deposits

     439        (4,257     (3,818

Total borrowings

     357        (551     (194
                        

Total interest-bearing liabilities

     796        (4,808     (4,012
                        

Net interest income, tax-equivalent

   $ (2,077   $ 551      $ (1,526
                        

 

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Tax-Equivalent Adjustments to Yields and Margins

As part of our evaluation of net interest income, we review our consolidated average balances, our yield on average interest-earning assets and the costs of average interest-bearing liabilities. Such yields and costs are derived by dividing annualized income or expense by the average balance of assets or liabilities. Because management reviews net interest income on a tax-equivalent basis, the analysis contains certain non-GAAP financial measures. In these non-GAAP financial measures, interest income and net interest income are adjusted to reflect tax-exempt interest income on a tax-equivalent basis assuming a tax rate of 35%. This assumed rate may differ from our actual effective income tax rate. In addition, the interest-earning asset yield, net interest margin and the net interest rate spread are adjusted to a fully taxable equivalent basis. We believe that these measures and ratios present a more meaningful measure of the performance of interest-earning assets because they provide a better basis for comparison of net interest income regardless of the mix of taxable and tax-exempt instruments.

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

 

     For the Three Months
Ended March 31,
 
     2011     2010  
     (dollars in thousands)  

Net interest income as stated

   $ 32,187      $ 33,467   

Tax equivalent adjustment-investments

     417        662   

Tax equivalent adjustment-loans

     24        25   
                

Tax equivalent net interest income

   $ 32,628      $ 34,154   
                

Yield on earning assets without tax adjustment

     4.48     4.88

Yield on earning assets - tax equivalent

     4.52     4.95

Net interest margin without tax adjustment

     3.03     3.09

Net interest margin - tax equivalent

     3.07     3.15

Net interest spread without tax adjustment

     2.71     2.67

Net interest spread - tax equivalent

     2.75     2.74

The following table presents, for the periods indicated, certain information relating to our consolidated average balances and reflect our yield on average interest-earning assets and costs of average interest-bearing liabilities. The table contains certain non-GAAP financial measures to adjust tax-exempt interest income on a tax-equivalent basis assuming a tax rate of 35%.

 

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     For the Three Months Ended March 31,  
     2011     2010  
     AVERAGE
BALANCE
    INTEREST      YIELD/
RATE
(%)(6)
    AVERAGE
BALANCE
    INTEREST      YIELD/
RATE
(%)(6)
 
     (dollars in thousands)  

INTEREST-EARNING ASSETS:

              

Investment securities (1):

              

Taxable

   $ 1,280,002      $ 11,452         3.58   $ 1,231,724      $ 13,446         4.37

Tax-exempt (tax equivalent) (2)

     75,825        1,192         6.29        119,987        1,891         6.30   
                                      

Total investment securities

     1,355,827        12,644         3.73        1,351,711        15,337         4.54   
                                      

Cash equivalents

     1,109        3         1.08        294        1         1.36   
                                      

Loans (2) (3):

              

Commercial and commercial real estate

     2,656,905        32,282         4.86        2,801,126        35,659         5.09   

Residential real estate mortgages

     197,495        2,106         4.27        122,616        1,383         4.51   

Home equity and consumer

     79,539        862         4.40        99,091        1,036         4.24   

Fees on loans

       139             158      
                                      

Net loans (tax equivalent) (2)

     2,933,939        35,389         4.89        3,022,833