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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
(Registrants 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 issuers 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.
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INDEX
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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)
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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)
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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)
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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)
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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)
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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 managements opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with the Companys 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 years 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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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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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 Companys 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 Companys 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 Banks 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 Companys 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 Banks 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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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 Companys customer base lies within the Chicago area. Approximately 51% of the Companys 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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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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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 FRBs 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 swapspay 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 swapspay 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 swapsreceive 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 Mortgages 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 entitys 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 bonds 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 Companys 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 counterpartys 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 managements 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 loans 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 Companys 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 Companys 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 managements 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 managements assessment of liquidation of collateral, the Company classifies the OREO and repossessed assets as nonrecurring Level 3 in the fair value hierarchy.
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Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below.
As of 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 | |
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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 Companys assets and liabilities are considered financial instruments. Many of the Companys 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 bonds 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 loans 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 counterpartys 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 managements assumptions and rate and pricing information from each loan commitment
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transaction. On the Companys 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 Companys 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 Companys 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. | Managements 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 managements 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 bonds 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 securitys 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 Companys 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 | 38,236 | 5.13 | ||||||||||||||||||
Total interest-earning assets (2) |
4,290,875 | 48,036 | 4.52 | 4,374,838 | 53,574 | 4.95 | ||||||||||||||||||
NON-EARNING ASSETS: |
||||||||||||||||||||||||
Allowance for loan losses |
(132,545 | ) | (111,348 | ) | ||||||||||||||||||||
Cash and due from banks |
121,105 | 74,160 | ||||||||||||||||||||||
Accrued interest and other assets |
110,148 | 141,845 | ||||||||||||||||||||||
TOTAL ASSETS |
$ | 4,389,583 | $ | 4,479,495 | ||||||||||||||||||||
INTEREST-BEARING LIABILITIES: |
||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 848,246 | 1,779 | 0.85 | $ | 708,216 | 2,045 | 1.17 | ||||||||||||||||
Savings deposits |
38,094 | 8 | 0.09 | 41,050 | 8 | 0.08 | ||||||||||||||||||
Time deposits |
1,574,597 | 6,837 | 1.76 | 1,563,384 | 10,389 | 2.69 | ||||||||||||||||||
Total interest-bearing deposits |
2,460,937 | 8,624 | 1.42 | 2,312,650 | 12,442 | 2.18 | ||||||||||||||||||
Other borrowings |
495,266 | 1,809 | 1.46 | 481,034 | 2,285 | 1.90 | ||||||||||||||||||
Notes payable and other advances |
386,522 | 1,043 | 1.08 | 622,178 | 1,624 | 1.04 | ||||||||||||||||||
Junior subordinated debentures |
86,607 | 1,443 | 6.66 | 86,607 | 1,438 | 6.64 | ||||||||||||||||||
Subordinated notes |
88,942 | 2,489 | 11.19 | 55,749 | 1,631 | 11.70 | ||||||||||||||||||
Total interest-bearing liabilities |
3,518,274 | 15,408 | 1.77 | 3,558,218 | 19,420 | 2.21 | ||||||||||||||||||
NONINTEREST-BEARING LIABILITIES: |
||||||||||||||||||||||||
Noninterest-bearing deposits |
612,032 | 606,604 | ||||||||||||||||||||||
Accrued interest, taxes and other liabilities |
52,801 | 50,085 | ||||||||||||||||||||||
Total noninterest-bearing liabilities |
664,833 | 656,689 | ||||||||||||||||||||||
STOCKHOLDERS EQUITY |
206,476 | 264,588 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 4,389,583 | $ | 4,479,495 | ||||||||||||||||||||
Net interest income (tax equivalent) (2) |
$ | 32,628 | $ | 34,154 | ||||||||||||||||||||
Net interest spread (tax equivalent) (2) (4) |
2.75 | % | 2.74 | % | ||||||||||||||||||||
Net interest margin (tax equivalent) (2) (5) |
3.07 | % | 3.15 | % | ||||||||||||||||||||
(1) | Investment securities average balances are based on amortized cost. |
(2) | Calculations are computed on a tax-equivalent basis using a tax rate of 35%. |
(3) | Nonaccrual loans are included in the above stated average balances. |
(4) | Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
(5) | Net interest margin is determined by dividing tax-equivalent net interest income by average interest-earning assets. |
(6) | Yield/Rates are annualized. |
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Table of Contents
Noninterest Income
The following table presents, for the periods indicated, our major categories of noninterest income:
For the Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
(in thousands) | ||||||||
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 | ||||||
Letter of credit & other loan fees |
1,151 | 1,008 | ||||||
Change in market value of employee deferred compensation plan |
167 | 15 | ||||||
Other derivative income |
753 | 209 | ||||||
Other noninterest income |
379 | 571 | ||||||
Total noninterest income |
$ | 6,885 | $ | 4,374 | ||||
Total noninterest income was $6.9 million during the first quarter of 2011, an increase of $2.5 million, or 57.4%, as compared to the $4.4 million of noninterest income for the first quarter of 2010. This increase is primarily due to an increase in mortgage origination revenue generated from Cole Taylor Mortgage, which began operations in the first quarter of 2010 and totaled $1.5 million in the first quarter of 2011. Other derivative income increased to $0.8 million in the first quarter of 2011 from $0.2 million in the first quarter of 2010 as a result of an increase in the number and the size of fees collected on customer swaps. The first quarter of 2010 included gains on the sales of available-for-sale investment securities of $1.4 million and losses on the disposition of bulk purchases mortgage loans of $2.0 million.
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Table of Contents
Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense:
For the Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
(dollars in thousands) | ||||||||
Salaries and employee benefits: |
||||||||
Salaries, employment taxes, and medical insurance |
$ | 13,201 | $ | 10,462 | ||||
Sign-on bonuses and severance |
50 | 171 | ||||||
Incentives, commissions, and retirement benefits |
1,438 | 980 | ||||||
Total salaries and employee benefits |
14,689 | 11,613 | ||||||
Occupancy of premises, furniture and equipment |
2,890 | 2,554 | ||||||
Nonperforming asset expense |
3,277 | 4,938 | ||||||
FDIC assessment |
1,948 | 2,213 | ||||||
Legal fees, net |
794 | 819 | ||||||
Other professional services |
352 | 685 | ||||||
Other noninterest expense |
4,599 | 4,330 | ||||||
Total noninterest expense |
$ | 28,549 | $ | 27,152 | ||||
Efficiency ratio |
73.07 | % | 74.58 | % | ||||
Noninterest expense during the first quarter of 2011 increased $1.3 million, or 5.1%, to $28.5 million, as compared to $27.2 million during the same quarter in 2010. The higher level of noninterest expense during the first quarter of 2011 is primarily the result of increased salaries and employee benefits, partially offset by decreased nonperforming asset expense.
Total salaries and employee benefits expense during the first quarter of 2011 increased $3.1 million, or 26.5%, to $14.7 million, as compared to $11.6 million during the first quarter of 2010. The number of full time equivalent employees increased to 610 at March 31, 2011, as compared to 473 at March 31, 2010, an increase of 137. This increase is primarily due to 117 new employees at Cole Taylor Mortgage.
Nonperforming asset expense totaled $3.3 million during the first quarter of 2011 as compared to $4.9 million during the first quarter of 2010, a decrease of $1.6 million. Lower write-downs on OREO and repossessed assets were required in the first quarter of 2011 as compared to the first quarter of 2010. Nonperforming asset expense during the first quarter of 2010 included a $3.2 million write-down associated with the transfer of certain nonperforming commercial loans held for sale to the loan portfolio, which was the lower of cost or fair value.
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Table of Contents
Efficiency Ratio
The efficiency ratio is calculated by dividing total noninterest expense by total revenues (net interest income and noninterest income, adjusted for gains or losses on sales of investment securities). The lower the efficiency ratio, the more efficient the entity is operating. Our efficiency ratio was 73.07% in the first quarter of 2011, compared to 74.58% in the first quarter in 2010. The slight improvement in the efficiency ratio was due to an increase in noninterest income, excluding the gains and losses on sales of investment securities.
Income Taxes
During first quarter of 2011, we recorded an income tax benefit of $106,000 largely due to a change in the State of Illinois tax rate as applied to our beginning of the year net recorded deferred tax asset after valuation allowance. This reflects the increase in value of our available tax planning strategy on investment securities. This benefit is partially offset by the release of the residual tax effects of changes in the beginning of the year valuation allowance previously allocated to other comprehensive income. These residual tax effects resulted from changes in the deferred tax liability associated with deferred gains on terminated cash flow hedges recorded in other comprehensive income.
The expense recorded in the first quarter of 2010 also includes the release of the residual tax effects of changes in the beginning of the year valuation allowance previously allocated to other comprehensive income.
FINANCIAL CONDITION
Overview
Total assets decreased $197.2 million, or 4.4%, to $4.29 billion at March 31, 2011 from total assets of $4.48 billion at December 31, 2010, largely the result of decreases in loans held for sale and loans. These decreases were offset by increases in investment securities and other real estate and repossessed assets. Total liabilities decreased $217.4 million, or 5.1%, to $4.06 billion at March 31, 2011 from $4.28 billion at December 31, 2010, resulting from decreases in notes payable and other advances and other borrowings offset by increases in total deposits. Total stockholders equity at March 31, 2011 was $229.0 million, as compared to $208.8 million at December 31, 2010, reflecting the impact of completing a $25 million capital raise in the first quarter of 2011.
Investment Securities
Investment securities totaled $1.31 billion at March 31, 2011, compared to $1.25 billion at December 31, 2010, an increase of $51.0 million, or 4.1%. During the first three months of 2011, we purchased approximately $83.1 million of investment securities, mostly mortgage-related securities. A total of $1.6 million of municipal obligations either matured or were called. The overall weighted average life of our investment portfolio at March 31, 2011 was approximately 8.2 years, compared to approximately 8.3 years at December 31, 2010.
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Table of Contents
As of March 31, 2011, mortgage-related securities (at estimated fair value) comprised 92.5% of our investment portfolio, almost all of which were securities issued by government and government-sponsored enterprises.
At March 31, 2011, we had a net unrealized loss of $26.5 million in our available-for-sale investment portfolio, which was comprised of $7.5 million of gross unrealized gains and $34.0 million of gross unrealized losses. At December 31, 2010 the net unrealized loss was $21.3 million, which was comprised of $7.6 million of gross unrealized gains and $28.9 million of gross unrealized losses. The gross unrealized losses at March 31, 2011 related to 90 investment securities with a carrying value of $1.24 billion. Each quarter we analyze each of these securities to determine if other-than-temporary impairment has occurred. The factors we consider include the magnitude of the unrealized loss in comparison to the securitys carrying value, the length of time the security has been in an unrealized loss position and the current independent bond rating for the security. Those securities with unrealized losses for more than 12 months or for more than 10% of their carrying value are subjected to further analysis to determine if it is probable that not all the contractual cash flows will be received. We obtain fair value estimates from additional independent sources and perform cash flow analysis to determine if other-then-temporary impairment has occurred. Of the 90 securities with gross unrealized losses at March 31, 2011, only four securities have been in a loss position for 12 months or more and none had additional other-than-temporary impairment for the quarter ended March 31, 2011.
As a member of FHLB, we are required to hold FHLB stock. The amount of FHLBC stock that we are required to hold is based on the Banks asset size and the amount of borrowings from the FHLB. At March 31, 2011, we held $29.5 million of FHLBC stock and maintained $260.0 million of FHLB advances. Currently, the FHLB of Chicago is under a cease and desist order with its regulator that requires prior regulatory approval to declare dividends and to redeem member capital stock other than excess capital stock under limited circumstances. We have assessed the ultimate recoverability of our FHLBC stock and believe no impairment has occurred.
Loans
Total loans in our portfolio decreased by $41.8 million to $2.67 billion at March 31, 2011, from total loans of $2.71 billion at December 31, 2010. Commercial loans, which includes commercial and industrial (C&I), commercial real estate secured, and construction and land loans, decreased $46.6 million, or 1.7%. The decline in total commercial loans was primarily due to a decrease of $24.7 million, or 2.2%, in commercial real estate secured loans and a decrease of $16.9 million, or 16.2% in residential construction and land loans. Consumer-oriented loans decreased $4.8 million.
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Table of Contents
The composition of our loan portfolio as of March 31, 2011 and December 31, 2010 was as follows:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Amount | Percentage of Gross Loans |
Amount | Percentage of Gross Loans |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Loans Held for Portfolio: |
||||||||||||||||
Commercial and industrial |
$ | 1,348,173 | 49 | % | $ | 1,351,862 | 47 | % | ||||||||
Commercial real estate secured |
1,095,681 | 39 | 1,120,361 | 40 | ||||||||||||
Residential construction and land |
87,180 | 3 | 104,036 | 4 | ||||||||||||
Commercial construction and land |
105,033 | 4 | 106,423 | 4 | ||||||||||||
Total commercial loans |
2,636,067 | 95 | 2,682,682 | 95 | ||||||||||||
Consumer-oriented loans |
147,821 | 5 | 152,657 | 5 | ||||||||||||
Gross loans |
2,783,888 | 100 | % | 2,835,339 | 100 | % | ||||||||||
Less: Unearned discount |
(1 | ) | (1 | ) | ||||||||||||
Total loans |
2,783,887 | 2,835,338 | ||||||||||||||
Less: Allowance for loan losses |
(114,966 | ) | (124,568 | ) | ||||||||||||
Portfolio loans, net |
$ | 2,668,921 | $ | 2,710,770 | ||||||||||||
Loans Held for Sale |
$ | 52,872 | $ | 259,020 | ||||||||||||
Total C&I loans were relatively unchanged at $1.35 billion at both March 31, 2011 and December 31, 2010 and account for 49% of our total loan portfolio at March 31, 2011. C&I loans include all loans for commercial purposes (other than real estate construction) that are either unsecured or secured by collateral other than commercial real estate investment. These loans are generally made to operating companies in a variety of businesses, excluding commercial real estate.
Our commercial real estate secured loans decreased $24.7 million, or 2.2%, to $1.10 billion at March 31, 2011, as compared to $1.12 billion at December 31, 2010. Approximately 90% of the total commercial real estate secured portfolio is loans secured by owner and non-owner occupied commercial properties. The remainder of this portfolio consists of loans secured by residential income properties.
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Table of Contents
The following table presents the composition of our commercial real estate portfolio as of the dates indicated:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Balance | Percentage of Total Commercial Real Estate Loans |
Balance | Percentage of Total Commercial Real Estate Loans |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Commercial non-owner occupied*: |
||||||||||||||||
Retail strip centers or malls |
$ | 188,971 | 17 | % | $ | 198,527 | 18 | % | ||||||||
Office/mix use property |
114,209 | 10 | 116,726 | 10 | ||||||||||||
Commercial properties |
149,030 | 14 | 147,920 | 13 | ||||||||||||
Specialized other |
80,808 | 7 | 82,332 | 7 | ||||||||||||
Other commercial properties |
41,355 | 4 | 43,595 | 4 | ||||||||||||
Subtotal commercial non-owner occupied |
574,373 | 52 | 589,100 | 52 | ||||||||||||
Commercial owner occupied |
406,703 | 37 | 411,519 | 37 | ||||||||||||
Multi-family properties |
114,605 | 11 | 119,742 | 11 | ||||||||||||
Total commercial real estate secured |
$ | 1,095,681 | 100 | % | $ | 1,120,361 | 100 | % | ||||||||
* | As a result of our recent core system conversion, we identified certain sub-codings within our loan system that changed the characterization of certain commercial real estate non-owner occupied loans to owner occupied real estate. Although there was no impact to the calculation of the total commercial real estate loans, we have adjusted the table above to reflect the revised classifications for all periods presented. |
Our construction and land loans consist primarily of loans to professional real estate developers for the construction of single-family homes, town-homes, and condominium conversions and commercial properties. Our residential construction and land loans decreased by $16.8 million, or 16.2%, to $87.2 million at March 31, 2011, as compared to $104.0 million at December 31, 2010. We continue to actively reduce our exposure to this portion of our loan portfolio. The composition of our residential real estate construction and land portfolio as of the date indicated was as follows:
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Table of Contents
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
Balance | Percentage of Total Construction Loans |
Percentage of Gross Loans |
Balance | Percentage of Total Construction Loans |
Percentage of Gross Loans |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Residential properties: |
||||||||||||||||||||||||
Single family attached and detached housing |
$ | 5,790 | 7 | % | 0.2 | % | $ | 13,585 | 13 | % | 0.4 | % | ||||||||||||
Condo (new & conversions) |
36,659 | 42 | 1.3 | 39,994 | 38 | 1.4 | ||||||||||||||||||
Multi-family |
13,038 | 15 | 0.5 | 18,159 | 18 | 0.6 | ||||||||||||||||||
Completed for sale |
9,243 | 11 | 0.3 | 8,947 | 9 | 0.3 | ||||||||||||||||||
Total residential construction |
64,730 | 75 | 2.3 | 80,685 | 78 | 2.8 | ||||||||||||||||||
Land unimproved & farmland |
13,556 | 15 | 0.5 | 14,049 | 14 | 0.5 | ||||||||||||||||||
Land improved & entitled |
1,728 | 2 | 0.1 | 1,871 | 1 | * | ||||||||||||||||||
Land under development |
7,166 | 8 | 0.2 | 7,431 | 7 | 0.3 | ||||||||||||||||||
Total land |
22,450 | 25 | 0.8 | 23,351 | 22 | 0.8 | ||||||||||||||||||
Total residential construction and land |
$ | 87,180 | 100 | % | 3.1 | % | $ | 104,036 | 100 | % | 3.6 | % | ||||||||||||
* | Represents less than 1% |
Commercial construction and land loans totaled $105.0 million at March 31, 2011 as compared to $106.4 million at December 31, 2010, a decrease of $1.4 million.
Total consumer-oriented loans, which include residential real estate mortgages, home equity loans and lines of credit, and other consumer loans, decreased $4.8 million, or 3.2%, to $147.8 million at March 31, 2011.
Loans Held for Sale
At March 31, 2011, we held $52.9 million loans classified as held for sale, as compared to $259.0 million at December 31, 2010. At each of March 31, 2011 and December 31, 2010, the held for sale portfolio consisted solely of residential mortgage loans originated by Cole Taylor Mortgage. We intend to sell these loans as part of our normal operations and have elected to account for these loans at fair value. We further intend to sell the majority of the servicing rights associated with these mortgage loans, retaining only a small percentage of these rights, in order to maximize the economic value of these loans.
The aggregate, unpaid principal balances associated with these loans was $51.9 million at March 31, 2011 and an unrealized gain of $990,000 and was included in mortgage origination revenues in noninterest income on the Consolidated Statements of Operations.
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Table of Contents
Loan Quality and Nonperforming Assets
The following table sets forth the amounts of nonperforming assets as of the dates indicated:
Mar. 31, 2011 |
Dec. 31, 2010 |
Mar. 31, 2010 |
||||||||||
(dollars in thousands) | ||||||||||||
Loans contractually past due 90 days or more but still accruing interest |
$ | 54 | $ | 55 | $ | 58 | ||||||
Nonaccrual loans: |
||||||||||||
Commercial and industrial |
57,500 | 71,438 | 25,310 | |||||||||
Commercial real estate secured |
76,134 | 42,221 | 34,863 | |||||||||
Residential construction and land |
13,599 | 20,660 | 57,320 | |||||||||
Commercial construction and land |
6,311 | 12,734 | 14,171 | |||||||||
All other loan types |
14,612 | 12,632 | 9,468 | |||||||||
Total nonaccrual loans |
168,156 | 159,685 | 141,132 | |||||||||
Total nonperforming loans |
168,210 | 159,740 | 141,190 | |||||||||
Other real estate owned and repossessed assets |
38,165 | 31,490 | 27,355 | |||||||||
Total nonperforming assets |
$ | 206,375 | $ | 191,230 | $ | 168,545 | ||||||
Restructured loans not included in nonperforming assets |
$ | 19,741 | $ | 29,786 | $ | 1,247 | ||||||
Nonperforming loans to total loans |
5.93 | % | 5.16 | % | 4.70 | % | ||||||
Nonperforming assets to total loans plus repossessed property |
7.18 | % | 6.12 | % | 5.55 | % | ||||||
Nonperforming assets to total assets |
4.81 | % | 4.26 | % | 3.73 | % |
Nonperforming assets were $206.4 million, or 4.81%, of total assets on March 31, 2011, compared to $191.2 million, or 4.26% of total assets on December 31, 2010, and $168.5 million, or 3.73% of total assets on March 31, 2010. During the first quarter of 2011, $19.8 million of nonperforming loans were charged-off and $8.6 million of loans were transferred to other real estate owned and repossessed assets. These decreases in nonperforming assets were offset by new nonaccrual loans.
Nonperforming loans:
Nonperforming loans include nonaccrual loans and interest-accruing loans that are contractually past due 90 days or more. We evaluate all loans on which principal or interest is contractually past due 90 days or more to determine if they are adequately secured and in the process of collection. If sufficient doubt exists as to the full collection of principal and interest on a loan, we place it on nonaccrual and discontinue recognizing interest income. After a loan is placed on nonaccrual status, any current period interest previously accrued but not yet collected is reversed against current income. Interest is included in income subsequent to the date the loan is placed on nonaccrual status only as interest is received and so long as management is satisfied that there is a high probability that principal will be collected in full. The loan is returned to accrual status only when the borrower has made required payments for a minimum length of time and demonstrates the ability to make future payments of principal and interest as scheduled.
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Table of Contents
Commercial real estate secured loans are the largest category of nonaccrual loans at $76.1 million and comprise approximately 45% of all nonaccrual loans. The increase of $33.9 million in commercial real estate secured loans in the first quarter of 2011, was largely comprised of loans already on the watch list of criticized and classified loans. Partially offsetting this increase is a decrease of $13.9 million in commercial and industrial nonaccrual loans, as well as reductions in residential and commercial construction and land loans.
Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets totaled $38.2 million at March 31, 2011 as compared to $31.5 million at December 31, 2010 and $27.4 million at March 31, 2010. The following table provides a rollforward, for the periods indicated, of other real estate and repossessed assets:
For the Period Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
Balance at beginning of period |
$ | 31,490 | $ | 26,231 | ||||
Transfers from loans |
8,619 | 10,385 | ||||||
Dispositions and settlements |
(531 | ) | (5,025 | ) | ||||
Additional impairment |
(1,413 | ) | (4,236 | ) | ||||
Balance at end of period |
$ | 38,165 | $ | 27,355 | ||||
During the first quarter of 2011, we transferred $8.6 million of loans into other real estate owned and repossessed assets. The loans transferred primarily consisted of $4.8 million from our residential construction and land portfolio, $2.4 million from our commercial real estate secured portfolio and $1.0 million from our consumer portfolio. During first quarter of 2011, we also received proceeds of $652,000 as a settlement on legal proceeding involving a repossessed asset that had a carrying value of $531,000. We also reduced the carrying value of certain other real estate owned and repossessed assets by $1.4 million during first quarter 2011 to reflect a decrease in the estimated fair value of those assets. This decrease was recorded as either additional nonperforming asset expense or provision for loan losses for assets recently transferred from the loan portfolio. The level of other real estate owned and repossessed assets have increased during the first quarter of 2011, and we expect that these assets may increase in the future as we continue to work through the elevated level of nonperforming assets.
Impaired loans:
At March 31, 2011, impaired loans totaled $178.6 million, compared to $181.1 million at December 31, 2010. Total impaired loans were $132.9 million at March 31, 2010.
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Table of Contents
The balance of impaired loans and the related allowance for loan losses for impaired loans is as follows:
March 31, 2011 |
Dec. 31, 2010 |
March 31, 2010 |
||||||||||
(in thousands) | ||||||||||||
Impaired loans: |
||||||||||||
Commercial and industrial |
$ | 69,415 | $ | 78,804 | $ | 25,310 | ||||||
Commercial real estate secured |
82,651 | 63,831 | 34,863 | |||||||||
Residential construction and land |
17,129 | 24,190 | 57,320 | |||||||||
Commercial construction and land |
6,311 | 12,734 | 14,171 | |||||||||
Consumer-oriented |
3,086 | 1,522 | 1,247 | |||||||||
Total impaired loans |
$ | 178,592 | $ | 181,081 | $ | 132,911 | ||||||
Recorded balance of impaired loans: |
||||||||||||
With related allowance for loan losses |
$ | 122,891 | $ | 136,404 | $ | 101,364 | ||||||
With no related allowance for loan losses |
55,701 | 44,677 | 31,547 | |||||||||
Total impaired loans |
$ | 178,592 | $ | 181,081 | $ | 132,911 | ||||||
Allowance for losses on impaired loans: |
||||||||||||
Commercial and industrial |
$ | 28,346 | $ | 35,258 | $ | 5,961 | ||||||
Commercial real estate secured |
15,302 | 10,940 | 3,589 | |||||||||
Residential construction and land |
3,417 | 5,189 | 10,095 | |||||||||
Commercial construction and land |
79 | 8,470 | 4,696 | |||||||||
Consumer-oriented |
| | | |||||||||
Total allowance for losses on impaired loans |
$ | 47,144 | $ | 59,857 | $ | 24,341 | ||||||
The decrease in impaired loans during the first quarter of 2011 primarily resulted from net charge-offs and transfers into other real estate owned and were partially offset by additions to impaired loans during the period. The allowance for loan losses related to impaired loans decreased during the first quarter of 2011 and totaled $47.1 million at March 31, 2011 as compared to $59.9 million at December 31, 2010 and $24.3 million at March 31, 2010. The decrease in the allowance for losses on impaired loans in 2011 was primarily due to net charge-offs during the period, partially offset by an increase in the estimated impairment on these loans. Commercial real estate secured loans comprise approximately 46% of all impaired loans and comprised 32% of the allowance for loan losses on impaired loans.
Through an individual impairment analysis, at March 31, 2011, we determined that $126.0 million of our impaired loans had a specific measure of impairment and required a related allowance for loan losses of $47.1 million. We also held $52.6 million of impaired loans, for which the individual analysis did not result in a measure of impairment, and so no related allowance for loan losses was provided. Once we determine the loan is impaired, we perform an individual analysis to establish the amount of the related allowance for loan losses, if any, based upon the present value of expected future cash flows discounted at the loans effective interest rate, except that collateral-dependent loans may be measured for impairment based upon the fair value of the collateral, less estimated cost to sell. Generally, since the majority of our impaired loans are collateral-dependent real estate loans, the fair value is determined by a current
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appraisal. The individual impairment analysis also takes into account available and reliable borrower guarantees and any cross-collateralization agreements. Certain other loans are collateralized by business assets, such as equipment, inventory, and accounts receivable. The fair value of these loans is based upon estimates of realizability and collectability of the underlying collateral. While impaired loans exhibit weaknesses that may inhibit repayment in compliance with the original note terms, the impairment analysis may not result in a related allowance for loan losses for each individual loan.
Impaired loans include all nonaccrual loans, accruing loans judged to have higher risk of noncompliance with the present contractual repayment schedule for both interest and principal, as well as troubled debt restructurings. Unless modified in a troubled-debt restructuring, certain homogenous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment and are, therefore, excluded from impaired loans. At March 31, 2011, we held $19.7 million of loans classified as a troubled debt restructuring which includes commercial loans of $17.9 million and consumer loans of $1.8 million.
The balance of nonaccrual and impaired loans as of March 31, 2011 is presented below:
Nonaccrual Loans |
Impaired Loans |
|||||||
(dollars in thousands) | ||||||||
Commercial nonaccrual loans |
$ | 153,544 | $ | 153,544 | ||||
Commercial loans on accrual but impaired |
n/a | 21,962 | ||||||
Consumer-oriented loans |
14,612 | 3,086 | ||||||
$ | 168,156 | $ | 178,592 | |||||
n/a | - not applicable |
Potential Problem Loans
As part of our standard credit administration process, we risk rate our commercial loan portfolio. As part of this process, loans that are rated with a higher level of risk are monitored more closely. We internally identify certain loans in our loan risk ratings that we have placed on heightened monitoring because of certain weaknesses that may inhibit the borrowers ability to perform under the contractual terms of the loan agreement but have not reached the status of nonaccrual loans. As of March 31, 2011, these potential problem loans totaled $19.2 million. Of these potential problem loans at March 31, 2011, $9.1 million were in our commercial and industrial portfolio and $12.6 million were in our commercial real estate secured portfolio. In comparison, potential problem loans at December 31, 2010 totaled $46.8 million. The largest categories of potential problem loans at December 31, 2010 included $32.4 million of commercial real estate secured loans, $9.3 million of commercial and industrial loans, and the remaining $5.1 million were loans in the construction and land portfolio. We do not necessarily expect to realize losses on potential problem loans, but we recognize potential problem loans can carry a higher probability of default and may require additional attention by management.
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Allowance for Loan Losses
We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of the allowance includes identifying problem loans, estimating the amount of probable loss related to those loans, estimating probable losses from specific portfolio segments and evaluating the impact on our loan portfolio of a number of economic and qualitative factors. Although management believes that the allowance for loan losses is adequate to absorb probable losses on existing loans that may become uncollectible, there can be no assurance that our allowance will prove sufficient to cover actual loan losses in the future.
The following table includes an analysis of our allowance for loan losses and other related data for the periods indicated:
For Three Months
Ended March 31, |
||||||||
2011 | 2010 | |||||||
(dollars in thousands) | ||||||||
Average total loans |
$ | 2,933,939 | $ | 3,022,833 | ||||
Total loans at end of period |
$ | 2,836,759 | $ | 3,006,771 | ||||
Allowance for loan losses: |
||||||||
Allowance at beginning of period |
$ | 124,568 | $ | 106,185 | ||||
Net (charge-offs) recoveries: |
||||||||
Commercial and commercial real estate |
(10,736 | ) | (8,439 | ) | ||||
Real estate construction |
(8,692 | ) | (17,605 | ) | ||||
Residential real estate mortgages and consumer loans |
(415 | ) | (1,120 | ) | ||||
Total net charge-offs |
(19,843 | ) | (27,164 | ) | ||||
Provision for loan losses |
10,241 | 21,130 | ||||||
Allowance at end of period |
$ | 114,966 | $ | 100,151 | ||||
Annualized net charge-offs to average total loans |
2.71 | % | 3.59 | % | ||||
Allowance to total loans at end of period (excluding loans held for sale) |
4.13 | % | 3.36 | % | ||||
Allowance to nonperforming loans |
68.35 | % | 70.93 | % |
Our allowance for loan losses was $115.0 million at March 31, 2011, or 4.13% of end-of-period loans (excluding loans held for sale) and 68.35% of nonperforming loans. At March 31, 2010, the allowance for loan losses was $100.2 million, which represented 3.36% of end-of-period loans (excluding loans held for sale) and 70.93% of nonperforming loans. Net charge-offs during the first quarter of 2011 were $19.8 million, or 2.71% of average loans on an annualized basis. In comparison, net charge-offs during the first quarter of 2010 were $27.2 million, or 3.59% of average loans on an annualized basis.
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Provision for Loan Losses
The provision for loan losses is based on the level of the allowance for loan losses deemed necessary to cover probable losses in our portfolio as of the balance sheet date. Our provision for loan losses was $10.2 million in the first quarter of 2011 and $21.1 million in the first quarter of 2010.
Deposits
Total deposit balances at March 31, 2011 increased $50.0 million to $3.08 billion as compared to $3.03 billion at year-end 2010. During the first quarter of 2011, our total in-market deposits increased $13.8 million and our out-of-market deposits increased by $36.2 million.
Total in-market deposits increased $13.8 million to $2.49 billion at March 31, 2011 as compared to $2.47 billion at December 31, 2010. Money market accounts increased $23.3 million to $606.6 million due to our on-going strategy to increase deposits with our core customers. Deposits maintained through the CDARS network increased $19.6 million to $202.5 million. These increases were partially offset by decreases in noninterest-bearing deposits of $16.2 million to $617.1 million, decreases in customer CDs of $10.8 million to $704.2 million and decreases in NOW accounts of $9.6 million to $239.1 million. Total out-of-market deposits increased by $36.2 million to $591.2 million at March 31, 2011 from $555.0 million at year-end 2010, with most of the increase occurring in out-of-local market CDs which increased by $23.5 million and brokered CDs which increased by $13.0 million.
The following table sets forth the period-end balances of total deposits as of each of the dates indicated, as well as categorizes our deposits as in-market and out-of-market deposits:
Mar. 31, 2011 |
Dec. 31, 2010 |
|||||||
(in thousands) | ||||||||
In-market deposits: |
||||||||
Noninterest-bearing deposits |
$ | 617,107 | $ | 633,300 | ||||
NOW accounts |
239,067 | 248,662 | ||||||
Savings accounts |
38,040 | 37,992 | ||||||
Money market accounts |
606,620 | 583,365 | ||||||
Customer certificates of deposit |
704,234 | 715,030 | ||||||
CDARS time deposits |
202,458 | 182,879 | ||||||
Public time deposits |
78,160 | 70,697 | ||||||
Total in-market deposits |
2,485,686 | 2,471,925 | ||||||
Out-of-market deposits: |
||||||||
Brokered money market deposits |
5,520 | 5,832 | ||||||
Out-of-local-market certificates of deposit |
122,808 | 99,313 | ||||||
Brokered certificates of deposit |
462,843 | 449,836 | ||||||
Total out-of-market deposits |
591,171 | 554,981 | ||||||
Total deposits |
$ | 3,076,857 | $ | 3,026,906 | ||||
Average interest-bearing deposits for the first three months of 2011 increased $148.3 million, or 6.4%, to $2.46 billion, compared to $2.31 billion for the first three months of 2010. An increase of $144.2 million in money market accounts are responsible for most of the increase. Total average time deposits also increased $11.2 million. A $77.9 million increase in CDARS, a
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$28.9 million increase in out-of-market certificates of deposit and a $4.4 million increase in public time deposits were offset by decreases of $66.5 million in certificates of deposit and decreases of $33.5 million in brokered certificates of deposit.
The following table sets forth, for the periods indicated, the distribution of our average deposit account balances and average cost of funds in each category of deposits:
For the Three Months Ended March 31, 2011 |
For the Three Months Ended March 31, 2010 |
|||||||||||||||||||||||
Average Balance |
Percent of Deposits |
Rate | Average Balance |
Percent of Deposits |
Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Noninterest-bearing demand deposits |
$ | 612,032 | 19.9 | % | | % | $ | 606,604 | 20.8 | % | | % | ||||||||||||
NOW accounts |
240,928 | 7.9 | 1.06 | 243,649 | 8.3 | 1.52 | ||||||||||||||||||
Money market accounts |
607,318 | 19.8 | 0.77 | 464,567 | 15.9 | 0.99 | ||||||||||||||||||
Savings deposits |
38,094 | 1.2 | 0.09 | 41,050 | 1.4 | 0.08 | ||||||||||||||||||
Time deposits: |
||||||||||||||||||||||||
Certificates of deposit |
713,423 | 23.2 | 1.83 | 779,963 | 26.7 | 2.59 | ||||||||||||||||||
Out-of-local-market certificates of deposit |
114,714 | 3.7 | 1.24 | 85,822 | 2.9 | 2.44 | ||||||||||||||||||
Brokered certificates of deposit |
465,195 | 15.1 | 2.40 | 498,665 | 17.1 | 3.44 | ||||||||||||||||||
CDARS time deposits |
202,491 | 6.6 | 0.81 | 124,558 | 4.3 | 1.58 | ||||||||||||||||||
Public Funds |
78,774 | 2.6 | 0.52 | 74,376 | 2.6 | 0.90 | ||||||||||||||||||
Total time deposits |
1,574,597 | 51.2 | 1.76 | 1,563,384 | 53.6 | 2.69 | ||||||||||||||||||
Total deposits |
$ | 3,072,969 | 100.0 | % | $ | 2,919,254 | 100.0 | % | ||||||||||||||||
Other Borrowings
Other borrowings include securities sold under agreements to repurchase, federal funds purchased and U.S. Treasury tax and loan note option borrowings. Period-end other borrowings decreased $20.0 million to $491.0 million at March 31, 2011, as compared to $511.0 million at December 31, 2010. Most of the decrease resulted from an $18.4 million decrease in repurchase agreements. At March 31, 2011, subject to available collateral, the Bank had available pre-approved repurchase agreement lines of $930.0 million and pre-approved overnight federal funds borrowing lines of $99.0 million. Of the pre-approved repurchase agreement lines, we have collateral available to borrow $597.0 million as of March 31, 2011. In comparison, at December 31, 2010, we had available pre-approved repurchase agreement lines of $930.0 million, with collateral available to borrow $511.7 million and pre-approved overnight federal funds borrowing lines of $119.0 million.
Notes Payable and Other Advances
Borrowings from the FHLB decreased $245.0 million during the first three months of 2011 to $260.0 million at March 31, 2011, compared to $505.0 million as of December 31, 2010. We decreased borrowings from the FHLB during the first quarter of 2011 due to reduced funding needs. At March 31, 2011, the borrowings from the FHLB were collateralized by $459.4 million of securities and a blanket lien on $149.4 million of qualified first-mortgage loans, home equity loans and commercial real estate loans. We have additional borrowing capacity of $327.5 million. At December 31, 2010, we maintained collateral of $521.6 million of investment
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securities and a blanket lien on $175.5 million on qualified first-mortgage residential, home equity and commercial real estate loans and had additional borrowing capacity of $113.1 million.
We participate in the FRBs Borrower In Custody (BIC) program. At March 31, 2011 the Bank pledged $822.0 million of commercial loans as collateral and had available $686.7 million of borrowing capacity at the FRB. In comparison, the Bank had pledged $813.1 million of commercial loans as collateral and had available $504.9 million of borrowing capacity under the BIC program at December 31, 2010. There were no borrowings under the BIC program at either March 31, 2011 or December 31, 2010.
Junior Subordinated Debentures
At March 31, 2011, we had $86.6 million of junior subordinated debentures comprised of $45.4 million issued to TAYC Capital Trust I and $41.2 million issued to TAYC Capital Trust II. The junior subordinated debentures issued by each trust are currently callable at par, at our option. At March 31, 2011, unamortized issuance costs relating to TAYC Capital Trust I were $2.2 million and $364,000 related to TAYC Capital Trust II. Unamortized issuance costs would be recognized as noninterest expense if the debentures were called by us.
Subordinated Notes
The following table describes the subordinated debt outstanding at March 31, 2011 on the Consolidated Balance Sheets. The discount is being amortized as an additional interest expense of the subordinated notes over the remaining contractual life of the notes.
Mar. 31, 2011 | Dec. 31, 2010 | |||||||
(in thousands) | ||||||||
Taylor Capital Group, Inc.: |
||||||||
8% subordinated notes issued May 2010, due May 28, 2020 |
$ | 33,938 | $ | 33,938 | ||||
Unamortized discount |
(4,278 | ) | (4,347 | ) | ||||
8% subordinated notes issued October 2010, due May 28, 2020 |
3,562 | 3,562 | ||||||
Unamortized discount |
(448 | ) | (455 | ) | ||||
Taylor Capital Group subordinated notes, net |
32,774 | 32,698 | ||||||
Cole Taylor Bank: |
||||||||
10% subordinated notes issued September 2008, due Sept. 29, 2016 |
60,000 | 60,000 | ||||||
Unamortized discount |
(3,744 | ) | (3,863 | ) | ||||
Cole Taylor Bank subordinated notes, net |
56,256 | 56,137 | ||||||
Total subordinated notes, net |
$ | 89,030 | $ | 88,835 | ||||
CAPITAL RESOURCES
At March 31, 2011 and December 31, 2010, both the Company and the Bank were considered well capitalized under capital guidelines for bank holding companies and banks. The Companys and the Banks capital ratios were as follows as of the dates indicated:
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ACTUAL | FOR CAPITAL ADEQUACY PURPOSES |
TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS |
||||||||||||||||||||||
AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
As of March 31, 2011: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Taylor Capital Group, Inc. |
$ | 470,026 | 14.24 | % | >$264,093 | >8.00 | % | >$330,116 | >10.00 | % | ||||||||||||||
Cole Taylor Bank |
441,506 | 13.42 | >263,143 | >8.00 | >328,929 | >10.00 | ||||||||||||||||||
Tier I Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Taylor Capital Group, Inc. |
338,747 | 10.26 | >132,047 | >4.00 | >198,070 | >6.00 | ||||||||||||||||||
Cole Taylor Bank |
343,148 | 10.43 | >131,572 | >4.00 | >197,357 | >6.00 | ||||||||||||||||||
Leverage (to average assets) |
||||||||||||||||||||||||
Taylor Capital Group, Inc. |
338,747 | 7.72 | >175,583 | >4.00 | >219,478 | >5.00 | ||||||||||||||||||
Cole Taylor Bank |
343,148 | 7.84 | >175,001 | >4.00 | >218,752 | >5.00 | ||||||||||||||||||
As of December 31, 2010: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Taylor Capital Group, Inc. |
$ | 448,389 | 12.98 | % | >$276,381 | >8.00 | % | >$345,476 | >10.00 | % | ||||||||||||||
Cole Taylor Bank |
414,423 | 12.04 | >275,401 | >8.00 | >344,252 | >10.00 | ||||||||||||||||||
Tier I Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Taylor Capital Group, Inc. |
308,397 | 8.93 | >138,190 | >4.00 | >207,286 | >6.00 | ||||||||||||||||||
Cole Taylor Bank |
314,182 | 9.13 | >137,701 | >4.00 | >206,551 | >6.00 | ||||||||||||||||||
Leverage (to average assets) |
||||||||||||||||||||||||
Taylor Capital Group, Inc. |
308,397 | 6.89 | >178,971 | >4.00 | >223,714 | >5.00 | ||||||||||||||||||
Cole Taylor Bank |
314,182 | 7.05 | >178,270 | >4.00 | >222,838 | >5.00 |
All of our capital asset ratios increased during the first quarter of 2011, mostly due to a $25.0 million increase in regulatory capital in the period. In order to further strengthen the Banks capital ratios, we made a $25.0 million capital contribution to the Bank during the first quarter of 2011 from the capital raise. As a result, all of the Banks regulatory capital ratios increased during the period.
At each of March 31, 2011 and December 31, 2010, the Bank was considered well capitalized under regulatory capital guidelines. While we, as well as our Bank, continue to be considered well capitalized under the regulatory capital guidelines, our regulators could require us to maintain capital in excess of these required levels.
LIQUIDITY
During the first quarter of 2011, total assets decreased by $197.2 million, or 4.4%, primarily due to a decrease in the size of our loans held for sale portfolio. Cash inflows during the first three months of 2011 consisted largely of a $460.5 million increase in proceeds from loan sales and a capital raise and issuance of Series F Preferred stock in the amount of $24.4 million, net of issuance costs.
Cash outflows during the first three months of 2011 included $83.1 million for the purchase of investment securities, a $255.8 million reduction in loans originated for sale, a $245.0 million
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reduction in notes payable and other advances, a net decrease in other borrowings of $20.0 million and the payment of $2.1 million in dividends on our Series B, Series C and Series E preferred stock.
In connection with our liquidity risk management, we evaluate and closely monitor significant customer deposit balances for stability and average life. In order to maintain sufficient liquidity to meet all of our loan and deposit customers withdrawal and funding demands, we routinely measure and monitor the volume of our liquid assets and available funding sources. Additional sources of liquidity for Cole Taylor Bank include FHLB advances, the FRBs BIC Program, federal funds borrowing lines from larger correspondent banks and pre-approved repurchase agreement availability with major brokers and banks.
At the holding company level, cash and cash equivalents decreased to $18.4 million at March 31, 2011 from $23.1 million at December 31, 2010. Significant cash outflows during the first quarter of 2011 included $2.1 million for the payment of dividends on our Series B, Series C and Series E preferred stock, and $2.1 million of interest paid on our junior subordinated debentures and subordinated notes.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements include commitments to extend credit and financial guarantees. Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers.
At March 31, 2011, we had $833.1 million of undrawn commitments to extend credit and $77.1 million of financial and performance standby letters of credit. In comparison, at December 31, 2010, we had $905.5 million of undrawn commitments to extend credit and $67.9 million of financial and performance standby letters of credit. We expect most of these letters of credit to expire undrawn and we expect no significant loss from our obligation under financial guarantees beyond the amount already recognized as a liability on the Companys Consolidated Balance Sheets. At March 31, 2011 and December 31, 2010, we maintained a liability for $6.1 million and $5.4 million, respectively, for undrawn commitments and standby letters of credit for which we believed funding and loss were probable.
Derivative Financial Instruments
We have $106.9 million of notional amount interest rate swap agreements that are designated as fair value hedges against certain brokered CDs. The CD swaps are used to convert the fixed rate paid on the brokered CDs to a variable rate based on 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. Total ineffectiveness on the interest rate swaps was $14,000 and was recorded in other derivative income in noninterest income.
We have $300.0 million of notional amount interest rate corridor agreements that are designated as cash flow hedges against the variability of the interest expense component of
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certain short-term borrowings, within a certain range. The fair value of these hedging instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged cash flows is reported as an adjustment to other comprehensive income. There was no ineffectiveness on the interest rate corridors for the three months ended March 31, 2011.
We use derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. As of March 31, 2011, we had notional amounts of $246.3 million of interest rate swaps with customers with whom 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.
We also use interest rate lock commitments and forward loan commitments at Cole Taylor Mortgage. At March 31, 2011, we had $153.4 million of notional amount of interest rate lock commitments and $141.7 million in notional amount of forward loan commitments.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Interest rate risk is the most significant market risk affecting us. Other types of market risk, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities. Interest rate risk can be defined as the exposure to a movement in interest rates that could have an adverse effect on our net interest income or the market value of our financial instruments. The ongoing monitoring and management of this risk is an important component of our asset and liability management process, which is governed by policies established by the Board of Directors and carried out by the Banks Asset/Liability Management Committee, or ALCO. ALCOs objectives are to manage, to the degree prudently possible, our exposure to interest rate risk over both the one year planning cycle and the longer term strategic horizon and, at the same time, to provide a stable and steadily increasing flow of net interest income. Interest rate risk management activities include establishing guidelines for tenor and repricing characteristics of new business flow, the maturity ladder of wholesale funding and investment security purchase and sale strategies, as well as the use of derivative financial instruments.
We have used various interest rate contracts, including swaps and interest rate floors and collars, to manage interest rate and market risk. These contracts can be designated as hedges of specific existing assets and liabilities. Our asset and liability management and investment policies do not allow the use of derivative financial instruments for trading purposes.
Our primary measurement of interest rate risk is earnings at risk, which is determined through computerized simulation modeling. The primary simulation model assumes a static balance sheet, a parallel interest rate rising or declining ramp and uses the balances, rates, maturities and repricing characteristics of all of our existing assets and liabilities, including derivative financial instruments. These models are built with the sole objective of measuring the volatility of the embedded interest rate risk as of the balance sheet date and, as such, do not provide for growth or any changes in balance sheet composition. Projected net interest income is computed by the model assuming market rates remaining unchanged and compares those results
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to other interest rate scenarios with changes in the magnitude, timing, and relationship between various interest rates. The impact of embedded options in the balance sheet such as callable agencies and mortgage-backed securities, real estate mortgage loans, and callable borrowings are also considered. Changes in net interest income in the rising and declining rate scenarios are then measured against the net interest income in the rates unchanged scenario. ALCO utilizes the results of the model to quantify the estimated exposure of net interest income to sustained interest rate changes.
Net interest income for year one in a 200 basis points rising rate scenario was calculated to increase $3.3 million, or 2.5%, as compared to the net interest income in the rates unchanged scenario at March 31, 2011. At December 31, 2010, the projected variance in the rising rate scenario was an increase of $2.7 million, or 1.9%. These exposures were within our policy guidelines. No simulation for net interest income at risk in a falling rate scenario was calculated because of the low level of market interest rates at both March 31, 2011 and December 31, 2010.
The following table indicates the estimated change in future net interest income from the rates unchanged simulation for the 12 months following the indicated dates, assuming a gradual shift up or down in market rates reflecting a parallel change in rates across the entire yield curve:
Change in Future Net Interest
Income from Rates Unchanged Simulation |
||||||||||||||||
At March 31, 2011 | At December 31, 2010 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Change in interest rates |
Dollar Change |
Percentage Change |
Dollar Change |
Percentage Change |
||||||||||||
+200 basis points over one year |
$ | 3,305 | 2.5 | % | $ | 2,655 | 1.9 | % | ||||||||
- 200 basis points over one year |
N/A | N/A | N/A | N/A |
N/A Not applicable
Computation of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including, among other factors, relative levels of market interest rates, product pricing, reinvestment strategies and customer behavior influencing loan and security prepayments and deposit decay and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions that we may take in response to changes in interest rates. We cannot assure you that our actual net interest income would increase or decrease by the amounts computed by the simulations.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. ASU No. 2011-03 removes two criterions from the assessment of effective control when determining whether a repo should be accounted for as a sale or as a secured borrowing. The remaining criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) if all of certain conditions are met. This ASU is effective for the interim or annual period that begins after December 15, 2011, with no early adoption permitted. We are currently
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assessing the impact the adoption of ASU No. 2011-03 will have on our consolidated financial statements.
In April 2011, the FASB issued ASU No. 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU No. 2011-02 provides guidance on determining whether a restructuring constitutes a troubled debt restructuring. In order to be classified as a troubled debt restructuring, the restructuring must contain a concession and the debtor is experiencing financial difficulties. This ASU is effective for the periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. This ASU further states that all troubled debt restructuring disclosures that had been deferred by ASU No. 2011-01, should be disclosed effective for interim and annual periods beginning on or after June 15, 2011. This accounting standard is not expected to have a material effect on our consolidated financial statements.
In January 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings. Update No. 2011-01 provides for the deferral of troubled debt restructuring disclosures included in Update No. 2010-20 that were effective for periods ending on or after December 15, 2010. These disclosures were deferred until the issuance of the troubled debt guidance that determines what constitutes troubled debt restructuring. This new guidance has been issued as ASU No. 2011-02 and is effective for periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. This accounting standard is not expected to have a material effect on our consolidated financial statements.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited financial data regarding our operations for each of the last eight quarters. This information, in the opinion of management, includes all adjustments necessary to present fairly our results of operations for such periods, consisting only of normal recurring adjustments for the periods indicated. The operating results for any quarter are not necessarily indicative of results for any future period.
2011 Quarter Ended | 2010 Quarter Ended | 2009 Quarter Ended | ||||||||||||||||||||||||||||||
Mar. 31 | Dec. 31 | Sep. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sep. 30 | Jun. 30 | |||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Interest income |
$ | 47,595 | $ | 49,967 | $ | 51,980 | $ | 53,682 | $ | 52,887 | $ | 53,965 | $ | 56,033 | $ | 55,715 | ||||||||||||||||
Interest expense |
15,408 | 16,405 | 17,613 | 19,004 | 19,420 | 21,155 | 23,658 | 25,335 | ||||||||||||||||||||||||
Net interest income |
32,187 | 33,562 | 34,367 | 34,678 | 33,467 | 32,810 | 32,375 | 30,380 | ||||||||||||||||||||||||
Provision for loan losses |
10,241 | 59,923 | 18,128 | 43,946 | 21,130 | 19,002 | 15,539 | 39,507 | ||||||||||||||||||||||||
Noninterest income |
6,885 | 18,009 | 44,142 | 6,158 | 4,374 | 12,735 | 3,376 | 12,137 | ||||||||||||||||||||||||
Noninterest expense |
28,549 | 36,971 | 26,646 | 27,467 | 27,152 | 30,219 | 22,516 | 23,707 | ||||||||||||||||||||||||
Income (loss) before income taxes |
282 | (45,323 | ) | 33,735 | (30,577 | ) | (10,441 | ) | (3,676 | ) | (2,304 | ) | (20,697 | ) | ||||||||||||||||||
Income taxes (benefit) |
(106 | ) | 284 | 321 | 306 | 306 | (647 | ) | 144 | 2,558 | ||||||||||||||||||||||
Net Income (loss) |
388 | (45,607 | ) | 33,414 | (30,883 | ) | (10,747 | ) | (3,029 | ) | (2,448 | ) | (23,255 | ) | ||||||||||||||||||
Preferred dividends and discounts |
(2,464 | ) | (2,448 | ) | (2,671 | ) | (17,449 | ) | (2,887 | ) | (2,880 | ) | (2,873 | ) | (2,868 | ) | ||||||||||||||||
Net income (loss) available to common stockholders |
$ | (2,076 | ) | $ | (48,055 | ) | $ | 30,743 | $ | (48,332 | ) | $ | (13,634 | ) | $ | (5,909 | ) | $ | (5,321 | ) | $ | (26,123 | ) | |||||||||
Income (loss) per common share: |
||||||||||||||||||||||||||||||||
Basic |
$ | (0.12 | ) | $ | (2.76 | ) | $ | 1.68 | $ | (3.35 | ) | $ | (1.30 | ) | $ | (0.56 | ) | $ | (0.51 | ) | $ | (2.49 | ) | |||||||||
Diluted |
(0.12 | ) | (2.76 | ) | 1.57 | (3.35 | ) | (1.30 | ) | (0.56 | ) | (0.51 | ) | (2.49 | ) | |||||||||||||||||
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The information contained in the section of this Quarterly Report on Form 10-Q captioned Managements Discussion and Analysis of Financial Condition and Results of OperationsQuantitative and Qualitative Disclosure About Market Risks is incorporated herein by reference.
Item 4. | Controls and Procedures |
We maintain a system of disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
We have carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that such controls and procedures were effective as of the end of the period covered by this report, in all material respects, to ensure that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide reasonable assurance of achieving our control objectives.
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
We are from time to time a party to litigation arising in the normal course of business. As of the date of this Quarterly Report on Form 10-Q, management knows of no threatened or pending legal actions against us that are likely to have a material adverse effect on our business, financial condition or results of operations.
Item 1A. | Risk Factors. |
There have been no material changes in our risk factors from those disclosed in our 2010 Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information. |
None.
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Item 6. | Exhibits. |
EXHIBIT INDEX
Exhibit Number |
Description of Exhibits | |
3.1 | Form of Third Amended and Restated Certificate of Incorporation of Taylor Capital Group, Inc. (incorporated by reference to Appendix A of the Companys Definitive Proxy Statement filed September 15, 2008). | |
3.2 | Form of Third Amended and Restated Bylaws of Taylor Capital Group, Inc. (incorporated by reference to Appendix B of the Companys Definitive Proxy Statement filed September 15, 2008). | |
3.3 | Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, dated November 19, 2008 (incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed November 24, 2008). | |
3.4 | Certificate of Designations of 8% Non-Cumulative, Convertible Perpetual Preferred Stock, Series C of Taylor Capital Group, Inc., dated May 28, 2010 (incorporated by reference to Exhibit 10.7 of the Companys Current Report on Form 8-K filed June 1, 2010). | |
3.5 | Certificate of Designations of Nonvoting Convertible Preferred Stock, Series D and 8% Nonvoting, Non-Cumulative, Convertible Perpetual Preferred Stock, Series E of Taylor Capital Group, Inc. dated October 21, 2010 (incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed October 28, 2010). | |
3.6 | Certificate of Designations of 8% Non-Cumulative, Non-Voting, Contingent Convertible Preferred Stock, Series F and Non-Voting Convertible Preferred Stock, Series G (incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed March 29, 2011). | |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Security Exchange Act of 1934. | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Security Exchange Act of 1934. | |
32.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TAYLOR CAPITAL GROUP, INC. | ||||
Date: May 9, 2011 | ||||
/s/ MARK A. HOPPE | ||||
Mark A. Hoppe | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
/s/ RANDALL T. CONTE | ||||
Randall T. Conte | ||||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
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