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, 2012
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 x 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.
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 shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: At April 30, 2012, there were 28,421,873 shares of Common Stock, $0.01 par value, outstanding.
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
March 31, 2012 (unaudited) |
December 31, 2011 |
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ASSETS | ||||||||
Cash and cash equivalents: |
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Cash and due from banks |
$ | 76,737 | $ | 120,075 | ||||
Short-term investments |
69 | 1,089 | ||||||
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Total cash and cash equivalents |
76,806 | 121,164 | ||||||
Investment securities: |
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Available for sale, at fair value |
1,138,748 | 1,175,380 | ||||||
Held to maturity (fair value of $166,312 at March 31, 2012 and $111,054 at December 31, 2011) |
160,824 | 104,296 | ||||||
Loans, held for sale, at fair value |
210,040 | 185,984 | ||||||
Loans, net of allowance for loan losses of $93,509 at March 31, 2012 and $103,744 at December 31, 2011 |
2,810,288 | 2,824,555 | ||||||
Premises, leasehold improvements and equipment, net |
14,627 | 14,882 | ||||||
Investment in Federal Home Loan Bank and Federal Reserve Bank stock, at cost |
63,039 | 56,781 | ||||||
Other real estate and repossessed assets, net |
36,941 | 35,622 | ||||||
Other assets |
183,756 | 167,146 | ||||||
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Total assets |
$ | 4,695,069 | $ | 4,685,810 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Deposits: |
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Noninterest-bearing |
$ | 702,723 | $ | 802,480 | ||||
Interest-bearing |
2,286,916 | 2,320,731 | ||||||
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Total deposits |
2,989,639 | 3,123,211 | ||||||
Accrued interest, taxes and other liabilities |
102,549 | 61,183 | ||||||
Short-term borrowings |
924,641 | 768,133 | ||||||
Long-term borrowings |
85,000 | 147,500 | ||||||
Junior subordinated debentures |
86,607 | 86,607 | ||||||
Subordinated notes, net |
89,867 | 89,648 | ||||||
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Total liabilities |
4,278,303 | 4,276,282 | ||||||
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Stockholders equity: |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized: |
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Series B, 5% fixed rate cumulative perpetual, 104,823 shares issued and outstanding at March 31, 2012 and December 31, 2011, $1,000 liquidation value |
102,474 | 102,042 | ||||||
Series D, nonvoting, convertible; 860,378 shares authorized; no shares issued and outstanding at March 31, 2012 and 405,330 shares issued and outstanding at December 31, 2011 |
| 4 | ||||||
Series G, nonvoting, convertible; 1,350,000 shares authorized; no shares issued and outstanding at March 31, 2012 and 877,344 shares issued and outstanding at December 31, 2011 |
| 9 | ||||||
Nonvoting convertible preferred stock; 1,350,000 shares authorized; 1,282,674 shares issued and outstanding at March 31, 2012 and no shares issued and outstanding at December 31, 2011 |
13 | | ||||||
Common stock, $0.01 par value; 45,000,000 shares authorized; 29,786,013 shares issued at March 31, 2012 and 29,718,074 shares issued at December 31, 2011; 28,428,015 shares outstanding at March 31, 2012 and 28,360,076 shares outstanding at December 31, 2011 |
298 | 297 | ||||||
Surplus |
424,134 | 423,674 | ||||||
Accumulated deficit |
(110,699 | ) | (118,426 | ) | ||||
Accumulated other comprehensive income, net |
30,131 | 31,513 | ||||||
Treasury stock, at cost, 1,357,998 shares at March 31, 2012 and at December 31, 2011 |
(29,585 | ) | (29,585 | ) | ||||
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Total stockholders equity |
416,766 | 409,528 | ||||||
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Total liabilities and stockholders equity |
$ | 4,695,069 | $ | 4,685,810 | ||||
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See accompanying notes to consolidated financial statements (unaudited)
1
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars in thousands, except per share data)
For the Three Months Ended March 31, |
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2012 | 2011 | |||||||
Interest income: |
||||||||
Interest and fees on loans |
$35,283 | $35,365 | ||||||
Interest and dividends on investment securities: |
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Taxable |
10,318 | 11,452 | ||||||
Tax-exempt |
663 | 775 | ||||||
Interest on cash equivalents |
3 | 3 | ||||||
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Total interest income |
46,267 | 47,595 | ||||||
Interest expense: |
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Deposits |
5,411 | 8,624 | ||||||
Short-term borrowings |
563 | 1,809 | ||||||
Long-term borrowings |
500 | 1,043 | ||||||
Junior subordinated debentures |
1,472 | 1,443 | ||||||
Subordinated notes |
2,519 | 2,489 | ||||||
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Total interest expense |
10,465 | 15,408 | ||||||
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Net interest income |
35,802 | 32,187 | ||||||
Provision for loan losses |
7,350 | 10,241 | ||||||
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Net interest income after provision for loan losses |
28,452 | 21,946 | ||||||
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Noninterest income: |
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Service charges |
3,291 | 2,890 | ||||||
Mortgage banking revenue |
17,530 | 1,517 | ||||||
Gain (loss) on disposition of bulk purchased mortgage loans |
(7 | ) | 28 | |||||
Gain on sales of investment securities |
956 | | ||||||
Other derivative income |
561 | 753 | ||||||
Other noninterest income |
1,615 | 1,697 | ||||||
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Total noninterest income |
23,946 | 6,885 | ||||||
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Noninterest expense: |
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Salaries and employee benefits |
23,637 | 14,689 | ||||||
Occupancy of premises |
2,175 | 2,278 | ||||||
Furniture and equipment |
615 | 612 | ||||||
Nonperforming asset expense |
694 | 3,277 | ||||||
Early extinguishment of debt |
1,001 | | ||||||
FDIC assessment |
1,702 | 1,948 | ||||||
Legal fees, net |
856 | 794 | ||||||
Other noninterest expense |
5,888 | 4,951 | ||||||
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Total noninterest expense |
36,568 | 28,549 | ||||||
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Income before income taxes |
15,830 | 282 | ||||||
Income tax expense (benefit) |
6,361 | (106 | ) | |||||
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Net income |
9,469 | 388 | ||||||
Preferred dividends and discounts |
(1,742 | ) | (2,464 | ) | ||||
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Net income (loss) applicable to common stockholders |
$ 7,727 | $(2,076 | ) | |||||
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Basic income (loss) per common share |
$ 0.26 | $ (0.12 | ) | |||||
Diluted income (loss) per common share |
0.26 | (0.12 | ) |
See accompanying notes to consolidated financial statements (unaudited).
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(dollars in thousands)
For the Three Months Ended March 31, |
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2012 | 2011 | |||||||
Net income |
$ | 9,469 | $ | 388 | ||||
Other comprehensive income (loss), net of income tax: |
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Change in unrealized gains and losses on available for sale securities, net of reclassification adjustment |
(1,586 | ) | (3,104 | ) | ||||
Changes in deferred loss on investments transferred to held to maturity from available for sale |
28 | 43 | ||||||
Change in unrealized loss from cash flow hedging instruments |
176 | 216 | ||||||
Changes in deferred gains and losses from termination of cash flow hedging instruments |
| (380 | ) | |||||
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Total other comprehensive loss, net of income tax |
(1,382 | ) | (3,225 | ) | ||||
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Total comprehensive income (loss), net of income tax |
$ | 8,087 | $ | (2,837 | ) | |||
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See accompanying notes to consolidated financial statements (unaudited).
3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)
(in thousands, except per share data)
Preferred Stock, Series B |
Preferred Stock, Series C |
Preferred Stock, Series D |
Preferred Stock, Series E |
Preferred Stock, Series F |
Preferred Stock, Series G |
Nonvoting Convertible Preferred, Stock |
Common Stock |
Surplus | Retained Earnings (Accumulated Deficit) |
Accumulated Other Comprehensive Income (Loss) |
Treasury Stock |
Total | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2011 |
$ | 102,042 | $ | | $ 4 | $ | $ | | $ 9 | $ | $297 | $ | 423,674 | $(118,426 | ) | $ 31,513 | $ | (29,585 | ) | $ | 409,528 | |||||||||||||||||||||||||||||||
Issuance of restricted stock grants, net of forfeitures |
| | | | | | | 1 | | | | | 1 | |||||||||||||||||||||||||||||||||||||||
Exercise of stock grants |
| | | | | | | | 27 | | | | 27 | |||||||||||||||||||||||||||||||||||||||
Amortization of stock based compensation awards |
| | | | | | | | 474 | | | | 474 | |||||||||||||||||||||||||||||||||||||||
Net income |
| | | | | | | | | 9,469 | | | 9,469 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
| | | | | | | | | (1,382 | ) | | (1,382 | ) | ||||||||||||||||||||||||||||||||||||||
Exchange of Series D & G for Nonvoting Preferred |
| | (4 | ) | | | (9 | ) | 13 | | | | | | | |||||||||||||||||||||||||||||||||||||
Rights offering and Series C and E conversion costs |
| | | | | | | | (41 | ) | (41 | ) | ||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends and discounts accumulated, Series B |
432 | | | | | | | | (1,742 | ) | | | (1,310 | ) | ||||||||||||||||||||||||||||||||||||||
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Balance at March 31, 2012 |
$ | 102,474 | $ | | $ | $ | $ | | $ | $ 13 | $298 | $ | 424,134 | $(110,699 | ) | $ 30,131 | $ | (29,585 | ) | $ | 416,766 | |||||||||||||||||||||||||||||||
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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 and conversion costs |
| | | | 25,000 | | | | (650 | ) | | | | 24,350 | ||||||||||||||||||||||||||||||||||||||
Conversion of Series F to Series G and common stock |
| | | | (25,000 | ) | 2 | | 23 | 24,975 | | | | | ||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock grants, net of forfeitures |
| | | | | | | | | | | | | |||||||||||||||||||||||||||||||||||||||
Amortization of stock based compensation awards |
| | | | | | | | 786 | | | | 786 | |||||||||||||||||||||||||||||||||||||||
Net income |
| | | | | | | | | 388 | | | 388 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
| | | | | | | | | | (3,225 | ) | | (3,225 | ) | |||||||||||||||||||||||||||||||||||||
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 | ) | |||||||||||||||||||||||||||||||||||||
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Balance at March 31, 2011 |
$ | 100,792 | $ | 31,912 | $ 4 | $5,588 | $ | | $ 2 | $ | $215 | $ | 337,804 | $(191,971 | ) | $(25,722 | ) | $ | (29,585 | ) | $ | 229,039 | ||||||||||||||||||||||||||||||
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See accompanying notes to consolidated financial statements (unaudited).
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
For the Three Months Ended March 31, |
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2012 | 2011 | |||||||
Cash flows from operating activities: |
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Net income |
$ | 9,469 | $ | 388 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Provision for loan losses |
7,350 | 10,241 | ||||||
Other derivative income |
(561 | ) | (753 | ) | ||||
Gain on sales of investment securities |
(956 | ) | | |||||
Other-than-temporary impairment on investment security |
125 | | ||||||
Amortization of premiums and discounts, net |
1,180 | 1,042 | ||||||
Deferred loan fee amortization |
(954 | ) | (1,240 | ) | ||||
Loans originated for sale |
(829,294 | ) | (255,830 | ) | ||||
Proceeds from loan sales |
812,459 | 462,440 | ||||||
Gain on sales of loans |
(8,123 | ) | (1,934 | ) | ||||
Depreciation and amortization |
602 | 601 | ||||||
Deferred income tax benefit (expense) |
6,544 | (2,488 | ) | |||||
(Gains) losses on other real estate |
(3 | ) | 1,292 | |||||
Excess tax benefit on stock options exercised and stock awards |
84 | 314 | ||||||
Other, net |
985 | 675 | ||||||
Changes in other assets and liabilities: |
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Accrued interest receivable |
359 | 292 | ||||||
Other assets |
(9,522 | ) | 9,171 | |||||
Accrued interest, taxes and other liabilities |
3,760 | (2,523 | ) | |||||
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Net cash (used in) provided by operating activities |
(6,496 | ) | 221,688 | |||||
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Cash flows from investing activities: |
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Purchase of available for sale securities |
(6,625 | ) | (83,052 | ) | ||||
Purchase of held to maturity securities |
(38,581 | ) | | |||||
Proceeds from principal payments and maturities of available for sale securities |
42,092 | 19,654 | ||||||
Proceeds from principal payments and maturities of held to maturity securities |
3,881 | 6,131 | ||||||
Proceeds from sales of available for sale securities |
17,657 | | ||||||
Purchases of FHLB and FRB stock |
(6,258 | ) | (314 | ) | ||||
Net (increase) decrease in loans |
(576 | ) | 25,701 | |||||
Net additions to premises, leasehold improvements and equipment |
(347 | ) | (247 | ) | ||||
Net proceeds from sales of other real estate and repossessed assets |
4,284 | 652 | ||||||
Additions to mortgage servicing rights |
(12,706 | ) | (140 | ) | ||||
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Net cash (used in) provided by investing activities |
2,821 | (31,615 | ) | |||||
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Cash flows from financing activities: |
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Net increase (decrease) in deposits |
(133,284 | ) | 50,951 | |||||
Net increase (decrease) in short-term borrowings |
156,509 | (20,034 | ) | |||||
Repayments of long-term borrowings |
(62,500 | ) | (245,000 | ) | ||||
Net proceeds (costs) from preferred stock issued |
(41 | ) | 24,350 | |||||
Excess tax benefit on stock options exercised and stock awards |
(84 | ) | (314 | ) | ||||
Proceeds from exercise of employee stock options |
27 | | ||||||
Preferred stock dividends paid and discounts accumulated |
(1,310 | ) | (2,052 | ) | ||||
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Net cash used in financing activities |
(40,683 | ) | (192,099 | ) | ||||
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Net decrease in cash and cash equivalents |
(44,358 | ) | (2,026 | ) | ||||
Cash and cash equivalents, beginning of period |
121,164 | 81,329 | ||||||
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Cash and cash equivalents, end of period |
$ | 76,806 | $ | 79,303 | ||||
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Consolidated Statements of Cash Flows continued on the next page
See accompanying notes to consolidated financial statements (unaudited)
5
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)
(dollars in thousands)
For the Three Months Ended March 31, |
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2012 | 2011 | |||||||
Supplemental disclosure of cash flow information: |
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Cash paid (received) during the period for: |
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Interest |
$ | 11,908 | $ | 17,527 | ||||
Income taxes |
92 | (182 | ) | |||||
Supplemental disclosures of noncash investing and financing activities: |
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Change in fair value of available for sale investments securities, net of tax |
(1,586 | ) | (3,104 | ) | ||||
Available for sale investment securities acquired, not yet settled |
15,815 | | ||||||
Held to maturity investment securities acquired, not yet settled |
21,791 | | ||||||
Transfer from loans to investment securities |
3,750 | | ||||||
Transfer of held-for-sale loans to portfolio loans |
902 | 1,472 | ||||||
Loans transferred to other real estate and repossessed assets |
5,600 | 8,619 |
See accompanying notes to consolidated financial statements (unaudited)
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation:
These consolidated financial statements contain unaudited information as of March 31, 2012 and for the three month periods ended March 31, 2012 and March 31, 2011. 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, 2012 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, 2012 and December 31, 2011 were as follows:
March 31, 2012 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
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(in thousands) | ||||||||||||||||
Available for sale: |
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U.S. government sponsored agency securities |
$ | 20,668 | $ | 354 | $ | (58 | ) | $ | 20,964 | |||||||
Residential mortgage-backed securities |
807,280 | 24,829 | (1,035 | ) | 831,074 | |||||||||||
Commercial mortgage-backed securities |
136,934 | 9,923 | | 146,857 | ||||||||||||
Collateralized mortgage obligations |
63,593 | 1,916 | | 65,509 | ||||||||||||
State and municipal obligations |
66,348 | 4,256 | (10 | ) | 70,594 | |||||||||||
Other securities |
3,750 | | | 3,750 | ||||||||||||
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Total available for sale |
1,098,573 | 41,278 | (1,103 | ) | 1,138,748 | |||||||||||
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Held to maturity: |
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Residential mortgage-backed securities |
118,209 | 5,994 | (22 | ) | 124,181 | |||||||||||
Collateralized mortgage obligations |
42,615 | 257 | (741 | ) | 42,131 | |||||||||||
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Total held to maturity |
160,824 | 6,251 | (763 | ) | 166,312 | |||||||||||
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Total |
$ | 1,259,397 | $ | 47,529 | $ | (1,866 | ) | $ | 1,305,060 | |||||||
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7
December 31, 2011 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
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(in thousands) | ||||||||||||||||
Available for sale: |
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U.S. government sponsored agency securities |
$ | 24,473 | $ | 796 | $ | | $ | 25,269 | ||||||||
Residential mortgage-backed securities |
834,383 | 26,285 | (1,731 | ) | 858,937 | |||||||||||
Commercial mortgage-backed securities |
137,646 | 10,561 | | 148,207 | ||||||||||||
Collateralized mortgage obligations |
68,598 | 2,022 | | 70,620 | ||||||||||||
State and municipal obligations |
67,418 | 4,929 | | 72,347 | ||||||||||||
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Total available for sale |
1,132,518 | 44,593 | (1,731 | ) | 1,175,380 | |||||||||||
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Held to maturity: |
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Residential mortgage-backed securities |
81,901 | 6,042 | | 87,943 | ||||||||||||
Collateralized mortgage obligations |
22,395 | 716 | | 23,111 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held to maturity |
104,296 | 6,758 | | 111,054 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,236,814 | $ | 51,351 | $ | (1,731) | $ | 1,286,434 | ||||||||
|
|
|
|
|
|
|
|
As of March 31, 2012, 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 include securities collateralized by 1-4 family residential mortgage loans, while commercial mortgage-backed securities include securities collateralized by mortgage loans on multifamily properties. Of the total mortgage related investment securities, $1.20 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 $5.2 million were private-label residential mortgage related securities. Other securities of $3.8 million at March 31, 2012 include preferred stock received as part of a loan workout arrangement.
Investment securities with an approximate book value of $944.2 million at March 31, 2012 and $930.0 million at December 31, 2011, 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 2012, the Company recorded gains of $956,000 on the sales of available for sale investment securities. There were no sales of available for sale investment securities during the first quarter of 2011.
8
The following table summarizes, for investment securities with unrealized losses as of March 31, 2012 and December 31, 2011, 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, 2012 | ||||||||||||||||||||||||
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 agency securities |
$ | 10,179 | $ | (58 | ) | $ | | $ | | $ | 10,179 | $ | (58 | ) | ||||||||||
Residential mortgage-backed securities |
| | 5,171 | (1,035 | ) | 5,171 | (1,035 | ) | ||||||||||||||||
State and municipal obligations |
406 | (10 | ) | | | 406 | (10 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Temporarily impaired securities Available for sale |
$ | 10,585 | $ | (68 | ) | $ | 5,171 | $ | (1,035 | ) | $ | 15,756 | $ | (1,103 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Held to maturity: |
||||||||||||||||||||||||
Residential mortgage-backed securities |
$ | 10,257 | $ | (22 | ) | $ | | $ | | $ | 10,257 | $ | (22 | ) | ||||||||||
Collateralized mortgage obligations |
19,487 | (741 | ) | | | 19,487 | (741 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Temporarily impaired securities Held to maturity |
$ | 29,744 | $ | (763 | ) | $ | | $ | | $ | 29,744 | $ | (763 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 40,329 | $ | (831 | ) | $ | 5,171 | $ | (1,035 | ) | $ | 45,500 | $ | (1,866 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 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: |
||||||||||||||||||||||||
Residential mortgage-backed securities |
$ | 15,024 | $ | (66 | ) | $ | 4,939 | $ | (1,665 | ) | $ | 19,963 | $ | (1,731 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Temporarily impaired securities Available for sale |
$ | 15,024 | $ | (66 | ) | $ | 4,939 | $ | (1,665 | ) | $ | 19,963 | $ | (1,731 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Held to maturity: |
||||||||||||||||||||||||
Temporarily impaired securities: Held to maturity |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 15,024 | $ | (66 | ) | $ | 4,939 | $ | (1,665 | ) | $ | 19,963 | $ | (1,731 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2012, the Company had three securities in its investment portfolio that have been in an unrealized loss position for twelve or more months, with a total unrealized loss of $1.0 million. Each of the securities in an unrealized loss position was a private-label residential mortgage-backed security.
9
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 $927,000, and were subject to further review for other-than-temporary impairment.
For any securities that had been in an unrealized loss position that was greater than 10% and for more than 12 months, additional testing is performed to evaluate other-than-temporary impairment. For the two private-label residential mortgage-backed securities, the Company obtained fair value estimates from 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, 2012 indicated that there was additional credit loss on this security and the Company recorded an additional $125,000 other-than-temporary-impairment charge in the first quarter of 2012. 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.
One additional investment security was evaluated for other-than-temporary impairment at March 31, 2012. This security is in the Companys state and municipal obligation portfolio and was received in 2008 in a loan work out arrangement. Scheduled payments were received as agreed from 2008 until the May 2011 interest payment, which was not received. Previously, the Company had recognized other-than-temporary impairment loss on this security. The expected future annual cash flows were analyzed as of March 31, 2012 and no additional other-than-temporary impairment was recorded in the first quarter of 2012.
10
The following table shows the contractual maturities of investment securities, categorized by amortized cost and estimated fair value, at March 31, 2012.
Amortized Cost |
Estimated Fair Value |
|||||||
(in thousands) | ||||||||
Available for sale: |
||||||||
Due in one year or less |
$ | 989 | $ | 992 | ||||
Due after one year through five years |
1,199 | 1,292 | ||||||
Due after five years through ten years |
52,617 | 55,907 | ||||||
Due after ten years |
32,211 | 33,367 | ||||||
Residential mortgage-backed securities |
807,280 | 831,074 | ||||||
Commercial mortgage-backed securities |
136,934 | 146,857 | ||||||
Collateralized mortgage obligations |
63,593 | 65,509 | ||||||
Other securities |
3,750 | 3,750 | ||||||
|
|
|
|
|||||
Total available for sale |
$ | 1,098,573 | $ | 1,138,748 | ||||
|
|
|
|
|||||
Held to maturity: |
||||||||
Residential mortgage-backed securities |
$ | 118,209 | $ | 124,181 | ||||
Collateralized mortgage obligations |
42,615 | 42,131 | ||||||
|
|
|
|
|||||
Total held to maturity |
$ | 160,824 | $ | 166,312 | ||||
|
|
|
|
|||||
Total investment securities |
$ | 1,259,397 | $ | 1,305,060 | ||||
|
|
|
|
Investment securities do not include the Banks investment in Federal Home Loan Bank of Chicago (FHLBC) and Federal Reserve Bank (FRB) stock of $63.0 million at March 31, 2012 and $56.8 million at December 31, 2011. These investments are required for membership and are carried at cost.
The Bank must maintain a specified level of investment in FHLBC stock based upon the amount of outstanding FHLB borrowings. The Company had a $51.4 million investment in FHLBC stock at March 31, 2012 and a $45.1 million investment at December 31, 2011. As of March 31, 2012, the Company believes that it will ultimately recover the par value of the FHLBC stock.
11
3. Loans:
Loans classified by type at March 31, 2012 and December 31, 2011 were as follows:
March 31, 2012 |
December 31, 2011 |
|||||||
(in thousands) | ||||||||
Portfolio Loans: |
||||||||
Commercial and industrial |
$ | 1,437,379 | $ | 1,426,221 | ||||
Commercial real estate secured |
963,300 | 1,037,976 | ||||||
Residential construction and land |
56,780 | 64,824 | ||||||
Commercial construction and land |
102,404 | 99,021 | ||||||
Consumer |
343,934 | 300,257 | ||||||
|
|
|
|
|||||
Total loans |
2,903,797 | 2,928,299 | ||||||
Less: Allowance for loan losses |
(93,509 | ) | (103,744 | ) | ||||
|
|
|
|
|||||
Portfolio Loans, net |
$ | 2,810,288 | $ | 2,824,555 | ||||
|
|
|
|
|||||
Loans Held for Sale: |
||||||||
Total Loans Held for Sale |
$ | 210,040 | $ | 185,984 | ||||
|
|
|
|
The total amount of loans transferred to third parties as loan participations at March 31, 2012 was $248.4 million, all of which has been recognized 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 servicing responsibilities.
At March 31, 2012, loans held for sale of $210.0 million consisted entirely of residential mortgage loans originated by Cole Taylor Mortgage. 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 $203.9 million at March 31, 2012. An unrealized gain on these loans of $6.1 million was included in mortgage banking 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.
12
The following table presents the aging of loans by class at March 31, 2012 and December 31, 2011:
30-59 Days Past Due |
60-89 Days Past Due |
Greater Than 90 Days Past Due |
Total Past Due |
Loans Not Past Due |
Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
March 31, 2012 |
||||||||||||||||||||||||
Commercial and industrial |
$ | 478 | $ | | $ | 21,076 | $ | 21,554 | $ | 1,415,825 | $ | 1,437,379 | ||||||||||||
Commercial real estate secured |
| | 30,185 | 30,185 | 933,115 | 963,300 | ||||||||||||||||||
Residential construction and land |
| | 7,113 | 7,113 | 49,667 | 56,780 | ||||||||||||||||||
Commercial construction and land |
| | 26,046 | 26,046 | 76,358 | 102,404 | ||||||||||||||||||
Consumer |
4,726 | 1,070 | 9,078 | 14,874 | 539,100 | 553,974 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 5,204 | $ | 1,070 | $ | 93,498 | $ | 99,772 | $ | 3,014,065 | $ | 3,113,837 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2011 |
||||||||||||||||||||||||
Commercial and industrial |
$ | 129 | $ | | $ | 42,909 | $ | 43,038 | $ | 1,383,183 | $ | 1,426,221 | ||||||||||||
Commercial real estate secured |
| | 35,159 | 35,159 | 1,002,817 | 1,037,976 | ||||||||||||||||||
Residential construction and land |
| | 7,810 | 7,810 | 57,014 | 64,824 | ||||||||||||||||||
Commercial construction and land |
| | 5,279 | 5,279 | 93,742 | 99,021 | ||||||||||||||||||
Consumer |
5,589 | 1,691 | 11,904 | 19,184 | 467,057 | 486,241 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 5,718 | $ | 1,691 | $ | 103,061 | $ | 110,470 | $ | 3,003,813 | $ | 3,114,283 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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:
Pass. Loans in this category range from loans that are virtually risk free to those 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 prospects.
Substandard. Loans in this category relate to borrowers with deteriorating financial conditions and exhibit a number of well-defined weaknesses which currently inhibit 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 weaknesses are more pronounced and the loans are no longer accruing interest.
13
The following table presents the risk categories of loans by class at March 31, 2012 and December 31, 2011:
Commercial and Industrial |
CRE Secured | Residential Construction and Land |
Commercial Construction and Land |
Consumer | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
March 31, 2012 |
||||||||||||||||||||||||
Pass |
$1,384,472 | $ 893,744 | $44,241 | $ 76,358 | $544,896 | $2,943,711 | ||||||||||||||||||
Special Mention |
14,938 | 31,064 | 5,426 | | | 51,428 | ||||||||||||||||||
Substandard |
16,893 | 8,307 | | | | 25,200 | ||||||||||||||||||
Nonaccrual |
21,076 | 30,185 | 7,113 | 26,046 | 9,078 | 93,498 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Loans |
$1,437,379 | $ 963,300 | $56,780 | $102,404 | $553,974 | $3,113,837 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2011 |
||||||||||||||||||||||||
Pass |
$1,358,261 | $ 963,909 | $51,332 | $ 71,970 | $474,337 | $2,919,809 | ||||||||||||||||||
Special Mention |
6,458 | 30,557 | 5,682 | | | 42,697 | ||||||||||||||||||
Substandard |
18,593 | 8,351 | | 21,772 | | 48,716 | ||||||||||||||||||
Nonaccrual |
42,909 | 35,159 | 7,810 | 5,279 | 11,904 | 103,061 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Loans |
$1,426,221 | $1,037,976 | $64,824 | $ 99,021 | $486,241 | $3,114,283 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans include all nonaccrual loans, as well as certain accruing loans judged to have higher risk of noncompliance with the present repayment schedule for both interest and principal. 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.
The Companys policy is to charge-off a loan when a loss is highly probable and clearly identified. For consumer loans, the Company follows the guidelines issued by its primary regulator which specify the number of days of delinquency to charge off a consumer loan by type of credit. For commercial loans, except for unsecured loans that are generally charged-off when a loan is 90 days past due, the Company does not have a policy to automatically charge-off a commercial loan when it reaches a certain status of delinquency. If a commercial loan is determined to have an impairment, the Company will either establish a specific valuation allowance or, if management deems a loss to be highly probable and clearly identified, reduce the recorded investment in that loan by taking a full or partial charge-off. In making the determination that a loss is highly probable and clearly identified, management evaluates the type, marketability and availability of the collateral along with any credit enhancements supporting the loan. In determining when to fully or partially charge-off a loan, management considers prospects for collection of assets, likely time frame for repayment, solvency status of the borrower, the existence of practical or reasonable collection programs, the existence of shortfalls after attempts to improve collateral position, prospects for near-term improvements in collateral valuations, and other considerations identified in its internal loan review and workout processes.
14
The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011:
Unpaid Principal Balance |
Recorded Balance |
Allowance for Loan Losses Allocated |
YTD Average Balance |
Interest Income Recognized |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
March 31, 2012 |
||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ 9,751 | $ 5,857 | $ | $ 9,549 | $ | |||||||||||||||
Commercial real estate secured |
31,424 | 19,217 | | 13,802 | | |||||||||||||||
Residential construction and land |
2,742 | 2,742 | | 2,914 | | |||||||||||||||
Commercial construction and land |
6,547 | 4,602 | | 5,637 | | |||||||||||||||
Consumer |
5,084 | 5,055 | | 5,347 | 22 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Subtotal |
55,548 | 37,473 | | 37,249 | 22 | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
39,219 | 20,810 | 10,214 | 28,232 | 69 | |||||||||||||||
Commercial real estate secured |
22,850 | 15,188 | 3,745 | 23,100 | 61 | |||||||||||||||
Residential construction and land |
16,230 | 4,372 | 1,047 | 4,550 | | |||||||||||||||
Commercial construction and land |
21,659 | 21,443 | 7,464 | 10,781 | | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Subtotal |
99,958 | 61,813 | 22,470 | 66,663 | 130 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total impaired loans |
$155,506 | $ 99,286 | $22,470 | $103,912 | $152 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2011 |
||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ 16,810 | $ 13,241 | $ | $ 11,302 | $186 | |||||||||||||||
Commercial real estate secured |
19,152 | 8,386 | | 18,496 | 37 | |||||||||||||||
Residential construction and land |
3,161 | 3,086 | | 5,754 | | |||||||||||||||
Commercial construction and land |
7,952 | 6,672 | | 4,755 | 8 | |||||||||||||||
Consumer |
5,722 | 5,638 | | 3,070 | 77 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Subtotal |
52,797 | 37,023 | | 43,377 | 308 | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
56,533 | 35,654 | 23,292 | 53,656 | 49 | |||||||||||||||
Commercial real estate secured |
38,769 | 31,012 | 7,540 | 37,643 | 250 | |||||||||||||||
Residential construction and land |
17,530 | 4,727 | 1,181 | 8,820 | 51 | |||||||||||||||
Commercial construction and land |
220 | 119 | 31 | 3,489 | 31 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Subtotal |
113,052 | 71,512 | 32,044 | 103,608 | 381 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total impaired loans |
$165,849 | $108,535 | $32,044 | $146,985 | $689 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
Credit risks tend to be geographically concentrated in that the majority of the Companys customer base lies within the Chicago area. Approximately 44% 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, 2012, compared to 46% as of December 31, 2011.
15
The following table presents information regarding changes in the allowance for loan losses and the recorded investment in loans by class and based on impairment method as of March 31, 2012 and March 31, 2011:
Commercial & Industrial |
Commercial Real Estate Secured |
Residential Construction & Land |
Commercial Construction & Land |
Consumer | Total | |||||||||||||||||||
ALLOWANCE FOR LOAN LOSSES: |
||||||||||||||||||||||||
Beginning balance as of December 31, 2011 |
$ 51,389 | $ 30,319 | $ 8,083 | $ 6,978 | $ 6,975 | $ 103,744 | ||||||||||||||||||
Provision |
(1,472 | ) | (3,136 | ) | 733 | 6,776 | 4,449 | 7,350 | ||||||||||||||||
Charge-offs |
(13,110 | ) | (3,357 | ) | (434 | ) | (766 | ) | (1,172 | ) | (18,839 | ) | ||||||||||||
Recoveries |
942 | 178 | 3 | | 131 | 1,254 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance as of March 31, 2012 |
$ 37,749 | $ 24,004 | $ 8,385 | $ 12,988 | $ 10,383 | $ 93,509 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance individually evaluated for impairment |
$ 10,214 | $ 3,745 | $ 1,047 | $ 7,464 | $ | $ 22,470 | ||||||||||||||||||
Ending balance collectively evaluated for impairment |
27,535 | 20,259 | 7,338 | 5,524 | 10,383 | 71,039 | ||||||||||||||||||
LOANS: |
||||||||||||||||||||||||
Ending balance individually evaluated for impairment |
$ 26,667 | $ 34,405 | $ 7,114 | $ 26,045 | $ 5,055 | $ 99,286 | ||||||||||||||||||
Ending balance collectively evaluated for impairment |
1,410,712 | 928,895 | 49,666 | 76,359 | 548,919 | 3,014,551 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$1,437,379 | $ 963,300 | $56,780 | $102,404 | $553,974 | $3,113,837 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
ALLOWANCE FOR LOAN 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 |
$ 28,346 | $ 15,302 | $ 3,417 | $ 79 | $ | $ 47,144 | ||||||||||||||||||
Ending balance collectively evaluated for impairment |
28,342 | 20,445 | 9,522 | 4,002 | 5,511 | 67,822 | ||||||||||||||||||
LOANS: |
||||||||||||||||||||||||
Ending balance individually evaluated for impairment |
$ 69,415 | $ 82,651 | $17,129 | $ 6,311 | $ 3,086 | $ 178,592 | ||||||||||||||||||
Ending balance collectively evaluated for impairment |
1,278,758 | 1,013,030 | 70,051 | 98,722 | 197,606 | 2,658,167 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$1,348,173 | $1,095,681 | $87,180 | $105,033 | $200,692 | $2,836,759 | ||||||||||||||||||
|
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|
|
A modified loan is considered a troubled-debt restructuring (TDR) when the borrower is experiencing documented financial difficulty and concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics at the outset of a new loan. The most common types of modifications include interest rate modifications, forbearance on principal and/or interest, partial charge-offs and changes in note structure. All loans modified in a TDR are evaluated for impairment in accordance with the Companys allowance for loan loss methodology.
For the commercial portfolio, loans modified in a TDR are separately evaluated for impairment at the time of restructuring and at each subsequent reporting date for as long as they are reported as TDRs. The impairment evaluation is generally measured by comparing the recorded investment in the loan to the fair value of the collateral net of estimated costs to sell if the loan is collateral dependent. The Company recognizes a specific valuation allowance equal to the amount of the measured impairment, if applicable.
Commercial and consumer loans modified in a TDR are classified as impaired loans for a minimum of one year. After one year, a loan is no longer included in the balance of impaired loans if the loan was modified to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is performing based on the terms of the restructuring agreement, although the loan continues to be reported as a TDR. Nonperforming restructured loans totaled $47.3 million at March 31, 2012 and $33.4 million at December 31, 2011. Performing restructured loans (TDRs that are not past due or in a nonaccrual status) totaled $14.8 million at March 31, 2012 and $14.2 million at December 31, 2011.
16
The following table provides information on loans modified in a TDR during the quarter ended March 31, 2012. The Pre-Modification Outstanding Recorded Balance is equal to the outstanding balance immediately prior to modification. The Post-Modification Outstanding Balance is equal to the outstanding balance immediately after modification.
Number of Loans |
Pre-Modification Outstanding Recorded Balance |
Post-Modification Outstanding Recorded Balance |
||||||||||
(dollars in thousands) | ||||||||||||
Commercial and industrial |
3 | $ 5,737 | $ 5,737 | |||||||||
Commercial real estate secured |
1 | 566 | 566 | |||||||||
Commercial construction and land |
4 | 20,260 | 20,260 | |||||||||
Consumer |
12 | 1,017 | 1,008 | |||||||||
|
|
|
|
|
|
|||||||
Total |
20 | $27,580 | $27,571 | |||||||||
|
|
|
|
|
|
The following table provides information on TDRs that defaulted for the first time for the quarter ended March 31, 2012 and had been modified within the last twelve months.
Number of Loans |
Recorded Investment |
|||||||
(dollars in thousands) | ||||||||
Residential construction and land |
1 | $529 | ||||||
Consumer |
3 | 418 | ||||||
|
|
|
|
|||||
Total |
4 | $947 | ||||||
|
|
|
|
4. Interest-Bearing Deposits:
Interest-bearing deposits at March 31, 2012 and December 31, 2011 were as follows:
March 31, 2012 |
December 31, 2011 |
|||||||
(in thousands) | ||||||||
NOW accounts |
$ | 392,659 | $ | 324,877 | ||||
Savings accounts |
39,630 | 38,370 | ||||||
Money market deposits |
689,912 | 657,500 | ||||||
Time deposits: |
||||||||
Certificates of deposit |
506,784 | 558,874 | ||||||
Brokered certificates of deposit |
339,037 | 407,068 | ||||||
Out-of-local-market certificates of deposit |
130,989 | 135,838 | ||||||
CDARS time deposits |
126,562 | 122,219 | ||||||
Public time deposits |
39,509 | 54,086 | ||||||
Out-of-local-market CDARS time deposits |
21,834 | 21,899 | ||||||
|
|
|
|
|||||
Total time deposits |
1,164,715 | 1,299,984 | ||||||
|
|
|
|
|||||
Total |
$ | 2,286,916 | $ | 2,320,731 | ||||
|
|
|
|
As of March 31, 2012, time deposits in the amount of $100,000 or more totaled $524.0 million compared to $562.3 million at December 31, 2011.
Brokered certificates of deposit (CDs) are carried net of mark-to-market adjustments when they are the hedged item in a fair value hedging relationship and net of the related broker placement fees of $1.8 million at March 31, 2012 and $2.0 million at December 31, 2011, which
17
are amortized to the maturity date of the related brokered CDs. The amortization is included in deposit interest expense. As of March 31, 2012, the Company had four brokered CDs with a balance of $60.0 million that could be called after a lock-out period but before their stated maturity. During the first quarter of 2012 and the first quarter of 2011, the Company did not incur any expense associated with brokered CDs that were called before their stated maturity.
5. Borrowings:
Short-Term:
Short-term borrowings at March 31, 2012 and December 31, 2011 consisted of the following:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Amount Borrowed |
Weighted- Average Rate |
Amount Borrowed |
Weighted- Average Rate |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Customer repurchase agreements |
$ | 30,225 | 0.10 | % | $ | 14,315 | 0.10 | % | ||||||||
Federal funds purchased |
70,417 | 0.39 | 78,818 | 0.38 | ||||||||||||
FHLB advances |
823,999 | 0.13 | 675,000 | 0.09 | ||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 924,641 | 0.15 | % | $ | 768,133 | 0.12 | % | ||||||||
|
|
|
|
Customer repurchase agreements are collateralized financing transactions primarily executed with local Bank customers and with overnight maturities.
18
FHLB short-term advances at March 31, 2012 and December 31, 2011 consisted of the following:
March 31, 2012 |
Dec. 31, 2011 |
|||||||
(in thousands) | ||||||||
FHLB overnight advance 0.13%, due January 3, 2012 |
$ | | $ | 185,000 | ||||
FHLB overnight advance 0.052%, due January 4, 2012 |
| 60,000 | ||||||
FHLB overnight advance 0.052%, due January 4, 2012 |
| 45,000 | ||||||
FHLB overnight advance 0.052%, due January 4, 2012 |
| 20,000 | ||||||
FHLB overnight advance 0.052%, due January 4, 2012 |
| 40,000 | ||||||
FHLB advance 0.08%, due January 13, 2012, non-callable |
| 25,000 | ||||||
FHLB advance 0.08%, due February 21, 2012, non-callable |
| 200,000 | ||||||
FHLB advance 0.08%, due March 7, 2012, non-callable |
| 100,000 | ||||||
FHLB advance 0.13%, due April 2, 2012, non-callable |
300,000 | | ||||||
FHLB advance 0.09%, due April 4, 2012, non-callable |
23,999 | | ||||||
FHLB advance 0.13%, due April 4, 2012, non-callable |
300,000 | | ||||||
FHLB advance 0.13%, due April 4, 2012, non-callable |
100,000 | | ||||||
FHLB advance 0.14%, due April 25, 2012, non-callable |
100,000 | | ||||||
|
|
|
|
|||||
Total short-term FHLB advances |
$ | 823,999 | $ | 675,000 | ||||
|
|
|
|
Long-Term:
As of March 31, 2012 and December 31, 2011, long-term borrowings consisted of the following:
March 31, 2012 |
Dec. 31, 2011 |
|||||||
(in thousands) | ||||||||
Term Repurchase Agreements: |
||||||||
Structured repurchase agreement rate 1.29%, due January 26, 2012, non-callable |
$ | | $ | 10,000 | ||||
Structured repurchase agreement rate 1.24%, due March 2, 2012, non-callable |
| 25,000 | ||||||
Structured repurchase agreement rate 2.17%, due July 29, 2015, non-callable |
40,000 | 40,000 | ||||||
|
|
|
|
|||||
Total term repurchase agreements |
40,000 | 75,000 | ||||||
|
|
|
|
|||||
FHLB Long-Term Advances: |
||||||||
1.39%, due January 11, 2012, non-callable |
| 10,000 | ||||||
0.63%, due July 12, 2013, non-callable |
20,000 | 20,000 | ||||||
1.86%, due August 12, 2014, non-callable |
25,000 | 25,000 | ||||||
2.03%, due August 12, 2015, non-callable |
| 17,500 | ||||||
|
|
|
|
|||||
Total FHLB long-term advances |
45,000 | 72,500 | ||||||
|
|
|
|
|||||
Total long-term borrowings |
$ | 85,000 | $ | 147,500 | ||||
|
|
|
|
Term structured repurchase agreements are collateralized financing transactions executed with broker/dealer counterparties with terms longer than overnight.
In the first quarter of 2012, a FHLB long-term advance of $17.5 million was terminated. The Company incurred $1.0 million in early extinguishment of debt expense in the first quarter of 2012 related to this termination. This termination was executed to shift funding sources to lower cost alternatives.
19
Collateral:
At March 31, 2012, the FHLB advances were collateralized by $893.5 million of investment securities and a blanket lien on $438.8 million of qualified first-mortgage residential, multi-family, home equity and commercial real estate loans. Based on the value of collateral pledged at March 31, 2012, the Bank had additional borrowing capacity at the FHLB of $304.7 million. In comparison, at December 31, 2011, the FHLB advances were collateralized by $782.1 million of investment securities and a blanket lien on $390.8 million of qualified first-mortgage residential and home equity loans with additional borrowing capacity of $277.3 million.
The Bank participates in the FRBs Borrower In Custody (BIC) program. At March 31, 2012, the Bank had pledged $618.1 million of commercial loans as collateral for an available $512.5 million of borrowing capacity at the FRB. At March 31, 2012, the Bank had no advances from the FRB. At December 31, 2011, the Bank pledged $569.2 million of commercial loans as collateral for available borrowing capacity of $463.3 million under the BIC program at the FRB, however, there were no advances from the FRB at December 31, 2011.
6. Stockholders Equity:
On March 26, 2012, the Company and Prairie Capital IV, L.P. and Prairie Capital IV QP, L.P. (together, the Prairie Funds) entered into an Exchange Agreement to simplify the Companys capital structure through the consolidation of all outstanding shares of two series of the Companys preferred stock into a single newly-created series of preferred stock with substantially identical terms. Pursuant to the Exchange Agreement, the Company agreed to issue to each of the Prairie Funds, and each of the Prairie Funds agreed to acquire from the Company, one share of the Companys newly-created Nonvoting Convertible Preferred Stock (the Nonvoting Preferred) in exchange for each share of the Companys Nonvoting Convertible Preferred Stock, Series D (the Series D Preferred), and Non-Voting Convertible Preferred Stock, Series G (the Series G Preferred), held by the Prairie Funds (the Exchange Transaction). The Series D Preferred, Series G Preferred and Nonvoting Preferred are each nonvoting common stock equivalents having substantially identical terms as one another.
The Company completed the Exchange Transaction on March 29, 2012, through the issuance of a total of 1,282,674 shares of Nonvoting Preferred in exchange for a total of 405,330 shares of Series D Preferred and 877,344 shares of Series G Preferred held by the Prairie Funds. As a result of the Exchange Transaction, no shares of Series D Preferred or Series G Preferred remain outstanding.
20
7. Other Comprehensive Income (Loss):
The following table presents other comprehensive income (loss) for the periods indicated:
For the Three Months Ended March 31, 2012 |
For the Three Months Ended March 31, 2011 |
|||||||||||||||||||||||
Before Tax Amount |
Tax Effect |
Net of Tax |
Before Tax Amount |
Tax Effect |
Net of Tax |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Unrealized gains from securities: |
||||||||||||||||||||||||
Change in unrealized gains (losses) on available for sale securities |
$ | (1,731 | ) | $ | 709 | $ | (1,022 | ) | $ | (5,216 | ) | $ | 2,112 | $ | (3,104 | ) | ||||||||
Less: reclassification adjustment for gains included in net income |
(956 | ) | 392 | (564 | ) | | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Change in net unrealized gains (losses) on available for sale securities |
(2,687 | ) | 1,101 | (1,586 | ) | (5,216 | ) | 2,112 | (3,104 | ) | ||||||||||||||
Changes in deferred loss on investments transferred to held to maturity from available for sale |
47 | (19 | ) | 28 | 62 | (19 | ) | 43 | ||||||||||||||||
Change in net unrealized loss from cash flow hedging instruments |
244 | (68 | ) | 176 | 272 | (56 | ) | 216 | ||||||||||||||||
Change in net deferred gain from termination of cash flow hedging instruments |
| | | (630 | ) | 250 | (380 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Other comprehensive income (loss) |
$ | (2,396 | ) | $ | 1,014 | $ | (1,382 | ) | $ | (5,512 | ) | $ | 2,287 | $ | (3,225 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
8. Earnings Per Share:
Earnings per share are calculated using the two-class method. The calculation of basic earnings per share requires an allocation of earnings to all securities that participate in dividends with common shares, such as unvested restricted stock and preferred participating stock, to the extent that each security may share in the entitys earnings. Basic earnings per share are calculated by dividing undistributed earnings allocated to common stock by the weighted average number of common shares outstanding. Dilutive earnings per share considers the dilutive effect of all securities that participate in dividends with common shares, as well as common stock equivalents that do not participate in dividends with common stock, such as stock options and warrants to purchase shares of common stock. Dilutive earnings per share are calculated by dividing undistributed earnings allocated to common stockholders by the sum of the weighted average number of common shares outstanding and the weighted average number of common stock equivalents outstanding, provided those common stock equivalents are dilutive. Potentially dilutive common stock equivalents are excluded from the calculation of diluted earnings per share in periods in which the effect would reduce the loss per share or increase the income per share (i.e., when the common stock equivalents are antidilutive.) To the extent there is an undistributed loss for the period, that loss is allocated entirely to the weighted average number of common shares as the participating security holders have no contractual obligation to share in losses.
For the three months ended March 31, 2012, common stock equivalents included in the calculation of diluted earnings per share were 78,644 stock options outstanding to purchase shares of common stock and 472,748 warrants to purchase shares of common stock. Weighted-average common stock equivalents that were considered antidilutive and were not included in the calculation of diluted earnings per share at March 31, 2012 were 446,024 stock options outstanding to purchase shares of common stock and 500,000 warrants to purchase shares of common stock.
21
Due to the net loss applicable to common stockholders for the quarter ended March 31, 2011, all common stock equivalents were considered antidilutive and were not included in the computation of basic or diluted earnings per share. At March 31, 2011, actual 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 convertible Series G preferred stock which could be converted into 220,000 shares of common stock.
The following table sets forth the computation of basic and diluted loss per common share for the periods indicated.
For the Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(dollars in thousands, except per share amounts) |
||||||||
Net income |
$ | 9,469 | $ | 388 | ||||
Preferred dividends and discounts |
(1,742 | ) | (2,464 | ) | ||||
|
|
|
|
|||||
Net income (loss) available to common stockholders |
$ | 7,727 | $ | (2,076 | ) | |||
|
|
|
|
|||||
Undistributed earnings allocated to common shares |
$ | 7,311 | $ | (2,076 | ) | |||
Undistributed earnings allocated to unvested restricted participating shares |
82 | | ||||||
Undistributed earnings allocated to preferred participating shares |
334 | | ||||||
|
|
|
|
|||||
Total undistributed earnings |
$ | 7,727 | $ | (2,076 | ) | |||
|
|
|
|
|||||
Basic income (loss) per common share |
$ | 0.26 | $ | (0.12 | ) | |||
|
|
|
|
|||||
Basic weighted-average common shares outstanding |
28,071,406 | 17,440,617 | ||||||
Dilutive effect of common stock equivalents |
551,392 | | ||||||
|
|
|
|
|||||
Diluted weighted-average common shares outstanding |
28,622,798 | 17,440,617 | ||||||
|
|
|
|
|||||
Diluted income (loss) per common share |
$ | 0.26 | $ | (0.12 | ) | |||
|
|
|
|
22
9. 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 2012. 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, 2012:
Shares | Weighted- Average Exercise Price |
|||||||
Outstanding at January 1, 2012 |
816,031 | $16.66 | ||||||
Granted |
| | ||||||
Exercised |
(3,125 | ) | 8.75 | |||||
Forfeited |
| | ||||||
Expired |
(22,557 | ) | 20.80 | |||||
|
|
|||||||
Outstanding at March 31, 2012 |
790,349 | 16.57 | ||||||
|
|
|||||||
Exercisable at March 31, 2012 |
616,625 | 19.19 | ||||||
|
|
As of March 31, 2012, the total compensation cost related to nonvested stock options that has not yet been recognized totaled $560,000 and the weighted average period over which these costs are expected to be recognized is approximately 1.8 years.
Generally, the Company grants restricted stock awards that vest upon completion of future service requirements. However, for certain restricted stock awards granted in 2010, 2011 and 2012, 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.
23
The following table provides information regarding nonvested restricted stock for the three month period ended March 31, 2012:
Nonvested Restricted Stock |
Shares | Weighted- Average Grant-Date Fair Value |
||||||
Nonvested at January 1, 2012 |
307,377 | $13.40 | ||||||
Granted |
65,235 | 13.46 | ||||||
Vested |
(45,453 | ) | 17.46 | |||||
Forfeited |
(422 | ) | 29.60 | |||||
|
|
|||||||
Nonvested at March 31, 2012 |
326,737 | 12.83 | ||||||
|
|
As of March 31, 2012, the total compensation cost related to nonvested restricted stock that has not yet been recognized totaled $3.0 million and the weighted average period over which these costs are expected to be recognized is approximately 2.0 years.
10. 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, callable interest rate exchange agreements and interest rate corridors, floors and collars to manage the interest rate risk associated with its commercial loan portfolio, brokered CDs, cash flows related to FHLB advances and repurchase agreements and mortgage servicing associated with Cole Taylor Mortgage. The Company also has interest rate lock commitments and forward loan commitments associated with Cole Taylor Mortgage that are considered derivatives. Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the Banks investment portfolios (covered call options).
24
The following table describes the derivative instruments outstanding at March 31, 2012:
As of March 31, 2012 | ||||||||||||||||
Notional Amount |
Average Strike Rates |
Maturity | Balance Sheet/ Income Statement Location |
Fair Value |
||||||||||||
(dollars in thousands) | ||||||||||||||||
Fair value hedging derivative instruments: |
||||||||||||||||
Brokered CD interest rate swapspay variable/receive fixed |
$ | 106,920 | Receive 2.27% Pay 0.466% |
3.2 yrs | Other assets/ Noninterest income |
$ | 4,944 | |||||||||
Callable brokered CD interest rate swapspay variable/receive fixed |
60,000 | Receive 3.44% Pay 0.228% |
12.4 yrs | Other assets/ Noninterest income |
943 | |||||||||||
|
|
|||||||||||||||
Total fair value hedging derivative instruments |
166,920 | |||||||||||||||
Cash flow hedging derivative instruments: |
||||||||||||||||
Interest rate corridors |
155,000 | 0.33%-1.33% | 0.4 yrs | Other assets/OCI | 7 | |||||||||||
|
|
|||||||||||||||
Total hedging derivative instruments |
321,920 | |||||||||||||||
Non-hedging derivative instruments: |
||||||||||||||||
Customer interest rate swapspay fixed/receive variable |
406,542 | Pay 2.87% Receive 0.328% |
Wtd. avg 3.2 yrs | Other liabilities/ Noninterest income |
(18,683 | ) | ||||||||||
Customer interest rate swapsreceive fixed/pay variable |
406,542 | Receive 2.87% Pay 0.328% |
Wtd. avg 3.2 yrs | Other assets/ Noninterest income |
18,164 | |||||||||||
Interest rate swapsmortgage servicing rights |
52,500 | Receive 2.225% Pay 0.3480% |
Wtd. avg 9.8 yrs | Other assets/ Noninterest income |
55 | |||||||||||
Interest rate lock commitments |
580,926 | NA | 0.1 yrs | Other assets/ Noninterest income |
4,989 | |||||||||||
Forward loan sale commitments |
574,420 | NA | 0.1 yrs | Other assets/ Noninterest income |
2,041 | |||||||||||
|
|
|||||||||||||||
Total non-hedging derivative instruments |
2,020,930 | |||||||||||||||
|
|
|||||||||||||||
Total derivative instruments |
$ | 2,342,850 | ||||||||||||||
|
|
As of December 31, 2011 | ||||||||||||||||
Notional Amount |
Average Strike Rates |
Maturity | Balance Sheet/ Income Statement Location |
Fair Value |
||||||||||||
(dollars in thousands) | ||||||||||||||||
Fair value hedging derivative instruments: |
||||||||||||||||
Brokered CD interest rate swapspay variable/receive fixed |
$ | 106,920 | Receive 2.27% Pay 0.430% |
3.4 yrs | Other assets/ Noninterest income |
$ | 5,027 | |||||||||
Callable brokered CD interest rate swapspay variable/receive fixed |
60,000 | Receive 3.44% Pay 0.128% |
12.6 yrs | Other assets/ Noninterest income |
1,176 | |||||||||||
|
|
|||||||||||||||
Total fair value hedging derivative instruments |
166,920 | |||||||||||||||
Cash flow hedging derivative instruments: |
||||||||||||||||
Interest rate corridors |
155,000 | 0.33%-1.33% | 0.6 yrs | Other assets/OCI | 111 | |||||||||||
|
|
|||||||||||||||
Total hedging derivative instruments |
321,920 | |||||||||||||||
Non-hedging derivative instruments: |
||||||||||||||||
Customer interest rate swappay fixed/receive variable |
413,105 | Pay 2.90% Receive 0.358% |
Wtd. avg 3.3 yrs | Other liabilities/ Noninterest income |
(19,505 | ) | ||||||||||
Customer interest rate swapreceive fixed/pay variable |
413,105 | Receive 2.90% Pay 0.358% |
Wtd. avg 3.3 yrs | Other assets/ Noninterest income |
19,010 | |||||||||||
Interest rate swapsmortgage servicing rights |
22,500 | Receive 2.2457% Pay 0.3705% |
Wtd. avg. 9.8 yrs | Other assets/ Noninterest income |
489 | |||||||||||
Interest rate lock commitments |
369,961 | NA | 0.1 yrs | Other assets/ Noninterest income |
4,706 | |||||||||||
Forward loan sale commitments |
352,633 | NA | 0.1 yrs | Other assets/ Noninterest income |
(5,296 | ) | ||||||||||
|
|
|||||||||||||||
Total non-hedging derivative instruments |
1,571,304 | |||||||||||||||
|
|
|||||||||||||||
Total derivative instruments |
$ | 1,893,224 | ||||||||||||||
|
|
25
At March 31, 2012, the Company had $106.9 million of notional amount interest rate swap agreements that were 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 CDs is reported as an adjustment to the carrying value of the brokered CDs. Total ineffectiveness on these interest rate swaps was $13,000 and was recorded in other derivative income in noninterest income in the first quarter of 2012.
At March 31, 2012, the Company had $60.0 million of notional amount interest rate swap agreements that were designated as fair value hedges against certain callable brokered CDs. These swaps are used to convert the fixed rate paid on the callable 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 callable brokered CDs is reported as an adjustment to the carrying value of the callable brokered CDs. Total ineffectiveness on these interest rate swaps was $147,000 and was recorded in other derivative income in noninterest income in the first quarter of 2012.
At March 31, 2012, the Company also had $155.0 million of notional amount interest rate corridors which were designated as cash flow hedges against certain borrowings. The corridors are used to reduce the variability in the interest paid on the borrowings attributable to changes in 1-month LIBOR. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value is recorded in other comprehensive income (OCI). There was no ineffectiveness on the interest rate corridors for the quarter ended March 31, 2012.
We use derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. At March 31, 2012, $813.0 million of derivative instruments were interest rate exchange agreements related to customer transactions, which are not designated as hedges. As of March 31, 2012, we had notional amounts of $406.5 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, 2012, we had offsetting interest rate swaps with other counterparties with a notional amount of $406.5 million in which we agreed to receive a variable interest rate and pay a fixed interest rate.
The Company enters into interest rate swaps as a part of Cole Taylor Mortgages servicing business in order to minimize most of the price volatility of the mortgage services rights asset. At March 31, 2012, the Company had a notional amount of $52.5 million of interest rate swaps. 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 noninterest income.
The Company enters into interest rate lock and forward loan sale commitments as part of Cole Taylor Mortgages origination business. At March 31, 2012, the Company had notional amounts of $580.9 million of interest rate lock commitments and $574.4 million of forward loan sale commitments. 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 noninterest income.
26
The Company enters into covered call option transactions from time to time that are designed primarily to increase the total return associated with the investment securities portfolio. There were no covered call options outstanding as of March 31, 2012, and there were no premiums related to covered call options recognized in noninterest income in the first quarter 2012.
11. Fair Value Measurement:
On January 1, 2010, the Company elected to account for held for sale residential mortgage loans originated by Cole Taylor Mortgage at fair value under the fair value option in accordance with ASC 825 Financial Instruments. When the Company began to retain mortgage servicing rights (MSR) in 2011, an election was made to account for these rights under the fair value option. In addition, any purchased MSRs are accounted for under the fair value option. The Company has not elected the fair value option for any other financial asset or liability.
In accordance with FASB ASC 820, the Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are defined as follows:
Level 1 Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3 Significant unobservable inputs that reflect an 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, when available. 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, among other things. The fair value measurements are compared to another independent source on a quarterly basis to review for reasonableness. In addition, the Company reviews the third-party valuation methodology on a periodic basis. Any significant differences in valuation are reviewed with members of management who have the relevant technical expertise to assess the results. The Company has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not have fair value measurements available for a security, the Company has estimated the fair value based on specific information about each security. The Company has determined that these valuations are classified in Level 3 of the fair value hierarchy.
27
Loans held for sale:
Loans held for sale included residential mortgage loans that have been originated by Cole Taylor Mortgage and for which the Company has elected to account for on a recurring basis under the fair value option.
In prior periods, the Company had certain residential mortgage loans that it acquired in a bulk purchase transaction and nonaccrual commercial loans classified as held for sale. These loans were recorded at the lower of cost or fair value and were recorded at fair value on a nonrecurring basis.
For all residential mortgage loans held for sale, the fair value is based upon quoted market prices for similar assets in active markets and is 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 $5.6 million of mortgage loans originated by Cole Taylor Mortgage and transferred to the Companys portfolio. 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, 2012 and December 31, 2011, a portion of the Companys total impaired loans were evaluated based on the fair value of the collateral. Generally, since the majority of our impaired loans are collateral-dependent real estate loans, the fair value is determined by a current appraisal. For impaired loans that are collateral dependent, our practice is to obtain an updated appraisal every nine to 18 months, depending on the nature and type of the collateral and the stability of collateral valuations, as determined by senior members of credit management. OREO and repossessed assets require an updated appraisal at least annually. We have established policies and procedures related to appraisals and maintain a list of approved appraisers who have met specific criteria. In addition, our policy for appraisals on real estate dependent commercial loans generally requires each appraisal to have an independent compliance and technical review by a qualified third party to ensure the consistency and quality of the appraisal and valuation. We discount appraisals for estimated selling costs and, when appropriate, consider the date of the appraisal and stability of the local real estate market when analyzing the estimated fair value of individual impaired loans that are collateral dependent.
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.
28
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.
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.
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 certain 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. In conjunction with the FASBs fair value measurement guidance, the Company has elected to account for the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Mortgage derivatives:
Mortgage derivatives include interest rate swaps hedging mortgage servicing rights, interest rate lock commitments to originate held for sale residential mortgage loans for individual customers and forward commitments to sell residential mortgage loans to various investors. The fair value of the interest rate swaps used to hedge MSRs is classified in Level 2 of the 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
29
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 posting thresholds, mutual puts and guarantees. 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.
Mortgage servicing rights:
The Company records its MSRs at fair value in other assets in the Consolidated Balance Sheets. MSRs do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of MSRs by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of MSRs include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the model are validated on a regular basis. The fair value is validated on a quarterly basis with an independent third party. Any discrepancies between the internal model and the third party validation are investigated and resolved by an internal committee. Due to the nature of the valuation inputs, MSRs are classified in Level 3 of 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.
30
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below. There were no transfers of assets or liabilities measured at fair value on a recurring basis between Level 1 and Level 2 during the three months ending March 31, 2012.
As of March 31, 2012 | ||||||||||||||||
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 |
$1,138,748 | $ | $1,134,179 | $4,569 | ||||||||||||
Loans |
5,577 | | 5,577 | | ||||||||||||
Loans held for sale, at fair value |
210,040 | | 210,040 | | ||||||||||||
Assets held in employee deferred compensation plans |
2,892 | 2,892 | | | ||||||||||||
Derivative instruments |
24,058 | | 24,058 | | ||||||||||||
Mortgage servicing rights |
22,394 | | | 22,394 | ||||||||||||
Mortgage derivative instruments |
7,085 | | 2,096 | 4,989 | ||||||||||||
Liabilities: |
||||||||||||||||
Derivative instruments |
18,683 | | 18,683 | |
As of December 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 |
$1,175,380 | $ | $1,174,561 | $ 819 | ||||||||||||
Loans |
5,124 | | 5,124 | | ||||||||||||
Loans held for sale |
185,984 | | 185,984 | | ||||||||||||
Assets held in employee deferred compensation plans |
2,688 | 2,688 | | | ||||||||||||
Derivative instruments |
25,324 | | 25,324 | | ||||||||||||
Mortgage servicing rights |
8,742 | | | 8,742 | ||||||||||||
Mortgage derivative instruments |
5,195 | | 489 | 4,706 | ||||||||||||
Liabilities: |
||||||||||||||||
Derivative instruments |
19,505 | | 19,505 | | ||||||||||||
Mortgage derivative instruments |
5,296 | | 5,296 | |
31
The following table presents quantitative information about Level 3 fair value measurements as of March 31, 2012:
Fair Value (in thousands) |
Valuation Techniques |
Unobservable Inputs | Range of Qualitative Information (Weighted Average) | |||||||
MEASURED ON A RECURRING BASIS: |
||||||||||
Available for sale securities |
$4,569 | See (1) below | See (1) below | See (1) below | ||||||
Mortgage interest rate lock commitments (Mortgage derivative instruments) |
4,989 | Sales cash flow |
Expected closing ratio Expected delivery price |
40.40% - 96.00% (80.98%) 97.88 bps 107.47 bps (102.86 bps) | ||||||
Mortgage servicing rights |
22,394 | Discounted cash flow |
Weighted average prepayment speed Weighted average discount rate Delinquencies Costs to service |
7.4 34.0 (11.6) 10.00% - 10.50% (10.01%) 0% - 0.54% (0.16%) $54 - $57 ($56) | ||||||
MEASURED ON A NON-RECURRING BASIS: |
||||||||||
Loans |
26,566 | Managements assessment of liquidation value of collateral |
See (2) below | See (2) below | ||||||
Other real estate owned and repossessed assets |
29,692 | Managements assessment of liquidation value of collateral |
See (3) below | See (3) below |
(1) | Fair value can be based on discounted cash flow, offer prices or par. Each available for sale security is evaluated on an individual basis. |
(2) | Managements assessment of the liquidation value of collateral is based on third party information including current financial statements and bank statements, inventory reports, and accounts receivable aging and may be further reduced by a management determined rate which can range from 0% to 100%. Each loan is evaluated on an individual basis. |
(3) | Managements assessment of the liquidation value of collateral is based on a third party appraised value. The value is further reduced by a management determined rate, which can range from 5% to 20%, and estimated costs to sell. Each loan is evaluated on an individual basis. |
32
The significant unobservable inputs used in the fair value measurement of the Companys available for sale securities classified as Level 3 include interest rates and expected life. An increase in interest rates would result in a lower fair value measurement and a decrease in interest rates would result in a higher fair value measurement. An increase in expected life would result in a higher fair value measurement and a decrease in expected life would results in a lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Companys MSRs include prepayments speeds, discount rates, delinquencies and cost to service. Significant increases in prepayment speeds, discount rates, delinquencies or cost to service would result in a significantly lower fair value measurement. Conversely, significant decreases in prepayment speeds, discount rates, delinquencies or costs to service would result in a significantly higher fair value measurement. With the exception of changes in delinquencies, which can change the cost to service, each of the unobservable inputs moves independently.
The significant unobservable inputs used in the fair value measurement of the Companys interest rate lock commitments are the expected closing ratio and the expected delivery price. Significant increases in the expected closing ratio and the expected delivery price would result in a higher fair value measurement while significant decreases in those inputs would result in a lower measurement. The unobservable inputs move independently of each other.
The table below includes a rollforward of the Consolidated Balance Sheets amounts for the three months ended March 31, 2012 and 2011 (including the change in fair value) for investment securities measured at fair value on a recurring basis and classified by the Company within Level 3 of the valuation hierarchy:
For the Three
Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Beginning balance |
$ 819 | $1,380 | ||||||
Purchases |
| | ||||||
Transfers |
3,750 | |||||||
Maturities |
| | ||||||
Changes in assumptions |
| | ||||||
|
|
|
|
|||||
Fair value at period end |
$4,569 | $1,380 | ||||||
|
|
|
|
The transfer represents a security received as part of a loan workout arrangement. The measurement of fair value of these investment securities had no effect on earnings or other comprehensive income in the first quarter of 2012.
33
The table below includes a rollforward of the Consolidated Balance Sheets amounts for the three months ended March 31, 2012 and 2011 (including the change in fair value) for mortgage derivative instruments measured at fair value on a recurring basis and classified by the Company within Level 3 of the valuation hierarchy.
For the Three
Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Beginning balance |
$4,706 | $438 | ||||||
Mortgage derivative instruments gain, net |
283 | 493 | ||||||
|
|
|
|
|||||
Fair value at period end |
$4,989 | $931 | ||||||
|
|
|
|
The measurement of fair value of these mortgage derivative instruments reduced earnings by $56,000 in the first quarter of 2012.
The table below includes a rollforward of the Consolidated Balance Sheets amounts for the three months ended March 31, 2012 and 2011 (including the change in fair value) for MSRs measured at fair value on a recurring basis and classified by the Company within Level 3 of the valuation hierarchy.
For the Three
Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Beginning balance |
$ 8,742 | $ | ||||||
MSR purchases |
5,632 | | ||||||
MSR originations |
7,074 | 140 | ||||||
Change in assumptions |
1,749 | | ||||||
Other changes |
(803 | ) | | |||||
|
|
|
|
|||||
Fair value at period end |
$22,394 | $140 | ||||||
|
|
|
|
The measurement of fair value of the MSRs increased earnings by $946,000 in the first quarter of 2012.
34
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 and other real estate owned and repossessed assets.
As of March 31, 2012 | ||||||||||||||||
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 |
$166,312 | $ | $166,312 | $ | ||||||||||||
Loans |
57,757 | | 31,191 | 26,566 | ||||||||||||
OREO and repossessed assets |
29,692 | | | 29,692 |
As of December 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 |
$111,054 | $ | $111,054 | $ | ||||||||||||
Loans |
47,415 | | 31,400 | 16,015 | ||||||||||||
OREO and repossessed assets |
28,782 | | | 28,782 |
At March 31, 2012, the Company had $26.6 million of impaired loans and $29.7 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 value of impaired loans represents sales, payments or net charge-offs of $3.5 million and three additional impaired loans with fair value of $14.1 million which reflects the charge to earnings of $7.5 million to reduce these loans to fair value. The change in Level 3 OREO and repossessed assets during the quarter ended March 31, 2012 included $3.9 million of additions and $3.0 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
35
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 approximates fair value since their maturities are short-term.
Investment securities:
The Company obtains fair value measurements from an independent pricing service, when available. 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. When the independent pricing service does not have fair value measurements available for a security, the Company has estimated the fair value based on specific information about each security.
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.
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 820 - Fair Value Measurements and Disclosures. 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.
36
Investment in FHLB and FRB Stock:
The fair value of these investments in FHLB and FRB stock equals 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. In conjunction with the FASBs fair value measurement guidance, the Company has elected to account for the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
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 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.
37
Short-term 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.
Long-term borrowings:
Securities sold under agreements to repurchase with original maturities over one year and other advances have been valued at the present values of 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.
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.
38
The estimated fair values of the Companys financial instruments are as follows:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||
Carrying Value |
Fair Value | Level 1 | Level 2 | Level 3 | Carrying Value |
Fair Value | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Financial Assets: |
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Cash and cash equivalents |
$ 76,806 | $ 76,806 | $ 76,806 | $ | $ | $ 121,164 | $ 121,164 | |||||||||||||||||||||
Available for sale investments |
1,138,748 | 1,138,748 | | 1,134,179 | 4,569 | 1,175,380 | 1,175,380 | |||||||||||||||||||||
Held to maturity investments |
160,824 | 166,312 | | 166,312 | | 104,296 | 111,054 | |||||||||||||||||||||
Loans held for sale |
210,040 | 210,040 | | 210,040 | | 185,984 | 185,984 | |||||||||||||||||||||
Loans, net of allowance |
2,810,288 | 2,868,040 | | 31,191 | 2,836,849 | 2,824,555 | 2,825,765 | |||||||||||||||||||||
Investment in FHLB and FRB stock |
63,039 | 63,039 | | 63,039 | | 56,781 | 56,781 | |||||||||||||||||||||
Accrued interest receivable |
15,113 | 15,113 | 15,113 | | | 15,472 | 15,472 | |||||||||||||||||||||
Derivative financial instruments |
31,143 | 31,143 | | 26,154 | 4,989 | 30,519 | 30,519 | |||||||||||||||||||||
Other assets |
2,892 | 2,892 | 2,892 | | | 2,688 | 2,688 | |||||||||||||||||||||
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Total financial assets |
$4,508,893 | $4,572,133 | $ 94,811 | $1,630,915 | $2,846,407 | $4,516,839 | $4,524,807 | |||||||||||||||||||||
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Financial Liabilities: |
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Deposits without stated maturities |
$1,824,924 | $1,824,924 | $1,824,924 | $ | $ | $1,823,227 | $1,823,227 | |||||||||||||||||||||
Deposits with stated maturities |
1,164,715 | 1,170,321 | | 1,170,321 | | 1,299,984 | 1,312,956 | |||||||||||||||||||||
Short-term borrowings |
924,641 | 924,635 | | 924,635 | | 768,133 | 768,135 | |||||||||||||||||||||
Long-term borrowings |
85,000 | 87,979 | | 87,979 | | 147,500 | 151,824 | |||||||||||||||||||||
Accrued interest payable |
3,639 | 3,639 | 3,639 | | | 5,741 | 5,741 | |||||||||||||||||||||
Derivative financial instruments |
18,683 | 18,683 | | 18,683 | | 24,801 | 24,801 | |||||||||||||||||||||
Junior subordinated debentures |
86,607 | 73,098 | 46,131 | 26,967 | | 86,607 | 56,298 | |||||||||||||||||||||
Subordinated notes, net |
89,867 | 88,208 | | 88,208 | | 89,648 | 88,849 | |||||||||||||||||||||
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Total financial liabilities |
$4,198,076 | $4,191,487 | $1,874,694 | $2,316,793 | $ | $4,245,641 | $4,231,831 | |||||||||||||||||||||
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Off-Balance-Sheet Financial Instruments: |
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Unfunded commitments to extend credit |
$ 4,439 | $ 4,439 | $ | $ 4,439 | $ | $ 4,368 | $ 4,368 | |||||||||||||||||||||
Standby letters of credit |
292 | 292 | | 292 | | 277 | 277 | |||||||||||||||||||||
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Total off-balance-sheet financial instruments |
$ 4,731 | $ 4,731 | $ | $ 4,731 | $ | $ 4,645 | $ 4,645 | |||||||||||||||||||||
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The remaining balance sheet assets and liabilities of the Company are not considered financial instruments and have not been valued differently than is required under historical cost accounting. Since assets and liabilities that are not financial instruments are excluded above, the difference between total financial assets and financial liabilities does not, nor is it intended to, represent the market value of the Company. Furthermore, the estimated fair value information may not be comparable between financial institutions due to the wide range of valuation techniques permitted, and assumptions necessitated, in the absence of an available trading market.
39
12. Segment Reporting:
The Company has identified two segments for purposes of financial reporting: Banking and Mortgage Banking. In addition, the Company utilizes an Other category. These segments were determined based on the products and services provided or the type of customers served and are consistent with the information that is used by the Companys key decision makers to make operating decisions and to assess the Companys performance.
The following table presents financial information from the Companys operating segments for the periods ended March 31, 2012 and March 31, 2011.
Banking | Mortgage Banking | Other* | Consolidated Total |
|||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
As of March 31: | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||||||||
Net interest income |
$ 37,188 | $ 34,773 | $ 2,461 | $ | 1,334 | $(3,847 | ) | $(3,920 | ) | $ 35,802 | $ 32,187 | |||||||||||||||||||||
Provision for loan losses |
7,225 | 10,241 | 125 | | | | 7,350 | 10,241 | ||||||||||||||||||||||||
Total noninterest income |
6,372 | 5,321 | 17,531 | 1,522 | 43 | 42 | 23,946 | 6,885 | ||||||||||||||||||||||||
Total noninterest expense |
25,076 | 24,011 | 11,492 | 4,538 | | | 36,568 | 28,549 | ||||||||||||||||||||||||
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Income (loss) before income taxes |
11,259 | 5,842 | 8,375 | (1,682 | ) | (3,804 | ) | (3,878 | ) | 15,830 | 282 | |||||||||||||||||||||
Income tax expense (benefit) |
4,503 | 2,336 | 3,350 | (639 | ) | (1,492 | ) | (1,803 | ) | 6,361 | (106 | ) | ||||||||||||||||||||
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Net income (loss) |
$ 6,756 | $ 3,506 | $ 5,025 | $ | (1,043 | ) | $(2,312 | ) | $(2,075 | ) | $ 9,469 | $ 388 | ||||||||||||||||||||
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Total average assets |
$4,233,634 | $4,239,858 | $422,787 | $ | 146,141 | $ 3,600 | $ 3,584 | $4,660,021 | $4,389,583 | |||||||||||||||||||||||
Average loans |
2,739,092 | 2,804,422 | 390,130 | 129,517 | | | 3,129,222 | 2,933,939 |
* | The Other category includes subordinated debt expense, certain parent company activities and residual income tax expense, representing the difference between the actual amount incurred and the amount allocated to operating segments. |
40
13. Subsequent Events
Events subsequent to the balance sheet date of March 31, 2012 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.
41
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 banking services through offices in Chicago and 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 2011 Annual Report on Form 10-K filed with the SEC on March 9, 2012.
Recent Legislation Impacting the Financial Services Industry
On July 21, 2010, President Obama signed the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) into law. The Dodd-Frank Act represents a sweeping reform of the supervisory and regulatory framework applicable to financial institutions and capital markets in the United States. The Dodd-Frank Act creates new federal governmental entities responsible for overseeing different aspects of the U.S. financial services industry, including identifying emerging systemic risks. It also shifts certain authorities and responsibilities among federal financial institution regulators, including the supervision of holding company affiliates and the regulation of consumer financial services and products. Numerous provisions of the Dodd-Frank Act are required to be implemented through rulemaking by the appropriate federal regulatory agencies. Some of the required regulations have been issued and others have been released for public comment, but many have yet to be released in any form. Furthermore, while the reforms primarily target systemically important financial service providers, their influence is expected to impact smaller institutions over time in varying degrees. Management of the Company and Bank will continue to evaluate the effect of these changes; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative changes, will not have a negative impact on the business, financial condition and results of operations of the Company and the Bank.
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 2011 Annual Report on Form 10-K.
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The preparation of financial statements in conformity with these accounting principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available to us as of the date of the consolidated financial statements and, accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. The estimates, assumptions and judgments made by us are based upon historical experience, current information and 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 actual results. We consider our policies for the allowance for loan losses, the realizability of deferred tax assets, derivatives and the valuation of investment securities to be critical accounting policies.
The following accounting policies materially affect our reported earnings and financial condition and require significant estimates, assumptions and judgments.
Allowance for Loan Losses
We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on 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 that we consider sufficient to absorb probable losses inherent in our portfolio as of the balance sheet date. In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including historical charge-off experience, changes in the size of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent, criticized and impaired loans. In addition, we use information about specific 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 area 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 periods until sale and the collateral liquidation method, our actual losses may materially vary from our current estimates.
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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 our allowance for loan losses. We review our estimates on a quarterly basis and, as we identify changes in estimates, our allowance for loan losses is adjusted through the recording of a provision for loan losses.
Income Taxes
We maintain 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 of loans are deductible, not the provision for loan losses. Under U.S. 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 ability to realize 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, positive credit quality trends and the state of overall economic environment. Examples of negative evidence may include a cumulative loss in the current year and prior two years, no tax planning opportunities to accelerate income, availability of taxes paid in open carryback years and negative general business and economic trends. We currently do not maintain a valuation allowance against our net deferred tax assets because management has determined that it is more-likely-than-not that these deferred tax assets will be realized.
Derivative Financial Instruments
We use derivative financial instruments (derivatives), including interest rate exchange and corridor agreements, callable interest rate exchange 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 OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For all hedging
44
relationships, derivative gains and losses that are not effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings during the period of the change in fair value. Similarly, the changes in the fair value of derivatives that do not qualify for hedge accounting or are not designated as an accounting hedge are also reported currently in earnings.
At the inception of a formally designated hedge and quarterly thereafter, an assessment is made to determine whether changes in the fair values or cash flows of the derivatives have been highly effective in offsetting the changes in the fair values or cash flows of the hedged item and whether they are expected to be highly effective in the future. If it is determined that derivatives are not highly effective as a hedge, hedge accounting is discontinued for the period. Once hedge accounting is terminated, all changes in fair value of the derivatives are reported currently in the Consolidated Statements of Operations in other noninterest income, which could result in greater volatility in our earnings.
The estimates of fair values of certain of our derivative instruments, such as interest rate exchange agreements (or 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 periodically 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 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
45
assets and review the valuations and any significant differences in valuations with members of management who have the relevant technical expertise to assess the results. In addition, we review the third party valuation methodology on a periodic basis.
Each quarter we review our investment securities portfolio to determine whether unrealized losses are temporary or other than temporary, based on an evaluation of the creditworthiness of the issuers/guarantors, as well as the underlying collateral, if applicable. Our analysis includes an evaluation of the type of security, the length of time and extent to which the fair value has been less than the 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, an other-than-temporary impairment charge will be recorded in current earnings for the amount of the credit loss component. The amount of impairment related to factors other than the credit loss is recognized in OCI. 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. 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 Consolidated Statements 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 2012 and beyond to differ materially from those expressed in, or implied by, these forward-looking statements.
46
These risks, uncertainties and other factors include, without limitation:
| Our business may be adversely affected by the highly regulated environment in which we operate. |
| Competition from financial institutions and other financial services providers may adversely affect our growth and profitability. |
| Our business is subject to the conditions of the local economy in which we operate and continued weakness in the local economy and the real estate markets may adversely affect us. |
| Our business is subject to domestic and to a lesser extent, international economic conditions and other factors, many of which are beyond our control and could adversely affect our business. |
| The preparation of our consolidated financial statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results. |
| Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio. |
| Our residential mortgage loan repurchase reserve for losses could be insufficient. |
| We are subject to interest rate risk, including interest rate fluctuations that could reduce our profitability. |
| Certain hedging strategies that we use to manage investment in mortgage servicing rights may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity. |
| Our residential mortgage lending profitability could be significantly reduced if we are not able to originate and resell a high volume of mortgage loans. |
| We have counterparty risk and therefore we may be adversely affected by the soundness of other financial institutions. |
| We are subject to certain operational risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. The Companys controls and procedures may fail or be circumvented. |
| We are dependent upon outside third parties for processing and handling of Company records and data. |
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| System failure or breaches of our network security, including with respect to our internet banking activities, could subject us to increased operating costs as well as litigation and other liabilities. |
| We are subject to lending concentration risks. |
| We may not be able to access sufficient and cost-effective sources of liquidity. |
| We are subject to liquidity risk, including unanticipated deposit volatility. |
| The recent repeal of federal prohibitions on payment of interest on business demand deposits could increase our interest expense. |
| Changes in our credit ratings could increase our financing costs or make it more difficult for us to obtain funding or capital on commercially acceptable terms. |
| We are a bank holding company and our sources of funds are limited. |
| Our business strategy is dependent on our continued ability to attract, develop and retain highly qualified and experienced personnel in senior management and customer relationship positions. |
| Our reputation could be damaged by negative publicity. |
| New lines of business or new products and services may subject us to certain additional risks. |
| We may experience difficulties in managing our future growth. |
| We and our subsidiaries are subject to changes in federal and state tax laws and changes in interpretation of existing laws. |
| Our participation in the U.S. Treasurys Troubled Asset Relief Capital Purchase Program may place significant restrictions on our operations. |
| Regulatory requirements, growth plans or operating results may require us to raise additional capital, which may not be available on favorable terms or at all. |
| We have not paid a dividend on our common stock since the second quarter of 2008. In addition, regulatory restrictions and liquidity constraints at the holding company level could impair our ability to make distributions on our outstanding securities. |
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, 2011 Annual Report on Form 10-K filed with the SEC on March 9, 2012. 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.
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RESULTS OF OPERATIONS
Overview
Net income for the first three months of 2012 was $9.5 million, compared to $388,000 for the first three months of 2011. Net income applicable to common stockholders was $7.7 million, or $0.26 per diluted common share outstanding, for the first quarter of 2012, compared to a net loss applicable to common stockholders of $2.1 million, or $0.12 per diluted common share, in the first quarter of 2011. Results were led by strong mortgage banking revenue and continued improvements in credit quality in the first quarter of 2012 as compared to the first quarter of 2011.
Highlights
| Pre-tax, pre-provision operating earnings (a non-GAAP financial measure in which provision for loan losses, nonperforming asset expense and certain non-recurring items, such as gains and losses on sales of investment securities and debt extinguishment expense are excluded) increased 73.9% to a record high $24.0 million for the quarter ended March 31, 2012, as compared to $13.8 for the quarter ended March 31, 2011. |
| In the first quarter of 2012, revenue (a non-GAAP financial measure calculated as net interest income plus noninterest income less gain or losses on sales of investment securities) was $58.9 million, an increase of 50.6% from $39.1 million in the first quarter of 2011. |
| Mortgage banking revenue grew to $17.5 million, compared to $1.5 million in the same quarter in 2011. |
| Net interest margin increased from 3.07% in the first quarter of 2011 to 3.29% in the first quarter of 2012. |
| Average in-market deposits, excluding time deposits, increased by $319.6 million or 21.4%, growing from $1.49 billion in the first quarter of 2011 to $1.81 billion in the first quarter of 2012. |
| Nonperforming assets were $130.4 million, or 2.78%, of total assets on March 31, 2012, compared to $206.4 million, or 4.81% of total assets on March 31, 2011. |
| Our allowance for loan losses as a percentage of nonperforming loans was 100.01% at March 31, 2012 as compared to 68.35% at March 31, 2011. |
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
49
Companys financial performance such as the non-GAAP measures of pre-tax, pre-provision operating earnings and of revenue. Management believes that these measures are useful because they provide a more comparable basis for evaluating financial performance from operations period to period.
The following table reconciles the income (loss) before income taxes to pre-tax, pre-provision operating earnings for the periods indicated.
For the Three Months Ended |
||||||||
Mar. 31, 2012 |
Mar. 31, 2011 |
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(in thousands) | ||||||||
Income (loss) before income taxes |
$15,830 | $ 282 | ||||||
Add back (subtract): |
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Credit costs: |
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Provision for loan losses |
7,350 | 10,241 | ||||||
Nonperforming asset expense |
694 | 3,277 | ||||||
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Credit costs subtotal |
8,044 | 13,518 | ||||||
Other: |
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Gain on sales of investment securities |
(956 | ) | | |||||
Derivative termination fees |
| | ||||||
Early extinguishment of debt |
1,001 | | ||||||
Impairment of investment securities |
125 | | ||||||
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Other subtotal |
170 | | ||||||
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Pre-tax, pre-provision operating earnings |
$24,044 | $13,800 | ||||||
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The following table details the components of revenue for the periods indicated.
For the Three Months Ended |
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Mar. 31, 2012 |
Mar. 31, 2011 |
|||||||
(in thousands) | ||||||||
Net interest income |
$35,802 | $32,187 | ||||||
Noninterest income |
23,946 | 6,885 | ||||||
Add back (subtract): |
||||||||
Gain on sales of investment securities |
(956 | ) | | |||||
Derivative termination fees |
| | ||||||
Impairment of investment securities |
125 | | ||||||
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|
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Revenue |
$58,917 | $39,072 | ||||||
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|
Net Interest Income
Net interest income is our principal source of revenue 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.
50
Net interest income was $35.8 million for the first quarter of 2012, an increase of $3.6 million, or 11.2%, from $32.2 million in the first quarter of 2011.
Net interest margin increased from 3.07% in the first quarter of 2011 to 3.29% in the first quarter of 2012, an increase of 22 basis points. Net interest margin is calculated by dividing taxable equivalent net interest income by average interest-earning assets. Net interest margin increased due to a decrease in funding costs due to higher priced certificates of deposit (CDs) and brokered CDs maturing and due to deliberate changes made to the funding mix, including modification or termination of debt in 2011 and the first quarter of 2012.
The yield on average earning assets decreased from 4.52% in the first quarter of 2011 to 4.25% in the first quarter of 2012 due to decreased yields on both loans and investment securities. This variance was in part driven by growth in mortgage loans originated by Cole Taylor Mortgage and held in the loan portfolio, which increased average loan balances but lowered the yield on loan balances. The yield earned on loans declined to 4.54% in the first quarter of 2012 from 4.89% in the first quarter of 2011. In addition, the yield on the investment securities portfolio decreased from 3.73% in the first quarter of 2011 to 3.54% in the first quarter of 2012.
The yield on total interest-bearing liabilities declined from 1.77% in the first quarter of 2011 to 1.22% in the first quarter of 2012. The decline reflects significant, anticipated deposit repricing as well as deliberate changes in the funding mix, including early extinguishment of debt.
Average interest-earning assets during the first quarter of 2012 were $4.41 billion as compared to $4.29 billion during the first quarter of 2011, an increase of $120.8 million, or 2.8%. The increase was driven by an increase in consumer loans, largely due to certain mortgages originated by Cole Taylor Mortgage being held in the loan portfolio. Average loan balances increased $195.3 million, or 6.7%, from the first quarter of 2011 to the first quarter of 2012 while average investment balances decreased $74.4 million, or 5.5%, during that same time period.
Average interest-bearing deposit balances decreased to $2.29 billion in the first quarter of 2012, compared to $2.46 billion in the first quarter of 2011, a decrease of $174.6 million, or 7.1%. Time deposits decreased $346.6 million, or 22.0%, while the total of interest-bearing demand deposits and savings deposits increased $172.0 million or 19.4%. Average noninterest-bearing deposits also increased, growing from $612.0 million in the first quarter of 2011 to $754.0 million in the first quarter of 2012.
With an adjustment for tax-exempt income, our consolidated net interest income for the first quarter of 2012 was $36.2 million, compared to $32.6 million for the same quarter a year ago. This non-GAAP presentation is discussed below. See Tax-Equivalent Adjustments to Yields and Margins.
51
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, 2012 As Compared to Quarter Ended March 31, 2011 |
||||||||||||||||
VOLUME | RATE | DAYS* | NET | |||||||||||||
(in thousands) | ||||||||||||||||
INTEREST EARNED ON: |
||||||||||||||||
Investment securities |
$ | (748 | ) | $ | (698 | ) | $ | 140 | $ | (1,306 | ) | |||||
Loans |
2,263 | (2,730 | ) | 393 | (74 | ) | ||||||||||
|
|
|||||||||||||||
Total interest-earning assets |
(1,380 | ) | ||||||||||||||
|
|
|||||||||||||||
INTEREST PAID ON: |
||||||||||||||||
Interest-bearing deposits |
(586 | ) | (2,724 | ) | 96 | (3,214 | ) | |||||||||
Total borrowings |
547 | (2,351 | ) | 75 | (1,729 | ) | ||||||||||
|
|
|||||||||||||||
Total interest-bearing liabilities |
(4,943 | ) | ||||||||||||||
|
|
|||||||||||||||
Net interest income, tax-equivalent |
$ | 3,563 | ||||||||||||||
|
|
* | Represents variance due to one greater day in the quarter ended March 31, 2012 versus the quarter ended March 31, 2011. |
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.
52
For the Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(dollars in thousands) | ||||||||
Net interest income as stated |
$35,802 | $32,187 | ||||||
Tax equivalent adjustment-investments |
357 | 417 | ||||||
Tax equivalent adjustment-loans |
32 | 24 | ||||||
|
|
|
|
|||||
Tax equivalent net interest income |
$36,191 | $32,628 | ||||||
|
|
|
|
|||||
Yield on earning assets without tax adjustment |
4.21 | % | 4.48 | % | ||||
Yield on earning assets - tax equivalent |
4.25 | % | 4.52 | % | ||||
Net interest margin without tax adjustment |
3.26 | % | 3.03 | % | ||||
Net interest margin - tax equivalent |
3.29 | % | 3.07 | % | ||||
Net interest spread without tax adjustment |
2.99 | % | 2.71 | % | ||||
Net interest spread - tax equivalent |
3.02 | % | 2.75 | % |
The following table presents, for the periods indicated, certain information relating to our consolidated average balances and reflects our yield on average interest-earning assets and costs of average interest-bearing liabilities. The table contains certain non-GAAP financial measures to adjust tax-exempt interest income on a tax-equivalent basis assuming a tax rate of 35%.
53
For the Three Months Ended March 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
AVERAGE BALANCE |
INTEREST | YIELD/ RATE (%)(6) |
AVERAGE BALANCE |
INTEREST | YIELD/ RATE (%)(6) |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
INTEREST-EARNING ASSETS: |
||||||||||||||||||||||||
Investment securities (1): |
||||||||||||||||||||||||
Taxable |
$1,214,586 | $10,318 | 3.40 | % | $1,280,002 | $11,452 | 3.58 | % | ||||||||||||||||
Tax-exempt (tax equivalent) (2) |
66,859 | 1,020 | 6.10 | 75,825 | 1,192 | 6.29 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total investment securities |
$1,281,445 | 11,338 | 3.54 | 1,355,827 | 12,644 | 3.73 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Cash equivalents |
960 | 3 | 1.24 | 1,109 | 3 | 1.08 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Loans (2) (3): |
||||||||||||||||||||||||
Commercial and commercial real estate |
2,611,527 | 29,838 | 4.52 | 2,656,905 | 32,282 | 4.86 | ||||||||||||||||||
Residential real estate mortgages |
451,569 | 3,992 | 3.54 | 197,495 | 2,106 | 4.27 | ||||||||||||||||||
Home equity and consumer |
66,126 | 697 | 4.23 | 79,539 | 862 | 4.40 | ||||||||||||||||||
Fees on loans |
788 | 139 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Net loans (tax equivalent) (2) |
3,129,222 | 35,315 | 4.54 | 2,933,939 | 35,389 | 4.89 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets (2) |
4,411,627 | 46,656 | 4.25 | 4,290,875 | 48,036 | 4.52 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
NON-EARNING ASSETS: |
||||||||||||||||||||||||
Allowance for loan losses |
(105,068 | ) | (132,545 | ) | ||||||||||||||||||||
Cash and due from banks |
90,103 | 121,105 | ||||||||||||||||||||||
Accrued interest and other assets |
263,359 | 110,148 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
TOTAL ASSETS |
$4,660,021 | $4,389,583 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
INTEREST-BEARING LIABILITIES: |
||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||
Interest-bearing demand deposits |
$1,019,219 | 1,545 | 0.61 | $ 848,246 | 1,779 | 0.85 | ||||||||||||||||||
Savings deposits |
39,107 | 7 | 0.07 | 38,094 | 8 | 0.09 | ||||||||||||||||||
Time deposits |
1,227,968 | 3,858 | 1.26 | 1,574,597 | 6,837 | 1.76 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing deposits |
2,286,294 | 5,410 | 0.95 | 2,460,937 | 8,624 | 1.42 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Short-term borrowings |
854,257 | 564 | 0.26 | 517,469 | 985 | 0.76 | ||||||||||||||||||
Long-term borrowings |
120,618 | 500 | 1.64 | 364,319 | 1,867 | 2.05 | ||||||||||||||||||
Junior subordinated debentures |
86,607 | 1,472 | 6.80 | 86,607 | 1,443 | 6.66 | ||||||||||||||||||
Subordinated notes |
89,758 | 2,519 | 11.23 | 88,942 | 2,489 | 11.19 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
3,437,534 | 10,465 | 1.22 | 3,518,274 | 15,408 | 1.77 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
NONINTEREST-BEARING LIABILITIES: |
||||||||||||||||||||||||
Noninterest-bearing deposits |
753,995 | 612,032 | ||||||||||||||||||||||
Accrued interest, taxes and other liabilities |
61,933 | 52,801 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total noninterest-bearing liabilities |
815,928 | 664,833 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
STOCKHOLDERS EQUITY |
406,559 | 206,476 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$4,660,021 | $4,389,583 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income (tax equivalent) (2) |
$36,191 | $32,628 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest spread (tax equivalent) (2) (4) |
3.02 | % | 2.75 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin (tax equivalent) (2) (5) |
3.29 | % | 3.07 | % | ||||||||||||||||||||
|
|
|
|
(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. |
54
Noninterest Income
The following table presents, for the periods indicated, our major categories of noninterest income:
For the Three Months Ended | ||||||||
March 31, 2012 |
March 31, 2011 |
|||||||
(in thousands) | ||||||||
Service charges |
$ 3,291 | $2,890 | ||||||
Mortgage banking revenue |
17,530 | 1,517 | ||||||
Gain (loss) on disposition of bulk purchased mortgage loans |
(7 | ) | 28 | |||||
Gain on sales of investment securities |
956 | | ||||||
Letter of credit & other loan fees |
945 | 1,151 | ||||||
Change in market value of employee deferred compensation plan |
167 | 167 | ||||||
Other derivative income |
561 | 753 | ||||||
Other noninterest income |
503 | 379 | ||||||
|
|
|
|
|||||
Total noninterest income |
$23,946 | $6,885 | ||||||
|
|
|
|
Total noninterest income was $23.9 million during the first quarter of 2012, an increase of $17.0 million, or 246.4%, as compared to the $6.9 million of noninterest income for the first quarter of 2011. This increase is primarily due to an increase in mortgage banking revenue generated from Cole Taylor Mortgage. Mortgage banking revenue increased from $1.5 million in the first quarter of 2011 to $17.5 million in the first quarter of 2012, a change of $16.0 million. Cole Taylor Mortgage experienced a significant increase in mortgage loan fundings, improving margins on mortgage loan sales in the secondary market and increased diversification of revenues with growth in mortgage servicing rights (MSRs) in the first quarter of 2012 as compared to the first quarter of 2011.
Service charges increased from $2.9 million in the first quarter of 2011 to $3.3 million in the first quarter of 2012, an increase of $400,000 or 13.8%. The increase is due to the introduction of new products and the addition of customers throughout 2011 and 2012, as well as pricing adjustments which commenced in the first quarter of 2012.
The first quarter of 2012 included gains on the sales of available for sale investment securities of $1.0 million. These securities were sold at the same time as an early extinguishment of debt occurred. There were no gains on the sales of available for sale investment securities in the first quarter of 2011.
55
Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense:
For the Three Months Ended | ||||||||
March 31, 2012 |
March 31, 2011 |
|||||||
(dollars in thousands) | ||||||||
Salaries and employee benefits: |
||||||||
Salaries, employment taxes, and medical insurance |
$15,488 | $13,251 | ||||||
Incentives, commissions, and retirement benefits |
8,149 | 1,438 | ||||||
|
|
|
|
|||||
Total salaries and employee benefits |
23,637 | 14,689 | ||||||
Occupancy of premises, furniture and equipment |
2,790 | 2,890 | ||||||
Nonperforming asset expense |
694 | 3,277 | ||||||
Early extinguishment of debt |
1,001 | | ||||||
FDIC assessment |
1,702 | 1,948 | ||||||
Legal fees, net |
856 | 794 | ||||||
Other professional services |
579 | 352 | ||||||
Other noninterest expense |
5,309 | 4,599 | ||||||
|
|
|
|
|||||
Total noninterest expense |
$36,568 | $28,549 | ||||||
|
|
|
|
|||||
Efficiency ratio* |
62.07 | % | 73.07 | % | ||||
|
|
|
|
* | The efficiency ratio is calculated by dividing total noninterest expense by an amount equal to net interest income plus noninterest income, excluding gains or losses on investment securities. |
Noninterest expense during the first quarter of 2012 increased $8.1 million, or 28.4%, to $36.6 million, as compared to $28.5 million during the same quarter in 2011. The higher level of noninterest expense during the first quarter of 2012 is primarily the result of increased salaries and employee benefits and early extinguishment of debt expense, partially offset by decreased nonperforming asset expense.
The first quarter of 2012 includes $1.0 million in early extinguishment of debt expense due to a decision to shift funding sources to lower cost alternatives. This early extinguishment occurred at the same time as a sale of available for sale investment securities occurred.
Salaries, employment taxes and medical insurance during the first quarter of 2012 increased $2.2 million, or 16.5%, to $15.5 million, as compared to $13.3 million during the first quarter of 2011. The number of full time equivalent employees increased to 652 at March 31, 2012, as compared to 610 at March 31, 2011, an increase of 42, primarily due to hiring of additional employees at Cole Taylor Mortgage. Incentives, commissions and retirement benefits increased $6.7 million for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011, primarily due to increases in mortgage banking and corporate incentives.
Nonperforming asset expense totaled $694,000 during the first quarter of 2012 as compared to $3.3 million during the first quarter of 2011, a decrease of $2.6 million. The decrease was due to lower levels of write-downs on other real estate owned and repossessed assets and lower unfunded commitment reserves.
56
Nonperforming asset expense reported in noninterest expense includes expenses associated with other real estate owned (OREO) and other repossessed assets held for sale as well as expenses related to impaired and nonperforming loans held for investment.
For assets held for sale, nonperforming asset expense related to OREO and other repossessed assets includes costs associated with owning and managing these assets, including real estate taxes, insurance, utilities and property management costs as well as any subsequent write-downs required by changes in the fair value of the assets and any gains or losses on dispositions.
Nonperforming asset expense related to loans held for investment includes expenses incurred by the Companys loan workout function for collection and foreclosure costs, receiver fees and expenses, and any other expenses incurred to protect the Companys interests in any loan collateral. In addition, nonperforming asset expense includes changes in the liability that the Company established for estimated probable losses from off-balance sheet commitments associated with impaired loans, such as standby letters of credit or unfunded loan commitments.
A quantification of the amount of expense in each of these categories for the periods indicated is as follows:
For the Quarter Ended |
||||||||
March 31, 2012 |
March 31, 2011 |
|||||||
(in thousands) | ||||||||
Held for sale |
$511 | $1,959 | ||||||
Held for investment |
183 | 1,318 | ||||||
|
|
|
|
|||||
Total |
$694 | $3,277 | ||||||
|
|
|
|
Our efficiency ratio was 62.07% in the first quarter of 2012, compared to 73.07% in the first quarter in 2011. The improvement in the efficiency ratio was largely due to the increase in mortgage banking revenue.
Income Taxes
Income tax expense increased from a benefit of $106,000 in the first quarter of 2011 to an expense of $6.4 million in the first quarter of 2012, an increase of $6.5 million. This increase was primarily due to the increase in our income before income taxes, which increased from $282,000 in the first quarter of 2011 to $15.8 million in the first quarter of 2012. At December 31, 2011, we released our $73.2 million valuation allowance against our net deferred tax assets. As this valuation allowance no longer exists, income tax expense is recognized on the statement of operations.
In addition to the increase in income tax expense related to the increase in income before income taxes, the first quarter of 2011 included an income tax benefit due to a change in the State of Illinois tax rate as applied to our January 1, 2011 net deferred tax asset after valuation allowance.
57
Segment Review
As described in Note 12 Segment Reporting, of the notes to the consolidated financial statements, we have two principal operating segments: Banking and Mortgage Banking.
The Banking segment consists of commercial banking, commercial real estate banking, asset based lending, retail banking and all other functions that support those units. Net income for the Banking segment for the quarter ended March 31, 2012 was $6.8 million, an increase of $3.3 million from net income of $3.5 million for the quarter ended March 31, 2011. Net interest income of $37.2 million for the first quarter of 2012 was $2.4 million greater than net interest income of $34.8 million for the same period in 2011. The increase is due to deposit repricing and deliberate changes to the funding mix, partially offset by decreased interest income due to lower loan volume and yields. Noninterest income increased from $5.3 million in the first quarter of 2011 to $6.4 million in the first quarter of 2012, an increase of $1.1 million. The increase was due to gains on the sale of available for sale investment securities of $1.0 million. In addition, increased service charges, due to new products and customers and a change in pricing, were partially offset by declines in other derivative income and loan fee income. Noninterest expense was $25.1 million in the first quarter of 2012 as compared to $24.0 million in the first quarter of 2011, an increase of $1.1 million. This increase was primarily due to early extinguishment of debt expense of $1.0 million. Increases in salaries and benefits and incentive compensation are offset by decreased nonperforming asset expense.
The Mortgage Banking segment originates residential mortgage loans for sale to investors and for retention in our loan portfolio through its retail and broker channels. This segment also services residential mortgage loans for various investors and for our own loans. Net income for the Mortgage Banking segment for the first quarter of 2012 was $5.0 million, a $6.0 million increase from net loss of $1.0 million for the first quarter of 2011. Net interest income increased $1.2 million, from $1.3 million for the quarter ended March 31, 2011 to $2.5 million for the quarter ended March 31, 2012. Net interest income increased due to the growth in loans originated by the Mortgage Banking segment and held on the balance sheet. Noninterest income increased significantly, moving from $1.5 million in the first quarter of 2011 to $17.5 million in the first quarter of 2012. This increase reflects the segments expansion of its national platform and improved margins on mortgage loan sales in the secondary market. Noninterest expense increased from $4.5 million in the first quarter of 2011 to $11.5 million in the first quarter of 2012. The increase is largely due to increased salaries and employee benefits expense and incentive compensation expense, primarily related to volume growth.
In addition, we use an Other category, which includes subordinated debt expense, certain parent company activities and residual income tax expense, representing the difference between the actual amount incurred and the amount allocated to operating segments.
58
FINANCIAL CONDITION
Overview
Total assets increased $9.3 million, or 0.2%, to $4.70 billion at March 31, 2012 from total assets of $4.69 billion at December 31, 2011, largely the result of increases in investment securities, loans held for sale and other assets. These increases were offset by decreases in cash and cash equivalents and loans. Total liabilities stayed flat at $4.28 billion at March 31, 2012 resulting from increases in short-term borrowings offset by decreases in total deposits and long-term borrowings. Total stockholders equity at March 31, 2012 was $416.8 million, as compared to $409.5 million at December 31, 2011.
Investment Securities
Investment securities totaled $1.30 billion at March 31, 2012, compared to $1.28 billion at December 31, 2011, an increase of $19.9 million, or 1.6%. During the first three months of 2012, we purchased approximately $82.8 million of investment securities, mostly mortgage-related securities.
As of March 31, 2012, mortgage-related securities (at estimated fair value) comprised 92.7% of our investment portfolio, almost all of which were securities issued by government and government-sponsored enterprises.
At March 31, 2012, we had a net unrealized gain of $40.2 million in our available for sale investment portfolio, which was comprised of $41.3 million of gross unrealized gains and $1.1 million of gross unrealized losses. At December 31, 2011 the net unrealized gain was $42.9 million, which was comprised of $44.6 million of gross unrealized gains and $1.7 million of gross unrealized losses. The gross unrealized losses at March 31, 2012 related to 6 investment securities with a carrying value of $15.8 million. Each quarter we analyze each of these securities to determine if other-than-temporary impairment has occurred. The factors we consider include the magnitude of the unrealized loss in comparison to the 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-than-temporary impairment has occurred. Of the 6 securities with gross unrealized losses at March 31, 2012, only three securities have been in a loss position for 12 months or more and one had other-than-temporary impairment charge of $125,000 which was recorded against earnings in the first quarter of 2012.
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 FHLBC. At March 31, 2012, we held $51.4 million of FHLBC stock and maintained $869.0 million of FHLB advances. We have assessed the ultimate recoverability of our FHLBC stock and believe no impairment has occurred.
59
Loans
The composition of our loan portfolio as of March 31, 2012 and December 31, 2011 was as follows:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Amount | Percentage of Gross Loans |
Amount | Percentage of Gross Loans |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Loans Held for Portfolio: |
||||||||||||||||
Commercial and industrial |
$ | 1,437,379 | 49 | % | $ | 1,426,221 | 50 | % | ||||||||
Commercial real estate secured |
963,300 | 33 | 1,037,976 | 35 | ||||||||||||
Residential construction and land |
56,780 | 2 | 64,824 | 2 | ||||||||||||
Commercial construction and land |
102,404 | 4 | 99,021 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
2,559,863 | 88 | 2,628,042 | 90 | ||||||||||||
Consumer loans |
343,934 | 12 | 300,257 | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans |
2,903,797 | 100 | % | 2,928,299 | 100 | % | ||||||||||
Less: Allowance for loan losses |
(93,509 | ) | (103,744 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Portfolio loans, net |
$ | 2,810,288 | $ | 2,824,555 | ||||||||||||
|
|
|
|
|||||||||||||
Loans Held for Sale |
$ | 210,040 | $ | 185,984 | ||||||||||||
|
|
|
|
Total loans in our portfolio slightly decreased to $2.90 billion at March 31, 2012 from $2.93 billion at December 31, 2011. Total commercial loans, which includes commercial and industrial (C&I), commercial real estate secured, and construction and land loans, decreased $68.2 million, or 2.6%. The decline in total commercial loans was primarily due to a decrease of $74.7 million, or 7.2%, in commercial real estate secured loans and a decrease of $8.0 million, or 12.4%, in residential construction and land loans. These decreases were offset by slight increases in commercial and industrial and commercial construction and land loans. Consumer loans increased $43.7 million.
C&I loans are made to businesses or to individuals for business purposes. C&I loans are made on either a secured or unsecured basis for a wide range of business purposes, terms, and maturities. These loans are made primarily in the form of seasonal or working-capital loans or term loans. Repayment of these loans is generally provided through the operating cash flow of the borrower.
The risk characteristics of C&I loans are largely influenced by general economic conditions, such as inflation, recessionary pressures, the rate of unemployment, changes in interest rates and money supply, and other factors that affect the borrowers operations and the value of the underlying collateral. Our credit risk strategy emphasizes consistent underwriting standards and diversification by industry and customer size. Our C&I loan portfolio is comprised of loans made to a variety of businesses in a diverse range of industries. This portfolio diversification is a significant factor used to mitigate the risk associated with fluctuations in economic conditions.
C&I loans also include those loans made by our asset-based lending division. Asset-based loans are made to businesses with the primary source of repayment derived from payments on
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the related assets securing the loan. Collateral for these loans may include accounts receivable, inventory, equipment and other fixed assets, and is monitored regularly to ensure ongoing sufficiency of collateral coverage and quality. The primary risk for these loans is a significant decline in collateral values due to general market conditions. Loan terms that mitigate these risks include typical industry amortization schedules, percentage of collateral coverage, maintenance of cash collateral accounts and regular asset monitoring. Because of the national scope of our asset-based lending, the risk of these loans is also diversified by geography.
Total C&I loans were relatively unchanged at $1.44 billion at March 31, 2012 and $1.43 billion at December 31, 2011, and accounted for 50% of our total loan portfolio at March 31, 2012.
Commercial real estate loans on completed properties include loans for the purchase of real property or for other business purposes where the primary collateral is the underlying real property. Our commercial real estate loans consist of loans on commercial owner-occupied properties and investment properties. Investment properties refer to multi-family residences and income producing non-owner occupied commercial real estate, including retail strip centers or malls, office and mixed use properties and other commercial and specialized properties, such as nursing homes, gas stations and convenience stores, churches, hotels, and motels. Repayment of these loans is generally provided through the operating cash flow of the property.
The risk in a commercial real estate loan depends primarily on the loan amount in relation to the value of the underlying collateral, the interest rate, and the borrowers ability to repay in a timely fashion. The credit risk of these loans is influenced by general economic and market conditions and the resulting impact on a borrowers operation of the owner-occupied business or upon the fluctuation in value and earnings performance of an income producing property. In addition, the value of the underlying collateral is influenced by local real estate market trends and general economic conditions. Credit risk is managed in this portfolio through underwriting standards, knowledge of the local real estate markets, periodic reviews of the loan collateral and the borrowers financial condition. In addition, all commercial real estate loans are supported by an independent third party appraisal at inception.
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The following table presents the composition of our commercial real estate portfolio as of the dates indicated:
March 31, 2012 | December 31, 2011 | |||||||||||||||
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 |
$ | 127,795 | 13 | % | $ | 143,052 | 14 | % | ||||||||
Office/mix use property |
111,647 | 11 | 113,429 | 11 | ||||||||||||
Commercial properties |
120,143 | 13 | 129,921 | 12 | ||||||||||||
Specialized other |
76,845 | 8 | 80,971 | 8 | ||||||||||||
Other commercial properties |
20,228 | 2 | 40,270 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal commercial non-owner occupied |
456,658 | 47 | 507,643 | 49 | ||||||||||||
Commercial owner occupied |
425,004 | 44 | 446,259 | 43 | ||||||||||||
Multi-family properties |
81,638 | 9 | 84,074 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate secured |
$ | 963,300 | 100 | % | $ | 1,037,976 | 100 | % | ||||||||
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|
|
|
|
|
|
Our commercial real estate secured loans decreased $74.7 million, or 7.2%, to $963.3 million at March 31, 2012, as compared to $1.04 billion at December 31, 2011. Approximately 92% 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.
Residential real estate construction and land loans primarily consist of loans to real estate developers to construct single-family homes, town-homes and condominium conversions. Commercial real estate construction and land loans primarily consist of loans to construct commercial real estate or income-producing properties. Both the residential and commercial real estate construction and land loans are repaid from proceeds from the sale of the finished units by the developer or may be converted to commercial real estate loans at the completion of the construction process. The risk characteristics of these loans are influenced by national and local economic conditions, including the rate of unemployment and consumer confidence and the related impact that these conditions have on demand, housing prices and real estate values. In addition, credit risk on individual projects is influenced by the developers ability and efficiency in completing construction, selling finished units or obtaining tenants to occupy these properties. Credit risk for these loans is primarily managed by underwriting standards, lending primarily in local markets to developers with whom we have has experience and ongoing oversight of project progress.
Our residential construction and land loans decreased by $8.0 million, or 12.4%, to $56.8 million at March 31, 2012, as compared to $64.8 million at December 31, 2011. Commercial construction and land loans totaled $102.4 million at March 31, 2012 as compared to $99.0 million at December 31, 2011, an increase of $3.4 million.
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Our consumer loans consist of open and closed-end credit extended to individuals for household, family, and other personal expenditures. Consumer loans primarily include loans to individuals secured by their personal residence, including first mortgages and home equity and home improvement loans. The primary risks in consumer lending are loss of income of the borrower that can result from job losses or unforeseen personal hardships due to medical or family issues that may impact repayment. In the case of first and second mortgage or home equity lending, a significant reduction in the value of the asset financed can influence a borrowers ability to repay the loan. Because the size of consumer loans is typically smaller than commercial loans, the risk of loss on an individual consumer loan is usually less than that of a commercial loan. Credit risk for these loans is managed by reviewing creditworthiness of the borrower, monitoring payment histories and obtaining adequate collateral positions.
Total consumer loans, increased $43.7 million, or 14.5%, to $343.9 million at March 31, 2012. This increase is the result of certain mortgages originated by Cole Taylor Mortgage being held in the loan portfolio rather than sold in the secondary market.
Loans Held for Sale
At March 31, 2012, we held $210.0 million loans classified as held for sale, as compared to $186.0 million at December 31, 2011. At each of March 31, 2012 and December 31, 2011, 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. The aggregate, unpaid principal balances associated with these loans was $203.9 million at March 31, 2012, with an unrealized gain of $6.1 million that was included in mortgage banking revenues in noninterest income on the Consolidated Statements of Operations.
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Loan Quality and Nonperforming Assets
The following table sets forth the amounts of nonperforming assets as of the dates indicated:
Mar. 31, 2012 |
Dec. 31, 2011 |
Mar. 31, 2011 |
||||||||||
(dollars in thousands) | ||||||||||||
Loans contractually past due 90 days or more but still accruing interest |
$ | | $ | | $ | 54 | ||||||
Nonaccrual loans: |
||||||||||||
Commercial and industrial |
21,076 | 42,909 | 57,500 | |||||||||
Commercial real estate secured |
30,185 | 35,159 | 76,134 | |||||||||
Residential construction and land |
7,113 | 7,810 | 13,599 | |||||||||
Commercial construction and land |
26,046 | 5,279 | 6,311 | |||||||||
All other loan types |
9,078 | 11,904 | 14,612 | |||||||||
|
|
|
|
|
|
|||||||
Total nonaccrual loans |
93,498 | 103,061 | 168,156 | |||||||||
|
|
|
|
|
|
|||||||
Total nonperforming loans |
93,498 | 103,061 | 168,210 | |||||||||
OREO and repossessed assets |
36,941 | 35,622 | 38,165 | |||||||||
|
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|
|
|
|
|||||||
Total nonperforming assets |
$ | 130,439 | $ | 138,683 | $ | 206,375 | ||||||
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|
|
|
|
|||||||
Performing restructured loans not included in nonperforming assets |
$ | 14,828 | $ | 14,176 | $ | 19,741 | ||||||
Nonperforming loans to total loans |
3.00 | % | 3.31 | % | 5.93 | % | ||||||
Nonperforming assets to total loans plus OREO and repossessed assets |
4.14 | % | 4.40 | % | 7.18 | % | ||||||
Nonperforming assets to total assets |
2.78 | % | 2.96 | % | 4.81 | % |
Nonperforming assets were $130.4 million, or 2.78%, of total assets on March 31, 2012, compared to $138.7 million, or 2.96% of total assets on December 31, 2011, and $206.4 million, or 4.81% of total assets on March 31, 2011. During the first quarter of 2012, $17.6 million of nonperforming loans were charged-off and $5.6 million of loans were transferred to OREO 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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Commercial real estate secured nonaccrual loans are the largest category of nonaccrual loans at $30.2 million and comprise approximately 32% of all nonaccrual loans. An increase of $20.8 million in commercial construction and land nonaccrual loans in the first quarter of 2012 was largely comprised of one borrower who was already on the watch list of criticized and classified loans. Partially offsetting this increase was a decrease of $21.8 million in commercial and industrial nonaccrual loans, as well as reductions in residential construction and land nonaccrual loans, primarily resulting from charge-offs, transfers to OREO and paydowns.
Other real estate owned and repossessed assets:
OREO and repossessed assets totaled $36.9 million at March 31, 2012 as compared to $35.6 million at December 31, 2011 and $38.2 million at March 31, 2011. The following table provides a rollforward, for the periods indicated, of other real estate owned and repossessed assets:
For the Period Ended | ||||||||
March 31, 2012 |
March 31, 2011 |
|||||||
(in thousands) | ||||||||
Balance at beginning of period |
$ | 35,622 | $ | 31,490 | ||||
Transfers from loans |
5,600 | 8,619 | ||||||
Dispositions and settlements |
(3,986 | ) | (531 | ) | ||||
Additional impairment |
(295 | ) | (1,413 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 36,941 | $ | 38,165 | ||||
|
|
|
|
During the first quarter of 2012, we transferred $5.6 million of loans into other real estate owned and repossessed assets. The loans transferred primarily consisted of $1.5 million from our commercial and industrial portfolio, $684,000 from our commercial real estate secured portfolio and $3.4 million from our consumer portfolio. We also reduced the carrying value of certain other real estate owned and repossessed assets by $295,000 during the first quarter of 2012 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 has decreased from March 31, 2011 to March 31, 2012, however, 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, 2012, impaired loans totaled $99.3 million, compared to $108.5 million at December 31, 2011. Total impaired loans were $178.6 million at March 31, 2011.
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The balance of impaired loans and the related allowance for loan losses for impaired loans is as follows:
March 31, 2012 |
Dec. 31, 2011 |
March 31, 2011 |
||||||||||
(in thousands) | ||||||||||||
Impaired loans: |
||||||||||||
Commercial and industrial |
$ | 26,667 | $ | 48,895 | $ | 69,415 | ||||||
Commercial real estate secured |
34,405 | 39,398 | 82,651 | |||||||||
Residential construction and land |
7,114 | 7,813 | 17,129 | |||||||||
Commercial construction and land |
26,045 | 6,791 | 6,311 | |||||||||
Consumer-oriented |
5,055 | 5,638 | 3,086 | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans |
$ | 99,286 | $ | 108,535 | $ | 178,592 | ||||||
|
|
|
|
|
|
|||||||
Recorded balance of impaired loans: |
||||||||||||
With related allowance for loan losses |
$ | 61,813 | $ | 71,512 | $ | 122,891 | ||||||
With no related allowance for loan losses |
37,473 | 37,023 | 55,701 | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans |
$ | 99,286 | $ | 108,535 | $ | 178,592 | ||||||
|
|
|
|
|
|
|||||||
Allowance for losses on impaired loans: |
||||||||||||
Commercial and industrial |
$ | 10,214 | $ | 23,292 | $ | 28,346 | ||||||
Commercial real estate secured |
3,745 | 7,540 | 15,302 | |||||||||
Residential construction and land |
1,047 | 1,181 | 3,417 | |||||||||
Commercial construction and land |
7,464 | 31 | 79 | |||||||||
Consumer-oriented |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total allowance for losses on impaired loans |
$ | 22,470 | $ | 32,044 | $ | 47,144 | ||||||
|
|
|
|
|
|
The decrease in impaired loans during the first quarter of 2012 primarily resulted from net charge-offs and transfers into OREO 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 2012 and totaled $22.5 million at March 31, 2012 as compared to $32.0 million at December 31, 2011 and $47.1 million at March 31, 2011. The decrease in the allowance for losses on impaired loans in 2012 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 35% of all impaired loans and comprised 17% of the allowance for loan losses on impaired loans.
Through an individual impairment analysis, at March 31, 2012, we determined that $61.8 million of our impaired loans had a specific measure of impairment and required a related allowance for loan losses of $22.5 million. We also held $37.5 million of impaired loans, for which the individual analysis did not result in a measure of impairment, and so no related allowance for loan losses was provided. Once we determine a 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
66
appraisal. For impaired loans that are collateral dependent, our practice is to obtain an updated appraisal every nine to 18 months, depending on the nature and type of the collateral and the stability of collateral valuations, as determined by senior members of credit management. OREO and repossessed assets require an updated appraisal at least annually. We have established policies and procedures related to appraisals and maintain a list of approved appraisers who have met specific criteria. In addition, our policy for appraisals on real estate dependent commercial loans generally requires each appraisal to have an independent compliance and technical review by a qualified third party to ensure the consistency and quality of the appraisal and valuation. We discount appraisals for estimated selling costs and, when appropriate, consider the date of the appraisal and stability of the local real estate market when analyzing the estimated fair value of individual impaired loans that are collateral dependent.
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, 2012, we held $62.1 million of loans classified as troubled-debt restructurings which includes commercial loans of $55.4 million and consumer loans of $6.7 million.
The balance of nonaccrual and impaired loans as of March 31, 2012 is presented below:
Nonaccrual Loans |
Impaired Loans |
|||||||
(dollars in thousands) | ||||||||
Commercial nonaccrual loans |
$ | 84,420 | $ | 84,420 | ||||
Commercial loans on accrual but impaired |
N/A | 9,811 | ||||||
Consumer loans |
9,078 | 5,055 | ||||||
|
|
|
|
|||||
$ | 93,498 | $ | 99,286 | |||||
|
|
|
|
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, 2012, these potential problem loans totaled $15.4 million. Of these potential problem loans at March 31, 2012, $11.3 million were in our commercial and
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industrial portfolio and $4.1 million were in our commercial real estate secured portfolio. In comparison, potential problem loans at December 31, 2011 totaled $37.0 million. The potential problem loans at December 31, 2011 included $20.3 million of construction and land loans, $12.6 million of commercial and industrial loans and $4.1 million of commercial real estate secured loans. We do not necessarily expect to realize losses on potential problem loans, but we recognize potential problem loans can carry a higher probability of default and may require additional attention by management.
Allowance for Loan Losses
We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of the allowance includes identifying problem loans, estimating the amount of probable loss related to those loans, estimating probable losses from specific portfolio segments and evaluating the impact on our loan portfolio of a number of economic and qualitative factors. Although management believes that the allowance for loan losses is adequate to absorb probable losses on existing loans that may become uncollectible, 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, |
||||||||
2012 | 2011 | |||||||
(dollars in thousands) | ||||||||
Average total loans |
$3,129,222 | $2,933,939 | ||||||
|
|
|
|
|||||
Total loans at end of period |
$3,113,837 | $2,836,759 | ||||||
|
|
|
|
|||||
Allowance for loan losses: |
||||||||
Allowance at beginning of period |
$103,744 | $124,568 | ||||||
Net (charge-offs) recoveries: |
||||||||
Commercial and commercial real estate |
(15,347 | ) | (10,734 | ) | ||||
Real estate construction |
(1,197 | ) | (8,692 | ) | ||||
Residential real estate mortgages and consumer loans |
(1,041 | ) | (417 | ) | ||||
|
|
|
|
|||||
Total net charge-offs |
(17,585 | ) | (19,843 | ) | ||||
Provision for loan losses |
7,350 | 10,241 | ||||||
|
|
|
|
|||||
Allowance at end of period |
$93,509 | $114,966 | ||||||
|
|
|
|
|||||
Annualized net charge-offs to average total loans |
2.25 | % | 2.71 | % | ||||
Allowance to total loans at end of period (excluding loans held for sale) |
3.22 | % | 4.13 | % | ||||
Allowance to nonperforming loans |
100.01 | % | 68.35 | % |
Our allowance for loan losses was $93.5 million at March 31, 2012, or 3.22% of end-of-period loans (excluding loans held for sale) and 100.01% of nonperforming loans. At March 31, 2011, the allowance for loan losses was $115.0 million, which represented 4.13% of end-of-period loans (excluding loans held for sale) and 68.35% of nonperforming loans. Net charge-offs during the first quarter of 2012 were $17.6 million, or 2.25% of average loans on an annualized basis. In comparison, net charge-offs during the first quarter of 2011 were $19.8 million, or 2.71% 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 $7.4 million in the first quarter of 2012 and $10.2 million in the first quarter of 2011.
Mortgage Servicing Rights
We sell residential mortgage loans originated by Cole Taylor Mortgage. In the three months ended March 31, 2012, we sold a portion of the originated loans into the secondary market while retaining servicing rights of those loans. Upon sale, a MSR asset is capitalized, which represents the fair value of future net cash flows expected to be realized for performing servicing activities. In addition to the MSRs resulting from the retention of servicing on loans originated by Cole Taylor Mortgage, we completed bulk purchases of $5.6 million of MSRs in the first quarter of 2012, which were recorded at fair value at the time of purchase.
We elected to account for MSRs using the fair value option. The balance of the MSR asset was $22.4 million at March 31, 2012 and $8.7 million at December 31, 2011. The amount of loans serviced for others at March 31, 2012 was $2.38 billion and $1.02 billion at December 31, 2011.
Deposits
Total deposit balances at March 31, 2012 decreased $133.6 million to $2.99 billion as compared to $3.12 billion at year-end 2011. During the first quarter of 2012, our total in-market deposits decreased $60.6 million and our out-of-market deposits decreased by $72.9 million.
Total in-market deposits decreased $60.6 million to $2.50 billion at March 31, 2012 as compared to $2.56 billion at December 31, 2011. Noninterest-bearing deposits decreased $99.8 million to $702.7 million primarily due to seasonality. Customer CDs decreased $52.1 million to $506.8 million and public time deposits decreased $14.6 million to $39.5 million. NOW accounts increased $67.8 million to $392.7 million largely due to new relationships. Money market account balances increased $32.4 million to $689.9 million due to our on-going strategy to increase deposits with our core customers. Total out-of-market deposits decreased by $72.9 million to $491.9 million at March 31, 2012 from $564.8 million at year-end 2011, with most of the decrease occurring in brokered CDs which decreased by $68.0 million.
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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, 2012 |
Dec. 31, 2011 |
|||||||
(in thousands) | ||||||||
In-market deposits: |
||||||||
Noninterest-bearing deposits |
$ | 702,723 | $ | 802,480 | ||||
NOW accounts |
392,659 | 324,877 | ||||||
Savings accounts |
39,630 | 38,370 | ||||||
Money market accounts |
689,912 | 657,500 | ||||||
Customer certificates of deposit |
506,784 | 558,874 | ||||||
CDARS time deposits |
126,562 | 122,219 | ||||||
Public time deposits |
39,509 | 54,086 | ||||||
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|
|
|
|||||
Total in-market deposits |
2,497,779 | 2,558,406 | ||||||
Out-of-market deposits: |
||||||||
Out-of-local-market certificates of deposit |
130,989 | 135,838 | ||||||
Out-of-local market CDARS time deposits |
21,834 | 21,899 | ||||||
Brokered certificates of deposit |
339,037 | 407,068 | ||||||
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|
|
|
|||||
Total out-of-market deposits |
491,860 | 564,805 | ||||||
|
|
|
|
|||||
Total deposits |
$ | 2,989,639 | $ | 3,123,211 | ||||
|
|
|
|
Average interest-bearing deposits for the first three months of 2012 decreased $174.6 million, or 7.1%, to $2.29 billion, compared to $2.46 billion for the first three months of 2011. A decrease of $172.3 million in certificates of deposit is responsible for most of the decrease in average interest-bearing deposits. Increases of $107.8 million in NOW accounts and $68.8 million in money market accounts were offset by decreases of $92.4 million in brokered CDs and $90.5 million in CDARS time deposits.
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, 2012 |
For the Three Months Ended March 31, 2011 |
|||||||||||||||||||||||
Average Balance |
Percent of Deposits |
Average Rate |
Average Balance |
Percent of Deposits |
Average Rate |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Noninterest-bearing demand deposits |
$ | 753,995 | 24.8 | % | | % | $ | 612,032 | 19.9 | % | | % | ||||||||||||
NOW accounts |
348,723 | 11.5 | 0.67 | 240,928 | 7.9 | 1.06 | ||||||||||||||||||
Money market accounts |
670,496 | 22.0 | 0.58 | 607,318 | 19.8 | 0.77 | ||||||||||||||||||
Savings deposits |
39,107 | 1.3 | 0.07 | 38,094 | 1.2 | 0.09 | ||||||||||||||||||
Time deposits: |
||||||||||||||||||||||||
Certificates of deposit |
541,106 | 17.8 | 1.41 | 713,423 | 23.2 | 1.83 | ||||||||||||||||||
Out-of-local-market certificates of deposit |
132,255 | 4.3 | 0.87 | 114,714 | 3.7 | 1.24 | ||||||||||||||||||
Brokered certificates of deposit |
372,835 | 12.3 | 1.58 | 465,195 | 15.1 | 2.40 | ||||||||||||||||||
CDARS time deposits |
111,943 | 3.7 | 0.47 | 202,491 | 6.6 | 0.81 | ||||||||||||||||||
CDARS out-of-local market time deposits |
21,926 | 0.7 | | | | | ||||||||||||||||||
Public time deposits |
47,903 | 1.6 | 0.39 | 78,774 | 2.6 | 0.52 | ||||||||||||||||||
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|
|
|
|
|
|
|
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Total time deposits |
1,227,968 | 40.4 | 1.26 | 1,574,597 | 51.2 | 1.76 | ||||||||||||||||||
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Total deposits |
$ | 3,040,289 | 100.0 | % | $ | 3,072,969 | 100.0 | % | ||||||||||||||||
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Borrowings
Short-term borrowings include overnight securities sold under agreements to repurchase, federal funds purchased and short-term FHLB advances, which consist of borrowings from the FHLBC. Short-term borrowings increased $156.5 million to $924.6 million at March 31, 2012, as compared to $768.1 million at December 31, 2011. Most of the increase resulted from a $149.0 million increase in short-term FHLB advances which reflects a shift from the use of higher cost brokered deposits. Overnight repurchase agreements increased $15.9 million.
Long-term borrowings include term structured repurchase agreements and long-term FHLB advances, which consist of borrowings from the FHLBC. Long-term borrowings were $85.0 million at March 31, 2012, a decrease of $62.5 million from the balance of $147.5 million on December 31, 2011. Term structured repurchase agreements decreased $35.0 million and long-term FHLB advances decreased $27.5 million. In the first quarter of 2012, we terminated a long-term FHLB advance to shift funding sources to lower cost alternatives.
At March 31, 2012 and December 31, 2011, subject to available collateral, we had available pre-approved total repurchase agreement lines of $850.0 million. Of the pre-approved repurchase agreement lines, we had uncollateralized lines available to borrow of $810.0 million at March 31, 2012 and $775.0 million at December 31, 2011. Remaining collateral available to pledge for repurchase agreement lines totaled $169.2 million at March 31, 2012, compared with $255.3 million at December 31, 2011.
At March 31, 2012, all borrowings from the FHLBC were collateralized by $893.5 million of investment securities and a blanket lien on $438.8 million of qualified first-mortgage residential, multi-family, home equity and commercial real estate loans. Based on the value of collateral pledged, we had additional borrowing capacity of $304.7 million at March 31, 2012. At December 31, 2011, we maintained collateral of $782.1 million of investment securities and a blanket lien on $390.8 million on qualified first-mortgage residential, home equity and commercial real estate loans and had additional borrowing capacity of $277.3 million.
We participate in the FRBs Borrower In Custody (BIC) program. At March 31, 2012 the Bank pledged $618.1 million of commercial loans as collateral and had available $512.5 million of borrowing capacity at the FRB. In comparison, the Bank had pledged $569.2 million of commercial loans as collateral and had available $463.3 million of borrowing capacity under the BIC program at December 31, 2011. There were no borrowings under the BIC program at either March 31, 2012 or December 31, 2011.
Junior Subordinated Debentures
At March 31, 2012, 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, 2012, unamortized issuance costs relating to TAYC Capital Trust I were $2.1 million and $347,000 related to TAYC Capital Trust II. Unamortized issuance costs would be immediately recognized as noninterest expense if the debentures were called by us.
71
Subordinated Notes
The following table describes the subordinated debt outstanding at March 31, 2012 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, 2012 | Dec. 31, 2011 | |||||||
(in thousands) | ||||||||
Taylor Capital Group, Inc.: |
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8% subordinated notes issued May 2010, due May 28, 2020 |
$33,938 | $33,938 | ||||||
Unamortized discount |
(3,981 | ) | (4,059 | ) | ||||
8% subordinated notes issued October 2010, due May 28, 2020 |
3,562 | 3,562 | ||||||
Unamortized discount |
(420 | ) | (427 | ) | ||||
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Taylor Capital Group subordinated notes, net |
33,099 | 33,014 | ||||||
Cole Taylor Bank: |
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10% subordinated notes issued September 2008, due Sept. 29, 2016 |
60,000 | 60,000 | ||||||
Unamortized discount |
(3,232 | ) | (3,366 | ) | ||||
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Cole Taylor Bank subordinated notes, net |
56,768 | 56,634 | ||||||
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Total subordinated notes, net |
$89,867 | $89,648 | ||||||
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72
CAPITAL RESOURCES
At March 31, 2012 and December 31, 2011, both the Company and the Bank were considered well capitalized under regulatory capital guidelines for bank holding companies and banks. The Companys and the Banks capital ratios were as follows as of the dates indicated:
ACTUAL | FOR CAPITAL ADEQUACY PURPOSES |
TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS |
||||||||||||||||||||||
AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
As of March 31, 2012: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Taylor Capital Group, Inc. |
$541,423 | 15.46 | % | >280,191 | >8.00 | % | >350,239 | >10.00 | % | |||||||||||||||
Cole Taylor Bank |
499,205 | 14.26 | >280,024 | >8.00 | >350,030 | >10.00 | ||||||||||||||||||
Tier I Capital (to Risk Weighted Assets) |
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Taylor Capital Group, Inc. |
418,460 | 11.95 | >140,096 | >4.00 | >210,143 | >6.00 | ||||||||||||||||||
Cole Taylor Bank |
409,368 | 11.70 | >140,012 | >4.00 | >210,018 | >6.00 | ||||||||||||||||||
Leverage (to average assets) |
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Taylor Capital Group, Inc. |
418,460 | 9.08 | >184,314 | >4.00 | >230,392 | >5.00 | ||||||||||||||||||
Cole Taylor Bank |
409,368 | 8.89 | >184,158 | >4.00 | >230,197 | >5.00 | ||||||||||||||||||
As of December 31, 2011: |
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Total Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
Taylor Capital Group, Inc. |
$517,706 | 14.72 | % | >$281,366 | >8.00 | % | >$351,708 | >10.00 | % | |||||||||||||||
Cole Taylor Bank |
471,615 | 13.42 | >281,220 | >8.00 | >351,526 | >10.00 | ||||||||||||||||||
Tier I Capital (to Risk Weighted Assets) |
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Taylor Capital Group, Inc. |
394,630 | 11.22 | >140,683 | >4.00 | >211,025 | >6.00 | ||||||||||||||||||
Cole Taylor Bank |
381,563 | 10.85 | >140,610 | >4.00 | >210,915 | >6.00 | ||||||||||||||||||
Leverage (to average assets) |
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Taylor Capital Group, Inc. |
394,630 | 8.84 | >178,661 | >4.00 | >223,327 | >5.00 | ||||||||||||||||||
Cole Taylor Bank |
381,563 | 8.53 | >178,946 | >4.00 | >223,683 | >5.00 |
All of our capital asset ratios increased during the first quarter of 2012, mostly due to net income for the quarter.
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. We have agreed, consistent with past practice, to provide our regulators notice before the payment of dividends. The Bank is also subject to dividend restrictions set forth by regulatory authorities.
LIQUIDITY
During the first quarter of 2012, total assets increased $9.3 million, or 0.2%, primarily due to increases in investment securities, loans held for sale and other assets. Cash inflows during the first three months of 2012 consisted largely of $812.5 million increase in proceeds from loan sales, $156.5 million increase in short-term borrowings and $42.1 million in proceeds from principal payments and maturities of available for sale securities.
Cash outflows during the first three months of 2012 included $829.3 million for loans originated for sale, $133.3 million decrease in deposits, $38.6 million for the purchase of investment securities and a $62.5 million reduction in long-term borrowings.
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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 $40.6 million at March 31, 2012 from $45.0 million at December 31, 2011. Significant cash outflows during the first quarter of 2012 included $1.3 million for the payment of dividends on our Series B preferred stock, and $2.2 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, 2012, we had $811.2 million of undrawn commitments to extend credit and $83.7 million of financial and performance standby letters of credit. In comparison, at December 31, 2011, we had $846.7 million of undrawn commitments to extend credit and $75.0 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 both March 31, 2012 and December 31, 2011, we maintained a liability for $4.4 million for undrawn commitments and standby letters of credit for which we believed funding and loss were probable.
Derivative Financial Instruments
At March 31, 2012, we had $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 CDs is reported as an adjustment to the carrying value of the brokered CDs. Total ineffectiveness on these interest rate swaps was $13,000 and was recorded in other derivative income in noninterest income in the first quarter of 2012.
At March 31, 2012, we had $60.0 million of notional amount interest rate swap agreements that are designated as fair value hedges against certain callable brokered CDs. These swaps are used to convert the fixed rate paid on the callable 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 callable brokered CDs is reported as an adjustment to the carrying
74
value of the callable brokered CDs. Total ineffectiveness on these interest rate swaps was $147,000 and was recorded in other derivative income in noninterest income in the first quarter of 2012.
At March 31, 2012 we also had $155.0 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, 2012.
We use derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. At March 31, 2012, $813.0 million of derivative instruments were interest rate exchange agreements related to customer transactions, which are not designated as hedges. As of March 31, 2012, we had notional amounts of $406.5 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, 2012, we had offsetting interest rate swaps with other counterparties with a notional amount of $406.5 million in which we agreed to receive a variable interest rate and pay a fixed interest rate.
We enter into interest rate swaps as a part of Cole Taylor Mortgages servicing business in order to minimize most of the price volatility of the mortgage services rights asset. At March 31, 2012, the Company had a notional amount of $52.5 million of interest rate swaps. 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 noninterest income.
We enter into interest rate lock and forward loan sale commitments as part of Cole Taylor Mortgages origination business. At March 31, 2012, the Company had notional amounts of $580.9 million of interest rate lock commitments and $574.4 million of forward loan sale commitments. 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 noninterest income.
We enter into covered call option transactions from time to time that are designed primarily to increase the total return associated with the investment securities portfolio. There were no covered call options outstanding as of March 31, 2012, and there were no premiums related to covered call options recognized in noninterest income in the first quarter 2012.
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
75
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 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 agency 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 the next twelve months in a 200 basis points rising rate scenario was calculated to increase $1.7 million, or 1.4%, as compared to the net interest income in the rates unchanged scenario at March 31, 2012. At December 31, 2011, the projected variance in the rising rate scenario was a decrease of $907,000, or 0.6%. 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, 2012 and December 31, 2011.
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, 2012 | At December 31, 2011 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Change in interest rates |
Dollar Change |
Percentage Change |
Dollar Change |
Percentage Change |
||||||||||||
+200 basis points over one year |
$ | 1,736 | 1.4 | % | $ | (907 | ) | (0.6 | )% | |||||||
- 200 basis points over one year |
N/A | N/A | N/A | N/A |
N/A Not applicable
76
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 June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. ASU No. 2011-05 provides guidance to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in OCI. The FASB has eliminated the option to present OCI as part of the statement of changes in stockholders equity. This ASU requires either the addition of OCI to the current statement of operations for one single statement of comprehensive income or the addition of a statement that presents total OCI. In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU defers only those changes to ASU 2011-05 that relate to the presentation of reclassification adjustments. While this issue is being reconsidered, entities should continue to report reclassifications out of accumulated OCI consistent with guidance in effect prior to ASU 2011-05. These ASUs are effective for the interim or annual periods beginning after December 15, 2011. These accounting standards were adopted as of the first quarter 2012 and the adoption did not have a material effect on our consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP (generally accepted accounting principles) and IFRSs (international financial reporting standards). The amendments in this update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. This ASU is effective for the interim and annual period that begins after December 15, 2011. This accounting standard was adopted as of the first quarter 2012 and the adoption did not have a material effect on our consolidated financial statements.
In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. ASU No. 2011-03 removes two criteria from the assessment of effective control when determining whether a repurchase agreement 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. This accounting standard was adopted as of the first quarter 2012 and the adoption did not have a material effect on our consolidated financial statements.
77
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.
2012 Quarter Ended | 2011 Quarter Ended | 2010 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 |
$46,267 | $ 46,345 | $47,299 | $46,821 | $47,595 | $ 49,967 | $51,980 | $ 53,682 | ||||||||||||||||||||||||
Interest expense |
10,465 | 11,079 | 12,581 | 14,578 | 15,408 | 16,405 | 17,613 | 19,004 | ||||||||||||||||||||||||
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Net interest income |
35,802 | 35,266 | 34,718 | 32,243 | 32,187 | 33,562 | 34,367 | 34,678 | ||||||||||||||||||||||||
Provision for loan losses |
7,350 | 10,955 | 16,240 | 11,822 | 10,241 | 59,923 | 18,128 | 43,946 | ||||||||||||||||||||||||
Noninterest income |
23,946 | 16,538 | 19,432 | 6,387 | 6,885 | 18,009 | 44,142 | 6,158 | ||||||||||||||||||||||||
Noninterest expense |
36,568 | 31,846 | 28,152 | 27,846 | 28,549 | 36,971 | 26,646 | 27,467 | ||||||||||||||||||||||||
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Income (loss) before income taxes |
15,830 | 9,003 | 9,758 | (1,038 | ) | 282 | (45,323 | ) | 33,735 | (30,577 | ) | |||||||||||||||||||||
Income taxes (benefit) |
6,361 | (73,317 | ) | (42 | ) | 355 | (106 | ) | 284 | 321 | 306 | |||||||||||||||||||||
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Net Income (loss) |
9,469 | 82,320 | 9,800 | (1,393 | ) | 388 | (45,607 | ) | 33,414 | (30,883 | ) | |||||||||||||||||||||
Preferred dividends and discounts |
(1,742 | ) | (12,235 | ) | (2,477 | ) | (2,470 | ) | (2,464 | ) | (2,448 | ) | (2,671 | ) | (17,449 | ) | ||||||||||||||||
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Net income (loss) available to common stockholders |
$ 7,727 | $ 70,085 | $ 7,323 | $ (3,863 | ) | $ (2,076 | ) | $(48,055 | ) | $30,743 | $(48,332 | ) | ||||||||||||||||||||
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Income (loss) per common share: |
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Basic |
$ 0.26 | $ 3.20 | $ 0.35 | $ (0.19 | ) | $ (0.12 | ) | $ (2.76 | ) | $ 1.68 | $ (3.35 | ) | ||||||||||||||||||||
Diluted |
0.26 | 3.20 | 0.35 | (0.19 | ) | (0.12 | ) | (2.76 | ) | 1.57 | (3.35 | ) | ||||||||||||||||||||
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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, 2012.
78
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, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 pending or threatened 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 2011 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. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
79
Item 6. | Exhibits |
EXHIBIT INDEX
Exhibit |
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 | Certificate of Amendment, dated May 13, 2010, to the Third Amended and Restated Certificate of Incorporation of Taylor Capital group, Inc. (incorporated by reference to Exhibit 3.2 of the Companys Quarterly Report on Form 10-Q for the period ended June 30, 2011, filed August 4, 2011). | |
3.3 | Certificate of Amendment, dated December 27, 2011, to the Third Amended and Restated Certificate of Incorporation of Taylor Capital Group, Inc. (incorporated by reference to Exhibit 3.3 of the Companys Current Report on form 8-K filed December 27, 2011). | |
3.4 | 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). | |
3.5 | 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). | |
3.6 | Certificate of Amendment, dated December 27, 2011, to the Certificate of Designations of 8% Non-Cumulative, Convertible Perpetual Preferred Stock, Series C, of Taylor Capital Group, Inc. (incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed December 27, 2011). | |
3.7 | 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). | |
3.8 | Certificate of amendment, dated December 27, 2011, to the 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. (incorporated by reference to Exhibit 3.2 of the Companys Current Report on Form 8-K filed December 27, 2011). | |
3.9 | Certificate of Designations of 8% Non-cumulative, Nonvoting, 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). | |
3.10 | Certificate of Designations of Nonvoting Convertible Preferred Stock of Taylor Capital Group, Inc. (incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed March 30, 2012). | |
3.11 | 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). | |
10.1 | Exchange Agreement, dated as of March 26, 2012, by and among Taylor Capital Group, Inc., Prairie Capital IV, L.P. and Prairie Capital IV QP, L.P. (incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed March 30, 2012). |
80
Exhibit |
Description of Exhibits | |
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. | |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2012 and December 31, 2011; (ii) Consolidated Statements of Operations for the three months ended March 31, 2012 and March 31, 2011; (iii) Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2012 and March 31, 2011; (iv) Consolidated Statements of Changes in Stockholders Equity for the three months ended March 31, 2012 and March 31, 2011; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and March 31, 2011; and (vi) Notes to Consolidated Financial Statements tagged as blocks of text.* |
* | As provided in Rule 406T of Regulation S-T, this information shall not be deemed filed for purposes of Section 11 and 12 of the Securities Act and Section 18 of the Exchange Act, or otherwise subject to liability under those sections. |
81
Pursuant to the requirements of the Securities 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 4, 2012 | ||
/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) |
82
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Mark A. Hoppe, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Taylor Capital Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 4, 2012
/s/ Mark A. Hoppe |
Mark A. Hoppe |
President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Randall T. Conte, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Taylor Capital Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 4, 2012
/s/ Randall T. Conte |
Randall T. Conte |
Chief Operating and Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer and Chief Financial Officer of Taylor Capital Group, Inc. (the Company) hereby certify that:
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2012 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 4, 2012 | /s/ Mark A. Hoppe |
|||||||
Mark A. Hoppe President and Chief Executive Officer |
||||||||
Dated: May 4, 2012 | /s/ Randall T. Conte |
|||||||
Randall T. Conte Chief Operating and Chief Financial Officer |
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or another document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Taylor Capital Group, Inc. and will be retained by Taylor Capital Group, Inc. and furnished to the Securities and Exchange Commission or its Staff upon request.
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