Item 1. Financial Statements
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
Cash and cash equivalents:
|
|
|
|
Cash and due from banks
|
$
|
97,764
|
|
|
$
|
165,921
|
|
Short-term investments
|
68
|
|
|
464
|
|
Total cash and cash equivalents
|
97,832
|
|
|
166,385
|
|
Investment securities:
|
|
|
|
Available for sale, at fair value
|
1,013,635
|
|
|
936,938
|
|
Held to maturity, at amortized cost (fair value of $410,828 at June 30, 2013 and $342,231 at December 31, 2012)
|
420,691
|
|
|
330,819
|
|
Loans held for sale
|
693,937
|
|
|
938,379
|
|
Loans, net of allowance for loan losses of $83,576 at June 30, 2013 and $82,191 at December 31, 2012
|
3,218,972
|
|
|
3,086,112
|
|
Premises, leasehold improvements and equipment, net
|
23,941
|
|
|
16,062
|
|
Investments in Federal Home Loan Bank and Federal Reserve Bank stock, at cost
|
79,726
|
|
|
74,950
|
|
Mortgage servicing rights, at fair value
|
145,729
|
|
|
78,917
|
|
Other real estate and repossessed assets, net
|
19,794
|
|
|
24,259
|
|
Other assets
|
187,113
|
|
|
149,589
|
|
Total assets
|
$
|
5,901,370
|
|
|
$
|
5,802,410
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Deposits:
|
|
|
|
Noninterest-bearing
|
$
|
1,138,839
|
|
|
$
|
1,179,724
|
|
Interest-bearing
|
2,553,587
|
|
|
2,348,618
|
|
Total deposits
|
3,692,426
|
|
|
3,528,342
|
|
Accrued interest, taxes and other liabilities
|
133,208
|
|
|
131,473
|
|
Short-term borrowings
|
1,428,855
|
|
|
1,463,019
|
|
Long-term borrowings
|
—
|
|
|
—
|
|
Junior subordinated debentures
|
86,607
|
|
|
86,607
|
|
Subordinated notes, net
|
—
|
|
|
33,366
|
|
Total liabilities
|
5,341,096
|
|
|
5,242,807
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares authorized:
|
|
|
|
Series A, 8% perpetual non-cumulative; 4,000,000 shares authorized, 4,000,000 shares issued and outstanding at June 30, 2013 and December 31, 2012, $25 liquidation value
|
100,000
|
|
|
100,000
|
|
Series B, 5% fixed rate cumulative perpetual; 104,823 shares authorized, 104,823 shares issued and outstanding at June 30, 2013 and December 31, 2012, $1,000 liquidation value
|
104,745
|
|
|
103,813
|
|
Nonvoting convertible; 1,350,000 shares authorized, 1,282,674 shares issued and outstanding at June 30, 2013 and at December 31, 2012
|
13
|
|
|
13
|
|
Common stock, $0.01 par value; 45,000,000 shares authorized; 30,456,637 shares issued at June 30, 2013 and 30,150,040 shares issued at December 31, 2012; 29,098,639 shares outstanding at June 30, 2013 and 28,792,042 shares outstanding at December 31, 2012
|
305
|
|
|
302
|
|
Surplus
|
416,420
|
|
|
412,391
|
|
Accumulated deficit
|
(38,104
|
)
|
|
(63,537
|
)
|
Accumulated other comprehensive income, net
|
6,480
|
|
|
36,206
|
|
Treasury stock, at cost, 1,357,998 shares at June 30, 2013 and December 31, 2012
|
(29,585
|
)
|
|
(29,585
|
)
|
Total stockholders’ equity
|
560,274
|
|
|
559,603
|
|
Total liabilities and stockholders’ equity
|
$
|
5,901,370
|
|
|
$
|
5,802,410
|
|
See accompanying notes to consolidated financial statements (unaudited)
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
For the Six Months
|
|
Ended June 30,
|
|
Ended June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Interest income:
|
|
|
|
|
|
|
|
Interest and fees on loans
|
$
|
37,499
|
|
|
$
|
35,422
|
|
|
$
|
75,128
|
|
|
$
|
70,705
|
|
Interest and dividends on investment securities:
|
|
|
|
|
|
|
|
Taxable
|
8,398
|
|
|
9,889
|
|
|
17,015
|
|
|
20,207
|
|
Tax-exempt
|
2,077
|
|
|
691
|
|
|
3,504
|
|
|
1,354
|
|
Interest on cash equivalents
|
1
|
|
|
3
|
|
|
2
|
|
|
6
|
|
Total interest income
|
47,975
|
|
|
46,005
|
|
|
95,649
|
|
|
92,272
|
|
Interest expense:
|
|
|
|
|
|
|
|
Deposits
|
4,213
|
|
|
4,938
|
|
|
8,477
|
|
|
10,349
|
|
Short-term borrowings
|
473
|
|
|
629
|
|
|
893
|
|
|
1,192
|
|
Long-term borrowings
|
—
|
|
|
69
|
|
|
—
|
|
|
569
|
|
Junior subordinated debentures
|
1,444
|
|
|
1,464
|
|
|
2,887
|
|
|
2,936
|
|
Subordinated notes
|
763
|
|
|
2,527
|
|
|
1,627
|
|
|
5,046
|
|
Total interest expense
|
6,893
|
|
|
9,627
|
|
|
13,884
|
|
|
20,092
|
|
Net interest income
|
41,082
|
|
|
36,378
|
|
|
81,765
|
|
|
72,180
|
|
Provision for loan losses
|
700
|
|
|
100
|
|
|
1,000
|
|
|
7,450
|
|
Net interest income after provision for loan losses
|
40,382
|
|
|
36,278
|
|
|
80,765
|
|
|
64,730
|
|
Noninterest income:
|
|
|
|
|
|
|
|
Service charges
|
3,505
|
|
|
3,355
|
|
|
6,996
|
|
|
6,646
|
|
Mortgage banking revenue
|
38,533
|
|
|
23,014
|
|
|
70,563
|
|
|
40,544
|
|
Gains on sales of investment securities, net
|
6
|
|
|
3,020
|
|
|
7
|
|
|
3,976
|
|
Other derivative income
|
1,704
|
|
|
815
|
|
|
3,264
|
|
|
1,376
|
|
Other noninterest income
|
2,353
|
|
|
1,685
|
|
|
4,990
|
|
|
3,293
|
|
Total noninterest income
|
46,101
|
|
|
31,889
|
|
|
85,820
|
|
|
55,835
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
37,322
|
|
|
28,278
|
|
|
71,350
|
|
|
51,915
|
|
Occupancy of premises
|
2,625
|
|
|
2,136
|
|
|
5,193
|
|
|
4,311
|
|
Furniture and equipment
|
894
|
|
|
786
|
|
|
1,631
|
|
|
1,401
|
|
Nonperforming asset expense, net
|
(1,198
|
)
|
|
828
|
|
|
(639
|
)
|
|
1,522
|
|
Early extinguishment of debt
|
5,380
|
|
|
2,987
|
|
|
5,380
|
|
|
3,988
|
|
FDIC assessment
|
1,759
|
|
|
1,497
|
|
|
3,783
|
|
|
3,199
|
|
Legal fees, net
|
1,117
|
|
|
757
|
|
|
1,975
|
|
|
1,613
|
|
Loan expense, net
|
2,895
|
|
|
1,425
|
|
|
5,266
|
|
|
2,543
|
|
Outside services
|
2,818
|
|
|
708
|
|
|
5,314
|
|
|
1,287
|
|
Other noninterest expense
|
6,659
|
|
|
4,584
|
|
|
12,773
|
|
|
8,775
|
|
Total noninterest expense
|
60,271
|
|
|
43,986
|
|
|
112,026
|
|
|
80,554
|
|
Income before income taxes
|
26,212
|
|
|
24,181
|
|
|
54,559
|
|
|
40,011
|
|
Income tax expense
|
10,595
|
|
|
9,956
|
|
|
21,685
|
|
|
16,317
|
|
Net income
|
15,617
|
|
|
14,225
|
|
|
32,874
|
|
|
23,694
|
|
Preferred dividends and discounts
|
(3,780
|
)
|
|
(1,748
|
)
|
|
(7,441
|
)
|
|
(3,490
|
)
|
Net income applicable to common stockholders
|
$
|
11,837
|
|
|
$
|
12,477
|
|
|
$
|
25,433
|
|
|
$
|
20,204
|
|
Basic income per common share
|
$
|
0.39
|
|
|
$
|
0.42
|
|
|
$
|
0.84
|
|
|
$
|
0.68
|
|
Diluted income per common share
|
0.39
|
|
|
0.41
|
|
|
0.83
|
|
|
0.66
|
|
See accompanying notes to consolidated financial statements (unaudited)
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
For the Six Months
|
|
Ended June 30,
|
|
Ended June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Net income
|
$
|
15,617
|
|
|
$
|
14,225
|
|
|
$
|
32,874
|
|
|
$
|
23,694
|
|
Other comprehensive income (loss), net of income tax:
|
|
|
|
|
|
|
|
Change in unrealized gains and losses on available for sale securities, net of reclassification adjustment
|
(26,317
|
)
|
|
1,069
|
|
|
(30,161
|
)
|
|
(517
|
)
|
Change in deferred gains and losses on investments transferred to held to maturity from available for sale
|
(235
|
)
|
|
4,878
|
|
|
(547
|
)
|
|
4,906
|
|
Change in unrealized loss from cash flow hedging instruments
|
741
|
|
|
212
|
|
|
982
|
|
|
388
|
|
Total other comprehensive income (loss), net of income tax
|
(25,811
|
)
|
|
6,159
|
|
|
(29,726
|
)
|
|
4,777
|
|
Total comprehensive income (loss), net of income tax
|
$
|
(10,194
|
)
|
|
$
|
20,384
|
|
|
$
|
3,148
|
|
|
$
|
28,471
|
|
See accompanying notes to consolidated financial statements (unaudited)
TAYLOR CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, Series A
|
|
Preferred
Stock,
Series B
|
|
Preferred
Stock,
Series D
|
|
Preferred
Stock,
Series G
|
|
Nonvoting
Convertible
Preferred
Stock
|
|
Common
Stock
|
|
Surplus
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Treasury
Stock
|
|
Total
|
Balance at December 31, 2012
|
$
|
100,000
|
|
|
$
|
103,813
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
302
|
|
|
$
|
412,391
|
|
|
$
|
(63,537
|
)
|
|
$
|
36,206
|
|
|
$
|
(29,585
|
)
|
|
$
|
559,603
|
|
Issuance of restricted stock grants, net of forfeitures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Exercise of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Amortization of stock-based compensation awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
3,915
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,915
|
|
Tax expense on options, dividends and vesting
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,874
|
|
|
—
|
|
|
—
|
|
|
32,874
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,726
|
)
|
|
—
|
|
|
(29,726
|
)
|
Issuance of common stock for warrant exercise
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
153
|
|
|
—
|
|
|
—
|
|
|
|
|
|
154
|
|
Series A Preferred issuance costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47
|
)
|
Series A Preferred dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,889
|
)
|
|
—
|
|
|
—
|
|
|
(3,889
|
)
|
Preferred stock dividends and discounts accumulated, Series B
|
—
|
|
|
932
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,552
|
)
|
|
—
|
|
|
—
|
|
|
(2,620
|
)
|
Balance as of June 30, 2013
|
$
|
100,000
|
|
|
$
|
104,745
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
305
|
|
|
$
|
416,420
|
|
|
$
|
(38,104
|
)
|
|
$
|
6,480
|
|
|
$
|
(29,585
|
)
|
|
$
|
560,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Amortization of stock-based compensation awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
972
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
972
|
|
Exercise of stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,694
|
|
|
—
|
|
|
—
|
|
|
23,694
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,777
|
|
|
—
|
|
|
4,777
|
|
Issuance of common stock for warrant exercise
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
123
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
124
|
|
Exchange of Series D and G for Nonvoting Preferred
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(9
|
)
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Rights offering and Series C and E conversion costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(96
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(96
|
)
|
Preferred stock dividends and discounts accumulated, Series B
|
—
|
|
|
871
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,490
|
)
|
|
—
|
|
|
—
|
|
|
(2,619
|
)
|
Balance as of June 30, 2012
|
$
|
—
|
|
|
$
|
102,913
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
299
|
|
|
$
|
424,700
|
|
|
$
|
(98,222
|
)
|
|
$
|
36,290
|
|
|
$
|
(29,585
|
)
|
|
$
|
436,408
|
|
See accompanying notes to consolidated financial statements (unaudited).
TAYLOR CAPITAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
June 30,
|
|
2013
|
|
2012
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
32,874
|
|
|
$
|
23,694
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
Other derivative income
|
(3,264
|
)
|
|
(1,376
|
)
|
Gains on sales of investment securities, net
|
(7
|
)
|
|
(3,976
|
)
|
Amortization of premiums and discounts, net
|
5,958
|
|
|
2,876
|
|
Other-than-temporary impairment on investment security
|
—
|
|
|
125
|
|
Deferred loan fee amortization
|
(1,824
|
)
|
|
(1,806
|
)
|
Provision for loan losses
|
1,000
|
|
|
7,450
|
|
Payments on loans held for sale
|
459
|
|
|
—
|
|
Loans originated for sale
|
(3,623,103
|
)
|
|
(1,731,434
|
)
|
Proceeds from loan sales
|
3,994,709
|
|
|
1,672,875
|
|
Gains from sales of originated mortgage loans
|
(44,133
|
)
|
|
(11,456
|
)
|
Depreciation and amortization
|
1,599
|
|
|
1,226
|
|
Deferred income tax expense
|
21,370
|
|
|
14,403
|
|
(Gain) loss on sales of other real estate
|
(1,792
|
)
|
|
542
|
|
Excess tax benefit (shortfall) on stock options exercised and stock awards
|
(16
|
)
|
|
102
|
|
Change in fair value of mortgage derivative instruments
|
(15,224
|
)
|
|
(9,591
|
)
|
Change in fair value of mortgage servicing rights
|
(12,205
|
)
|
|
755
|
|
Other, net
|
7,360
|
|
|
2,169
|
|
Changes in other assets and liabilities:
|
|
|
|
Accrued interest receivable
|
(996
|
)
|
|
527
|
|
Other assets
|
1,043
|
|
|
(7,492
|
)
|
Accrued interest payable, taxes and other liabilities
|
(17,035
|
)
|
|
17,023
|
|
Net cash provided by (used in) by operating activities
|
346,773
|
|
|
(23,364
|
)
|
Cash flows from investing activities:
|
|
|
|
Purchases of available for sale securities
|
(278,980
|
)
|
|
(193,737
|
)
|
Purchases of held to maturity securities
|
(108,538
|
)
|
|
(60,311
|
)
|
Proceeds from principal payments and maturities of available for sale securities
|
83,005
|
|
|
86,522
|
|
Proceeds from principal payments and maturities of held to maturity securities
|
36,747
|
|
|
9,692
|
|
Proceeds from sales of available for sale securities
|
66,392
|
|
|
205,616
|
|
Settlement of prior year investment security purchases
|
(23,625
|
)
|
|
—
|
|
Net increase in loans
|
(262,622
|
)
|
|
(87,028
|
)
|
Net additions to premises, leasehold improvements and equipment
|
(9,478
|
)
|
|
(1,816
|
)
|
Purchases of FHLB and FRB stock
|
(54,776
|
)
|
|
(12,070
|
)
|
Proceeds from redemptions of FHLB and FRB stock
|
50,000
|
|
|
13,665
|
|
Purchase of mortgage servicing rights
|
(12,551
|
)
|
|
(26,864
|
)
|
Net proceeds from sales of other real estate and repossessed assets
|
11,297
|
|
|
10,113
|
|
Net cash used in investing activities
|
(503,129
|
)
|
|
(56,218
|
)
|
|
|
|
|
Consolidated Statements of Cash Flow continued on the next page.
|
TAYLOR CAPITAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
June 30,
|
|
2013
|
|
2012
|
Cash flows from financing activities:
|
|
|
|
Net increase in deposits
|
165,816
|
|
|
60,965
|
|
Net increase (decrease) in short-term borrowings
|
(34,164
|
)
|
|
133,005
|
|
Repayments of long-term borrowings
|
—
|
|
|
(127,500
|
)
|
Repayment of subordinated notes
|
(37,500
|
)
|
|
—
|
|
Net proceeds from preferred stock issuance
|
(47
|
)
|
|
—
|
|
Common stock issuance costs
|
—
|
|
|
28
|
|
Common stock issued in cashless warrant conversion
|
154
|
|
|
—
|
|
Restricted stock grant
|
2
|
|
|
—
|
|
Excess tax benefit (shortfall) on stock options exercised and stock awards
|
16
|
|
|
(102
|
)
|
Exercise of stock options
|
35
|
|
|
27
|
|
Preferred stock dividends paid and discounts accumulated
|
(6,509
|
)
|
|
(2,619
|
)
|
Net cash provided by financing activities
|
87,803
|
|
|
63,804
|
|
Net decrease in cash and cash equivalents
|
(68,553
|
)
|
|
(15,778
|
)
|
Cash and cash equivalents, beginning of period
|
166,385
|
|
|
121,164
|
|
Cash and cash equivalents, end of period
|
$
|
97,832
|
|
|
$
|
105,386
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
$
|
14,249
|
|
|
$
|
10,786
|
|
Income taxes
|
8,441
|
|
|
1,197
|
|
Supplemental disclosures of noncash investing and financing activities:
|
|
|
|
Transfer of available for sale investment securities to held to maturity investment securities
|
—
|
|
|
162,798
|
|
Available for sale investment securities acquired, not yet settled
|
1,510
|
|
|
—
|
|
Held to maturity investment securities acquired, not yet settled
|
20,000
|
|
|
—
|
|
Change in fair value of available for sale investment securities, net of tax
|
(30,161
|
)
|
|
(517
|
)
|
Transfer of portfolio loans to held for sale loans
|
125,546
|
|
|
—
|
|
Transfer of held for sale loans to portfolio loans
|
—
|
|
|
306
|
|
Transfer of loans to equity securities
|
—
|
|
|
3,750
|
|
Loans transferred to other real estate and repossessed assets
|
5,040
|
|
|
7,660
|
|
Additions to mortgage servicing rights resulting from originations
|
42,056
|
|
|
14,801
|
|
See accompanying notes to consolidated financial statements (unaudited)
TAYLOR CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1.
Basis of Presentation
:
These consolidated financial statements contain unaudited information as of
June 30, 2013
and for the
quarter and six months ended
June 30, 2013
and
June 30, 2012
. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by United States of America generally accepted accounting principles (“U.S. GAAP”) are not included herein. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with Taylor Capital Group, Inc.'s (the "Company") audited consolidated financial statements and the related notes. The statement of income for the
six months ended June 30, 2013
is not necessarily indicative of the results that the Company may achieve for the full year.
Loans Held for Sale
Loans held for sale consist solely of residential mortgage loans. The Company intends to sell these loans. Loans that were originated and immediately designated as held for sale are accounted for at fair value with changes in fair value recognized in noninterest income. Loans that were originated and held in the loan portfolio and then transferred to held for sale are accounted for at lower of cost or market.
Amounts in the prior year's consolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation. In 2012, the Company revised the presentation of several schedules in Note 3 - "Loans and Loans Held for Sale" to exclude loans held for sale.
2.
Investment Securities
:
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investment securities at
June 30, 2013
and
December 31, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
(in thousands)
|
Available For Sale:
|
|
June 30, 2013:
|
|
|
|
|
|
|
|
U.S. government sponsored agency securities
|
$
|
14,977
|
|
|
$
|
384
|
|
|
$
|
—
|
|
|
$
|
15,361
|
|
Residential mortgage-backed securities
|
538,236
|
|
|
7,913
|
|
|
(10,100
|
)
|
|
536,049
|
|
Commercial mortgage-backed securities
|
128,397
|
|
|
8,045
|
|
|
—
|
|
|
136,442
|
|
Collateralized mortgage obligations
|
14,953
|
|
|
391
|
|
|
—
|
|
|
15,344
|
|
State and municipal obligations
|
323,888
|
|
|
2,313
|
|
|
(15,762
|
)
|
|
310,439
|
|
Total at June 30, 2013
|
$
|
1,020,451
|
|
|
$
|
19,046
|
|
|
$
|
(25,862
|
)
|
|
$
|
1,013,635
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
9,998
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,998
|
|
U.S. government sponsored agency securities
|
15,073
|
|
|
983
|
|
|
—
|
|
|
16,056
|
|
Residential mortgage-backed securities
|
549,735
|
|
|
27,385
|
|
|
(406
|
)
|
|
576,714
|
|
Commercial mortgage-backed securities
|
134,774
|
|
|
11,926
|
|
|
—
|
|
|
146,700
|
|
Collateralized mortgage obligations
|
21,106
|
|
|
340
|
|
|
—
|
|
|
21,446
|
|
State and municipal obligations
|
162,702
|
|
|
4,182
|
|
|
(860
|
)
|
|
166,024
|
|
Total at December 31, 2012
|
$
|
893,388
|
|
|
$
|
44,816
|
|
|
$
|
(1,266
|
)
|
|
$
|
936,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
(in thousands)
|
Held To Maturity:
|
|
June 30, 2013:
|
|
|
|
|
|
|
|
U.S. government sponsored agency securities
|
$
|
9,992
|
|
|
$
|
—
|
|
|
$
|
(620
|
)
|
|
$
|
9,372
|
|
Residential mortgage-backed securities
|
253,547
|
|
|
3,284
|
|
|
(8,358
|
)
|
|
248,473
|
|
Collateralized mortgage obligations
|
68,421
|
|
|
—
|
|
|
(2,463
|
)
|
|
65,958
|
|
State and municipal obligations
|
88,731
|
|
|
77
|
|
|
(1,783
|
)
|
|
87,025
|
|
Total at June 30, 2013
|
$
|
420,691
|
|
|
$
|
3,361
|
|
|
$
|
(13,224
|
)
|
|
$
|
410,828
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
$
|
220,762
|
|
|
$
|
9,150
|
|
|
$
|
(189
|
)
|
|
$
|
229,723
|
|
Collateralized mortgage obligations
|
57,853
|
|
|
2,346
|
|
|
(81
|
)
|
|
60,118
|
|
State and municipal obligations
|
52,204
|
|
|
186
|
|
|
—
|
|
|
52,390
|
|
Total at December 31, 2012
|
$
|
330,819
|
|
|
$
|
11,682
|
|
|
$
|
(270
|
)
|
|
$
|
342,231
|
|
As of
June 30, 2013
, the Company held
$1.00 billion
(estimated fair value) of mortgage related investment securities that 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,
$997.9 million
(estimated fair value), or
99.6%
, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae and Freddie Mac, and the remaining
$4.4 million
were private-label residential mortgage related securities.
Investment securities with an approximate book value of
$895.9 million
at
June 30, 2013
and
$632.4 million
at
December 31, 2012
, 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. The amount of pledged investment securities has increased due to an increase in deposits and short-term borrowings that require collateral.
The following table summarizes the Company’s gross realized gains and losses for the
quarter and six month periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
For the Six Months Ended
|
|
June 30,
2013
|
|
June 30,
2012
|
|
June 30,
2013
|
|
June 30,
2012
|
|
(in thousands)
|
Gross realized gains
|
$
|
6
|
|
|
$
|
3,909
|
|
|
$
|
7
|
|
|
$
|
4,865
|
|
Gross realized losses
|
—
|
|
|
(889
|
)
|
|
—
|
|
|
(889
|
)
|
Net realized gains
|
$
|
6
|
|
|
$
|
3,020
|
|
|
$
|
7
|
|
|
$
|
3,976
|
|
The following table summarizes, for investment securities with unrealized losses as of
June 30, 2013
and
December 31, 2012
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
$
|
179,520
|
|
|
$
|
(9,717
|
)
|
|
$
|
3,524
|
|
|
$
|
(383
|
)
|
|
$
|
183,044
|
|
|
$
|
(10,100
|
)
|
State and municipal obligations
|
247,475
|
|
|
(15,762
|
)
|
|
—
|
|
|
—
|
|
|
247,475
|
|
|
(15,762
|
)
|
Total temporarily impaired available for sale securities
|
$
|
426,995
|
|
|
$
|
(25,479
|
)
|
|
$
|
3,524
|
|
|
$
|
(383
|
)
|
|
$
|
430,519
|
|
|
$
|
(25,862
|
)
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored agency securities
|
$
|
9,998
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,998
|
|
|
$
|
—
|
|
Residential mortgage-backed securities
|
24,802
|
|
|
(57
|
)
|
|
3,888
|
|
|
(349
|
)
|
|
28,690
|
|
|
(406
|
)
|
State and municipal obligations
|
52,400
|
|
|
(860
|
)
|
|
—
|
|
|
—
|
|
|
52,400
|
|
|
(860
|
)
|
Total temporarily impaired available for sale securities
|
$
|
87,200
|
|
|
$
|
(917
|
)
|
|
$
|
3,888
|
|
|
$
|
(349
|
)
|
|
$
|
91,088
|
|
|
$
|
(1,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
Held To Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored agency securities
|
$
|
9,372
|
|
|
$
|
(620
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,372
|
|
|
$
|
(620
|
)
|
Residential mortgage-backed securities
|
165,950
|
|
|
(8,086
|
)
|
|
12,035
|
|
|
(272
|
)
|
|
177,985
|
|
|
(8,358
|
)
|
Collateralized mortgage obligations
|
65,958
|
|
|
(2,463
|
)
|
|
—
|
|
|
—
|
|
|
65,958
|
|
|
(2,463
|
)
|
State and municipal obligations
|
38,481
|
|
|
(1,783
|
)
|
|
—
|
|
|
—
|
|
|
38,481
|
|
|
(1,783
|
)
|
Total temporarily impaired held to maturity securities
|
$
|
279,761
|
|
|
$
|
(12,952
|
)
|
|
$
|
12,035
|
|
|
$
|
(272
|
)
|
|
$
|
291,796
|
|
|
$
|
(13,224
|
)
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
$
|
26,728
|
|
|
$
|
(189
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,728
|
|
|
$
|
(189
|
)
|
Collateralized mortgage obligations
|
4,659
|
|
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
4,659
|
|
|
(81
|
)
|
Total temporarily impaired held to maturity securities
|
$
|
31,387
|
|
|
$
|
(270
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,387
|
|
|
$
|
(270
|
)
|
At
June 30, 2013
, the Company had
four
investment securities in an unrealized loss position for 12 or more months with a total unrealized loss of
$655,000
. Each of the
four
securities in an unrealized loss position was a residential mortgage-backed security; two were private-label securities and two were issued by government sponsored enterprises.
Of the
four
residential mortgage-backed securities that were in an unrealized loss position for more than 12 months,
three
were in an unrealized loss position of less than 10% of amortized cost. As part of its normal process, the Company reviewed these securities, considering the severity and duration of the loss and current credit ratings, and concluded that the decline in
fair value was not credit related but related to changes in interest rates and current illiquidity in the market for this type of security. The
one
private-label residential mortgage-backed security in an unrealized loss position for more than 12 months had a total unrealized loss of
$354,000
, which was greater than 10% of the amortized cost of the security, and was subject to further review for other-than-temporary impairment. If this analysis showed that the Company did not expect to recover its entire investment, an other-than-temporary impairment charge would be recorded for the amount of the expected credit loss.
For the
one
private-label security that was in an unrealized loss position of more than 10% of amortized cost, 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. The private-label mortgage-backed security 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 be first to absorb the losses, if any, from collateral shortfalls. At the time the Company purchased the private-label security, it held one of the highest investment grades, as rated by nationally recognized credit rating agencies. The cash flow analysis took into account the Company’s tranche and the current level of support provided by the lower tranches. The Company believes that market illiquidity continues to impact the value of this private-label security because of the continued lack of active trading. This security does not contain subprime mortgage loans, but does 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 of recent years. Previously, the Company had recognized an other-than-temporary impairment loss on this
one
security. The independent cash flow analysis performed at
June 30, 2013
indicated that there was no additional expected credit loss on this security. Therefore, the Company expects to recover its entire investment and
no
other-than-temporary impairment charge was recorded in the quarter ended
June 30, 2013
.
One
additional investment security was evaluated for other-than-temporary impairment at
June 30, 2013
. This security is in the Company’s state and municipal obligation portfolio and was acquired in 2008 in a loan work out arrangement. Scheduled payments were received as agreed until November 2010. Since that time,
two
principal and interest payments have been received. The Company had recognized other-than-temporary impairment loss on this security of
$381,000
in 2011. The expected future annual cash flows were analyzed as of
June 30, 2013
and
no
additional other-than-temporary impairment was recorded in the
second quarter
of
2013
. The cost and fair value of this investment security was
$551,000
at
June 30, 2013
.
The following table shows the contractual maturities of debt securities, categorized by amortized cost and estimated fair value, at
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
(in thousands)
|
Available For Sale:
|
|
|
|
Due in one year or less
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
5,101
|
|
|
5,361
|
|
Due after five years through ten years
|
55,370
|
|
|
57,167
|
|
Due after ten years
|
278,394
|
|
|
263,272
|
|
Residential mortgage-backed securities
|
538,236
|
|
|
536,049
|
|
Commercial mortgage-backed securities
|
128,397
|
|
|
136,442
|
|
Collateralized mortgage obligations
|
14,953
|
|
|
15,344
|
|
Total available for sale
|
$
|
1,020,451
|
|
|
$
|
1,013,635
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
(in thousands)
|
Held To Maturity:
|
|
|
|
Due after five years through ten years
|
$
|
9,992
|
|
|
$
|
9,372
|
|
Due after ten years
|
88,731
|
|
|
87,025
|
|
Residential mortgage-backed securities
|
253,547
|
|
|
248,473
|
|
Collateralized mortgage obligations
|
68,421
|
|
|
65,958
|
|
Total held to maturity
|
$
|
420,691
|
|
|
$
|
410,828
|
|
Investment securities do not include Cole Taylor Bank's (the "Bank") aggregate investment in Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank (“FRB”) stock of
$79.7 million
at
June 30, 2013
and
$75.0 million
at
December 31, 2012
. These investments are required for membership and are carried at cost.
The Bank must maintain a specified level of investment in FHLBC stock based on the amount of its outstanding FHLB borrowings. At
June 30, 2013
, the Company had a
$68.0 million
investment in FHLBC stock, compared to
$63.3 million
at
December 31, 2012
. As of
June 30, 2013
, the Company believes that it will ultimately recover the par value of the FHLBC stock.
3.
Loans and Loans Held for Sale
:
Loans by type at
June 30, 2013
and
December 31, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
(in thousands)
|
Loans:
|
|
|
|
Commercial and industrial
|
$
|
1,707,502
|
|
|
$
|
1,590,587
|
|
Commercial real estate secured
|
1,036,303
|
|
|
965,978
|
|
Residential construction and land
|
42,606
|
|
|
45,903
|
|
Commercial construction and land
|
119,839
|
|
|
103,715
|
|
Lease receivables
|
93,999
|
|
|
50,803
|
|
Consumer
|
311,115
|
|
|
416,635
|
|
Gross loans
|
3,311,364
|
|
|
3,173,621
|
|
Less: Unearned discount
|
(8,816
|
)
|
|
(5,318
|
)
|
Loans
|
3,302,548
|
|
|
3,168,303
|
|
Less: Allowance for loan losses
|
(83,576
|
)
|
|
(82,191
|
)
|
Loans, net
|
$
|
3,218,972
|
|
|
$
|
3,086,112
|
|
Loans Held for Sale:
|
|
|
|
Total Loans Held for Sale
|
$
|
693,937
|
|
|
$
|
938,379
|
|
Nonperforming loans include nonaccrual loans and interest-accruing loans contractually past due
90 days
or more. Loans are placed on a nonaccrual basis for recognition of interest income when sufficient doubt exists as to the full collection of principal and interest. Generally, loans are to be placed on nonaccrual when principal and interest is contractually past due 90 days, unless the loan is adequately secured and in the process of collection.
The following table presents the aging of loans by class at
June 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,577
|
|
|
$
|
16,577
|
|
|
$
|
1,690,925
|
|
|
$
|
1,707,502
|
|
Commercial real estate secured
|
—
|
|
|
—
|
|
|
20,900
|
|
|
20,900
|
|
|
1,015,403
|
|
|
1,036,303
|
|
Residential construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,606
|
|
|
42,606
|
|
Commercial construction and land
|
—
|
|
|
—
|
|
|
26,272
|
|
|
26,272
|
|
|
93,567
|
|
|
119,839
|
|
Lease receivables, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85,183
|
|
|
85,183
|
|
Consumer
|
4,294
|
|
|
228
|
|
|
5,790
|
|
|
10,312
|
|
|
300,803
|
|
|
311,115
|
|
Loans
|
$
|
4,294
|
|
|
$
|
228
|
|
|
$
|
69,539
|
|
|
$
|
74,061
|
|
|
$
|
3,228,487
|
|
|
$
|
3,302,548
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,705
|
|
|
$
|
16,705
|
|
|
$
|
1,573,882
|
|
|
$
|
1,590,587
|
|
Commercial real estate secured
|
—
|
|
|
—
|
|
|
14,530
|
|
|
14,530
|
|
|
951,448
|
|
|
965,978
|
|
Residential construction and land
|
—
|
|
|
—
|
|
|
4,495
|
|
|
4,495
|
|
|
41,408
|
|
|
45,903
|
|
Commercial construction and land
|
—
|
|
|
—
|
|
|
15,220
|
|
|
15,220
|
|
|
88,495
|
|
|
103,715
|
|
Lease receivables, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,485
|
|
|
45,485
|
|
Consumer
|
4,137
|
|
|
1,974
|
|
|
8,587
|
|
|
14,698
|
|
|
401,937
|
|
|
416,635
|
|
Loans
|
$
|
4,137
|
|
|
$
|
1,974
|
|
|
$
|
59,537
|
|
|
$
|
65,648
|
|
|
$
|
3,102,655
|
|
|
$
|
3,168,303
|
|
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 operating history that contains losses or adverse trends that 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 may, if not corrected, weaken the asset, inadequately protect the Bank’s credit position and/or 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.
The following table presents the risk categories of loans by class at
June 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Nonaccrual
|
|
Total Loans
|
|
(in thousands)
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,672,673
|
|
|
$
|
16,086
|
|
|
$
|
2,166
|
|
|
$
|
16,577
|
|
|
$
|
1,707,502
|
|
Commercial real estate secured
|
971,984
|
|
|
19,071
|
|
|
24,348
|
|
|
20,900
|
|
|
1,036,303
|
|
Residential construction and land
|
39,046
|
|
|
3,560
|
|
|
—
|
|
|
—
|
|
|
42,606
|
|
Commercial construction and land
|
88,345
|
|
|
5,222
|
|
|
—
|
|
|
26,272
|
|
|
119,839
|
|
Lease receivables, net
|
85,183
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85,183
|
|
Consumer
|
305,325
|
|
|
—
|
|
|
—
|
|
|
5,790
|
|
|
311,115
|
|
Loans
|
$
|
3,162,556
|
|
|
$
|
43,939
|
|
|
$
|
26,514
|
|
|
$
|
69,539
|
|
|
$
|
3,302,548
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,540,041
|
|
|
$
|
28,298
|
|
|
$
|
5,543
|
|
|
$
|
16,705
|
|
|
$
|
1,590,587
|
|
Commercial real estate secured
|
914,250
|
|
|
20,194
|
|
|
17,004
|
|
|
14,530
|
|
|
965,978
|
|
Residential construction and land
|
37,150
|
|
|
4,258
|
|
|
—
|
|
|
4,495
|
|
|
45,903
|
|
Commercial construction and land
|
83,159
|
|
|
5,276
|
|
|
60
|
|
|
15,220
|
|
|
103,715
|
|
Lease receivables, net
|
45,485
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,485
|
|
Consumer
|
408,048
|
|
|
—
|
|
|
—
|
|
|
8,587
|
|
|
416,635
|
|
Loans
|
$
|
3,028,133
|
|
|
$
|
58,026
|
|
|
$
|
22,607
|
|
|
$
|
59,537
|
|
|
$
|
3,168,303
|
|
Impaired loans include all nonaccrual loans, as well as accruing loans estimated to have higher risk of noncompliance with the present repayment schedule for both interest and principal. Unless modified in a troubled debt restructuring, certain homogeneous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment and are, therefore, excluded from impaired loans.
The Company’s 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 at which to charge-off a consumer loan by type of credit. 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.
The following table presents loans individually evaluated for impairment by class of loans as of
June 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
Unpaid
Principal
Balance
|
|
Recorded
Balance
|
|
Allowance
for Loan
Losses
Allocated
|
|
Unpaid
Principal
Balance
|
|
Recorded
Balance
|
|
Allowance
for Loan
Losses
Allocated
|
|
(in thousands)
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
4,534
|
|
|
$
|
2,437
|
|
|
$
|
—
|
|
|
$
|
4,998
|
|
|
$
|
3,006
|
|
|
$
|
—
|
|
Commercial real estate secured
|
27,322
|
|
|
19,438
|
|
|
—
|
|
|
31,073
|
|
|
21,442
|
|
|
—
|
|
Residential construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
16,378
|
|
|
4,495
|
|
|
—
|
|
Commercial construction and land
|
2,395
|
|
|
1,008
|
|
|
—
|
|
|
5,402
|
|
|
4,194
|
|
|
—
|
|
Consumer
|
6,348
|
|
|
5,946
|
|
|
—
|
|
|
6,684
|
|
|
6,462
|
|
|
—
|
|
Subtotal
|
40,599
|
|
|
28,829
|
|
|
—
|
|
|
64,535
|
|
|
39,599
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
33,377
|
|
|
15,611
|
|
|
8,486
|
|
|
20,595
|
|
|
15,235
|
|
|
8,006
|
|
Commercial real estate secured
|
21,119
|
|
|
16,714
|
|
|
1,820
|
|
|
8,117
|
|
|
4,483
|
|
|
1,121
|
|
Commercial construction and land
|
25,430
|
|
|
25,264
|
|
|
6,024
|
|
|
11,038
|
|
|
11,026
|
|
|
2,930
|
|
Subtotal
|
79,926
|
|
|
57,589
|
|
|
16,330
|
|
|
39,750
|
|
|
30,744
|
|
|
12,057
|
|
Total impaired loans
|
$
|
120,525
|
|
|
$
|
86,418
|
|
|
$
|
16,330
|
|
|
$
|
104,285
|
|
|
$
|
70,343
|
|
|
$
|
12,057
|
|
The following table presents average balances of loans individually evaluated for impairment and associated interest income recognized by class of loans as of
June 30, 2013
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
June 30, 2012
|
|
QTD
Average
Recorded
Balance
|
|
YTD
Average
Recorded
Balance
|
|
QTD
Interest
Income
Recognized
|
|
YTD
Interest
Income
Recognized
|
|
QTD
Average
Recorded
Balance
|
|
YTD
Average
Recorded
Balance
|
|
QTD
Interest
Income
Recognized
|
|
YTD
Interest
Income
Recognized
|
|
(in thousands)
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,456
|
|
|
$
|
2,640
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,517
|
|
|
$
|
8,758
|
|
|
$
|
17
|
|
|
$
|
17
|
|
Commercial real estate secured
|
24,323
|
|
|
23,363
|
|
|
164
|
|
|
321
|
|
|
19,784
|
|
|
15,984
|
|
|
—
|
|
|
—
|
|
Residential construction and land
|
371
|
|
|
1,746
|
|
|
—
|
|
|
—
|
|
|
2,841
|
|
|
2,923
|
|
|
—
|
|
|
—
|
|
Commercial construction and land
|
1,008
|
|
|
2,070
|
|
|
—
|
|
|
—
|
|
|
2,924
|
|
|
4,174
|
|
|
—
|
|
|
—
|
|
Consumer
|
6,220
|
|
|
6,301
|
|
|
37
|
|
|
69
|
|
|
5,836
|
|
|
5,637
|
|
|
27
|
|
|
49
|
|
Subtotal
|
34,378
|
|
|
36,120
|
|
|
201
|
|
|
390
|
|
|
37,902
|
|
|
37,476
|
|
|
44
|
|
|
66
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
16,668
|
|
|
16,190
|
|
|
48
|
|
|
84
|
|
|
19,020
|
|
|
24,565
|
|
|
46
|
|
|
115
|
|
Commercial real estate secured
|
11,906
|
|
|
9,431
|
|
|
43
|
|
|
80
|
|
|
15,011
|
|
|
20,345
|
|
|
64
|
|
|
125
|
|
Residential construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,218
|
|
|
4,387
|
|
|
—
|
|
|
—
|
|
Commercial construction and land
|
25,315
|
|
|
20,552
|
|
|
—
|
|
|
—
|
|
|
13,438
|
|
|
8,998
|
|
|
—
|
|
|
—
|
|
Subtotal
|
53,889
|
|
|
46,173
|
|
|
91
|
|
|
164
|
|
|
51,687
|
|
|
58,295
|
|
|
110
|
|
|
240
|
|
Total impaired loans
|
$
|
88,267
|
|
|
$
|
82,293
|
|
|
$
|
292
|
|
|
$
|
554
|
|
|
$
|
89,589
|
|
|
$
|
95,771
|
|
|
$
|
154
|
|
|
$
|
306
|
|
The majority of the Company's commercial credit customers, as measured by outstanding balances, are located within the Chicago area, although they may do business outside of that area. As of
June 30, 2013
, approximately
31%
of the Company’s loans involved loans that were to some degree secured by real estate properties located primarily within the Chicago area, compared to
31%
as of
December 31, 2012
.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by class and based on impairment method as of
June 30, 2013
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Industrial
|
|
Commercial
Real Estate
Secured
|
|
Residential
Construction
& Land
|
|
Commercial
Construction
& Land
|
|
Lease Receivables
|
|
Consumer
|
|
Total
|
|
(in thousands)
|
ALLOWANCE FOR LOAN LOSSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as of December 31, 2012
|
$
|
35,946
|
|
|
$
|
20,542
|
|
|
$
|
6,642
|
|
|
$
|
8,928
|
|
|
$
|
273
|
|
|
$
|
9,860
|
|
|
$
|
82,191
|
|
Provision
|
(687
|
)
|
|
163
|
|
|
(992
|
)
|
|
3,830
|
|
|
238
|
|
|
(1,552
|
)
|
|
1,000
|
|
Charge-offs
|
(10
|
)
|
|
(29
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,194
|
)
|
|
(1,233
|
)
|
Recoveries
|
754
|
|
|
270
|
|
|
221
|
|
|
1
|
|
|
—
|
|
|
372
|
|
|
1,618
|
|
Ending balance as of June 30, 2013
|
$
|
36,003
|
|
|
$
|
20,946
|
|
|
$
|
5,871
|
|
|
$
|
12,759
|
|
|
$
|
511
|
|
|
$
|
7,486
|
|
|
$
|
83,576
|
|
Ending balance individually evaluated for impairment
|
$
|
8,486
|
|
|
$
|
1,820
|
|
|
$
|
—
|
|
|
$
|
6,024
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,330
|
|
Ending balance collectively evaluated for impairment
|
27,517
|
|
|
19,126
|
|
|
5,871
|
|
|
6,735
|
|
|
511
|
|
|
7,486
|
|
|
67,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
$
|
18,048
|
|
|
$
|
36,152
|
|
|
$
|
—
|
|
|
$
|
26,272
|
|
|
$
|
—
|
|
|
$
|
5,946
|
|
|
$
|
86,418
|
|
Ending balance collectively evaluated for impairment
|
1,689,454
|
|
|
1,000,151
|
|
|
42,606
|
|
|
93,567
|
|
|
85,183
|
|
|
305,169
|
|
|
3,216,130
|
|
Ending balance
|
$
|
1,707,502
|
|
|
$
|
1,036,303
|
|
|
$
|
42,606
|
|
|
$
|
119,839
|
|
|
$
|
85,183
|
|
|
$
|
311,115
|
|
|
$
|
3,302,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLOWANCE FOR LOAN LOSSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as of December 31, 2011
|
$
|
51,389
|
|
|
$
|
30,319
|
|
|
$
|
8,083
|
|
|
$
|
6,978
|
|
|
$
|
—
|
|
|
$
|
6,975
|
|
|
$
|
103,744
|
|
Provision
|
(1,028
|
)
|
|
(716
|
)
|
|
(82
|
)
|
|
3,629
|
|
|
—
|
|
|
5,647
|
|
|
7,450
|
|
Charge-offs
|
(14,901
|
)
|
|
(4,325
|
)
|
|
(499
|
)
|
|
(4,025
|
)
|
|
—
|
|
|
(2,100
|
)
|
|
(25,850
|
)
|
Recoveries
|
1,042
|
|
|
254
|
|
|
143
|
|
|
—
|
|
|
—
|
|
|
209
|
|
|
1,648
|
|
Ending balance as of June 30, 2012
|
$
|
36,502
|
|
|
$
|
25,532
|
|
|
$
|
7,645
|
|
|
$
|
6,582
|
|
|
$
|
—
|
|
|
$
|
10,731
|
|
|
$
|
86,992
|
|
Ending balance individually evaluated for impairment
|
$
|
9,196
|
|
|
$
|
6,232
|
|
|
$
|
845
|
|
|
$
|
1,189
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,462
|
|
Ending balance collectively evaluated for impairment
|
27,306
|
|
|
19,300
|
|
|
6,800
|
|
|
5,393
|
|
|
—
|
|
|
10,731
|
|
|
69,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
$
|
24,406
|
|
|
$
|
35,185
|
|
|
$
|
7,003
|
|
|
$
|
6,679
|
|
|
$
|
—
|
|
|
$
|
6,217
|
|
|
$
|
79,490
|
|
Ending balance collectively evaluated for impairment
|
1,458,021
|
|
|
940,495
|
|
|
47,444
|
|
|
83,411
|
|
|
—
|
|
|
372,966
|
|
|
2,902,337
|
|
Ending balance
|
$
|
1,482,427
|
|
|
$
|
975,680
|
|
|
$
|
54,447
|
|
|
$
|
90,090
|
|
|
$
|
—
|
|
|
$
|
379,183
|
|
|
$
|
2,981,827
|
|
Troubled Debt Restructurings
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 Company’s 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. Nonperforming restructured loans totaled
$13.4 million
at
June 30, 2013
and
$22.6 million
at
December 31, 2012
. Performing restructured loans totaled
$21.9 million
at
June 30, 2013
and
$17.5 million
at
December 31, 2012
.
The following tables provide information on loans modified in a TDR during the quarters ended
June 30, 2013
and
June 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
For the quarter ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
Number of
Loans
|
|
Pre-Modification
Outstanding
Recorded
Balance
|
|
Post-Modification
Outstanding
Recorded
Balance
|
|
Number
of Loans
|
|
Pre-Modification
Outstanding
Recorded
Balance
|
|
Post-Modification
Outstanding
Recorded
Balance
|
|
(dollars in thousands)
|
Commercial and industrial
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
380
|
|
|
$
|
380
|
|
Commercial real estate secured
|
1
|
|
|
842
|
|
|
842
|
|
|
1
|
|
|
718
|
|
|
718
|
|
Consumer
|
6
|
|
|
578
|
|
|
578
|
|
|
11
|
|
|
988
|
|
|
981
|
|
Total
|
7
|
|
|
$
|
1,420
|
|
|
$
|
1,420
|
|
|
13
|
|
|
$
|
2,086
|
|
|
$
|
2,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
For the six months ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
Number of
Loans
|
|
Pre-Modification
Outstanding
Recorded
Balance
|
|
Post-Modification
Outstanding
Recorded
Balance
|
|
Number
of Loans
|
|
Pre-Modification
Outstanding
Recorded
Balance
|
|
Post-Modification
Outstanding
Recorded
Balance
|
|
(dollars in thousands)
|
Commercial and industrial
|
1
|
|
|
$
|
2,659
|
|
|
$
|
2,659
|
|
|
4
|
|
|
$
|
6,117
|
|
|
$
|
6,117
|
|
Commercial real estate secured
|
3
|
|
|
2,147
|
|
|
2,147
|
|
|
2
|
|
|
1,284
|
|
|
1,284
|
|
Commercial construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
20,260
|
|
|
20,260
|
|
Consumer
|
17
|
|
|
1,271
|
|
|
1,271
|
|
|
23
|
|
|
2,005
|
|
|
1,989
|
|
Total
|
21
|
|
|
$
|
6,077
|
|
|
$
|
6,077
|
|
|
33
|
|
|
$
|
29,666
|
|
|
$
|
29,650
|
|
The following tables provide information on TDRs that defaulted for the first time during the period indicated and had been modified within the last twelve months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
For the quarter ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
Number
of Loans
|
|
Recorded
Investment at Period End
|
|
Number of
Loans
|
|
Recorded
Investment at Period End
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Consumer
|
1
|
|
|
$
|
86
|
|
|
1
|
|
|
$
|
224
|
|
Total
|
1
|
|
|
$
|
86
|
|
|
1
|
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
For the six months ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
Number
of Loans
|
|
Recorded
Investment at Period End
|
|
Number of
Loans
|
|
Recorded
Investment at Period End
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Residential construction and land
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
529
|
|
Consumer
|
1
|
|
|
86
|
|
|
4
|
|
|
642
|
|
Total
|
1
|
|
|
$
|
86
|
|
|
5
|
|
|
$
|
1,171
|
|
Loans Held for Sale
At
June 30, 2013
, loans held for sale of
$693.9 million
consisted entirely of residential mortgage loans originated by Cole Taylor Mortgage. A portion of these loans had been transferred from the loan portfolio. The unpaid principal balance associated with all loans held for sale was
$700.5 million
at
June 30, 2013
. An unrealized loss on these loans of
$6.5 million
for the
six months ended June 30, 2013
and an unrealized gain of
$12.2 million
for the
six months ended June 30, 2012
was included in mortgage banking revenues in noninterest income on the Consolidated Statements of Income.
None
of these loans were 90 days or more past due or on nonaccrual status. Interest income on these loans is included in net interest income and is not considered part of the change in fair value.
Loan Participations
The total amount of loans transferred to third parties as loan participations at
June 30, 2013
was
$189.5 million
, all of which has been recognized as a sale under the applicable accounting guidance in effect at the time of the transfer. The Company continues to have involvement with these loans through relationship management and its servicing responsibilities.
4.
Interest-Bearing Deposits
:
Interest-bearing deposits at
June 30, 2013
and
December 31, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
(in thousands)
|
Commercial interest checking
|
$
|
336,903
|
|
|
$
|
—
|
|
NOW accounts
|
537,103
|
|
|
573,133
|
|
Savings accounts
|
41,576
|
|
|
39,915
|
|
Money market deposits
|
771,382
|
|
|
744,791
|
|
Brokered money market deposits
|
—
|
|
|
27,840
|
|
Time deposits:
|
|
|
|
Certificates of deposit
|
557,656
|
|
|
561,998
|
|
Brokered certificates of deposit
|
160,408
|
|
|
199,604
|
|
CDARS time deposits
|
132,552
|
|
|
186,187
|
|
Public time deposits
|
16,007
|
|
|
15,150
|
|
Total time deposits
|
866,623
|
|
|
962,939
|
|
Total
|
$
|
2,553,587
|
|
|
$
|
2,348,618
|
|
At
June 30, 2013
, time deposits in the amount of
$100,000
or more totaled
$446.2 million
compared to
$482.2 million
at
December 31, 2012
.
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. Brokered CD placement fees of
$700,000
at
June 30, 2013
and
$1.1 million
at
December 31, 2012
are amortized to the maturity date of the related brokered CDs and are included in deposit interest expense. As of
June 30, 2013
, the Company had
one
brokered CD with an aggregate balance of
$15.0 million
that could be called after a lock-out period but before its stated maturity. During the
six months ended June 30, 2013
, the Company incurred
$184,000
in expense associated with a brokered CD that was called before its stated maturity. During the
six months ended June 30, 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. None were called and the Company did not incur any expense associated with brokered CDs that were called before their stated maturity during the
six months ended June 30, 2012
.
5.
Borrowings
:
Short-term:
Short-term borrowings at
June 30, 2013
and
December 31, 2012
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
Amount
Borrowed
|
|
Weighted-
Average
Rate
|
|
Amount
Borrowed
|
|
Weighted-
Average
Rate
|
|
(dollars in thousands)
|
Customer repurchase agreements
|
$
|
6,790
|
|
|
0.05
|
%
|
|
$
|
24,663
|
|
|
0.09
|
%
|
Federal funds purchased
|
60,375
|
|
|
0.48
|
|
|
173,356
|
|
|
0.64
|
|
FHLB advances
|
1,360,000
|
|
|
0.13
|
|
|
1,265,000
|
|
|
0.12
|
|
Cash flow hedge interest rate swap collateral
|
1,690
|
|
|
0.09
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,428,855
|
|
|
0.15
|
%
|
|
$
|
1,463,019
|
|
|
0.19
|
%
|
Customer repurchase agreements are collateralized financing transactions primarily executed with local Bank clients and with overnight maturities.
FHLB short-term advances at
June 30, 2013
and
December 31, 2012
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
Due Date
|
|
Earliest Call
Date
(if applicable)
|
|
June 30, 2013
|
|
December 31,
2012
|
|
(dollars in thousands)
|
FHLB overnight advance
|
0.130
|
%
|
|
January 2, 2013
|
|
n/a
|
|
$
|
—
|
|
|
$
|
665,000
|
|
FHLB advance
|
0.130
|
|
|
January 2, 2013
|
|
n/a
|
|
—
|
|
|
200,000
|
|
FHLB advance
|
0.070
|
|
|
January 16, 2013
|
|
n/a
|
|
—
|
|
|
200,000
|
|
FHLB advance
|
0.150
|
|
|
January 23, 2013
|
|
n/a
|
|
—
|
|
|
200,000
|
|
FHLB overnight advance
|
0.130
|
|
|
July 1, 2013
|
|
n/a
|
|
460,000
|
|
|
—
|
|
FHLB advance
|
0.150
|
|
|
July 3, 2013
|
|
n/a
|
|
100,000
|
|
|
—
|
|
FHLB advance
|
0.115
|
|
|
July 26, 2013
|
|
n/a
|
|
250,000
|
|
|
—
|
|
FHLB advance
|
0.130
|
|
|
July 31, 2013
|
|
n/a
|
|
200,000
|
|
|
—
|
|
FHLB advance
|
0.130
|
|
|
July 31, 2013
|
|
n/a
|
|
50,000
|
|
|
—
|
|
FHLB advance
|
0.150
|
|
|
August 2, 2013
|
|
n/a
|
|
100,000
|
|
|
—
|
|
FHLB advance
|
0.130
|
|
|
August 28, 2013
|
|
n/a
|
|
100,000
|
|
|
—
|
|
FHLB advance
|
0.150
|
|
|
September 4, 2013
|
|
n/a
|
|
100,000
|
|
|
—
|
|
Total short-term FHLB advances
|
|
|
|
|
|
|
$
|
1,360,000
|
|
|
$
|
1,265,000
|
|
Long-term:
As of
June 30, 2013
and
December 31, 2012
, the Company had
no
long-term borrowings.
At
June 30, 2013
, the FHLB advances were collateralized by
$786.4 million
of investment securities and blanket liens on
$906.2 million
of qualified first-mortgage residential loans, multi-family loans, home equity loans and commercial real estate loans. Based on the value of collateral pledged at
June 30, 2013
, the Bank had additional borrowing capacity at the FHLB of
$67.9 million
. In comparison, at
December 31, 2012
, the FHLB advances were collateralized by
$530.3 million
of investment securities and a blanket lien on
$920.1 million
of qualified first-mortgage residential, home equity and commercial real estate loans with additional borrowing capacity of
$57.1 million
.
The Bank participates in the FRB’s Borrower In Custody (“BIC”) program. At
June 30, 2013
, the Bank had pledged
$420.3 million
of commercial loans as collateral for an available
$358.9 million
borrowing capacity at the FRB. At
June 30, 2013
, the Bank had
no
advances from the FRB. At
December 31, 2012
, the Bank had pledged
$521.2 million
of commercial loans as collateral for available borrowing capacity of
$441.8 million
under the BIC program, with
no
advances outstanding at
December 31, 2012
.
6.
Subordinated Notes
:
On June 20, 2013, the Company prepaid in full the outstanding
$37.5 million
principal amount of its 8% subordinated notes together with accrued interest, plus a prepayment premium equal to 1.5% of the principal of the notes. The aggregate prepayment amount, which included accrued interest, was sent to the paying agent for the notes on
June 19, 2013
. The notes had originally been issued in two parts by the Company,
$33.9 million
on May 28, 2010 and
$3.6 million
on October 21, 2010. The entire
$37.5 million
principal had a scheduled maturity date of May 28, 2020.
The aggregate amount of funds required to prepay the notes was
$37.5 million
principal amount and approximately
$604,000
of accrued interest and prepayment premium. In the
second quarter of 2013
, the Company incurred
$5.4 million
of early extinguishment of debt expense associated with the unamortized discount, unamortized original issuance costs of the notes and the prepayment premium.
7.
Stockholders' Equity
:
Stock purchase warrants dated May 28, 2010 and October 21, 2010 (the "warrants") were issued by the Company in connection with the issuance of its
8%
subordinated notes due May 28, 2020, which, as described above, were prepaid in full, effective June 20, 2013. These warrants were originally exercisable on a cash basis for an aggregate of
937,500
shares of the Company’s common stock, before anti-dilution adjustments.
Since the issuance of the warrants, holders elected to exercise warrants related to
203,125
shares (before anti-dilution adjustments) on both a cashless and full cash basis. As of June 30, 2013,
47,020
shares were issued to holders who elected to exercise their warrants on a cashless basis and
12,634
shares were issued to holders who elected to exercise their warrants on a cash basis. The proceeds for the cash exercise of the warrants totaled
$154,000
and were included in second quarter results. These proceeds will be used for general corporate purposes.
On June 27, 2013, the Company sent a notice of conversion to all of the remaining outstanding warrants into the holders' right to receive an aggregate of
223,377
shares of common stock on a cashless basis in accordance with the terms of the warrants. Shares of common stock issuable related to the June 27, 2013 conversion will be issued to each warrant holder upon surrender to the Company of such warrant holder's warrant.
The common stock issued or remaining to be issued pursuant to to cashless conversions of the warrants was or will be issued without registration in reliance upon Section 3(a)(9) of the Securities Act. No commission or other remuneration was paid in connection with the cashless conversions of the warrants.
8.
Other Comprehensive Income (“OCI”)
:
The following table presents OCI for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Three Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
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 and losses on available for sale securities
|
$
|
(43,308
|
)
|
|
$
|
16,994
|
|
|
$
|
(26,314
|
)
|
|
$
|
5,721
|
|
|
$
|
(2,345
|
)
|
|
$
|
3,376
|
|
Less: reclassification adjustment for gains included in net income
|
(6
|
)
|
|
3
|
|
|
(3
|
)
|
|
(3,909
|
)
|
|
1,602
|
|
|
(2,307
|
)
|
Change in unrealized gains and losses on available for sale securities, net of reclassification adjustment
|
(43,314
|
)
|
|
16,997
|
|
|
(26,317
|
)
|
|
1,812
|
|
|
(743
|
)
|
|
1,069
|
|
Change in deferred gains and losses on investments transferred to held to maturity from available for sale
|
(490
|
)
|
|
255
|
|
|
(235
|
)
|
|
8,267
|
|
|
(3,389
|
)
|
|
4,878
|
|
Cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized loss from cash flow hedging instruments
|
1,240
|
|
|
(499
|
)
|
|
741
|
|
|
124
|
|
|
2
|
|
|
126
|
|
Less: reclassification adjustment for gains included in net income
|
—
|
|
|
—
|
|
|
—
|
|
|
175
|
|
|
(89
|
)
|
|
86
|
|
Change in unrealized loss from cash flow hedging, net of reclassification adjustment
|
1,240
|
|
|
(499
|
)
|
|
741
|
|
|
299
|
|
|
(87
|
)
|
|
212
|
|
Other comprehensive income (loss)
|
$
|
(42,564
|
)
|
|
$
|
16,753
|
|
|
$
|
(25,811
|
)
|
|
$
|
10,378
|
|
|
$
|
(4,219
|
)
|
|
$
|
6,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
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 and losses on available for sale securities
|
$
|
(50,357
|
)
|
|
$
|
20,200
|
|
|
$
|
(30,157
|
)
|
|
$
|
3,989
|
|
|
$
|
(1,635
|
)
|
|
$
|
2,354
|
|
Less: reclassification adjustment for gains included in net income
|
(7
|
)
|
|
3
|
|
|
(4
|
)
|
|
(4,865
|
)
|
|
1,994
|
|
|
(2,871
|
)
|
Change in unrealized gains and losses on available for sale securities, net of reclassification adjustment
|
(50,364
|
)
|
|
20,203
|
|
|
(30,161
|
)
|
|
(876
|
)
|
|
359
|
|
|
(517
|
)
|
Change in deferred gains and losses on investments transferred to held to maturity from available for sale
|
(1,012
|
)
|
|
465
|
|
|
(547
|
)
|
|
8,314
|
|
|
(3,408
|
)
|
|
4,906
|
|
Cash flow hedging:
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized loss from cash flow hedging
|
1,644
|
|
|
(662
|
)
|
|
982
|
|
|
20
|
|
|
44
|
|
|
64
|
|
Less: reclassification adjustment for gains included in net income
|
—
|
|
|
—
|
|
|
—
|
|
|
523
|
|
|
(199
|
)
|
|
324
|
|
Change in unrealized loss from cash flow hedging, net of reclassification adjustment
|
1,644
|
|
|
(662
|
)
|
|
982
|
|
|
543
|
|
|
(155
|
)
|
|
388
|
|
Other comprehensive income
|
$
|
(49,732
|
)
|
|
$
|
20,006
|
|
|
$
|
(29,726
|
)
|
|
$
|
7,981
|
|
|
$
|
(3,204
|
)
|
|
$
|
4,777
|
|
The following table presents the changes in each component of OCI, net of tax, for the
three months ended June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains and losses on available for sale securities
|
|
Net deferred gains and losses on investment transfer to held to maturity from available for sale
|
|
Net unrealized loss from cash flow hedging instruments
|
|
Total
|
|
|
(in thousands)
|
Balance at March 31, 2013
|
|
$
|
28,390
|
|
|
$
|
3,692
|
|
|
$
|
209
|
|
|
$
|
32,291
|
|
OCI before reclassification
|
|
(26,314
|
)
|
|
—
|
|
|
741
|
|
|
(25,573
|
)
|
Amounts reclassified from OCI
|
|
(3
|
)
|
|
(235
|
)
|
|
—
|
|
|
(238
|
)
|
Net current period other comprehensive income
|
|
(26,317
|
)
|
|
(235
|
)
|
|
741
|
|
|
(25,811
|
)
|
Balance as of June 30, 2013
|
|
$
|
2,073
|
|
|
$
|
3,457
|
|
|
$
|
950
|
|
|
$
|
6,480
|
|
The following table presents the changes in each component of OCI, net of tax, for the
six months ended June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains and losses on available for sale securities
|
|
Net deferred gains and losses on investment transfer to held to maturity from available for sale
|
|
Net unrealized loss from cash flow hedging instruments
|
|
Total
|
|
|
(in thousands)
|
Balance at December 31, 2012
|
|
$
|
32,234
|
|
|
$
|
4,004
|
|
|
$
|
(32
|
)
|
|
$
|
36,206
|
|
OCI before reclassification
|
|
(30,157
|
)
|
|
—
|
|
|
982
|
|
|
(29,175
|
)
|
Amounts reclassified from OCI
|
|
(4
|
)
|
|
(547
|
)
|
|
—
|
|
|
(551
|
)
|
Net current period other comprehensive income
|
|
(30,161
|
)
|
|
(547
|
)
|
|
982
|
|
|
(29,726
|
)
|
Balance as of June 30, 2013
|
|
$
|
2,073
|
|
|
$
|
3,457
|
|
|
$
|
950
|
|
|
$
|
6,480
|
|
The following table presents the amount reclassified out of each component of OCI for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from OCI
|
|
|
Detail of OCI components
|
|
Three months ended June 30, 2013
|
|
Six months ended June 30, 2013
|
|
Affected line item in the statement where net income is presented
|
|
|
(in thousands)
|
|
|
Net unrealized gains and losses on available for sale securities:
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
Gains on sales of investment securities
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Income tax expense
|
|
|
3
|
|
|
4
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Amortization of deferred gains and losses on investment transfer to held to maturity from available for sale:
|
|
|
490
|
|
|
1,012
|
|
|
Interest income
|
|
|
(255
|
)
|
|
(465
|
)
|
|
Income tax expense
|
|
|
235
|
|
|
547
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
238
|
|
|
$
|
551
|
|
|
Net of tax
|
9.
Earnings Per Share
:
Earnings per share is 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 entity’s earnings. Basic earnings per share is 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 is 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 of including such shares 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 participating security holders have no contractual obligation to share in losses.
The following table sets forth the computation of basic and diluted income per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter
|
|
For the Six Months
|
|
Ended June 30,
|
|
Ended June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(dollars in thousands, except per share amounts)
|
Net income
|
$
|
15,617
|
|
|
$
|
14,225
|
|
|
$
|
32,874
|
|
|
$
|
23,694
|
|
Preferred dividends and discounts
|
(3,780
|
)
|
|
(1,748
|
)
|
|
(7,441
|
)
|
|
(3,490
|
)
|
Net income available to common stockholders
|
$
|
11,837
|
|
|
$
|
12,477
|
|
|
$
|
25,433
|
|
|
$
|
20,204
|
|
Undistributed earnings allocated to common shares
|
$
|
11,183
|
|
|
$
|
11,815
|
|
|
$
|
24,042
|
|
|
$
|
19,124
|
|
Undistributed earnings allocated to unvested restricted participating shares
|
154
|
|
|
123
|
|
|
314
|
|
|
208
|
|
Undistributed earnings allocated to preferred participating shares
|
500
|
|
|
539
|
|
|
1,077
|
|
|
872
|
|
Total undistributed earnings
|
$
|
11,837
|
|
|
$
|
12,477
|
|
|
$
|
25,433
|
|
|
$
|
20,204
|
|
Basic weighted-average common shares outstanding
|
28,687,406
|
|
|
28,158,304
|
|
|
28,641,738
|
|
|
28,114,855
|
|
Dilutive effect of stock options
|
120,840
|
|
|
100,626
|
|
|
122,561
|
|
|
89,984
|
|
Dilutive effect of warrants
|
187,507
|
|
|
835,149
|
|
|
212,943
|
|
|
665,267
|
|
Diluted weighted-average common shares outstanding
|
28,995,753
|
|
|
29,094,079
|
|
|
28,977,242
|
|
|
28,870,106
|
|
Basic income per common share
|
$
|
0.39
|
|
|
$
|
0.42
|
|
|
$
|
0.84
|
|
|
$
|
0.68
|
|
Diluted income per common share
|
0.39
|
|
|
0.41
|
|
|
0.83
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive shares not included in diluted earnings per common share calculation:
|
|
|
|
|
|
|
|
Stock options
|
312,327
|
|
|
446,024
|
|
|
312,327
|
|
|
446,024
|
|
Warrants
|
505,479
|
|
|
500,000
|
|
|
505,479
|
|
|
500,000
|
|
10.
Stock-Based Compensation
:
The Company’s Incentive Compensation Plan (the “Plan”) allows for the granting of stock options and stock awards. Under the Plan, the Company has issued nonqualified stock options and restricted stock to only employees and directors.
Generally, stock options are granted with an exercise price equal to the fair market value of the common stock on the date of grant, which is 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 estimate the fair value of stock options issued to employees and directors. Since 2006, stock options granted vest equally over
four years
and expire
eight years
following the grant date. Compensation expense associated with stock options is recognized over the vesting period, or until the employee or director becomes retirement eligible if that time period is shorter.
The following is a summary of stock option activity for the
six months ended June 30, 2013
:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
Outstanding at January 1, 2013
|
763,506
|
|
|
$
|
16.64
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(4,376
|
)
|
|
8.03
|
|
Forfeited
|
—
|
|
|
—
|
|
Expired
|
(74,792
|
)
|
|
20.51
|
|
Outstanding at June 30, 2013
|
684,338
|
|
|
16.27
|
|
Exercisable at June 30, 2013
|
588,859
|
|
|
17.75
|
|
As of
June 30, 2013
, the total compensation cost related to nonvested stock options that has not yet been recognized totaled
$212,000
and the weighted-average period over which these costs are expected to be recognized is approximately
one
year.
The Company grants restricted stock awards, a portion of which vest upon completion of future service requirements. The fair value of restricted stock awards is equal to the last reported sales price of the Company’s common stock on the date of grant. The Company recognizes stock-based compensation expense for these awards over the vesting period based upon the number of awards ultimately expected to vest.
The following table provides information regarding nonvested restricted stock activity for the
six months ended June 30, 2013
:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Nonvested at January 1, 2013
|
245,627
|
|
|
$
|
13.81
|
|
Granted
|
309,468
|
|
|
17.11
|
|
Vested
|
(179,753
|
)
|
|
15.86
|
|
Forfeited or canceled
|
(1,313
|
)
|
|
17.11
|
|
Nonvested at June 30, 2013
|
374,029
|
|
|
15.54
|
|
As of
June 30, 2013
, the total compensation cost related to nonvested restricted stock that has not yet been recognized totaled
$3.3 million
and the weighted-average period over which these costs are expected to be recognized is approximately
1.6
years.
11.
Derivative Financial Instruments
:
The Company uses derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. The Company has used interest rate exchange agreements, or swaps, interest rate exchange swap options, or swaptions, callable swaps, agreements to purchase mortgage-backed securities, or mortgage TBAs for which it does not intend to take delivery, and interest rate floors, collars and corridors to manage the interest rate risk associated with its commercial loan portfolio, held for sale loans, brokered CDs, cash flows related to FHLB advances, junior subordinated borrowings, 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 Bank’s investment portfolios (covered call options).
The following tables describe the derivative instruments outstanding at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
Product
|
Notional
Amount
|
|
Average Strike
Rates
|
|
Average Maturity
|
|
Fair
Value
|
|
(dollars in thousands)
|
Fair value hedging derivative instruments:
|
|
|
|
|
Brokered CD interest rate swaps—pay variable/receive fixed
|
$
|
106,920
|
|
|
Receive 2.27%
Pay 0.243%
|
|
1.9 yrs
|
|
$
|
3,553
|
|
Callable brokered CD interest rate swaps—pay variable/receive fixed
|
15,000
|
|
|
Receive 3.55%
Pay (0.075)%
|
|
13.1 yrs
|
|
102
|
|
Total fair value hedging derivative instruments
|
121,920
|
|
|
|
|
|
|
|
Cash flow hedging derivative instruments:
|
|
|
|
|
|
|
|
Interest rate swap - receive fixed/pay variable
|
20,000
|
|
|
Receive 2.56% Pay 0.31%
|
|
12.0 yrs
|
|
1,592
|
|
Total cash flow hedging derivative instruments
|
20,000
|
|
|
|
|
|
|
|
Total hedging derivative instruments
|
141,920
|
|
|
|
|
|
|
|
Non-hedging derivative instruments:
|
|
|
|
|
|
|
|
Customer interest rate swap —pay fixed/receive variable
|
426,874
|
|
|
Pay 2.39%
Receive 0.223
|
|
3.2 yrs
|
|
(13,317
|
)
|
Customer interest rate swap —receive fixed/pay variable
|
426,874
|
|
|
Receive 2.39%
Pay 0.223%
|
|
3.2 yrs
|
|
13,050
|
|
Interest rate swaps—mortgage servicing rights
|
227,000
|
|
|
Receive 1.65%
Pay 0.247%
|
|
7.7 yrs
|
|
(8,585
|
)
|
Interest rate swaptions—mortgage servicing rights
|
40,000
|
|
|
n/a
|
|
10.1 yrs
|
|
1,513
|
|
Mortgage TBAs
|
30,000
|
|
|
n/a
|
|
0.04 yrs
|
|
(1,913
|
)
|
Interest rate lock commitments
|
871,678
|
|
|
n/a
|
|
0.6 yrs
|
|
(6,897
|
)
|
Forward loan sale commitments
|
1,192,500
|
|
|
n/a
|
|
0.1 yrs
|
|
51,897
|
|
Total non-hedging derivative instruments
|
3,214,926
|
|
|
|
|
|
|
|
Total derivative instruments
|
$
|
3,356,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
Product
|
Notional
Amount
|
|
Average
Strike Rates
|
|
Average Maturity
|
|
Fair
Value
|
|
(dollars in thousands)
|
Fair value hedging derivative instruments:
|
|
|
|
|
Brokered CD interest rate swaps—pay variable/receive fixed
|
$
|
106,920
|
|
|
Receive 2.27%
Pay 0.290%
|
|
2.4 yrs
|
|
$
|
4,854
|
|
Callable brokered CD interest rate swaps—pay variable/receive fixed
|
30,000
|
|
|
Receive 3.43%
Pay (0.039)%
|
|
12.1 yrs
|
|
415
|
|
Total fair value hedging derivative instruments
|
136,920
|
|
|
|
|
|
|
|
Cash flow hedging derivative instruments:
|
|
|
|
|
|
|
|
Interest rate swap - receive fixed/pay variable
|
20,000
|
|
|
Receive 2.56% Pay 0.31%
|
|
12.5 yrs
|
|
(53
|
)
|
Total cash flow hedging derivative instruments
|
20,000
|
|
|
|
|
|
|
|
Total hedging derivative instruments
|
156,920
|
|
|
|
|
|
|
|
Non-hedging derivative instruments:
|
|
|
|
|
|
|
|
Customer interest rate swap—pay fixed/receive variable
|
387,171
|
|
|
Pay 2.54%
Receive 0.263%
|
|
3.2 yrs
|
|
(19,640
|
)
|
Customer interest rate swap—receive fixed/pay variable
|
387,171
|
|
|
Receive 2.54%
Pay 0.263%
|
|
3.2 yrs
|
|
18,999
|
|
Interest rate swaps—mortgage servicing rights
|
192,500
|
|
|
Receive 1.62%
Pay 0.274%
|
|
7.8 yrs
|
|
3,786
|
|
Interest rate lock commitments
|
1,097,825
|
|
|
n/a
|
|
0.1 yrs
|
|
15,318
|
|
Forward loan sale commitments
|
1,501,495
|
|
|
n/a
|
|
0.1 yrs
|
|
(985
|
)
|
Total non-hedging derivative instruments
|
3,566,162
|
|
|
|
|
|
|
|
Total derivative instruments
|
$
|
3,723,082
|
|
|
|
|
|
|
|
Interest rate swaps designated as fair value hedges against certain brokered CDs are used to convert the fixed rate paid on the brokered CDs to a variable rate based on 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. The ineffectiveness on these interest rate swaps was recorded on the Consolidated Statements of Income in other derivative income in noninterest income.
Interest rate swaps designated as fair value hedges against certain callable brokered CDs are used to convert the fixed rate paid on the callable brokered CDs to a variable rate based on 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged callable brokered CD is reported as an adjustment to the carrying value of the callable brokered CDs. The ineffectiveness on these interest rate swaps was recorded on the Consolidated Statements of Income in other derivative income in noninterest income.
The following table shows the net gains (losses) recognized in the Consolidated Statements of Income related to fair value hedging derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income Location
|
|
For the Quarter Ended
|
|
For the Six Months Ended
|
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
|
|
|
(in thousands)
|
Change in fair value of brokered CD interest rate swaps
|
Other derivative income
|
|
$
|
(797
|
)
|
|
$
|
233
|
|
|
$
|
(1,301
|
)
|
|
$
|
150
|
|
|
Change in fair value of hedged brokered CDs
|
Other derivative income
|
|
803
|
|
(222
|
)
|
|
1,335
|
|
|
(126
|
)
|
|
Ineffectiveness
|
|
|
$
|
6
|
|
|
$
|
11
|
|
|
34
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of callable brokered CD interest rate swaps
|
Other derivative income
|
|
$
|
(147
|
)
|
|
$
|
154
|
|
|
(313
|
)
|
|
$
|
(80
|
)
|
|
Change in fair value of hedged callable brokered CDs
|
Other derivative income
|
|
199
|
|
(332
|
)
|
|
584
|
|
|
49
|
|
|
Ineffectiveness
|
|
|
$
|
52
|
|
|
$
|
(178
|
)
|
|
$
|
271
|
|
|
$
|
(31
|
)
|
|
The interest rate corridors designated as cash flow hedges 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.
The interest rate swaps designated as cash flow hedges are used to reduce the variability in the interest paid on a portion of the junior subordinated borrowings. 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.
The table below identifies the gains and losses recognized on the Company's interest rate derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
For the Six Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
|
|
|
|
|
Derivatives - effective portion recorded in OCI
|
|
|
|
|
|
|
|
Interest rate corridors
|
$
|
—
|
|
|
$
|
299
|
|
|
$
|
—
|
|
|
$
|
543
|
|
Interest rate swap
|
1,240
|
|
|
—
|
|
|
1,644
|
|
|
—
|
|
Total
|
$
|
1,240
|
|
|
$
|
299
|
|
|
$
|
1,644
|
|
|
$
|
543
|
|
|
|
|
|
|
|
|
|
Derivatives - effective portion reclassified from OCI to income
|
|
|
|
|
|
|
|
Interest rate corridors
|
$
|
—
|
|
|
$
|
(175
|
)
|
|
$
|
—
|
|
|
$
|
(523
|
)
|
Interest rate swap
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
(175
|
)
|
|
$
|
—
|
|
|
$
|
(523
|
)
|
|
|
|
|
|
|
|
|
Hedge ineffectiveness recorded directly in income
|
|
|
|
|
|
|
|
Interest rate corridors
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
|
|
$
|
(1
|
)
|
Interest rate swap
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
The Company uses derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. These derivative financial instruments are interest rate swaps and are not designated as hedges. The Company had offsetting interest rate swaps with other counterparties in which the Company agreed to receive a variable interest rate and pay a fixed interest rate. The non-hedging derivatives are recorded at their fair value on the Consolidated Balances Sheets in other assets (related to customer transactions) or other liabilities (offsetting swaps) with changes in fair value recorded on the Consolidated Statements of Income in noninterest income.
In the normal course of business, Cole Taylor Mortgage uses interest rate swaps, interest rate swaptions, mortgage TBAs, interest rate lock commitments and forward loan sale commitments as derivative instruments to hedge the risk associated with interest rate volatility. The instruments qualify as non-hedging derivatives.
Interest rate swaps are used in order to lessen the price volatility of the mortgage servicing rights ("MSR") asset. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded on the Consolidated Statements of Income in mortgage banking revenue in noninterest income.
In order to further lessen the price volatility of the MSR asset, the Company may enter into interest rate swaptions. These derivatives allow the Company or the counterparty to the transaction the future option of entering into an interest rate swap at a specific rate for a specified duration. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded on the Consolidated Statement of Income in mortgage banking revenue in noninterest income.
Another derivative the Company uses to lessen the price volatility of the MSR asset is the mortgage TBA, which is a forward commitment to buy to-be-announced securities for which the Company does not intend to take delivery of the security and will enter into an offsetting position before physical delivery. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded on the Consolidated Statement of Income in mortgage banking revenue in noninterest income.
The Company enters into interest rate lock commitments for originated residential mortgage loans. The Company then uses forward loan sale commitments to sell originated residential mortgage loans to offset the interest rate risk of the rate lock commitments, as well as mortgage loans held for sale. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets or other liabilities with changes in fair value recorded on the Consolidated Statements of Income in mortgage banking revenue in noninterest income.
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. Any premiums related to covered call options are recognized on the Consolidated Statements of Income in noninterest income. There were
no
covered call options outstanding as of
June 30, 2013
.
Amounts included in the Consolidated Statements of Income related to non-hedging derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
For the Six Months Ended
|
|
Consolidated Statements of Income Location
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
|
|
(in thousands)
|
|
|
Customer interest rate swaps - pay fixed/receive variable
|
Other derivative income
|
|
$
|
5,225
|
|
|
$
|
(2,249
|
)
|
|
$
|
6,323
|
|
|
$
|
(1,427
|
)
|
Customer interest rate swaps - pay variable/receive fixed
|
Other derivative income
|
|
(4,908
|
)
|
|
2,095
|
|
|
(5,949
|
)
|
|
1,249
|
|
Interest rate swaps - MSRs
|
Mortgage banking revenue
|
|
(9,385
|
)
|
|
2,532
|
|
|
(11,212
|
)
|
|
2,098
|
|
Interest rate swaptions - MSRs
|
Mortgage banking revenue
|
|
2,605
|
|
|
15
|
|
|
2,605
|
|
|
15
|
|
Mortgage TBA
|
Mortgage banking revenue
|
|
(1,913
|
)
|
|
—
|
|
|
(1,913
|
)
|
|
—
|
|
Interest rate lock commitments
|
Mortgage banking revenue
|
|
(16,497
|
)
|
|
9,408
|
|
|
(22,215
|
)
|
|
9,691
|
|
Forward loan sale commitments
|
Mortgage banking revenue
|
|
54,978
|
|
|
(10,734
|
)
|
|
52,882
|
|
|
(3,397
|
)
|
12.
Offsetting of Assets and Liabilities
:
Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally enforceable master netting agreements exist. The Company's brokered CD interest rate swaps, callable brokered CD interest rate swaps, cash flow interest rate swaps and interest rate swaps on MSR assets are generally executed under International Swaps and Derivatives Association (“ISDA”) master agreements which provide for this right of offset. The Company's mortgage forward loan sale agreements are generally subject to master securities forward transaction agreements which include netting provisions.
The Company generally does not offset interest rate swaps for financial reporting purposes. The Company does offset forward loan commitments for financial reporting purposes.
Information about financial instruments that are eligible for offset in the Consolidated Balance Sheets as of the dates included is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
Gross Amounts Recognized
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Collateral
|
|
Net Amount
|
|
|
(in thousands)
|
As of June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
58,918
|
|
|
$
|
(260
|
)
|
|
$
|
58,658
|
|
|
$
|
(6,519
|
)
|
|
$
|
—
|
|
|
$
|
52,139
|
|
Derivative liabilities
|
|
22,163
|
|
|
(260
|
)
|
|
21,903
|
|
|
(6,519
|
)
|
|
(15,281
|
)
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
10,923
|
|
|
(1,869
|
)
|
|
9,054
|
|
|
(8,449
|
)
|
|
—
|
|
|
605
|
|
Derivative liabilities
|
|
22,546
|
|
|
(1,869
|
)
|
|
20,677
|
|
|
(8,449
|
)
|
|
(11,660
|
)
|
|
568
|
|
13.
Fair Value Measurement
:
The Company has elected to account for residential mortgage loans originated by Cole Taylor Mortgage and designated as held for sale at fair value under the fair value option in accordance with ASC 825 – Financial Instruments. (Any mortgages originated, held in the loan portfolio and then transferred to held for sale are accounted for at the lower of cost or market.) When the Company began to retain MSRs 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 ASU 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 (unadjusted) for identical assets or liabilities in active markets that the Company 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, or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair values:
Available for sale investment securities
:
For these securities, the Company obtains fair value measurements from an independent pricing service, 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 bond’s 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.
Loans held for sale:
Loans held for sale includes residential mortgage loans that have been originated by Cole Taylor Mortgage and were originally designated as held for sale, along with residential mortgage loans that have been originated by Cole Taylor Mortgage, were originally held in the loan portfolio and then subsequently transferred to held for sale. The Company has elected to account for the loans that were originally designated as held for sale on a recurring basis under the fair value option. The loans that were transferred from the loan portfolio into held for sale are accounted for at the lower of cost or market.
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 mortgage loans originated for sale by Cole Taylor Mortgage and subsequently transferred to the Company’s portfolio. However, the Company evaluates certain loans for impairment when it is probable the payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan has been determined to be impaired, it is measured to establish the amount of the impairment, if any, based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, less estimated cost to sell. If the measure of the impaired loan is less than the recorded investment in the loan, a valuation allowance is established.
Generally, the majority of the Company’s impaired loans are collateral-dependent real estate loans where the fair value is determined by a current appraisal. For impaired loans that are collateral dependent, the Company’s 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. Management has established policies and procedures related to appraisals and maintains a list of approved appraisers who have met specific criteria. In addition, the Company’s policy for appraisals on real estate dependent commercial loans generally requires each appraisal to have an independent compliance and technical review performed by a qualified third party to ensure quality of the appraisal and valuation. The Company discounts appraisals for estimated selling costs and, when appropriate, considers 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.
In accordance with fair value measurements, only impaired loans for which an allowance for loan loss has been established based on the fair value of collateral require classification in the fair value hierarchy. As a result, a portion, but not all, of the Company’s impaired loans are classified in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or an estimate of fair value from an independent third-party real estate professional, the Company classifies the impaired loan as nonrecurring Level 2 in the fair value hierarchy. When an independent valuation is not available or there is no observable market price and fair value is based upon management’s assessment of the liquidation value of collateral, the Company classifies the impaired loan as nonrecurring Level 3 in the fair value hierarchy.
Assets held in employee deferred compensation plans
:
Assets held in employee deferred compensation plans are recorded at fair value and included in other assets on the Company’s Consolidated Balance Sheets. The assets associated with these plans are invested in mutual funds and classified as Level 1, as the fair value measurement is based upon available quoted prices. The Company also records a liability included in accrued interest, taxes and other liabilities on its Consolidated Balance Sheets for the amount due 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 counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings thresholds, mutual puts, and guarantees. In conjunction with the FASB’s 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, swaptions and mortgage TBAs hedging MSRs, 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 and swaptions 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 analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. In accordance with accounting guidance of fair value measurements, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral posting thresholds, mutual puts and guarantees. The fair value of mortgage TBAs and 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 external valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management’s assumptions and specific information about each borrower transaction and is classified in Level 3 of the hierarchy.
Mortgage servicing rights:
The Company records its MSRs at fair value. 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. OREO and repossessed assets require an updated appraisal at least annually. Only such assets that are recorded at fair value, less estimated cost to sell, are measured on a nonrecurring basis under the fair value hierarchy. Because the fair value is based upon management’s assessment of liquidation of collateral, the Company classifies the OREO and repossessed assets as nonrecurring Level 3 in the fair value hierarchy.
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
six months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
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
|
|
|
|
|
|
|
|
U.S. government sponsored agency securities
|
$
|
15,361
|
|
|
$
|
—
|
|
|
$
|
15,361
|
|
|
$
|
—
|
|
Residential mortgage-backed securities
|
536,049
|
|
|
—
|
|
|
536,049
|
|
|
—
|
|
Commercial mortgage-backed securities
|
136,442
|
|
|
—
|
|
|
136,442
|
|
|
—
|
|
Collateralized mortgage obligations
|
15,344
|
|
|
—
|
|
|
15,344
|
|
|
—
|
|
State and municipal obligations
|
310,439
|
|
|
—
|
|
|
309,888
|
|
|
551
|
|
Total available for sale investment securities
|
1,013,635
|
|
|
—
|
|
|
1,013,084
|
|
|
551
|
|
Loans
|
4,418
|
|
|
—
|
|
|
4,418
|
|
|
—
|
|
Loans held for sale
|
580,683
|
|
|
—
|
|
|
580,683
|
|
|
—
|
|
Assets held in employee deferred compensation plans
|
3,831
|
|
|
3,831
|
|
|
—
|
|
|
—
|
|
Derivative instruments
|
18,297
|
|
|
—
|
|
|
18,297
|
|
|
—
|
|
MSRs
|
145,729
|
|
|
—
|
|
|
—
|
|
|
145,729
|
|
Mortgage derivative instruments
|
54,986
|
|
|
—
|
|
|
53,410
|
|
|
1,576
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative instruments
|
13,317
|
|
|
—
|
|
|
13,317
|
|
|
—
|
|
Mortgage derivative instruments
|
18,971
|
|
|
—
|
|
|
10,498
|
|
|
8,473
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Available for sale investment securities
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
9,998
|
|
|
$
|
—
|
|
|
$
|
9,998
|
|
|
$
|
—
|
|
U.S. government sponsored agency securities
|
16,056
|
|
|
—
|
|
|
16,056
|
|
|
—
|
|
Residential mortgage-backed securities
|
576,714
|
|
|
—
|
|
|
576,714
|
|
|
—
|
|
Commercial mortgage-backed securities
|
146,700
|
|
|
—
|
|
|
146,700
|
|
|
—
|
|
Collateralized mortgage obligations
|
21,446
|
|
|
—
|
|
|
21,446
|
|
|
—
|
|
State and municipal obligations
|
166,024
|
|
|
—
|
|
|
165,473
|
|
|
551
|
|
Total available for sale investment securities
|
936,938
|
|
|
—
|
|
|
936,387
|
|
|
551
|
|
Loans
|
5,308
|
|
|
—
|
|
|
5,308
|
|
|
—
|
|
Loans held for sale
|
938,379
|
|
|
—
|
|
|
938,379
|
|
|
—
|
|
Assets held in employee deferred compensation plans
|
3,085
|
|
|
3,085
|
|
|
—
|
|
|
—
|
|
Derivative instruments
|
24,268
|
|
|
—
|
|
|
24,268
|
|
|
—
|
|
MSRs
|
78,917
|
|
|
—
|
|
|
—
|
|
|
78,917
|
|
Mortgage derivative instruments
|
19,104
|
|
|
—
|
|
|
3,786
|
|
|
15,318
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative instruments
|
19,693
|
|
|
—
|
|
|
19,693
|
|
|
—
|
|
Mortgage derivative instruments
|
985
|
|
|
—
|
|
|
985
|
|
|
—
|
|
The table below includes a rollforward of the amounts reported on the Consolidated Balance Sheets for the periods indicated (including the effect of the measurement of fair value on earnings or OCI) for assets 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 June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Investment Securities
|
|
Mortgage Servicing Rights
|
|
Mortgage Derivatives
|
|
(in thousands)
|
Beginning balance
|
$
|
551
|
|
|
$
|
4,569
|
|
|
$
|
106,576
|
|
|
$
|
22,394
|
|
|
$
|
9,600
|
|
|
$
|
4,989
|
|
Total net gains (losses) recorded in:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
10,842
|
|
|
(1,702
|
)
|
|
(16,497
|
)
|
|
9,409
|
|
Purchases
|
—
|
|
|
—
|
|
|
8,318
|
|
|
6,424
|
|
|
—
|
|
|
—
|
|
Originations
|
—
|
|
|
—
|
|
|
19,993
|
|
|
7,727
|
|
|
—
|
|
|
—
|
|
Maturities
|
—
|
|
|
(190
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers
|
—
|
|
|
(3,750
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value at period end
|
$
|
551
|
|
|
$
|
629
|
|
|
$
|
145,729
|
|
|
$
|
34,843
|
|
|
$
|
(6,897
|
)
|
|
$
|
14,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Investment Securities
|
|
Mortgage Servicing Rights
|
|
Mortgage Derivatives
|
|
(in thousands)
|
Beginning balance
|
$
|
551
|
|
|
$
|
819
|
|
|
$
|
78,917
|
|
|
$
|
8,742
|
|
|
$
|
15,318
|
|
|
$
|
4,706
|
|
Total net gains (losses) recorded in:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
12,205
|
|
|
(756
|
)
|
|
(22,215
|
)
|
|
9,692
|
|
Purchases
|
—
|
|
|
—
|
|
|
12,551
|
|
|
12,056
|
|
|
—
|
|
|
—
|
|
Originations
|
—
|
|
|
—
|
|
|
42,056
|
|
|
14,801
|
|
|
—
|
|
|
—
|
|
Maturities
|
—
|
|
|
(190
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value at period end
|
$
|
551
|
|
|
$
|
629
|
|
|
$
|
145,729
|
|
|
$
|
34,843
|
|
|
$
|
(6,897
|
)
|
|
$
|
14,398
|
|
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 consist of loans considered impaired that may require periodic adjustment to the lower of cost or fair value and OREO and repossessed assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
Total Fair
Value
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Loans
|
$
|
30,879
|
|
|
$
|
—
|
|
|
$
|
2,704
|
|
|
$
|
28,175
|
|
OREO and repossessed assets
|
11,980
|
|
|
—
|
|
|
—
|
|
|
11,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 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:
|
|
|
|
|
|
|
|
Loans
|
$
|
25,766
|
|
|
$
|
—
|
|
|
$
|
15,427
|
|
|
$
|
10,339
|
|
OREO and repossessed assets
|
18,672
|
|
|
—
|
|
|
—
|
|
|
18,672
|
|
At
June 30, 2013
, the Company had
$28.2 million
of impaired loans and
$12.0 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 during the
six months ended June 30, 2013
, represents sales, payments or net charge-offs of
$15.1 million
and
two
additional impaired loans with fair value of
$2.8 million
which reflects the charge to earnings of
$900,000
to reduce these loans to fair value. The change in Level 3 OREO and repossessed assets for the
six months ended June 30, 2013
, included
$2.4 million
of additions and
$9.1 million
of sales/settlements and write-downs which reduced OREO assets classified as Level 3.
The following table presents quantitative information about Level 3 fair value measurements as of
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
(in
thousands)
|
|
Valuation
Techniques
|
|
Unobservable Inputs
|
|
Range of Qualitative Information
(Weighted Average)
|
MEASURED ON A RECURRING BASIS:
|
|
|
|
|
|
|
|
Available for sale securities
|
$
|
551
|
|
|
See (1) below
|
|
See (1) below
|
|
See (1) below
|
Mortgage interest rate lock commitments (Mortgage derivative instruments)
|
(6,897
|
)
|
|
Sales cash flow
|
|
Expected closing ratio
|
|
48.10% -96.00% (84.15%)
|
|
|
|
|
|
Expected delivery price
|
|
90.58 bps –107.19 bps (100.80 bps)
|
Mortgage servicing rights
|
145,729
|
|
|
Discounted cash flow
|
|
Weighted average prepayment speed
(CPR) (2)
|
|
4.5% – 32.6% (8.5%)
|
|
|
|
|
|
Weighted average discount rate
|
|
0.00% - 16.25% (10.06%)
|
|
|
|
|
|
Weighted average maturity, in months
|
|
54 – 447 (308)
|
|
|
|
|
|
Delinquencies
|
|
0% - 100% (0.71%)
|
|
|
|
|
|
Costs to service
|
|
$63 - $250 ($69)
|
MEASURED ON A
NON-RECURRING BASIS
:
|
|
|
|
|
|
|
|
Loans
|
28,175
|
|
|
Management’s assessment of liquidation value of collateral
|
|
Discount to reflect realizable value
See (3) below
|
|
0% - 100%
|
OREO and repossessed assets
|
11,980
|
|
|
Management’s assessment of liquidation value of collateral
|
|
Discount to reflect realizable value
See (4) below
|
|
5% - 20%
|
|
|
(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)
|
CPR or conditional prepayment rate is the proportion of the principal of a pool of loans that is assumed to be paid off prematurely each period.
|
|
|
(3)
|
Management’s assessment of the liquidation value of collateral is based on third party information including current appraisals, current financial statements and bank statements, inventory reports, and accounts receivable aging and may be further reduced by a management determined rate. Each loan is evaluated on an individual basis.
|
|
|
(4)
|
Management’s 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 and estimated costs to sell. Each loan is evaluated on an individual basis.
|
The significant unobservable inputs used in the fair value measurement of the Company’s available for sale securities classified as Level 3 include interest rates and expected life. Generally, 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 result in a lower fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Company’s 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 significant unobservable inputs used in the fair value measurement of the Company’s MSRs include prepayment 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, the unobservable inputs move independently of each other.
Key economic assumptions used in the measuring of the fair value of the MSRs and the sensitivity of the fair value to immediate adverse changes in those assumptions at
June 30, 2013
are presented in the following table:
|
|
|
|
|
|
June 30, 2013
|
(dollars in thousands except weighted average costs to service)
|
|
|
|
Weighted average prepayment speed (CPR)
|
8.50
|
%
|
Impact on fair value of 10% adverse change
|
$
|
(4,827
|
)
|
Impact on fair value of 20% adverse change
|
(9,373
|
)
|
|
|
Weighted average discount rate
|
10.06
|
%
|
Impact on fair value of 10% adverse change
|
$
|
(6,093
|
)
|
Impact on fair value of 20% adverse change
|
(11,713
|
)
|
|
|
Weighted average delinquency rate
|
0.71
|
%
|
Impact on fair value of 10% adverse change
|
$
|
(672
|
)
|
Impact on fair value of 20% adverse change
|
(1,344
|
)
|
|
|
Weighted average costs to service
|
$
|
69
|
|
Impact on fair value of 10% adverse change
|
$
|
(1,967
|
)
|
Impact on fair value of 20% adverse change
|
(3,935
|
)
|
Fair Value of Financial Instruments
The Company is required to provide certain disclosures of the estimated fair value of its financial instruments. A portion of the Company’s assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available, or readily determinable, trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. The Company may use significant estimates and present value calculations for the purposes of estimating fair values. Accordingly, fair values are based on various factors relative to current economic conditions, risk characteristics and other factors. The assumptions and estimates used in the fair value determination process are subjective in nature and involve uncertainties and significant judgment and, therefore, fair values cannot be determined with precision. Changes in assumptions could significantly affect these estimated values.
In addition to the valuation methodologies explained above for financial instruments recorded at fair value on a recurring and non-recurring basis, the following methods and assumptions were used to determine fair values for other significant classes of financial instruments:
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 the maturities of these items are short-term.
Loans:
With the exception of certain impaired loans and certain mortgage loans originated by Cole Taylor Mortgage and transferred to the Company’s portfolio, 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 impaired 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 at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, less estimated cost to sell. The fair value of collateral dependent real estate loans is determined by a current appraisal. The individual impairment analysis also takes into account available and reliable borrower guarantees and any cross-collateralization agreements. Certain other loans are collateralized by business assets and the fair value of these loans is based on estimates of realizability and collectability of the underlying collateral.
Investment in FHLB and FRB Stock:
The fair value of the 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.
Other assets:
Financial instruments in other assets consist of assets in the Company’s nonqualified deferred compensation plan. The carrying value of these assets approximates their fair value and is based on quoted market prices.
Deposit liabilities:
Deposit liabilities with stated maturities have been valued at the present value of future cash flows using rates which approximate current market rates for similar instruments, unless this calculation results in a present value which is less than the book value of the reflected deposit, in which case the book value has been utilized as an estimate of fair value. Fair values of deposits without stated maturities equal the respective amounts due on demand.
Short-term borrowings:
The carrying amount of overnight securities sold under agreements to repurchase and federal funds purchased 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 Company in 2010, which have been redeemed, have been historically 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 these commitments are predominantly floating rate, subject to material adverse change clauses, cancelable and not readily marketable. The carrying value and the fair value of standby letters of credit represent the unamortized portion of the fee paid by the customer. A reserve for unfunded commitments is established if it is probable that a liability has been incurred by the Company under a standby letter of credit or a loan commitment that has not yet been funded.
The estimated fair values of the Company’s financial instruments as of
June 30, 2013
and
December 31, 2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
Carrying
Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
97,832
|
|
|
$
|
97,832
|
|
|
$
|
97,832
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available for sale investments
|
1,013,635
|
|
|
1,013,635
|
|
|
—
|
|
|
1,013,084
|
|
|
551
|
|
Held to maturity investments
|
420,691
|
|
|
410,828
|
|
|
—
|
|
|
410,828
|
|
|
—
|
|
Loans held for sale
|
693,937
|
|
|
694,394
|
|
|
—
|
|
|
694,394
|
|
|
—
|
|
Loans, net of allowance
|
3,218,972
|
|
|
3,277,777
|
|
|
—
|
|
|
7,122
|
|
|
3,270,655
|
|
Investment in FHLB and FRB stock
|
79,726
|
|
|
79,726
|
|
|
—
|
|
|
79,726
|
|
|
—
|
|
Accrued interest receivable
|
16,502
|
|
|
16,502
|
|
|
16,502
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
73,283
|
|
|
73,283
|
|
|
—
|
|
|
71,707
|
|
|
1,576
|
|
Other assets
|
3,831
|
|
|
3,831
|
|
|
3,831
|
|
|
—
|
|
|
—
|
|
Total financial assets
|
$
|
5,618,409
|
|
|
$
|
5,667,808
|
|
|
$
|
118,165
|
|
|
$
|
2,276,861
|
|
|
$
|
3,272,782
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits without stated maturities
|
$
|
2,825,803
|
|
|
$
|
2,825,803
|
|
|
$
|
2,825,803
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deposits with stated maturities
|
866,623
|
|
|
867,858
|
|
|
—
|
|
|
867,858
|
|
|
—
|
|
Short-term borrowings
|
1,428,855
|
|
|
1,428,794
|
|
|
—
|
|
|
1,428,794
|
|
|
—
|
|
Accrued interest payable
|
2,549
|
|
|
2,549
|
|
|
2,549
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
32,288
|
|
|
32,288
|
|
|
—
|
|
|
23,815
|
|
|
8,473
|
|
Junior subordinated debentures
|
86,607
|
|
|
79,843
|
|
|
46,440
|
|
|
33,403
|
|
|
—
|
|
Total financial liabilities
|
$
|
5,242,725
|
|
|
$
|
5,237,135
|
|
|
$
|
2,874,792
|
|
|
$
|
2,353,870
|
|
|
$
|
8,473
|
|
Off-Balance-Sheet Financial Instruments:
|
|
|
|
|
|
|
|
|
|
Unfunded commitments to extend credit
|
$
|
1,501
|
|
|
$
|
1,501
|
|
|
$
|
—
|
|
|
$
|
1,501
|
|
|
$
|
—
|
|
Standby letters of credit
|
287
|
|
|
287
|
|
|
—
|
|
|
287
|
|
|
—
|
|
Total off-balance-sheet financial instruments
|
$
|
1,788
|
|
|
$
|
1,788
|
|
|
$
|
—
|
|
|
$
|
1,788
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Carrying
Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
166,385
|
|
|
$
|
166,385
|
|
|
$
|
166,385
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available for sale investments
|
936,938
|
|
|
936,938
|
|
|
—
|
|
|
936,387
|
|
|
551
|
|
Held to maturity investments
|
330,819
|
|
|
342,231
|
|
|
—
|
|
|
342,231
|
|
|
—
|
|
Loans held for sale
|
938,379
|
|
|
938,379
|
|
|
—
|
|
|
938,379
|
|
|
—
|
|
Loans, net of allowance
|
3,086,112
|
|
|
3,139,173
|
|
|
—
|
|
|
20,735
|
|
|
3,118,438
|
|
Investment in FHLB and FRB stock
|
74,950
|
|
|
74,950
|
|
|
—
|
|
|
74,950
|
|
|
—
|
|
Accrued interest receivable
|
15,506
|
|
|
15,506
|
|
|
15,506
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
43,372
|
|
|
43,372
|
|
|
—
|
|
|
28,054
|
|
|
15,318
|
|
Other assets
|
3,085
|
|
|
3,085
|
|
|
3,085
|
|
|
—
|
|
|
—
|
|
Total financial assets
|
$
|
5,595,546
|
|
|
$
|
5,660,019
|
|
|
$
|
184,976
|
|
|
$
|
2,340,736
|
|
|
$
|
3,134,307
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits without stated maturities
|
$
|
2,565,403
|
|
|
$
|
2,565,403
|
|
|
$
|
2,565,403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deposits with stated maturities
|
962,939
|
|
|
964,947
|
|
|
—
|
|
|
964,947
|
|
|
—
|
|
Short-term borrowings
|
1,463,019
|
|
|
1,463,002
|
|
|
—
|
|
|
1,463,002
|
|
|
—
|
|
Accrued interest payable
|
3,191
|
|
|
3,191
|
|
|
3,191
|
|
|
—
|
|
|
—
|
|
Derivative financial instruments
|
20,678
|
|
|
20,678
|
|
|
—
|
|
|
20,678
|
|
|
—
|
|
Junior subordinated debentures
|
86,607
|
|
|
70,982
|
|
|
46,367
|
|
|
24,615
|
|
|
—
|
|
Subordinated notes, net
|
33,366
|
|
|
37,549
|
|
|
—
|
|
|
37,549
|
|
|
—
|
|
Total financial liabilities
|
$
|
5,135,203
|
|
|
$
|
5,125,752
|
|
|
$
|
2,614,961
|
|
|
$
|
2,510,791
|
|
|
$
|
—
|
|
Off-Balance-Sheet Financial Instruments:
|
|
|
|
|
|
|
|
|
|
Unfunded commitments to extend credit
|
$
|
3,572
|
|
|
$
|
3,572
|
|
|
$
|
—
|
|
|
$
|
3,572
|
|
|
$
|
—
|
|
Standby letters of credit
|
437
|
|
|
437
|
|
|
—
|
|
|
437
|
|
|
—
|
|
Total off-balance-sheet financial instruments
|
$
|
4,009
|
|
|
$
|
4,009
|
|
|
$
|
—
|
|
|
$
|
4,009
|
|
|
$
|
—
|
|
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.
14.
Segment Reporting
:
The Company has identified two operating segments for purposes of financial reporting: Banking and Mortgage Banking. 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 Company’s key decision makers to make operating decisions and to assess the Company’s performance. In addition, the Company utilizes an Other category.
The Banking operating segment includes commercial banking, asset-based lending, equipment finance, retail banking and all other functions that support those units. The Mortgage Banking operating segment originates mortgage loans for sale to investors and for the Company's portfolio through its retail and broker channels. This segment also services residential mortgage loans for various investors and for loans owned by the Company. The Other segment includes subordinated debt expense, certain parent company activities and residual income tax expense or benefit, representing the difference between the actual amount incurred and the amount allocated to operating segments.
The accounting policies of the individual operating segments are generally the same as those of the Company. Segment results are presented based on our management accounting practices. The information presented in our segment reporting is based on internal allocations, which involve management judgment. The application and development of management reporting methodologies is a dynamic process and is subject to periodic adjustments and enhancements.
The following table presents financial information from the Company’s operating segments and the Other category as of the dates indicated:
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Banking
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Mortgage Banking
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Other*
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Consolidated
Total
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For the Quarter Ended
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For the Quarter Ended
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For the Quarter Ended
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For the Quarter Ended
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June 30,
2013
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June 30,
2012
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|
June 30,
2013
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|
June 30,
2012
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|
June 30,
2013
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|
June 30,
2012
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|
June 30,
2013
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|
June 30,
2012
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|
(in thousands)
|
Net interest income (loss)
|
$
|
37,175
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|
|
$
|
36,735
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|
|
$
|
5,742
|
|
|
$
|
3,503
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|
|
$
|
(1,835
|
)
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|
$
|
(3,860
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)
|
|
$
|
41,082
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|
|
$
|
36,378
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Provision for loan losses
|
946
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|
2
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|
|
(246
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)
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|
98
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|
|
—
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|
|
—
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|
|
700
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|
|
100
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Total noninterest income
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7,528
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|
8,831
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|
38,530
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|
23,015
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|
43
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|
|
43
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|
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46,101
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|
31,889
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Total noninterest expense
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25,805
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|
|
28,169
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|
|
29,086
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|
|
15,817
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|
|
5,380
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|
|
—
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|
|
60,271
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|
|
43,986
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Income (loss) before income taxes
|
17,952
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|
17,395
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|
15,432
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10,603
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(7,172
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)
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|
(3,817
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)
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|
26,212
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|
|
24,181
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Income tax expense (benefit)
|
7,091
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|
|
6,871
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|
4,928
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|
3,782
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(1,424
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)
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|
(697
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)
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|
10,595
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|
|
9,956
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Net income (loss)
|
$
|
10,861
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|
|
$
|
10,524
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|
|
$
|
10,504
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|
|
$
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6,821
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|
$
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(5,748
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)
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$
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(3,120
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)
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$
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15,617
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|
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$
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14,225
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Total average assets
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$
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4,652,059
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$
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4,256,252
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$
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1,090,917
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$
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607,794
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$
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4,243
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$
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3,764
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$
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5,747,219
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$
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4,867,810
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Average loans
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2,983,777
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|
|
2,716,230
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|
|
271,141
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|
|
230,926
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|
|
—
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|
|
—
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|
|
3,254,918
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|
|
2,947,156
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Average held for sale loans
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—
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—
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|
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634,327
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|
324,245
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|
|
—
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|
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—
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|
|
634,327
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|
324,245
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*
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The Other category includes subordinated note expense, certain parent company activities and residual income tax expense (benefit).
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Banking
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Mortgage Banking
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Other*
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Consolidated
Total
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For the Six Months Ended
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For the Six Months Ended
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For the Six Months Ended
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For the Six Months Ended
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|
June 30,
2013
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|
June 30,
2012
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|
June 30,
2013
|
|
June 30,
2012
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|
June 30,
2013
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|
June 30,
2012
|
|
June 30,
2013
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|
June 30,
2012
|
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(in thousands)
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Net interest income (loss)
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$
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73,356
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$
|
74,102
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$
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12,156
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|
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$
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5,785
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|
$
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(3,747
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)
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$
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(7,707
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)
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$
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81,765
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$
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72,180
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Provision for loan losses
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1,238
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|
7,226
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(238
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)
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|
224
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|
|
—
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|
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—
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|
|
1,000
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|
7,450
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Total noninterest income
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15,175
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|
15,202
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70,560
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|
40,546
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|
85
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|
|
87
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85,820
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|
55,835
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Total noninterest expense
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51,273
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52,844
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55,373
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27,710
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|
5,380
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|
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—
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|
112,026
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|
80,554
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Income (loss) before income taxes
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36,020
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|
29,234
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27,581
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18,397
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(9,042
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)
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(7,620
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)
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54,559
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|
40,011
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Income tax expense (benefit)
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14,228
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|
11,547
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8,303
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|
6,428
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(846
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)
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(1,658
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)
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21,685
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|
16,317
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Net income (loss)
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$
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21,792
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$
|
17,687
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$
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19,278
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$
|
11,969
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$
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(8,196
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)
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$
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(5,962
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)
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$
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32,874
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$
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23,694
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Total average assets
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$
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4,570,122
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|
|
$
|
4,244,943
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$
|
1,120,735
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$
|
515,291
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|
|
$
|
4,138
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|
|
$
|
3,682
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$
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5,694,995
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|
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$
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4,763,916
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Average loans
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2,935,140
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|
|
2,727,711
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|
|
281,340
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|
|
214,451
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|
—
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|
|
—
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|
|
3,216,480
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|
|
2,942,162
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Average held for sale loans
|
—
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|
|
—
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|
|
662,573
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|
|
257,878
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|
|
—
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|
|
—
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|
|
662,573
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|
|
257,878
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|
|
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*
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The Other category includes subordinated note expense, certain parent company activities and residual income tax expense (benefit).
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15.
Subsequent Events
:
On July 11, 2013, the Company announced that it had agreed to repurchase
26,200
shares of its outstanding Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the "Series B stock"), in a privately negotiated transaction for an aggregate price of
$26.2 million
, its face liquidation amount, plus approximately
$200,000
of accrued but unpaid dividends. This repurchase settled on July 16, 2013, was funded using available cash on hand and represented approximately
25%
of the outstanding shares of Series B stock.
On July 15, 2013, the Company announced that it had entered into a merger agreement with MB Financial, Inc. ("MB") The agreement provides that, subject to the conditions set forth in the merger agreement and briefly described below, the Company will merge with and into MB, with MB as the surviving corporation. Immediately following the merger, the Company's wholly owned subsidiary bank will merge with MB's wholly owned subsidiary bank, MB Financial Bank, N.A.
In the merger, each share of the common stock and each share of nonvoting preferred stock of the Company will be converted into the right to receive (1)
0.64318
of a share of the common stock of MB and (2)
$4.08
in cash. All "in-the-money" Company stock options and warrants outstanding will be canceled in exchange for a cash payment as provided in the agreement, as will all then-outstanding unvested restricted stock awards of the Company. However, the cash consideration paid for the restricted stock awards will remain subject to vesting or other lapse restrictions. Each share of the Company's outstanding Perpetual Non-Cumulative Preferred Stock, Series A, will be exchanged for a share of a series of MB preferred stock with substantially identical terms. Any shares of the Company's outstanding Series B stock that are not repurchased or redeemed by the Company prior to the merger will be converted into shares of a series of MB preferred stock with substantially identical terms and, as provided in the merger agreement, redeemed by MB promptly after the effective time of the merger.
The completion of the merger is subject to customary conditions, including approval by the Company's and MB's stockholders and the receipt of required regulatory approvals. The merger is expected to be completed in the first half of 2014.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements under “Management’s 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 of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), reflect the 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 2013 and beyond to differ materially from those expressed in, or implied by, these forward-looking statements.
These risks, uncertainties and other factors include, without limitation:
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•
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We may be materially and adversely affected by the highly regulated environment in which we operate.
|
|
|
•
|
Increasing dependence on our mortgage business may increase volatility in our consolidated revenues and earnings and our residential mortgage lending profitability could be significantly reduced if we are not able to originate and sell mortgage loans at profitable margins.
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|
|
•
|
Changes in interest rates may change the value of our mortgage servicing rights ("MSRs") portfolio which may increase the volatility of our earnings.
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|
•
|
Certain hedging strategies that we use to manage investment in MSRs, mortgage loans held for sale and interest rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.
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|
•
|
Our mortgage loan repurchase reserve for losses could be insufficient.
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|
•
|
A significant increase in certain loan balances associated with our mortgage business may result in liquidity risk related to the funding of these loans.
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|
•
|
We are subject to interest rate risk, including interest rate fluctuations, that could have a material adverse effect on us.
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|
•
|
Competition from financial institutions and other financial services providers may adversely affect our growth and profitability and have a material adverse effect on us.
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|
•
|
Our business is subject to the conditions of the economies in which we operate and continued weakness in those economies and the real estate markets may materially and adversely affect us.
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|
•
|
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 materially and adversely affect us.
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|
•
|
The preparation of our consolidated financial statements requires us to make estimates and judgments, including the use of models, which are subject to an inherent degree of uncertainty and which may differ from actual results.
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|
•
|
We must manage credit risk and if we are unable to do so, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio, which could have a material adverse effect on us.
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|
•
|
We may not be able to access sufficient and cost-effective sources of liquidity.
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|
•
|
We are subject to liquidity risk, including unanticipated deposit volatility.
|
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|
•
|
The repeal of federal prohibitions on payment of interest on business demand deposits could increase our interest expense and have a material adverse effect on us.
|
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|
•
|
Changes in certain credit ratings related to us or our credit could increase our financing costs or make it more difficult for us to obtain funding or capital on commercially acceptable terms.
|
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|
•
|
As a bank holding company, our sources of funds are limited.
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•
|
We are subject to certain operational risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. Our controls and procedures may fail or be circumvented.
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•
|
We are dependent on outside third parties for processing and handling of our 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.
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•
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We have counterparty risk and, therefore, we may be materially and adversely affected by the soundness of other financial institutions.
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•
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We are subject to lending concentration risks.
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•
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We are subject to mortgage asset concentration risks.
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•
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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.
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•
|
Our reputation could be damaged by negative publicity.
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•
|
New lines of business, new products and services or new customer relationships may subject us to certain additional risks.
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•
|
We may experience difficulties in managing our future growth.
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•
|
We and our subsidiaries are subject to changes in federal and state tax laws and changes in interpretation of existing laws.
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•
|
Regulatory requirements including rules recently adopted by the U.S. federal bank regulatory agencies to implement Basel III, growth plans or operating results may require us to raise additional capital, which may not be available on favorable terms or at all.
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•
|
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.
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•
|
The Agreement and Plan of Merger (the "Merger Agreement") with MB Financial, Inc. ("MB") may be terminated in accordance with its terms, and the merger may not be completed.
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•
|
Termination of the Merger Agreement could negatively impact us.
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|
•
|
We will be subject to business uncertainties and contractual restrictions while the merger is pending.
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•
|
Lawsuits may be filed against us, our Board of Directors and MB challenging the merger, and an adverse judgment in any such lawsuit may prevent the merger from being completed or from being completed within the expected timeframe.
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|
•
|
The Merger Agreement limits our ability to pursue an alternative acquisition proposal and requires us to pay a termination fee of $20 million under limited circumstances relating to alternative acquisition proposals.
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For further information abo
ut these and other risks, uncertainties and factors, please review the disclosure included in the section captioned “Risk Factors” in our December 31, 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 8, 2013. 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.
Introduction
Taylor Capital Group, Inc. is the holding company of Cole Taylor Bank (the “Bank”), a commercial bank headquartered in Chicago. The Bank specializes in serving the banking needs of closely held businesses and the people who manage them. Through its national businesses, the Bank also provides asset-based lending, residential mortgage lending and commercial equipment leasing through a growing network of offices throughout the United States. At
June 30, 2013
, we had consolidated assets of
$5.90 billion
, deposits of
$3.69 billion
and stockholders' equity of
$560.3 million
.
The following discussion and analysis focuses on the significant factors affecting our financial condition and results of operations and should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and notes thereto for the year ended December 31, 2012, included in our 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013. Operating results for the
six months ended
June 30, 2013
are not necessarily indicative of the results for the year ending December 31, 2013, or any other future period. 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 above under the caption “Cautionary Note Regarding Forward-Looking Statements”.
Application of Critical Accounting Policies
Our accounting and reporting policies conform to United States of America generally accepted accounting principles (“U.S. GAAP”) and general reporting practices within the financial services industry. Our accounting policies are described in the section captioned “Notes to Consolidated Financial Statements – 1. Summary of Significant Accounting and Reporting Policies” in our 2012 Annual Report on Form 10-K.
The preparatio
n of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available to us as of the date of the consolidated financial statements and, accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. The estimates, assumptions and judgments made by us are based on 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, income taxes, the valuation of derivative financial instruments, the valuation of investment securities and the valuation of mortgage servicing rights to be critical accounting policies.
The following accounting policies materially affect our reported earnings and financial condition and require significant estimates, assumptions and judgments.
Allowance for Loan Losses
We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in our loan portfolio. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include a general allowance computed by applying loss factors t
o 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 evalu
ating 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 economic and 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 c
ollateral. Continuing illiquidity in the Chicago area real estate market has maintained the recent relative 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.
Our non-consumer 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. Due to their size, 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 could 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 are subject to the income tax laws of the United States and the states and other jurisdictions in which we operate. The determination of income tax expense or benefit and the amounts of current and deferred income tax assets and liabilities involve the use of estimates, assumptions, interpretations, and judgment. Factors considered include interpretations of federal and state income tax laws, current financial accounting standards, the difference between the tax and financial reporting basis of assets and liabilities (temporary differences), assessment of the likelihood that the reversal of deferred deductible temporary difference will yield tax benefits, and estimates of reserves required for tax uncertainties. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to future results.
Deferred tax assets and liabilities are recorded for temporary differences between the pre-tax income reported on our consolidated financial statements and taxable income. Deferred tax assets and liabilities are measured using currently enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized as an income tax benefit or income tax expense in the period that includes the enactment date.
The determination of the realizability of the net deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, forecasts of future taxable income, applicable tax planning strategies, and assessments of current and future economic and business conditions. 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 net deferred tax assets will be realized.
Valuation of Derivative Financial Instruments
We use derivative financial instrum
ents (“derivatives”), including interest rate swaps and corridor agreements, interest rate swaptions, mortgage TBAs, callable interest rate swaps, as well as interest rate lock and forward loan sale commitments, to either accommodate individual c
ustomer 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, is recognized in current earnings during the period of the change in the fair value. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of Other Comprehensive Income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For all hedging relationships, derivative gains and losses that are not effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings during the period of the change in fair value. Similarly, the changes in the fair value of derivatives that do not qualify for hedge accounting or are not designated as an accounting hedge are also reported currently in earnings.
At the inception of a formally designated hedge and quarterly thereafter, an assessment is made to determine whether changes in the fair value or cash flows of the derivatives have been highly effective in offsetting the changes in the fair value or cash flows of the hedged item and whether they are expected to be highly effective in the future. If it is determined that derivatives are not highly effective as a hedge, hedge accounting is discontinued for the period. Once hedge accounting is terminated, all changes in fair value of the derivatives are reported currently in the Consolidated Statements of Income 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 swaps and corridors, are calculated by an independent pricing service which uses 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.
The fair value of forward loan sale commitments and mortgage TBAs is based on quoted prices for similar assets in active markets that we have the ability to access. We use an external valuation model that relies on internally developed input to estimate the fair value of our interest rate lock commitments.
Valuation of Investment Securities
The fair value of our investment securities portfolio is determined in accordance with U.S. 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 consolidated 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 bond yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, including credit spreads and current rating from credit rating agencies, and the bond’s terms and conditions, among other things. While we use an independent pricing service to obtain the fair values of our investment portfolio, we employ certain control procedures to determine the reasonableness of the valuations. We validate the overall reasonableness of the fair values by comparing information obtained from our independent pricing service to other third party valuation sources for selected assets and review the valuations and any 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 security’s carrying value, the characteristics of the underlying collateral, the degree of credit support provided by subordinate tranches within the total issuance, independent credit ratings, changes in credit ratings and a cash flow analysis, considering default rates, loss severities based upon the location of the collateral, and estimated prepayments. Those securities with unrealized losses for more than 12 months and for more than 10% of their carrying value are subjected to further analysis to determine if we expect to receive all the contractual cash flows. We use other independent pricing sources to obtain fair value estimates and perform discounted cash flow analysis for selected securities. When the discounted cash flow analysis obtained from those independent pricing sources indicates that we expect all future principal and interest payments will be received in accordance with their original contractual terms, we do not intend to sell the security, and we more likely than not will not be required to sell the security before recovery, the unrealized loss is deemed temporary. If such analysis shows that we do not expect to be able to recover our entire investment, 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 current economic conditions. 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 may have a material impact on our Consolidated Statements of Income.
Valuation of Mortgage Servicing Rights
The Company originates and sells residential mortgage loans in the secondary market and may retain the right to service the loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to the investors or master servicer. Upon a sale of mortgage loans for which MSRs are retained, the retained MSRs asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing activities. MSRs may also be acquired in a bulk purchase. Purchased MSRs are recorded at the purchase price at the date of purchase and at fair value thereafter.
MSRs do not trade in an active market with readily observable prices. 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 valuation model are validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party. Material discrepancies between the internal valuation and the third party valuation are analyzed and an internal committee determines whether or not an adjustment should be made to bring the internal valuation in line with the external valuation.
The Company has elected to account for MSRs using the fair value option. Changes in the fair value are recognized in mortgage banking revenue on the Company's Consolidated Statements of Income.
RESULTS OF OPERATIONS
Overview
Net income applicable to common stockholders was $11.8 million, or $0.39 per diluted common share for the
three months ended June 30, 2013
, compared to net income applicable to common stockholders of $12.5 million, or $0.41 per diluted common share, for the
three months ended June 30, 2012
. For the six months ended
June 30, 2013
, net income applicable to common stockholders was $25.4 million or $0.83 per diluted common share outstanding, compared to net income applicable to common stockholders of $20.2 million or $0.66 per diluted common share outstanding for the six months ended
June 30, 2012
. The decrease in income applicable to common stockholders for the
three months ended June 30, 2013
was primarily the result of early extinguishment expense associated with the prepayment of subordinated notes, an increase in salaries and employee benefits expense due to an increase in headcount and incentive compensation expense, an increase in volume related mortgage expenses and lower gains on sales of investment securities. Partially offsetting these items was an increase in mortgage banking revenue, an increase in interest income earned on loans and decreased funding costs. Nonperforming asset expense also decreased.
Highlights
|
|
•
|
Pre-tax, pre-provision operating earnings (a non-GAAP financial measure defined below) increased 23.9% to $31.1 million for the quarter ended
June 30, 2013
, as compared to $25.1 million for the quarter ended
June 30, 2012
. During the six months ended
June 30, 2013
, pre-tax, pre-provision operating earnings increased by 22.8% to $60.3 million from $49.1 million as compared to the six months ended
June 30, 2012
.
|
|
|
•
|
In the
second quarter of 2013
, total revenue (a non-GAAP financial measure defined below) was $87.2 million, a 33.7% increase from $65.2 million for the
second quarter of 2012
. For the six months ended
June 30, 2013
, total revenue was $167.6 million, a 34.9% increase from $124.2 million for the same period in 2012.
|
|
|
•
|
Total commercial loans increased to $3.00 billion at
June 30, 2013
, up $397.6 million, or 15.3%, from
June 30, 2012
.
|
|
|
•
|
At
June 30, 2013
, total nonperforming assets were $89.3 million, down from $106.7 million at
June 30, 2012
.
|
|
|
•
|
Mortgage origination volume was $1.87 billion for the
second quarter of 2013
, up $914.2 million or 95.2% from the
second quarter of 2012
.
|
|
|
•
|
The Company prepaid $37.5 million principal amount of the 8% subordinated notes originally due in 2020, which resulted in a non-recurring, pre-tax charge of $5.4 million associated with the unamortized discount, original issuance costs and prepayment premium.
|
|
|
•
|
We completed the purchase of MSRs as well as certain office space, furniture and equipment from Liberty Savings Bank, FSB of Wilmington, Ohio.
|
Our accounting and reporting policies conform to U.S. GAAP and general practice within the banking industry. Management also uses certain non-GAAP financial measures to evaluate the Company’s 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.
Pre-tax, pre-provision operating earnings is 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 investment securities and early debt extinguishment expense are excluded from income before taxes. Revenue is a non-GAAP financial measure calculated as net interest income plus noninterest income less gains and losses on investment securities.
The following table reconciles the income before income taxes to pre-tax, pre-provision operating earnings for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
For the Six Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
(in thousands)
|
Income before income taxes
|
$
|
26,212
|
|
|
$
|
24,181
|
|
|
$
|
54,559
|
|
|
$
|
40,011
|
|
Add back (subtract):
|
|
|
|
|
|
|
|
Credit costs:
|
|
|
|
|
|
|
|
Provision for loan losses
|
700
|
|
|
100
|
|
|
1,000
|
|
|
7,450
|
|
Nonperforming asset expense, net
|
(1,198
|
)
|
|
828
|
|
|
(639
|
)
|
|
1,522
|
|
Credit costs subtotal
|
(498
|
)
|
|
928
|
|
|
361
|
|
|
8,972
|
|
Other:
|
|
|
|
|
|
|
|
Gains on sales of investment securities, net
|
(6
|
)
|
|
(3,020
|
)
|
|
(7
|
)
|
|
(3,976
|
)
|
Early extinguishment of debt
|
5,380
|
|
|
2,987
|
|
|
5,380
|
|
|
3,988
|
|
Impairment of investment securities
|
—
|
|
|
—
|
|
|
—
|
|
|
125
|
|
Other subtotal
|
5,374
|
|
|
(33
|
)
|
|
5,373
|
|
|
137
|
|
Pre-tax, pre-provision operating earnings
|
$
|
31,088
|
|
|
$
|
25,076
|
|
|
$
|
60,293
|
|
|
$
|
49,120
|
|
|
|
|
|
|
|
|
|
The following table details the components of revenue for the periods indicated:
|
|
For the Quarter Ended
|
|
For the Six Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
(in thousands)
|
Net interest income
|
$
|
41,082
|
|
|
$
|
36,378
|
|
|
$
|
81,765
|
|
|
$
|
72,180
|
|
Noninterest income
|
46,101
|
|
|
31,889
|
|
|
85,820
|
|
|
55,835
|
|
Add back (subtract):
|
|
|
|
|
|
|
|
Gains on sales of investment securities, net
|
(6
|
)
|
|
(3,020
|
)
|
|
(7
|
)
|
|
(3,976
|
)
|
Impairment of investment securities
|
—
|
|
|
—
|
|
|
—
|
|
|
125
|
|
Revenue
|
$
|
87,177
|
|
|
$
|
65,247
|
|
|
$
|
167,578
|
|
|
$
|
124,164
|
|
Net Interest Income
Net interest income is an important source of our earnings and is the difference between total interest income and fees generated by interest-earning assets and total interest expense incurred on interest-bearing liabilities. The amount of net interest income is affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities and the level of rates earned or incurred on those assets and liabilities.
Quarter Ended
June 30, 2013
Compared to the Quarter Ended
June 30, 2012
Net interest income was
$41.1 million
for the
second quarter of 2013
, an increase of $4.7 million, or 12.9%, from
$36.4 million
for the
second quarter of 2012
.
Our net interest margin on a tax equivalent basis was
3.16%
for the
second quarter of 2013
, a decrease of 8 basis points from
3.24%
for the
second quarter of 2012
. Reductions in loan and investment yields have been partially offset by deliberate changes in the funding mix to reduce funding costs. Net interest margin is calculated by dividing taxable equivalent net interest income by average interest-earning assets.
The yield on average earning assets decreased from
4.08%
in the
second quarter of 2012
to
3.67%
in the
second quarter of 2013
due to decreased yields on both loans and investment securities. The yield earned on loans declined to
3.96%
in the
second quarter of 2013
from
4.41%
in the
second quarter of 2012
. Commercial loan yields drove most of the reduction as competitive pricing pressure on new loans and changes in the mix of the portfolio continued. The yield on the investment securities portfolio decreased to
3.15%
in the
second quarter of 2013
from
3.39%
in the
second quarter of 2012
due to the generally lower interest rate environment.
The rate paid on total interest-bearing liabilities declined from
1.11%
in the
second quarter of 2012
to
0.71%
in the
second quarter of 2013
. The early extinguishment of several comparatively high-rate long-term borrowings and significant anticipated deposit repricing, largely in customer certificates of deposit and brokered certificates of deposits, contributed to this reduction. In addition, in the third quarter of 2012, we prepaid all $60.0 million principal amount of the Bank's 10% subordinated notes in a continuation of our efforts to lower overall funding costs.
Average interest-earning assets during the
second quarter of 2013
were
$5.36 billion
as compared to
$4.56 billion
during the
second quarter of 2012
, an increase of $797.6 million, or 17.5%. Average loan balances increased $307.8 million, or 10.4%, due to growth across several loan categories including commercial and industrial, commercial real estate and portfolio mortgage loans. Lease receivables also increased as the commercial equipment leasing business, which was launched in mid-2012, began to ramp up its activities. These increases were partially offset by the transfer of mortgage loans from portfolio to held for sale. Average loans held for sale were
$634.3 million
for the
second quarter of 2013
and
$324.2 million
for the
second quarter of 2012
, an increase of $310.1 million or 95.7%. This increase was related to the increase in mortgage loan origination volume and the transfer referred to above. Average investment balances increased $180.2 million, or 13.9%, from the
second quarter of 2012
to the
second quarter of 2013
, with municipal securities accounting for most of the increase.
Total average interest-bearing deposits balances increased to
$2.49 billion
for the
second quarter of 2013
, compared to
$2.26 billion
for the
second quarter of 2012
, an increase of $234.1 million, due to an increase in money market, commercial interest checking and NOW accounts associated with on-going deposit raising efforts, partially offset by a continued decline in time deposits. Noninterest-bearing deposits increased $302.8 million in the
second quarter of 2013
due to an increase in consumer checking account balances, primarily from our relationship with an organization that provides electronic financial aid disbursements and payment services to the higher education industry, and an increase in mortgage escrow accounts due to growth in the mortgage servicing business.
Six Months Ended
June 30, 2013
Compared to the Six Months Ended
June 30, 2012
Net interest income was
$81.8 million
for the six months ended
June 30, 2013
, compared to
$72.2 million
for the six months ended
June 30, 2012
, an increase of $9.6 million, or 13.3%.
Our net interest margin on a tax equivalent basis was
3.18%
during the six months ended
June 30, 2013
as compared to
3.26%
during the six months ended
June 30, 2012
. Net interest margin decreased due to lower yields on loans and investment securities partially offset by a reduction in funding costs.
The yield on interest-earning assets was
3.70%
for the first six months of
2013
compared to
4.16%
for the first six months of
2012
. The decrease was due to decreases in rates on investment securities and loans. The loan yield decreased from
4.49%
for the six months ended
June 30, 2012
to
4.01%
for the six months ended
June 30, 2013
. This decrease is due to a change in the mix of the portfolio as lease receivables and portfolio mortgage loans, which typically carry lower yields than commercial loans, made up a larger portion of the portfolio in the six months ended
June 30, 2013
. Commercial loan yields also decreased, reflecting competitive pricing pressures. The yield on investment securities declined from
3.46%
for the six months ended
June 30, 2012
to
3.16%
for the six months ended
June 30, 2013
due to the generally lower interest rate environment.
The rate paid on total interest-bearing liabilities declined from
1.17%
for the six months ended
June 30, 2012
to
0.74%
for the six months ended
June 30, 2013
. This decrease was a result of funding related transactions including anticipated significant deposit repricing, primarily in customer certificates of deposit and brokered certificates of deposit and the termination of certain derivative contracts. In addition, in the third quarter of 2012 we prepaid all $60.0 million principal amount of the Bank's 10% subordinated notes in a continuation of our efforts to lower overall funding costs.
Average interest-earning assets during the first six months of
2013
were
$5.30 billion
as compared to
$4.49 billion
during the first six months of
2012
, an increase of $808.4 million, or 18.0%. Average investment balances increased $129.8 million, or 10.1%, between those two periods while average held for sale loan balances increased $404.7 million, or 156.9%, and average loan balances increased $274.3 million or 9.3%.
Average interest-bearing deposits balances increased to
$2.46 billion
for the six months ended
June 30, 2013
, compared to
$2.27 billion
for the six months ended
June 30, 2012
, an increase of $186.5 million due to growth in commercial interest checking, NOW and money market accounts, partially offset by a decrease in time deposits.
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 resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a tax-equivalent basis assuming a tax rate of 35.0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2013
Versus Quarter Ended
June 30, 2012 Increase/(Decrease)
|
|
Six Months Ended June 30, 2013
Versus Six Months Ended
June 30, 2012 Increase/(Decrease)
|
|
VOLUME
|
|
RATE
|
|
NET
|
|
VOLUME
|
|
RATE
|
|
DAYS*
|
|
NET
|
|
(in thousands)
|
INTEREST EARNED ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
$
|
1,454
|
|
|
$
|
(812
|
)
|
|
$
|
642
|
|
|
$
|
2,190
|
|
|
$
|
(1,951
|
)
|
|
$
|
(122
|
)
|
|
$
|
117
|
|
Cash equivalents
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
—
|
|
|
(3
|
)
|
Loans held for sale
|
2,664
|
|
|
(469
|
)
|
|
2,195
|
|
|
6,911
|
|
|
(769
|
)
|
|
(28
|
)
|
|
6,114
|
|
Loans
|
3,274
|
|
|
(3,396
|
)
|
|
(122
|
)
|
|
5,932
|
|
|
(7,268
|
)
|
|
(361
|
)
|
|
(1,697
|
)
|
Total interest-earning assets
|
|
|
|
|
2,713
|
|
|
|
|
|
|
|
|
4,531
|
|
INTEREST PAID ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
486
|
|
|
(1,212
|
)
|
|
(726
|
)
|
|
829
|
|
|
(2,643
|
)
|
|
(57
|
)
|
|
(1,871
|
)
|
Total borrowings
|
619
|
|
|
(2,628
|
)
|
|
(2,009
|
)
|
|
963
|
|
|
(5,245
|
)
|
|
(54
|
)
|
|
(4,336
|
)
|
Total interest-bearing liabilities
|
|
|
|
|
(2,735
|
)
|
|
|
|
|
|
|
|
(6,207
|
)
|
Net interest income, tax-equivalent
|
|
|
|
|
$
|
5,448
|
|
|
|
|
|
|
|
|
$
|
10,738
|
|
|
|
|
*
|
Represents variance due to one less day in the six months ended June 30, 2013 versus the six months ended June 30, 2012.
|
Tax-Equivalent Adjustments to Yields and Margins
As part of our evaluation of net interest income, we analyze our consolidated average balances, our yield on average interest-earning assets and the cost of average interest-bearing liabilities. Such yields and costs are calculated by dividing annualized income or expense by the average balance of assets or liabilities. Because management analyzes net interest income on a tax-equivalent basis, the analysis contains certain non-GAAP financial measures. In these non-GAAP financial measures, investment interest income, loan interest income, total interest income and net interest income are adjusted to reflect tax-exempt interest income on a tax-equivalent basis, assuming a tax rate of 35.0%. This assumed tax rate may differ from our actual effective income tax rate. In addition, the 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 Income. In addition, the interest-earning asset yield, net interest margin and net interest spread are shown with and without the tax-equivalent adjustment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(dollars in thousands)
|
Net interest income as stated
|
$
|
41,082
|
|
|
$
|
36,378
|
|
|
$
|
81,765
|
|
|
$
|
72,180
|
|
Tax-equivalent adjustment-investments
|
1,119
|
|
|
372
|
|
|
1,888
|
|
|
729
|
|
Tax-equivalent adjustment-loans
|
29
|
|
|
32
|
|
|
58
|
|
|
64
|
|
Tax-equivalent net interest income
|
$
|
42,230
|
|
|
$
|
36,782
|
|
|
$
|
83,711
|
|
|
$
|
72,973
|
|
Yield on earning assets without tax adjustment
|
3.59
|
%
|
|
4.05
|
%
|
|
3.63
|
%
|
|
4.13
|
%
|
Yield on earning assets – tax-equivalent
|
3.67
|
%
|
|
4.08
|
%
|
|
3.70
|
%
|
|
4.16
|
%
|
Net interest margin without tax adjustment
|
3.07
|
%
|
|
3.20
|
%
|
|
3.10
|
%
|
|
3.23
|
%
|
Net interest margin – tax-equivalent
|
3.16
|
%
|
|
3.24
|
%
|
|
3.18
|
%
|
|
3.26
|
%
|
Net interest spread without tax adjustment
|
2.88
|
%
|
|
2.93
|
%
|
|
2.89
|
%
|
|
2.96
|
%
|
Net interest spread – tax-equivalent
|
2.96
|
%
|
|
2.97
|
%
|
|
2.96
|
%
|
|
2.99
|
%
|
The following tables present, for the periods indicated, certain information relating to our consolidated average balances and reflect our yield on average interest-earning assets and costs of average interest-bearing liabilities. The tables contain certain non-GAAP financial measures to adjust tax-exempt interest income on a tax-equivalent basis assuming a tax rate of 35.0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2013
|
|
2012
|
|
AVERAGE
BALANCE
|
|
INTEREST
|
|
YIELD/
RATE
(%)(6)
|
|
AVERAGE
BALANCE
|
|
INTEREST
|
|
YIELD/
RATE
(%)(6)
|
|
(dollars in thousands)
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (1):
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
$
|
1,139,925
|
|
|
$
|
8,398
|
|
|
2.95
|
%
|
|
$
|
1,224,509
|
|
|
9,889
|
|
|
3.23
|
%
|
Tax-exempt (tax-equivalent) (2)
|
332,391
|
|
|
3,196
|
|
|
3.85
|
%
|
|
67,620
|
|
|
1,063
|
|
|
6.29
|
%
|
Total investment securities
|
1,472,316
|
|
|
11,594
|
|
|
3.15
|
%
|
|
1,292,129
|
|
|
10,952
|
|
|
3.39
|
%
|
Cash equivalents
|
237
|
|
|
1
|
|
|
1.67
|
%
|
|
709
|
|
|
3
|
|
|
1.67
|
%
|
Loans held for sale
|
634,327
|
|
|
5,348
|
|
|
3.37
|
%
|
|
324,245
|
|
|
3,153
|
|
|
3.89
|
%
|
Loans (2) (3):
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate
|
2,807,035
|
|
|
28,948
|
|
|
4.08
|
%
|
|
2,595,806
|
|
|
29,426
|
|
|
4.48
|
%
|
Lease receivables
|
66,766
|
|
|
492
|
|
|
2.95
|
%
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Residential real estate mortgages
|
335,638
|
|
|
2,072
|
|
|
2.47
|
%
|
|
289,129
|
|
|
2,164
|
|
|
2.99
|
%
|
Home equity and consumer
|
45,479
|
|
|
490
|
|
|
4.32
|
%
|
|
62,221
|
|
|
612
|
|
|
3.96
|
%
|
Fees on loans
|
|
|
178
|
|
|
|
|
|
|
100
|
|
|
|
Net loans (tax-equivalent) (2)
|
3,254,918
|
|
|
32,180
|
|
|
3.96
|
%
|
|
2,947,156
|
|
|
32,302
|
|
|
4.41
|
%
|
Total interest-earning assets (2)
|
5,361,798
|
|
|
49,123
|
|
|
3.67
|
%
|
|
4,564,239
|
|
|
46,410
|
|
|
4.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
(83,452
|
)
|
|
|
|
|
|
(95,899
|
)
|
|
|
|
|
Cash and due from banks
|
116,202
|
|
|
|
|
|
|
119,121
|
|
|
|
|
|
Accrued interest and other assets
|
352,671
|
|
|
|
|
|
|
280,349
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
5,747,219
|
|
|
|
|
|
|
$
|
4,867,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
1,602,427
|
|
|
1,989
|
|
|
0.50
|
%
|
|
1,092,349
|
|
|
1,616
|
|
|
0.60
|
%
|
Savings deposits
|
40,920
|
|
|
6
|
|
|
0.06
|
%
|
|
39,603
|
|
|
7
|
|
|
0.07
|
%
|
Time deposits
|
851,190
|
|
|
2,218
|
|
|
1.05
|
%
|
|
1,128,443
|
|
|
3,316
|
|
|
1.18
|
%
|
Total interest-bearing deposits
|
2,494,537
|
|
|
4,213
|
|
|
0.68
|
%
|
|
2,260,395
|
|
|
4,939
|
|
|
0.88
|
%
|
Short-term borrowings
|
1,281,609
|
|
|
473
|
|
|
0.15
|
%
|
|
1,010,111
|
|
|
629
|
|
|
0.25
|
%
|
Long-term borrowings
|
—
|
|
|
—
|
|
|
—
|
%
|
|
27,692
|
|
|
69
|
|
|
0.99
|
%
|
Junior subordinated debentures
|
86,607
|
|
|
1,444
|
|
|
6.67
|
%
|
|
86,607
|
|
|
1,464
|
|
|
6.76
|
%
|
Subordinated notes
|
29,084
|
|
|
763
|
|
|
10.49
|
%
|
|
89,981
|
|
|
2,527
|
|
|
11.23
|
%
|
Total interest-bearing liabilities
|
3,891,837
|
|
|
6,893
|
|
|
0.71
|
%
|
|
3,474,786
|
|
|
9,628
|
|
|
1.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
1,195,709
|
|
|
|
|
|
|
892,945
|
|
|
|
|
|
Accrued interest, taxes, and other liabilities
|
81,531
|
|
|
|
|
|
|
82,818
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
1,277,240
|
|
|
|
|
|
|
975,763
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
578,142
|
|
|
|
|
|
|
417,261
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
5,747,219
|
|
|
|
|
|
|
$
|
4,867,810
|
|
|
|
|
|
Net interest income (tax-equivalent) (2)
|
|
|
$
|
42,230
|
|
|
|
|
|
|
$
|
36,782
|
|
|
|
Net interest spread (tax-equivalent) (2) (4)
|
|
|
|
|
2.96
|
%
|
|
|
|
|
|
2.97
|
%
|
Net interest margin (tax-equivalent) (2) (5)
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Investment securities average balances are based on amortized cost.
|
|
|
|
|
(2) Calculations are computed on a tax-equivalent basis assuming a tax rate of 35%.
|
(3) Nonaccrual loans are included in the above stated average balances.
|
(4) Net interest spread represents the difference between the weighted average yield on interest-earning assets and the weighted 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2013
|
|
2012
|
|
AVERAGE
BALANCE
|
|
INTEREST
|
|
YIELD/
RATE
(%)
(6)
|
|
AVERAGE
BALANCE
|
|
INTEREST
|
|
YIELD/
RATE
(%)
(6)
|
|
(dollars in thousands)
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
$
|
1,131,969
|
|
|
$
|
17,015
|
|
|
3.01
|
%
|
|
$
|
1,219,547
|
|
|
$
|
20,207
|
|
|
3.31
|
%
|
Tax-exempt (tax-equivalent)
(2)
|
284,606
|
|
|
5,392
|
|
|
3.79
|
%
|
|
67,240
|
|
|
2,083
|
|
|
6.20
|
%
|
Total investment securities
|
1,416,575
|
|
|
22,407
|
|
|
3.16
|
%
|
|
1,286,787
|
|
|
22,290
|
|
|
3.46
|
%
|
Cash equivalents
|
395
|
|
|
2
|
|
|
1.01
|
%
|
|
835
|
|
|
5
|
|
|
1.18
|
%
|
Loans held for sale
|
662,573
|
|
|
11,126
|
|
|
3.36
|
%
|
|
257,878
|
|
|
5,012
|
|
|
3.89
|
%
|
Loans
(2) (3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate
|
2,765,124
|
|
|
57,305
|
|
|
4.12
|
%
|
|
2,603,666
|
|
|
59,263
|
|
|
4.50
|
%
|
Lease receivables
|
57,868
|
|
|
864
|
|
|
2.99
|
%
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Residential real estate mortgages
|
346,727
|
|
|
4,498
|
|
|
2.59
|
%
|
|
274,322
|
|
|
4,297
|
|
|
3.13
|
%
|
Home equity and consumer
|
46,761
|
|
|
1,052
|
|
|
4.54
|
%
|
|
64,174
|
|
|
1,309
|
|
|
4.10
|
%
|
Fees on loans
|
|
|
341
|
|
|
|
|
|
|
|
888
|
|
|
|
Net loans (tax-equivalent)
(2)
|
3,216,480
|
|
|
64,060
|
|
|
4.01
|
%
|
|
2,942,162
|
|
|
65,757
|
|
|
4.49
|
%
|
Total interest-earning assets
(2)
|
5,296,023
|
|
|
97,595
|
|
|
3.70
|
%
|
|
4,487,662
|
|
|
93,064
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
(83,238
|
)
|
|
|
|
|
|
|
(100,483
|
)
|
|
|
|
|
Cash and due from banks
|
133,280
|
|
|
|
|
|
|
|
104,612
|
|
|
|
|
|
Accrued interest and other assets
|
348,930
|
|
|
|
|
|
|
|
272,125
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
5,694,995
|
|
|
|
|
|
|
|
$
|
4,763,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
1,539,509
|
|
|
3,886
|
|
|
0.51
|
%
|
|
$
|
1,055,784
|
|
|
3,161
|
|
|
0.60
|
%
|
Savings deposits
|
40,590
|
|
|
13
|
|
|
0.06
|
%
|
|
39,355
|
|
|
14
|
|
|
0.07
|
%
|
Time deposits
|
879,748
|
|
|
4,578
|
|
|
1.05
|
%
|
|
1,178,205
|
|
|
7,173
|
|
|
1.22
|
%
|
Total interest-bearing deposits
|
2,459,847
|
|
|
8,477
|
|
|
0.69
|
%
|
|
2,273,344
|
|
|
10,348
|
|
|
0.92
|
%
|
Short-term borrowings
|
1,191,285
|
|
|
893
|
|
|
0.15
|
%
|
|
932,184
|
|
|
1,192
|
|
|
0.25
|
%
|
Long-term borrowings
|
—
|
|
|
—
|
|
|
—
|
%
|
|
74,155
|
|
|
569
|
|
|
1.52
|
%
|
Junior subordinated debentures
|
86,607
|
|
|
2,887
|
|
|
6.67
|
%
|
|
86,607
|
|
|
2,936
|
|
|
6.78
|
%
|
Subordinated notes
|
31,237
|
|
|
1,627
|
|
|
10.42
|
%
|
|
89,869
|
|
|
5,046
|
|
|
11.23
|
%
|
Total interest-bearing liabilities
|
3,768,976
|
|
|
13,884
|
|
|
0.74
|
%
|
|
3,456,159
|
|
|
20,091
|
|
|
1.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
1,264,451
|
|
|
|
|
|
|
823,470
|
|
|
|
|
|
Accrued interest, taxes, and other liabilities
|
87,150
|
|
|
|
|
|
|
72,377
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
1,351,601
|
|
|
|
|
|
|
895,847
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
574,418
|
|
|
|
|
|
|
411,910
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
5,694,995
|
|
|
|
|
|
|
$
|
4,763,916
|
|
|
|
|
|
Net interest income (tax-equivalent)
(2)
|
|
|
$
|
83,711
|
|
|
|
|
|
|
$
|
72,973
|
|
|
|
Net interest spread (tax-equivalent)
(2) (4)
|
|
|
|
|
2.96
|
%
|
|
|
|
|
|
2.99
|
%
|
Net interest margin (tax-equivalent)
(2) (5)
|
|
|
|
|
3.18
|
%
|
|
|
|
|
|
3.26
|
%
|
|
(1) Investment securities average balances are based on amortized cost.
|
(2) Calculations are computed on a tax-equivalent basis assuming a tax rate of 35%.
|
(3) Nonaccrual loans are included in the above stated average balances.
|
(4) Net interest spread represents the difference between the weighted average yield on interest-earning assets and the weighted 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.
|
Provision for Loan Losses
The provision for loan losses is based on 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
$700,000
for the quarter ended
June 30, 2013
, compared to
$100,000
for the quarter ended
June 30, 2012
. The increase in the provision for loan losses reflected an increase in the specific reserve and growth in the loan portfolio partially offset by net recoveries during the quarter ended
June 30, 2013
.
The provision for loan losses was
$1.0 million
for the six months ended
June 30, 2013
, compared to
$7.5 million
for the six months ended
June 30, 2012
. The decrease in provision expense reflected volume and mix changes in the loan portfolio and a lower level of net charge-offs and recoveries in the six months ended
June 30, 2013
, compared to the six months ended
June 30, 2012
.
Noninterest Income
The following table presents, for the periods indicated, our major categories of noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
(in thousands)
|
Service charges
|
$
|
3,505
|
|
|
$
|
3,355
|
|
|
$
|
6,996
|
|
|
$
|
6,646
|
|
Mortgage banking revenue
|
38,533
|
|
|
23,014
|
|
|
70,563
|
|
|
40,544
|
|
Gains on sales of investment securities, net
|
6
|
|
|
3,020
|
|
|
7
|
|
|
3,976
|
|
Letter of credit and other loan fees
|
1,074
|
|
|
935
|
|
|
2,165
|
|
|
1,880
|
|
Change in market value of employee deferred compensation plan
|
100
|
|
|
(91
|
)
|
|
218
|
|
|
76
|
|
Other derivative income
|
1,704
|
|
|
815
|
|
|
3,264
|
|
|
1,376
|
|
Other noninterest income
|
1,179
|
|
|
841
|
|
|
2,607
|
|
|
1,337
|
|
Total noninterest income
|
$
|
46,101
|
|
|
$
|
31,889
|
|
|
$
|
85,820
|
|
|
$
|
55,835
|
|
Quarter Ended
June 30, 2013
Compared to the Quarter Ended
June 30, 2012
Total noninterest income was
$46.1 million
during the
second quarter of 2013
, compared to
$31.9 million
in the
second quarter of 2012
, an increase of $14.2 million, or 44.5%. This increase was primarily due to an increase in mortgage banking revenue generated by Cole Taylor Mortgage. Mortgage banking revenue totaled
$38.5 million
in the
second quarter of 2013
, an increase of $15.5 million from the
second quarter of 2012
, primarily driven by an increase in loan originations of $914.2 million. Mortgage loan origination margins in the second quarter of 2013 were at a lower level than those seen at the end of 2012 and the first quarter of 2013. Mortgage servicing revenue increased due to an increase in the mortgage servicing portfolio of $8.72 billion between these two periods. This increase is a result of both servicing held on originated loans and servicing purchased from third parties.
The
second quarter of 2012
included gains on the sale of investment securities of
$3.0 million
. These securities were sold at the same time as an early extinguishment of debt and a covered call transaction occurred. Gains on the sale of investment securities in the
second quarter of 2013
were
$6,000
.
Other derivative income increased from
$815,000
in the
second quarter of 2012
to
$1.7 million
in the
second quarter of 2013
due to an increase in the number of customer swap transactions and related fees and an increase in the mark-to-market adjustment on fair value hedges.
Other noninterest income was
$841,000
in
second quarter of 2012
and
$1.2 million
in the
second quarter of 2013
, an increase of $338,000. Partnership income increased $490,000 in the
second quarter of 2013
. Fees from covered calls were $110,000 in the
second quarter of 2013
compared to $342,000 in the
second quarter of 2012
.
Six Months Ended
June 30, 2013
Compared to the Six Months Ended
June 30, 2012
Total noninterest income was
$85.8 million
during the six months ended
June 30, 2013
, compared to
$55.8 million
in the six months ended
June 30, 2012
, an increase of $30.0 million, or 53.8%. Mortgage banking revenue generated by Cole Taylor Mortgage totaled
$70.6 million
in the first six months of
2013
, an increase of $30.0 million from the first six months of
2012
.
Mortgage origination revenue increased due to an increase in loan originations, partially offset by a decline in mortgage origination margins. Mortgage servicing revenue increased due to growth in the mortgage servicing portfolio and favorable rate movement.
The six months ended
June 30, 2012
included gains on the sale of investment securities of
$4.0 million
related to a sale of securities at the same time as an early extinguishment of debt and a covered call transaction occurred. Gains on the sales of investment securities in the six months ended
June 30, 2013
were
$7,000
.
Other derivative income increased from
$1.4 million
in the first six months of
2012
to
$3.3 million
in the first six months of
2013
primarily due to an increase in the number and the size of fees collected on customer swaps.
Other noninterest income was
$2.6 million
in the first six months of
2013
and
$1.3 million
in the first six months of
2012
. Other noninterest income in the six months ended
June 30, 2012
included a $125,000 impairment charge on an investment security while no such charge was recognized in the six months ended
June 30, 2013
. Fees from covered calls were $257,000 greater in the six months ended
June 30, 2013
compared to the six months ended
June 30, 2012
. Partnership income increased $662,000 from the first six months of
2012
to the first six months of
2013
.
Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended
|
|
For the Six Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
(dollars in thousands)
|
Salaries and employee benefits:
|
|
|
|
|
|
|
|
Salaries, employment taxes and medical insurance
|
$
|
22,703
|
|
|
$
|
15,342
|
|
|
$
|
46,443
|
|
|
$
|
30,830
|
|
Incentives, commissions and retirement benefits
|
14,619
|
|
|
12,936
|
|
|
24,907
|
|
|
21,085
|
|
Total salaries and employee benefits
|
37,322
|
|
|
28,278
|
|
|
71,350
|
|
|
51,915
|
|
Occupancy of premises
|
2,625
|
|
|
2,136
|
|
|
5,193
|
|
|
4,311
|
|
Furniture and equipment
|
894
|
|
|
786
|
|
|
1,631
|
|
|
1,401
|
|
Nonperforming asset expense
|
(1,198
|
)
|
|
828
|
|
|
(639
|
)
|
|
1,522
|
|
FDIC assessment
|
1,759
|
|
|
1,497
|
|
|
3,783
|
|
|
3,199
|
|
Early extinguishment of debt
|
5,380
|
|
|
2,987
|
|
|
5,380
|
|
|
3,988
|
|
Legal fees, net
|
1,117
|
|
|
757
|
|
|
1,975
|
|
|
1,613
|
|
Loan expense, net
|
2,895
|
|
|
1,425
|
|
|
5,266
|
|
|
2,543
|
|
Outside services
|
2,818
|
|
|
708
|
|
|
5,314
|
|
|
1,287
|
|
Computer processing
|
1,047
|
|
|
627
|
|
|
2,013
|
|
|
1,213
|
|
Other noninterest expense
|
5,612
|
|
|
3,957
|
|
|
10,760
|
|
|
7,562
|
|
Total noninterest expense
|
$
|
60,271
|
|
|
$
|
43,986
|
|
|
$
|
112,026
|
|
|
$
|
80,554
|
|
Efficiency ratio
|
69.14
|
%
|
|
67.41
|
%
|
|
66.85
|
%
|
|
64.88
|
%
|
Quarter Ended
June 30, 2013
Compared to the Quarter Ended
June 30, 2012
Noninterest expense increased $16.3 million, or 37.0%, to
$60.3 million
for the
second quarter of 2013
, as compared to
$44.0 million
during the
second quarter of 2012
. The higher level of noninterest expense in the
second quarter of 2013
was primarily the result of increased salaries and employee benefits, volume related mortgage expenses and early extinguishment of debt expense. These increases were partially offset by a reduction in nonperforming asset expense.
Total salaries and employee benefits expense during the
second quarter of 2013
was
$37.3 million
, compared to
$28.3 million
during the
second quarter of 2012
, an increase of $9.0 million, or 31.8%. This increase was primarily driven by an increase in salaries, employment taxes, and medical insurance expense, which increased $7.4 million for the quarter ended
June 30, 2013
, compared to the quarter ended
June 30, 2012
, primarily due to an increased number of employees. The number of full time equivalent employees was 1,098 at
June 30, 2013
, as compared to 709 at
June 30, 2012
. This increase was primarily due to 348 new employees at Cole Taylor Mortgage, including employees added as part of the integration of retail branches. Incentives, commissions and retirement benefits increased from
$12.9 million
in the
second quarter of 2012
to
$14.6
million
in the
second quarter of 2013
due to increases in corporate and mortgage incentive expense and an increase in the number of employees.
Occupancy of premises expense increased from
$2.1 million
for the quarter ended
June 30, 2012
to
$2.6 million
for the quarter ended
June 30, 2013
. This increase was primarily a result of increased rental space and associated lease expense at Cole Taylor Mortgage as it expanded operations.
Nonperforming asset expense reported in noninterest expense includes expenses associated with impaired loans, 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 Company’s loan workout function for collection and foreclosure costs, receiver fees and expenses, and any other expenses incurred to protect the Company’s 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.
Nonperforming asset expense was a credit of
$1.2 million
for the quarter ended
June 30, 2013
, compared to expense of
$828,000
for the quarter ended
June 30, 2012
. This decrease primarily was due to an increase in gains on sales of OREO properties.
A quantification of the amount of nonperforming asset expense in the held for sale and held for investment loan categories for the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
For the Quarter
Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
(in thousands)
|
Held for sale
|
$
|
(1,354
|
)
|
|
$
|
815
|
|
Held for investment
|
156
|
|
|
13
|
|
Total
|
$
|
(1,198
|
)
|
|
$
|
828
|
|
The
second quarter of 2012
included
$3.0 million
in early extinguishment of debt expense related to the termination of a Federal Home Loan Bank ("FHLB") long-term advance 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. The
second quarter of 2013
included
$5.4 million
early extinguishment of debt expense related to the prepayment of the Company's outstanding subordinated notes.
Loan expense, net increased from
$1.4 million
in the
second quarter of 2012
to
$2.9 million
in the
second quarter of 2013
due to an increase in mortgage originations.
Outside services were
$708,000
in the
second quarter of 2012
and
$2.8 million
in the
second quarter of 2013
, an increase of $2.1 million. This increase was due to an increase in sub-servicing expense resulting from growth in the mortgage servicing portfolio.
Computer processing expense increased $420,000 from the
second quarter of 2012
to the
second quarter of 2013
. This increase was due to increase in mortgage volume and other mortgage information technology expenses.
Other noninterest expense increased from
$4.0 million
for the three months ended
June 30, 2012
to
$5.6 million
for the three months ended
June 30, 2013
, an increase of $1.6 million. This increase was primarily due to increases in employee development expense, business development expense and consulting expense.
Six Months Ended
June 30, 2013
Compared to the Six Months Ended
June 30, 2012
For the six months ended
June 30, 2013
, noninterest expense was
$112.0 million
, an increase of $31.4 million as compared to
$80.6 million
of noninterest expense during the six months ended
June 30, 2012
. The higher level of noninterest expense in the six months ended
June 30, 2013
was primarily attributable to higher salaries and benefits expense, early extinguishment of debt expense and volume related mortgage expenses, partially offset by decreases in nonperforming asset expense.
Total salaries and employee benefits expense totaled
$71.4 million
for the six months ended
June 30, 2013
, as compared to
$51.9 million
during the six months ended
June 30, 2012
, an increase of $19.5 million. The growth of Cole Taylor Mortgage and the related headcount additions resulted in increased salaries and benefits expense. Incentives, commissions and retirement benefits increased $3.8 million for the six months ended
June 30, 2013
, compared to the six months ended
June 30, 2012
, due to an increase in corporate and production based incentive expense, largely due to the strong performance of the Company.
For the six months ended
June 30, 2013
, nonperforming asset expense decreased to a credit of
$639,000
from expense of
$1.5 million
for the same period a year ago. Nonperforming asset expense reported in noninterest expense includes expenses associated with impaired loans, OREO and other repossessed assets held for sale as well as expenses related to impaired and nonperforming loans held for investment. The amount of write-downs on OREO and repossessed assets was lower in the six months ended
June 30, 2013
as compared to the six months ended
June 30, 2012
, while gains on sale of OREO properties were greater.
A quantification of the amount of nonperforming asset expense in the held for sale and held for investment categories for the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
(in thousands)
|
Held for sale
|
$
|
(1,324
|
)
|
|
$
|
1,327
|
|
Held for investment
|
685
|
|
|
195
|
|
Total
|
$
|
(639
|
)
|
|
$
|
1,522
|
|
The six months ended
June 30, 2012
included
$4.0 million
in early extinguishment of debt expense due to the decision to shift funding sources to lower cost alternatives. In the first six months of
2013
,
$5.4 million
of such expenses were recognized related to the prepayment of the Company's outstanding subordinated notes.
Loan expense, net increased from
$2.5 million
in the six months ended
June 30, 2012
to
$5.3 million
in the six months ended
June 30, 2013
due to an increase in mortgage originations.
Outside services were
$1.3 million
in the first six months of
2012
and
$5.3 million
in the first six months of
2013
, an increase of $4.0 million. This increase was due to an increase in sub-servicing expense resulting from growth in the mortgage servicing portfolio.
Computer processing expense increased $800,000 from the first six months of
2012
to the first six months of
2013
. This increase was due to increase in mortgage volume and other mortgage information technology expenses.
Other noninterest expense for the six months ended
June 30, 2013
was
$10.8 million
as compared to
$7.6 million
for the six months ended
June 30, 2012
, an increase of $3.2 million, or 42.1%. This increase was primarily due to increases in employee development expense, business development expense, taxes other than income taxes, consulting expense and expense associated with callable certificates of deposits.
Efficiency Ratio
The efficiency ratio is calculated by dividing total noninterest expense by total revenues (net interest income and noninterest income, excluding gains or losses on investment securities). Generally, a lower efficiency ratio indicates that an entity is operating more efficiently.
Our efficiency ratio was
69.14%
in the
second quarter of 2013
, compared to
67.41%
during the
second quarter of 2012
. Our efficiency ratio was
66.85%
for the first six months of
2013
, compared to
64.88%
for the first six months of
2012
. The
increase in the efficiency ratio was primarily due to an increase in salaries and benefits expense, volume related mortgage expenses and the increase in early extinguishment of debt expense, partially offset by an increase in total revenue.
Income Taxes
Income tax expense increased from
$16.3 million
in the first six months of
2012
to
$21.7 million
for the first six months of
2013
, an increase of $5.4 million. This increase was primarily due to the increase in our income before income taxes, which increased from $40.0 million in the first six months of
2012
to $54.6 million in the first six months of
2013
.
As of
June 30, 2013
, the deferred tax asset totaled $32.2 million, which, in the judgment of management, will more-likely-than-not be fully realized. The largest components of the deferred tax asset are associated with the allowance for loan losses, employee benefits, basis adjustments on our portfolio of OREO and federal and state net operating loss carry forwards. The deferred tax asset is net of deferred tax liabilities, the largest of which relate to mortgage and leasing. We are largely relying on forecast earnings in future years in making the determination that we will more-likely-than-not realize our deferred tax asset. For purposes of this determination, we used forecasts of future earnings that do not rely on significant increases in the level of profitability to realize our deferred tax asset. In addition, the forecasts do not rely on asset sales, non-routine transactions, a material change in the relationship between taxable income and pre-tax book income or any tax strategies. Earnings forecasts are subject to a variety of risks and uncertainties that could impact our operations. For a description of the various risks and uncertainties impacting our operations, see the "Risk Factors" section of our recent Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 8, 2013.
Segment Review
As described in Note 14 – “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, equipment financing and all other functions that support those units. The Mortgage Banking segment originates residential mortgage loans for sale to investors and for retention in our loan portfolio through retail and broker channels. This segment also services residential mortgage loans for various investors and for our own loans. In addition, we use an Other category, which includes subordinated note 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.
Quarter Ended
June 30, 2013
Compared to the Quarter Ended
June 30, 2012
Banking Segment
Net income for the Banking segment for the quarter ended
June 30, 2013
was
$10.9 million
, an increase of $337,000 from net income of
$10.5 million
for the quarter ended
June 30, 2012
. Net interest income of
$37.2 million
for the
second quarter of 2013
was $440,000 more than net interest income of
$36.7 million
for the same period in
2012
. The increase was due to deposit repricing and deliberate changes to the funding mix to reduce funding costs partially offset by compression of commercial loan yields due to competitive pricing pressures on new loans and changes in the mix of the portfolio. Noninterest income decreased from
$8.8 million
in the
second quarter of 2012
to
$7.5 million
in the
second quarter of 2013
, a decrease of $1.3 million. Gains on the sale of available for sale investment securities were $3.0 million in the
second quarter of 2012
related to securities that were sold at the same time as an early extinguishment of debt occurred. Gains on the sale of available for sale investment securities were $6,000 in the
second quarter of 2013
. Service charges increased $150,000 due to pricing adjustments and an increase in the number of deposit relationships. Other derivative income increased $891,000 due to an increase in fees related to customer swaps and favorable mark-to-market adjustments. Partnership income increased $490,000. Fees from covered calls were $110,000 in the
second quarter of 2013
compared to $342,000 in the
second quarter of 2012
.
Noninterest expense was
$25.8 million
in the
second quarter of 2013
as compared to
$28.2 million
in the
second quarter of 2012
, a decrease of $2.4 million. The
second quarter of 2012
included $3.0 million in early extinguishment of debt expense related to the termination of a FHLB long-term advance due to a decision to shift funding sources to lower cost alternatives. There was no early extinguishment of debt expense in the banking segment in the
second quarter of 2013
. Nonperforming asset expense was $2.0 million less in the
second quarter of 2013
as compared to the
second quarter of 2012
due to sales of several properties and fewer properties moving into OREO. Offsetting these favorable variances, salaries and benefits expense increased by $1.7 million due to additional staff, including the addition of the commercial equipment leasing group, and merit increases. Consulting expense and legal expense also increased from the
second quarter of 2012
to the
second quarter of 2013
.
Provision for loan losses was
$946,000
in the
second quarter of 2013
, an increase of $944,000 from the
second quarter of 2012
(see Provision for Loan Losses section above for additional detail.)
Mortgage Banking Segment
Net income for the Mortgage Banking segment for the
second quarter of 2013
was
$10.5 million
, a $3.7 million increase from net income of
$6.8 million
for the
second quarter of 2012
. Net interest income increased $2.2 million, from
$3.5 million
for the quarter ended
June 30, 2012
to
$5.7 million
for the quarter ended
June 30, 2013
, driven by an increase in both the held for sale and mortgage portfolio loans. Noninterest income also increased significantly, moving from
$23.0 million
in the
second quarter of 2012
to
$38.5 million
in the
second quarter of 2013
. This increase was driven by an increase in loan originations of $1.93 billion. Mortgage loan origination margins in the quarter ended June 30, 2013, were at a lower level than those seen in the quarter ended March 31, 2013. Mortgage servicing revenue primarily increased due to an increase in the mortgage servicing portfolio of $8.72 billion. Noninterest expense increased from
$15.8 million
in the
second quarter of 2012
to
$29.1 million
in the
second quarter of 2013
. The increase was largely due to increased salaries and employee benefits expense and incentive compensation expense due to additional headcount and an increase in commission based incentive compensation. Volume related loan expenses also increased.
Six Months Ended
June 30, 2013
Compared to the Six Months Ended
June 30, 2012
Banking Segment
Net income for the Banking segment for the six months ended
June 30, 2013
was
$21.8 million
, an increase of $4.1 million from net income of
$17.7 million
for the six months ended
June 30, 2012
. The improved performance is primarily attributable to a $6.0 million decrease in provision for loan losses (see Provision for Loan Losses section above for additional detail.) Net interest income decreased from
$74.1 million
for the first six months of
2012
to
$73.4 million
for the first six months of
2013
due to compression of commercial loan yields due to competitive pricing pressures on new loans and lower yields on investment securities, partially offset by a decline in funding costs. Noninterest income was flat at
$15.2 million
for the six months ended
June 30, 2012
and the six months ended
June 30, 2013
. An increase in derivative income, partnership investment income and fees on covered calls in the first six months of
2013
was offset by an absence of gains on the sales of investment securities in the first six months of
2013
as compared to gains on the sales of investment securities of $4.0 million in the first six months of
2012
.
Noninterest expense was
$52.8 million
in the first six months of
2012
compared to
$51.3 million
in the first six months of
2013
, a decrease of $1.5 million. This decrease was due to $4.0 million in early extinguishment of debt expense in the first six months of 2012 and a $2.2 million decline in nonperforming asset expense due to sales of several properties and fewer properties moving into OREO. These decreases were partially offset by an increase in salaries and benefits expense of $3.3 million due to additional staff, including the addition of the commercial equipment leasing group, merit increases and an increase in corporate incentive compensation expense related to our performance. Taxes other than income taxes increased $363,000 and expense associated with callable certificates of deposit was $184,000 in the first six months of
2013
, compared to zero in the first six months of
2012
. Consulting expense also increased from the first six months of 2013 to the first six months of 2012.
Mortgage Banking Segment
Net income for the Mortgage Banking segment for the six months ended
June 30, 2013
, was
$19.3 million
, an increase of $7.3 million from net income of
$12.0 million
for the six months ended
June 30, 2012
. Net interest income increased $6.4 million, from
$5.8 million
for the six month period ended
June 30, 2012
to
$12.2 million
for the six month period ended
June 30, 2013
due to an increase in both held for sale and mortgage portfolio loans. Noninterest income also increased, from
$40.5 million
for the first six months of
2012
to
$70.6 million
for the first six months of
2013
, an increase of $30.1 million. Mortgage origination revenue increased due to an increase in loan originations, partially offset by a decline in mortgage origination margins. Mortgage servicing revenue increased due to growth in the mortgage servicing portfolio and favorable rate movement. Noninterest expense increased from
$27.7 million
in for the six months ended
June 30, 2012
to
$55.4 million
in for the six months ended
June 30, 2013
, an increase of $27.7 million, primarily due to increased salaries and employee benefits expense and incentive compensation expense due to additional headcount and an increase in production and performance based incentive compensation. Volume related loan expenses also increased.
FINANCIAL CONDITION
Overview
Total assets increased $99.0 million, or 1.7%, to
$5.90 billion
at
June 30, 2013
from total assets of
$5.80 billion
at
December 31, 2012
, primarily as a result of increases in investment securities, loans and MSRs. Total liabilities increased $98.3 million to
$5.34 billion
at
June 30, 2013
from $
5.24 billion
at
December 31, 2012
, resulting from an increase in total
deposits, partially offset by decreases in short-term borrowing and subordinated notes. Total stockholders’ equity at
June 30, 2013
was $
560.3 million
as compared to $
559.6 million
at
December 31, 2012
, reflecting the impact of net income for the
six months ended
June 30, 2013
, partially offset by a decrease in the market value of available for sale investment securities.
Investment Securities
Investment securities totaled
$1.43 billion
at
June 30, 2013
, compared to
$1.27 billion
at
December 31, 2012
, an increase of $166.6 million, or 13.1%. During the
six months ended
June 30, 2013
, in addition to principal paydowns we purchased $387.5 million of investment securities and sold $66.4 million of available for sale investment securities, consisting mostly of mortgage related securities.
As of
June 30, 2013
, mortgage related securities (at estimated fair value) comprised approximately 70% of our investment portfolio. Almost all of the securities were issued by government and government-sponsored enterprises.
At
June 30, 2013
, we had a net unrealized loss of $6.8 million in our available for sale investment portfolio, which was comprised of
$19.0 million
of gross unrealized gains and $25.8 million of gross unrealized losses. At
December 31, 2012
, the net unrealized gain was $43.6 million, which was comprised of
$44.8 million
of gross unrealized gains and $1.2 million of gross unrealized losses. The gross unrealized losses of twelve months or longer at
June 30, 2013
related to four investment securities with a carrying value of
$16.2 million
. Each quarter we analyze each of these securities to determine if other-than-temporary impairment has occurred. The factors we consider include the magnitude of the unrealized loss in comparison to the security’s carrying value, the length of time the security has been in an unrealized loss position and the current independent bond rating for the security. Those securities with unrealized losses for more than 12 months and for more than 10% of their carrying value are subject 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 four securities with gross unrealized losses at
June 30, 2013
, one has been in a loss position for 12 months or more and had an unrealized loss position of more than 10% of amortized cost. After an analysis was performed, it was determined that no additional credit loss was expected and no other-than-temporary impairment charge was recorded in the
three months ended June 30, 2013
.
As a member of FHLB, we are required to hold FHLB stock. The amount of Federal Home Loan Bank Chicago ("FHLBC") stock that we are required to hold is based on the Bank’s asset size and the amount of borrowings from the FHLBC. At
June 30, 2013
, we held
$68.0 million
of FHLBC stock and maintained $1.36 billion of FHLB advances. We have assessed the ultimate recoverability of our FHLBC stock and believe no impairment has occurred.
Loans
The composition of our loan portfolio as of
June 30, 2013
and
December 31, 2012
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
Amount
|
|
Percentage
of Gross
Loans
|
|
Amount
|
|
Percentage
of Gross
Loans
|
|
(dollars in thousands)
|
Loans:
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,707,502
|
|
|
52
|
%
|
|
$
|
1,590,587
|
|
|
50
|
%
|
Commercial real estate secured
|
1,036,303
|
|
|
31
|
|
|
965,978
|
|
|
30
|
|
Residential construction and land
|
42,606
|
|
|
1
|
|
|
45,903
|
|
|
2
|
|
Commercial construction and land
|
119,839
|
|
|
4
|
|
|
103,715
|
|
|
3
|
|
Lease receivables
|
93,999
|
|
|
3
|
|
|
50,803
|
|
|
2
|
|
Total commercial loans
|
3,000,249
|
|
|
91
|
|
|
2,756,986
|
|
|
87
|
|
Consumer
|
311,115
|
|
|
9
|
|
|
416,635
|
|
|
13
|
|
Gross loans
|
3,311,364
|
|
|
100
|
%
|
|
3,173,621
|
|
|
100
|
%
|
Less: Unearned discount
|
(8,816
|
)
|
|
|
|
(5,318
|
)
|
|
|
Loans
|
3,302,548
|
|
|
|
|
3,168,303
|
|
|
|
Less: Allowance for loan losses
|
(83,576
|
)
|
|
|
|
(82,191
|
)
|
|
|
Loans, net
|
$
|
3,218,972
|
|
|
|
|
$
|
3,086,112
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale
|
$
|
693,937
|
|
|
|
|
$
|
938,379
|
|
|
|
Gross loans increased $137.7 million to
$3.31 billion
at
June 30, 2013
, from gross loans of
$3.17 billion
at
December 31, 2012
. Commercial loans, which include commercial and industrial (“C&I”), commercial real estate secured, construction and land loans and lease receivables, increased $243.3 million, or 8.8%. The increase in commercial loans during the
six months ended
June 30, 2013
consisted of a $116.9 million, or 7.4%, increase in C&I loans, a $70.3 million, or 7.3%, increase in commercial real estate secured loans, a $16.1 million, or 15.5%, increase in commercial construction and land loans and a $43.2 million, or 85.0%, increase in lease receivables. These increases were partly offset by a decrease of $3.3 million, or 7.2%, in residential construction and land loans. Consumer loans decreased by $105.5 million, or 25.3%, from
December 31, 2012
to
June 30, 2013
.
C&I loans are made to businesses or to individuals 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 borrower’s 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 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 increased to
$1.71 billion
at
June 30, 2013
compared to
$1.59 billion
at
December 31, 2012
, and accounted for 52% of our total loan portfolio at
June 30, 2013
. Increases were seen in multiple lending units including commercial banking, asset-based lending and equipment finance.
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, 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 borrower’s 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 borrower’s 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.
The following table presents the composition of our commercial real estate portfolio as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
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
|
$
|
105,305
|
|
|
10
|
%
|
|
$
|
109,266
|
|
|
11
|
%
|
Office/mix use property
|
110,174
|
|
|
11
|
|
|
113,216
|
|
|
12
|
|
Commercial properties
|
99,855
|
|
|
10
|
|
|
111,852
|
|
|
12
|
|
Specialized – other
|
73,133
|
|
|
7
|
|
|
69,827
|
|
|
7
|
|
Other commercial properties
|
24,806
|
|
|
2
|
|
|
28,870
|
|
|
3
|
|
Farmland
|
2,314
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Subtotal commercial non-owner occupied
|
415,587
|
|
|
40
|
|
|
433,031
|
|
|
45
|
|
Commercial owner occupied
|
498,057
|
|
|
48
|
|
|
425,723
|
|
|
44
|
|
Multi-family properties
|
122,659
|
|
|
12
|
|
|
107,224
|
|
|
11
|
|
Total commercial real estate secured
|
$
|
1,036,303
|
|
|
100
|
%
|
|
$
|
965,978
|
|
|
100
|
%
|
Our commercial real estate secured loans increased $70.3 million, or 7.3%, to
$1.04 billion
at
June 30, 2013
, as compared to
$966.0 million
at
December 31, 2012
. Approximately 90% of the total commercial real estate secured portfolio consists of loans secured by owner and non-owner occupied commercial properties. The remainder of this portfolio consists of loans secured by residential income properties. The increase in commercial real estate secured loans reflects the establishment of several new relationships, primarily in the commercial owner-occupied area, as we are selectively reentering this market.
Residential construction and land loans primarily consist of loans to real estate developers to construct single-family homes, town-homes and condominium conversions. Commercial construction and land loans primarily consist of loans to construct commercial real estate or income-producing properties. Both the residential and commercial 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 experience and ongoing oversight of project progress.
Our residential construction and land loans decreased by $3.3 million, or 7.2%, to
$42.6 million
at
June 30, 2013
, as compared to
$45.9 million
at
December 31, 2012
. Commercial construction and land loans totaled
$119.8 million
at
June 30, 2013
as compared to
$103.7 million
at
December 31, 2012
, an increase of $16.1 million, or 15.5%. We are selectively reentering certain commercial construction and land markets.
Our lease financing business offers a full range of equipment finance options and specializes in originating and syndicating commercial equipment leases for U.S. middle market companies. We have a general equipment focus with limited specialization of equipment types.
The risk characteristics of equipment leases are similar to those of C&I loans and are largely influenced by general economic conditions, such as inflation, recessionary pressures, the rate of unemployment and other factors that affect the borrower's operations and the value of the underlying equipment. Our credit risk strategy emphasizes consistent underwriting standards and diversification by industry and customer size. In addition to credit risk, equipment leases may entail residual value risk. Residual values are thoroughly analyzed prior to entering into a lease and closely monitored during the term. Lease conditions also mitigate residual risk. Our approach places syndication at the front end of the sales process which enables market confirmation of our judgment as to structure, term, residual and price; however, we had no syndicated leases as of
June 30, 2013
. Our leasing business has a national focus which also diversifies our risk geographically.
Our lease receivables totaled
$85.2 million
(net of unearned discounts) at
June 30, 2013
, compared to
$45.5 million
at
December 31, 2012
.
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 borrower’s 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 decreased $105.5 million, or 25.3%, to
$311.1 million
at
June 30, 2013
, compared to
$416.6 million
at
December 31, 2012
. This decrease was primarily the result of the transfer of mortgage loans to loans held for sale.
Nonperforming Assets
The following table sets forth the amounts of nonperforming assets as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
June 30, 2012
|
|
(dollars in thousands)
|
Loans contractually past due 90 days or more but still accruing interest
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Nonaccrual loans:
|
|
|
|
|
|
Commercial and industrial
|
16,577
|
|
|
16,705
|
|
|
20,193
|
|
Commercial real estate secured
|
20,900
|
|
|
14,530
|
|
|
30,264
|
|
Residential construction and land
|
—
|
|
|
4,495
|
|
|
7,003
|
|
Commercial construction and land
|
26,272
|
|
|
15,220
|
|
|
6,679
|
|
Consumer
|
5,790
|
|
|
8,587
|
|
|
9,965
|
|
Total nonaccrual loans
|
69,539
|
|
|
59,537
|
|
|
74,104
|
|
Total nonperforming loans
|
69,539
|
|
|
59,537
|
|
|
74,104
|
|
OREO and repossessed assets
|
19,794
|
|
|
24,259
|
|
|
32,627
|
|
Total nonperforming assets
|
$
|
89,333
|
|
|
$
|
83,796
|
|
|
$
|
106,731
|
|
Performing restructured loans not included in nonperforming assets
|
21,928
|
|
|
$
|
17,456
|
|
|
13,937
|
|
Nonperforming loans to total loans*
|
2.11
|
%
|
|
1.88
|
%
|
|
2.49
|
%
|
Nonperforming assets to total loans plus OREO and repossessed property*
|
2.69
|
%
|
|
2.62
|
%
|
|
3.54
|
%
|
Nonperforming assets to total assets
|
1.51
|
%
|
|
1.44
|
%
|
|
2.22
|
%
|
*Several credit ratios have been revised to exclude loans held for sale from total loans. Prior period ratios have been adjusted where necessary to reflect this change.
Nonperforming assets were
$89.3 million
, or
1.51%
of total assets, at
June 30, 2013
, compared to
$83.8 million
, or
1.44%
of total assets, at
December 31, 2012
, and
$106.7 million
, or
2.22%
of total assets, at
June 30, 2012
. Although
nonperforming assets increased from
December 31, 2012
to
June 30, 2013
due to the movement of a limited number of relationships into the nonaccrual category, the overall decrease in nonperforming assets compared to
June 30, 2012
is reflective of the continued focus to strengthen credit quality combined with an active resolution process. During the
three months ended June 30, 2013
, $726,000 of net recoveries were recognized.
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 no longer recognize 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.
Commercial construction and land nonaccrual loans are the largest category of nonaccrual loans at
$26.3 million
as of
June 30, 2013
and comprised approximately 38% of all nonaccrual loans at that date. Despite the increase in nonaccrual loans in the
six months ended June 30, 2013
, which was primarily due to a limited number of relationships, the overall trend in migration to nonaccrual loans is down over the last twelve months.
Other real estate owned and repossessed assets
OREO and repossessed assets totaled
$19.8 million
at
June 30, 2013
, as compared to
$24.3 million
at
December 31, 2012
and
$32.6 million
at
June 30, 2012
. The following table provides a rollforward, for the periods indicated, of OREO and repossessed assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
For the Six Months Ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
(in thousands)
|
Balance at beginning of period
|
$
|
27,218
|
|
|
$
|
36,941
|
|
|
$
|
24,259
|
|
|
$
|
35,622
|
|
Transfers from loans
|
—
|
|
|
2,060
|
|
|
5,040
|
|
|
7,660
|
|
Dispositions
|
(6,860
|
)
|
|
(5,432
|
)
|
|
(8,941
|
)
|
|
(9,417
|
)
|
Change in impairment
|
(564
|
)
|
|
(942
|
)
|
|
(564
|
)
|
|
(1,238
|
)
|
Balance at end of period
|
$
|
19,794
|
|
|
$
|
32,627
|
|
|
$
|
19,794
|
|
|
$
|
32,627
|
|
The level of OREO and repossessed assets decreased during the first six months of 2013. During the
six months ended June 30, 2013
, we transferred
$5.0 million
from loans into OREO and repossessed assets. The loans transferred primarily consisted of $2.3 million from our commercial real estate secured portfolio, $618,000 from our commercial construction and land portfolio and $2.2 million from our consumer portfolio. During the
six months ended June 30, 2013
, we sold several OREO properties. We also reduced the carrying value of certain OREO and repossessed assets by $564,000 during the
six months ended June 30, 2013
, to reflect a decrease in the estimated fair value of these assets.
Impaired loans
At
June 30, 2013
, impaired loans totaled
$86.4 million
, compared to
$70.3 million
at
December 31, 2012
, and
$79.5 million
at
June 30, 2012
. The balance of impaired loans and the related allowance for loan losses for impaired loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
June 30, 2012
|
|
(in thousands)
|
Impaired loans:
|
|
|
|
|
|
Commercial and industrial
|
$
|
18,048
|
|
|
$
|
18,241
|
|
|
$
|
24,406
|
|
Commercial real estate secured
|
36,152
|
|
|
25,925
|
|
|
35,185
|
|
Residential construction and land
|
—
|
|
|
4,495
|
|
|
7,003
|
|
Commercial construction and land
|
26,272
|
|
|
15,220
|
|
|
6,679
|
|
Consumer
|
5,946
|
|
|
6,462
|
|
|
6,217
|
|
Total impaired loans
|
$
|
86,418
|
|
|
$
|
70,343
|
|
|
$
|
79,490
|
|
Recorded balance of impaired loans:
|
|
|
|
|
|
With related allowance for loan losses
|
$
|
57,589
|
|
|
$
|
30,744
|
|
|
$
|
37,930
|
|
With no related allowance for loan losses
|
28,829
|
|
|
39,599
|
|
|
41,560
|
|
Total impaired loans
|
$
|
86,418
|
|
|
$
|
70,343
|
|
|
$
|
79,490
|
|
Allowance for losses on impaired loans:
|
|
|
|
|
|
Commercial and industrial
|
$
|
8,486
|
|
|
$
|
8,006
|
|
|
$
|
9,196
|
|
Commercial real estate secured
|
1,820
|
|
|
1,121
|
|
|
6,232
|
|
Residential construction and land
|
—
|
|
|
—
|
|
|
845
|
|
Commercial construction and land
|
6,024
|
|
|
2,930
|
|
|
1,189
|
|
Total allowance for losses on impaired loans
|
$
|
16,330
|
|
|
$
|
12,057
|
|
|
$
|
17,462
|
|
The increase in impaired loans during the
six months ended June 30, 2013
primarily resulted from the movement of a limited number of relationships into the nonaccrual category. The allowance for loan losses related to impaired loans increased during the
six months ended June 30, 2013
and totaled
$16.3 million
at
June 30, 2013
, as compared to
$12.1 million
at
December 31, 2012
and
$17.5 million
at
June 30, 2012
. The increase in the allowance for losses on impaired loans in the
six months ended June 30, 2013
was primarily due to an increase in specific reserves on a limited number of credits. The percentage of allowance on impaired loans to total impaired loans increased to 18.9% at
June 30, 2013
, compared to 17.1% at
December 31, 2012
. Commercial real estate secured loans comprised approximately 42% of all impaired loans and 11% of the allowance for loan losses on impaired loans at
June 30, 2013
.
Through an individual impairment analysis, we determined that at
June 30, 2013
,
$57.6 million
of our impaired loans had a specific measure of impairment and required a related allowance for loan losses of
$16.3 million
. We also held
$28.8 million
of impaired loans for which the individual analysis did not result in a measure of impairment and, therefore, 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 on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, less estimated cost to sell. Because the majority of our impaired loans are collateral-dependent real estate loans, the fair value is determined by a current appraisal. The individual impairment analysis also takes into account available and reliable borrower guarantees and any cross-collateralization agreements. Certain other loans are collateralized by business assets, such as equipment, inventory, and accounts receivable. The fair value of these loans is based on 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.
For impaired commercial 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.
Impaired loans include all nonaccrual loans and accruing loans judged to have higher risk of noncompliance with the current contractual repayment schedule for both interest and principal, as well as TDRs. Unless modified in a TDR, certain homogeneous loans, such as residential mortgage and consumer loans, are collectively evaluated for impairment and are, therefore, excluded from impaired loans. At
June 30, 2013
, we held
$21.9 million
of loans classified as performing restructured loans (performing TDRs) which includes commercial loans of $16.7 million and consumer loans of $5.2 million.
The balance of nonaccrual and impaired loans as of
June 30, 2013
is presented below:
|
|
|
|
|
|
|
|
|
|
Nonaccrual
Loans
|
|
Impaired
Loans
|
|
(dollars in thousands)
|
Commercial nonaccrual loans
|
$
|
63,749
|
|
|
$
|
63,749
|
|
Commercial loans on accrual but impaired
|
n/a
|
|
|
16,723
|
|
Consumer loans
|
5,790
|
|
|
5,946
|
|
|
$
|
69,539
|
|
|
$
|
86,418
|
|
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 borrower’s ability to perform under the contractual terms of the loan agreement but have not reached the status of nonaccrual loans. At
June 30, 2013
, these potential problem loans totaled $9.8 million. Of these potential problem loans at
June 30, 2013
, $9.1 million were in our commercial real estate secured portfolio and $696,000 were in our C&I portfolio. In comparison, potential problem loans at
December 31, 2012
totaled $9.7 million. The potential problem loans at
December 31, 2012
included $4.0 million of C&I loans, $5.6 million of commercial real estate secured loans and $60,000 of commercial construction and land 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. When we estimate the amount of probable loss related to specific portfolio segments, we calculate historic loss rates based upon current and a number of prior years charge-off experience for each separate loan grouping identified. The historical loss rates are then weighted based on our evaluation of the duration of the economic cycle to arrive at a current expected loss rate. The 2013 allowance reflects the loss experience from the last four years, while the 2012 allowance reflects loss experience from the last three year period. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
Six months ended
|
|
June 30, 2013
|
|
June 30, 2012
|
|
June 30, 2013
|
|
June 30, 2012
|
|
(dollars in thousands)
|
Average loans*
|
$
|
3,254,918
|
|
|
$
|
2,947,156
|
|
|
$
|
3,216,480
|
|
|
$
|
2,942,162
|
|
Loans at end of period*
|
$
|
3,302,548
|
|
|
$
|
2,981,827
|
|
|
$
|
3,302,548
|
|
|
$
|
2,981,827
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
Allowance at beginning of period
|
$
|
82,150
|
|
|
$
|
93,509
|
|
|
$
|
82,191
|
|
|
$
|
103,744
|
|
Charge-offs, net of recoveries:
|
|
|
|
|
|
|
|
Commercial and commercial real estate
|
870
|
|
|
(2,584
|
)
|
|
984
|
|
|
(17,930
|
)
|
Real estate construction
|
48
|
|
|
(3,184
|
)
|
|
222
|
|
|
(4,382
|
)
|
Residential real estate mortgages and consumer
|
(192
|
)
|
|
(849
|
)
|
|
(821
|
)
|
|
(1,890
|
)
|
Total net (charge-offs)/recoveries
|
726
|
|
|
(6,617
|
)
|
|
385
|
|
|
(24,202
|
)
|
Provision for loan losses
|
700
|
|
|
100
|
|
|
1,000
|
|
|
7,450
|
|
Allowance at end of period
|
$
|
83,576
|
|
|
$
|
86,992
|
|
|
$
|
83,576
|
|
|
$
|
86,992
|
|
Annualized net charge-offs to average total loans*
|
(0.09
|
)%
|
|
0.90
|
%
|
|
(0.02
|
)%
|
|
1.65
|
%
|
Allowance to total loans at end of period (excluding loans held for sale)
|
2.53
|
%
|
|
2.92
|
%
|
|
2.53
|
%
|
|
2.92
|
%
|
Allowance to nonperforming loans
|
120.19
|
%
|
|
117.39
|
%
|
|
120.19
|
%
|
|
117.39
|
%
|
*Several items have been revised to exclude loans held for sale from total loans. Prior period items have been adjusted where necessary to reflect this change.
Our allowance for loan losses was
$83.6 million
at
June 30, 2013
, or
2.53%
of end of period loans (excluding loans held for sale) and
120.19%
of nonperforming loans. In comparison, at
June 30, 2012
, our allowance for loan losses was
$87.0 million
, or
2.92%
of end of period loans (excluding loans held for sale) and
117.39%
of nonperforming loans. Net recoveries during the
three months ended June 30, 2013
were
$726,000
, or
0.09%
of average loans on an annualized basis. In comparison, net charge-offs during the
three months ended June 30, 2012
were
$6.6 million
, or
0.90%
of average loans on an annualized basis.
Loans Held for Sale
At
June 30, 2013
and
December 31, 2012
, the held for sale portfolio consisted solely of loans originated by Cole Taylor Mortgage. At
June 30, 2013
, we held
$693.9 million
of loans classified as held for sale as compared to
$938.4 million
at
December 31, 2012
. Of the loans held for sale, $113.7 million had been transferred from the loan portfolio during the quarter ended
June 30, 2013
. The decrease in loans held for sale was due to the timing of loan sales and the lower level of mortgage loan originations in the
second quarter of 2013
as compared to the fourth quarter of 2012. The aggregate, unpaid principal balance associated with these loans was
$700.5 million
at
June 30, 2013
, with an unrealized loss of
$6.5 million
, which was included in mortgage banking revenues in noninterest income on the Consolidated Statements of Income. The aggregate, unpaid principal of these loans was $901.3 million at
December 31, 2012
, with an unrealized gain of $37.1 million.
Mortgage Servicing Rights
We sell residential mortgage loans originated by Cole Taylor Mortgage into the secondary market and retain servicing rights on a portion of the loans sold. On sales where MSRs are retained, 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 MSRs of
$12.6 million
in the
six months ended June 30, 2013
and
$12.1 million
of MSRs in the
six months ended June 30, 2012
, which were recorded at at the purchase price at the date of purchase and at fair value thereafter.
We have elected to account for all MSRs using the fair value option. The balance of the MSR asset was
$145.7 million
at
June 30, 2013
and
$78.9 million
at
December 31, 2012
. The amount of residential mortgage loans serviced for others at
June 30, 2013
was $12.74 billion and $8.53 billion at
December 31, 2012
.
Deposits
Total deposits increased $164.1 million to
$3.69 billion
at
June 30, 2013
from
$3.53 billion
at
December 31, 2012
. During the
six months ended June 30, 2013
, noninterest-bearing deposits decreased $40.9 million and interest-bearing deposits increased $205.0 million. The decrease in noninterest-bearing deposits was primarily due to a decrease in consumer checking account balances primarily from our relationship with an organization that provides electronic financial aid disbursements and payment services to the higher education industry. This was partially offset by an increase in mortgage servicing related escrow deposits due to seasonality. The increase in interest-bearing deposits reflects the impact of on-going deposit raising efforts and the seasonal timing of certain public funds deposits.
Increases during the
six months ended June 30, 2013
included commercial interest-bearing checking accounts, which increased $336.9 million and money market accounts, which increased $26.6 million due to on-going deposit raising efforts and the seasonal timing of certain public fund deposits. Decreases during the
six months ended June 30, 2013
included NOW accounts, which decreased $36.0 million, brokered money market accounts, which decreased $27.8 million, certificates of deposit, which decreased $4.3 million, brokered certificates of deposit, which decreased $39.2 million and CDARS, which decreased $53.6 million.
The following table sets forth the period end balances of total deposits as of each of the dates indicated.
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31, 2012
|
|
(in thousands)
|
Noninterest-bearing deposits
|
$
|
1,138,839
|
|
|
$
|
1,179,724
|
|
Interest-bearing deposits
|
|
|
|
Commercial interest checking
|
336,903
|
|
|
—
|
|
NOW accounts
|
537,103
|
|
|
573,133
|
|
Savings accounts
|
41,576
|
|
|
39,915
|
|
Money market accounts
|
771,382
|
|
|
744,791
|
|
Brokered money market deposits
|
—
|
|
|
27,840
|
|
Certificates of deposit
|
557,656
|
|
|
561,998
|
|
Brokered certificates of deposit
|
160,408
|
|
|
199,604
|
|
CDARS time deposits
|
132,552
|
|
|
186,187
|
|
Public time deposits
|
16,007
|
|
|
15,150
|
|
Total interest-bearing deposits
|
2,553,587
|
|
|
2,348,618
|
|
Total deposits
|
$
|
3,692,426
|
|
|
$
|
3,528,342
|
|
Average deposits for the
six months ended June 30, 2013
increased $627.5 million, or 20.3%, to
$3.72 billion
, compared to
$3.10 billion
for the
six months ended June 30, 2012
. Total average time deposits decreased $298.5 million, or 25.3%, for the
six months ended June 30, 2013
as compared to the
six months ended June 30, 2012
, with a decrease of $177.4 million, or 50.8%, in average brokered certificates of deposit, a decrease of $84.6 million, or 13.3%, in average certificates of deposit, a decrease of $27.3 million, or 69.1%, in average public time deposits and a decrease of $9.1 million, or 5.9%, in average CDARs accounting for the decrease.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
|
Six months ended June 30, 2012
|
|
Average
Balance
|
|
Percent Of
Deposits
|
|
Rate
|
|
Average
Balance
|
|
Percent Of
Deposits
|
|
Rate
|
|
(dollars in thousands)
|
Noninterest-bearing demand deposits
|
$
|
1,264,451
|
|
|
34.0
|
%
|
|
—
|
%
|
|
$
|
823,470
|
|
|
26.6
|
%
|
|
—
|
%
|
Commercial interest checking
|
80,255
|
|
|
2.1
|
|
|
0.47
|
%
|
|
—
|
|
|
—
|
|
|
—
|
%
|
NOW accounts
|
695,772
|
|
|
18.7
|
|
|
0.58
|
%
|
|
359,956
|
|
|
11.6
|
|
|
0.67
|
%
|
Money market accounts
|
763,482
|
|
|
20.5
|
|
|
0.45
|
%
|
|
686,635
|
|
|
22.2
|
|
|
0.57
|
%
|
Brokered money market accounts
|
—
|
|
|
—
|
|
|
—
|
%
|
|
9,193
|
|
|
0.3
|
|
|
0.33
|
%
|
Savings deposits
|
40,590
|
|
|
1.1
|
|
|
0.07
|
%
|
|
39,355
|
|
|
1.3
|
|
|
0.07
|
%
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
550,442
|
|
|
14.8
|
|
|
1.15
|
%
|
|
635,073
|
|
|
20.5
|
|
|
1.27
|
%
|
Brokered certificates of deposit
|
171,966
|
|
|
4.6
|
|
|
1.36
|
%
|
|
349,393
|
|
|
11.3
|
|
|
1.56
|
%
|
CDARS time deposits
|
145,136
|
|
|
3.9
|
|
|
0.37
|
%
|
|
154,241
|
|
|
4.9
|
|
|
0.48
|
%
|
Public time deposits
|
12,204
|
|
|
0.3
|
|
|
0.28
|
%
|
|
39,498
|
|
|
1.3
|
|
|
0.39
|
%
|
Total time deposits
|
879,748
|
|
|
23.6
|
|
|
1.05
|
%
|
|
1,178,205
|
|
|
38.0
|
|
|
1.22
|
%
|
Total deposits
|
$
|
3,724,298
|
|
|
100.0
|
%
|
|
0.45
|
%
|
|
$
|
3,096,814
|
|
|
100.0
|
%
|
|
|
Borrowings
Short-term borrowings include customer repurchase agreements, federal funds purchased and short-term FHLB advances, which consist of borrowings from the FHLBC. Short-term borrowings decreased $34.2 million to
$1.43 billion
at
June 30, 2013
, as compared to
$1.46 billion
at
December 31, 2012
. This decrease was the result of a $113.0 million decrease in Fed Funds purchased and a $17.9 million decrease in customer repurchase agreements, which were partially offset by an increase of $95.0 million in FHLB advances. These decreases were due to the decrease in loans held for sale and other changes in the overall mix of the balance sheet.
Long-term borrowings include term structured repurchase agreements and long-term FHLB advances, which consist of borrowings from the FHLBC. We had
no
long-term borrowings at
June 30, 2013
or
December 31, 2012
.
At
June 30, 2013
and
December 31, 2012
, subject to available collateral and current borrowings, the Bank had available pre-approved repurchase agreement lines of $850.0 million. Of the pre-approved repurchase agreement lines, we had uncollateralized lines available to borrow $850.0 million as of
June 30, 2013
and at
December 31, 2012
.
At
June 30, 2013
all borrowings from the FHLBC were collateralized by
$786.4 million
of investment securities and a blanket lien on
$906.2 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
$67.9 million
at
June 30, 2013
. At
December 31, 2012
, we maintained collateral of $530.3 million of investment securities and a blanket lien on $920.1 million on qualified first-mortgage residential, home equity and commercial real estate loans and had additional borrowing capacity of $57.1 million.
We participate in the Federal Reserve Bank's ("FRB") Borrower In Custody (“BIC”) program. At
June 30, 2013
, the Bank pledged
$420.3 million
of commercial loans as collateral and had available
$358.9 million
of borrowing capacity at the FRB. In comparison, the Bank had pledged $521.2 million of commercial loans as collateral and had available $441.8 million of borrowing capacity under the BIC program at
December 31, 2012
. There were no borrowings under the BIC program at either
June 30, 2013
or
December 31, 2012
.
Junior Subordinated Debentures
At
June 30, 2013
, we had
$86.6 million
outstanding 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 to each of these trusts are currently callable at par, at our option. At
June 30, 2013
, unamortized issuance costs were $2.0 million relating to TAYC Capital Trust I and $329,000 related to TAYC Capital Trust II. Unamortized issuance costs would be immediately recognized as noninterest expense if the debentures were called by us.
Subordinated Notes
The following table describes the subordinated notes outstanding at
June 30, 2013
and
December 31, 2012
. On June 20, 2013, we prepaid in full the outstanding $37.5 million principal amount of the 8% subordinated notes together with accrued interest, plus a prepayment premium equal to 1.5% of the notes. We incurred $5.4 million of early extinguishment of debt expense associated with the unamortized discount, unamortized original issuance costs of the notes and the prepayment premium.
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
(in thousands)
|
Taylor Capital Group, Inc.:
|
|
|
|
8% subordinated notes issued May 2010, due May 28, 2020
|
$
|
—
|
|
|
$
|
33,938
|
|
Unamortized discount
|
—
|
|
|
(3,737
|
)
|
8% subordinated notes issued October 2010, due May 28, 2020
|
—
|
|
|
3,562
|
|
Unamortized discount
|
—
|
|
|
(397
|
)
|
Total subordinated notes, net
|
$
|
—
|
|
|
$
|
33,366
|
|
CAPITAL RESOURCES
At
June 30, 2013
and
December 31, 2012
, both the Company and the Bank were considered “well capitalized” under regulatory capital guidelines for bank holding companies and banks. The Company’s and the Bank’s 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 June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Taylor Capital Group, Inc.
|
$679,379
|
|
15.22
|
%
|
|
>$357,099
|
|
>8.00
|
%
|
|
>$446,373
|
|
>10.00
|
%
|
Cole Taylor Bank
|
$578,759
|
|
13.02
|
%
|
|
>$355,616
|
|
>8.00
|
%
|
|
>$444,520
|
|
>10.00
|
%
|
Tier I Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Taylor Capital Group, Inc.
|
$623,221
|
|
13.96
|
%
|
|
>$178,549
|
|
>4.00
|
%
|
|
>$267,824
|
|
>6.00
|
%
|
Cole Taylor Bank
|
$522,830
|
|
11.76
|
%
|
|
>$177,808
|
|
>4.00
|
%
|
|
>$266,712
|
|
>6.00
|
%
|
Leverage (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Taylor Capital Group, Inc.
|
$623,221
|
|
10.87
|
%
|
|
>$229,306
|
|
>4.00
|
%
|
|
>$286,632
|
|
>5.00
|
%
|
Cole Taylor Bank
|
$522,830
|
|
9.15
|
%
|
|
>$228,543
|
|
>4.00
|
%
|
|
>$285,679
|
|
>5.00
|
%
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Taylor Capital Group, Inc.
|
$685,998
|
|
16.27
|
%
|
|
>$337,408
|
|
>8.00
|
%
|
|
>$421,761
|
|
>10.00
|
%
|
Cole Taylor Bank
|
$548,513
|
|
13.05
|
%
|
|
>$336,172
|
|
>8.00
|
%
|
|
>$420,215
|
|
>10.00
|
%
|
Tier I Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Taylor Capital Group, Inc.
|
$599,504
|
|
14.21
|
%
|
|
>$168,704
|
|
>4.00
|
%
|
|
>$253,056
|
|
>6.00
|
%
|
Cole Taylor Bank
|
$495,575
|
|
11.79
|
%
|
|
>$168,086
|
|
>4.00
|
%
|
|
>$252,129
|
|
>6.00
|
%
|
Leverage (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Taylor Capital Group, Inc.
|
$599,504
|
|
11.14
|
%
|
|
>$215,267
|
|
>4.00
|
%
|
|
>$269,084
|
|
>5.00
|
%
|
Cole Taylor Bank
|
$495,575
|
|
9.24
|
%
|
|
>$214,436
|
|
>4.00
|
%
|
|
>$268,045
|
|
>5.00
|
%
|
Our Tier I Capital to Risk Weighted Assets and Total Capital to Risk Weighted Assets ratios decreased from
December 31, 2012
to
June 30, 2013
, primarily due to growth in average assets which offset the growth in capital. The Total Capital to Risk Weighted Assets ratio also declined due to the prepayment of the Company's subordinated notes.
While the Bank continues 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 continue to provide our regulators notice before the payment of dividends. The Bank is also subject to dividend restrictions set forth by regulatory authorities.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million). The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expand the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of instruments that now generally qualify as Tier 1 Capital will not qualify, or their qualifications will change when the Basel III rules are fully implemented.. The Basel III Rules also permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1 Capital ratio. In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more. Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015, with phase-in periods for many of the changes. Management is in the process of assessing the effect the Basel III Rules may have on the Company's and the Bank's capital positions and will monitor developments in this area.
LIQUIDITY
During the six months ended
June 30, 2013
, total assets increased $99.0 million, or 1.7%, primarily due to increases in our loans, mortgage servicing rights and investment securities, partially offset by decreases in loans held for sale, cash and cash equivalents and other real estate and repossessed assets. Cash inflows during the six months ended
June 30, 2013
consisted primarily of proceeds of $3.99 billion from sales of loans originated for sale and $186.1 million of sales, principal payments and maturities of investment securities. In addition, we increased deposits by $165.8 million.
Cash outflows during the six months ended
June 30, 2013
included $3.62 billion for loans originated for sale, $279.0 million for the purchase of available for sale investment securities, a $262.6 million increase in loans, purchase of $108.5 million of held to maturity investment securities, repayment of $37.5 million of subordinated notes and the payment of $3.9 million in dividends on our Series A Preferred and $2.6 million in dividends on our Series B Preferred.
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 the Bank include FHLB advances, the FRB’s 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 $84.6 million at
June 30, 2013
from $122.2 million at
December 31, 2012
. Significant cash outflows during the first six months of 2013 included $37.5 million repayment of subordinated notes, $4.3 million of interest paid on our junior subordinated debentures and subordinated notes, $3.9 million for the payment of dividends on our Series A Preferred and $2.6 million for the payment of dividends on our Series B Preferred. These cash outflows were partially offset by the payment of $9.0 million of dividends from the Bank to the Company.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements include commitments to extend credit and financial guarantees, which are used to meet the financial needs of our customers.
At
June 30, 2013
, we had $930.8 million of undrawn commitments to extend credit and $71.1 million of financial and performance standby letters of credit. In comparison, at
December 31, 2012
, we had $866.2 million of undrawn commitments to extend credit and $77.7 million of financial and performance standby letters of credit. We expect most of these letters of credit to expire undrawn with no significant loss for these obligations to the extent not already recognized as a liability on the Company’s Consolidated Balance Sheets. At
June 30, 2013
we maintained a liability of $1.5 million for unfunded loan commitments and commitments under standby letters of credit for which we believe funding and loss were probable. At
December 31, 2012
, we maintained this liability at $3.6 million.
Derivative Financial Instruments
At
June 30, 2013
, we had $106.9 million of notional amount interest rate swaps that were designated as fair value hedges against certain brokered CDs. The CD swaps are used to convert the fixed rate paid on the brokered CDs to a variable rate based upon 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs. Total ineffectiveness on the interest rate swaps is recorded in other derivative income on the Consolidated Statements of Income in noninterest income.
At
June 30, 2013
, the Company had $15.0 million of notional amount interest rate swaps 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 on 3-month LIBOR computed on the notional amount. The fair value of these hedging derivative instruments is reported on the Consolidated Balance Sheets in other assets and the change in fair value of the related hedged callable brokered CD is reported as an adjustment to the carrying value of the callable brokered CDs. Total ineffectiveness on these interest rate swaps is recorded on the Consolidated Statements of Income in other derivative income in noninterest income.
At
June 30, 2013
, we had $20.0 million of notional amount interest rate swaps that were designated as cash flow hedges against the variability in the interest paid on our junior subordinated debentures. 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 cash flows is reported as an adjustment to OCI.
We use derivative financial instruments to accommodate customer needs and to assist in interest rate risk management. As of
June 30, 2013
, $853.7 million of derivative instruments were interest rate swaps related to customer transactions, which were not designated as hedges. At
June 30, 2013
, we had notional amounts of $426.9 million of interest rate swaps with customers with whom we agreed to receive a fixed interest rate and pay a variable interest rate. In addition, as of
June 30, 2013
, we had offsetting interest rate swaps with other counterparties with a notional amount of $426.9 million in which we agreed to receive a variable interest rate and pay a fixed interest rate.
As a normal course of business, Cole Taylor Mortgage uses interest rate swaps, interest rate swaptions, mortgage TBAs, interest rate lock commitments and forward loan sale commitments as derivative instruments to hedge the risk associated with interest rate volatility. The instruments qualify as non-hedging derivatives.
Interest rate swaps are used in order to lessen the price volatility of the MSR asset. At
June 30, 2013
, we had a notional amount of $227.0 million of interest rate swaps hedging MSRs. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded in mortgage banking revenue in noninterest income.
In order to further lessen the price volatility of the MSR asset, we may enter into interest rate swaptions. These derivatives allow the Company or the counterparty to the transaction the future option of entering into an interest rate swap at a specific rate for a specified duration. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded in mortgage banking revenue on the Consolidated Statements of Income in noninterest income. At
June 30, 2013
we had a notional amount of $40.0 million of interest rate swaptions.
We enter into mortgage TBAs, which are forward commitments to buy to-be-announced securities for which we do not expect to take physical delivery, to lessen the price volatility of the MSR asset. At
June 30, 2013
, we had a notional amount of $30.0 million of mortgage TBAs. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets with changes in fair value recorded on the Consolidated Statement of Income in mortgage banking revenue in noninterest income.
We enter into interest rate lock commitments for originated residential mortgage loans. We then use forward loan sale commitments to sell originated residential mortgage loans to offset the interest rate risk of the rate lock commitments, as well as mortgage loans held for sale. At
June 30, 2013
, we had notional amounts of $871.7 million of interest rate lock
commitments and $1.19 billion of forward loan sale commitments. These derivatives are recorded at their fair value on the Consolidated Balance Sheets in other assets or other liabilities with changes in fair value recorded on the Consolidated Statements of Income in mortgage banking revenue on the Consolidated Statements of Income 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 that remained outstanding as of
June 30, 2013
.
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 Bank’s Asset/Liability Management Committee (“ALCO”). ALCO’s 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, swaptions, floors, collars and corridors to manage interest rate and market risk. Our asset and liability management and investment policies do not allow the use of derivative financial instruments for trading purposes. Therefore, at inception, these contracts are designated as hedges of specific existing assets and liabilities.
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 and 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 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 changes in balance sheet composition. Projected net interest income is computed by the model assuming market rates remain unchanged and we compare 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 products, such as callable agencies and mortgage-backed securities, real estate mortgage loans and callable borrowings, are also considered. Changes in net interest income in the rising and declining rate scenarios are then measured against the net interest income in the rates unchanged scenario. ALCO utilizes the results of the model to quantify the estimated exposure of our net interest income to sustained interest rate changes.
Net interest income for the next 12 months in a 200 basis points rising rate scenario was calculated to increase
$1.0 million
, or
0.6%
, from the net interest income in the rates unchanged scenario at
June 30, 2013
. At
December 31, 2012
, the projected variance in the rising rate scenario was an increase of
$6.3 million
, or
4.2%
. These exposures were within our policy guidelines. No simulation for net interest income at risk in a falling rate scenario was calculated due to the low level of market interest rates at both
June 30, 2013
and
December 31, 2012
.
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
|
|
June 30, 2013
|
|
December 31, 2012
|
|
(dollars in thousands)
|
Change in interest rates
|
Dollar
Change
|
|
Percentage
Change
|
|
Dollar
Change
|
|
Percentage
Change
|
+200 basis points over one year
|
$
|
1,027
|
|
|
0.6
|
%
|
|
$
|
6,312
|
|
|
4.2
|
%
|
-200 basis points over one year
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
______________________
N/A – Not applicable
Computation of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including, among other factors, relative levels of market interest rates, product pricing, reinvestment strategies and customer behavior influencing loan and security prepayments and deposit decay and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions that we may take in response to changes in interest rates. We make no assurances that our actual net interest income would increase or decrease by the amounts computed by the simulations.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU No. 2013-11 provides for consistent presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU will become effective for reporting periods beginning after December 15, 2013. We are currently assessing the impact the adoption of ASU No. 2013-11 will have on our consolidated financial statements.
In July 2013, FASB issued ASU No. 2013-10, "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes." ASU No. 2013-10 permits the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the interest rate on obligations of the U.S. Department of the Treasury and the London Interbank Offered Rate (LIBOR). This ASU became effective July 17, 2013. We are currently assessing the impact the adoption of ASU No. 2013-10 will have on our consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU No. 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP to provide additional detail about those amounts. This ASU became effective for reporting periods beginning after December 15, 2012. This accounting standard was adopted by the Company as of the first quarter 2013 and the adoption did not have a material effect on our consolidated financial statements.
In January 2013, the FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." ASU 2013-01 clarifies the scope of the disclosures required by ASC 210-20-50, "Balance Sheet - Offsetting." These amendments provide a user of financial statements with comparable information as it relates to certain reconciling differences between financial statements prepared in accordance with U.S. GAAP and those financial statement prepared in accordance with International Financial Reporting Standards. This ASU became retrospectively effective for fiscal years beginning on or after January 1, 2013 and interim periods within those periods. This accounting standard was adopted by the Company as of the first quarter 2013 and the adoption did not have a material effect on our consolidated financial statements.
Quarterly Financial Information
The following table sets forth unaudited financial data regarding our operations for each of the last eight quarters. This information, in the opinion of management, includes all adjustments necessary to present fairly our results of operations for such periods, consisting only of normal recurring adjustments for the periods indicated. The operating results for any quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Quarter Ended
|
|
2012 Quarter Ended
|
|
2011 Quarter Ended
|
|
Jun. 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sep. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sep. 30
|
|
|
|
(in thousands, except per share data)
|
Interest income
|
$
|
47,975
|
|
|
$
|
47,674
|
|
|
$
|
47,684
|
|
|
$
|
46,192
|
|
|
$
|
46,005
|
|
|
$
|
46,267
|
|
|
$
|
46,345
|
|
|
$
|
47,299
|
|
Interest expense
|
6,893
|
|
|
6,991
|
|
|
7,174
|
|
|
8,996
|
|
|
9,627
|
|
|
10,465
|
|
|
11,079
|
|
|
12,581
|
|
Net interest income
|
41,082
|
|
|
40,683
|
|
|
40,510
|
|
|
37,196
|
|
|
36,378
|
|
|
35,802
|
|
|
35,266
|
|
|
34,718
|
|
Provision for loan losses
|
700
|
|
|
300
|
|
|
1,200
|
|
|
900
|
|
|
100
|
|
|
7,350
|
|
|
10,955
|
|
|
16,240
|
|
Noninterest income
|
46,101
|
|
|
39,719
|
|
|
51,962
|
|
|
47,250
|
|
|
31,889
|
|
|
23,946
|
|
|
16,538
|
|
|
19,432
|
|
Noninterest expense
|
60,271
|
|
|
51,755
|
|
|
55,284
|
|
|
55,899
|
|
|
43,986
|
|
|
36,568
|
|
|
31,846
|
|
|
28,152
|
|
Income before income taxes
|
26,212
|
|
|
28,347
|
|
|
35,988
|
|
|
27,647
|
|
|
24,181
|
|
|
15,830
|
|
|
9,003
|
|
|
9,758
|
|
Income taxes (benefit)
|
10,595
|
|
|
11,090
|
|
|
14,530
|
|
|
10,898
|
|
|
9,956
|
|
|
6,361
|
|
|
(73,317
|
)
|
|
(42
|
)
|
Net income
|
15,617
|
|
|
17,257
|
|
|
21,458
|
|
|
16,749
|
|
|
14,225
|
|
|
9,469
|
|
|
82,320
|
|
|
9,800
|
|
Preferred dividends and discounts
|
(3,780
|
)
|
|
(3,661
|
)
|
|
(1,765
|
)
|
|
(1,757
|
)
|
|
(1,748
|
)
|
|
(1,742
|
)
|
|
(12,235
|
)
|
|
(2,477
|
)
|
Net income available to common stockholders
|
$
|
11,837
|
|
|
$
|
13,596
|
|
|
$
|
19,693
|
|
|
$
|
14,992
|
|
|
$
|
12,477
|
|
|
$
|
7,727
|
|
|
$
|
70,085
|
|
|
$
|
7,323
|
|
Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.39
|
|
|
$
|
0.45
|
|
|
$
|
0.66
|
|
|
$
|
0.50
|
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
|
$
|
3.20
|
|
|
$
|
0.35
|
|
Diluted
|
0.39
|
|
|
0.44
|
|
|
0.65
|
|
|
0.49
|
|
|
0.41
|
|
|
0.26
|
|
|
3.20
|
|
|
0.35
|
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
The information contained in the section of this Quarterly Report on Form 10-Q captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative 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 is 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 SEC’s 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
June 30, 2013
. 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
June 30, 2013
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.