Taylor Capital Group Reports Net Income of $15.6 Million for the Second Quarter of 2013

CHICAGO, July 15, 2013 /PRNewswire/ -- Taylor Capital Group, Inc. (the "Company") (NASDAQ: TAYC), the parent company of Cole Taylor Bank (the "Bank"), today reported results for the second quarter of 2013.

Net income for the quarter was $15.6 million, compared to $17.3 million for the first quarter of 2013. Net income applicable to common stockholders for the quarter was $11.8 million, or $0.39 per diluted share, compared to $13.6 million, or $0.44 per diluted share, for the first quarter of 2013. Net income for the second quarter included a $5.4 million pre-tax ($3.2 million after-tax) expense for the early extinguishment of debt costs related to prepaying $37.5 million of 8% subordinated notes. The following table compares selected financial information for the periods indicated:

"Our results for the second quarter of 2013 were outstanding and reflect sustained progress throughout the Bank," said Mark A. Hoppe, President and Chief Executive Officer of the Company. "Pre-tax, pre-provision operating earnings reached $31.1 million, up 6% from the prior quarter and up 24% from the prior-year period. From a shareholder perspective, our return on average common equity this quarter, adjusted for the one-time cost of retiring the subordinated notes, of over 16% reflects the tremendous accomplishments we have achieved. Commercial loans outstanding grew to over $3 billion, fueled by a more than 8% growth this quarter in Commercial and Industrial loans. This growth is noteworthy as it was achieved across multiple lending units despite significant competition in the markets we serve, and, importantly, as we continue to report solid credit quality metrics. Nonperforming loans declined this quarter, other real estate owned assets decreased to less than $20 million and the allowance as a percentage of nonperforming loans ratio increased to over 120%, all of which are reflective of our ongoing, dedicated effort to maintain strong credit standards."

Hoppe continued, "Total mortgage banking revenue increased 20% to $38.5 million this quarter. This accomplishment reflects the ability of our mortgage team to adapt to the significant interest rate volatility we saw this quarter. Our second quarter results demonstrate the success of our diversified model and the significant opportunities for future growth. We are extremely fortunate to have the right team in place to implement our strategy and achieve continuing strong results."

SECOND QUARTER 2013 HIGHLIGHTS - COMPARISON TO FIRST QUARTER 2013

• Revenue(1) was $87.2 million for the second quarter of 2013, up $6.8 million, or 8.4%, from the first quarter of 2013
• Net interest margin on a tax equivalent basis declined by 4 basis points to 3.16% for the second quarter of 2013 from 3.20% for the first quarter of 2013
• Mortgage banking revenue was $38.5 million for the second quarter of 2013, up $6.5 million, or 20.3%, from the first quarter of 2013
• $37.5 million of 8% subordinated notes originally due in 2020 was prepaid in full which resulted in a non-recurring, pre-tax charge of $5.4 million associated with the unamortized discount, original issuance costs and prepayment premium
• Total commercial loans grew $182.9 million, or 6.5%, from March 31, 2013
• The Company completed the purchase of mortgage servicing rights as well as certain office space, furniture and equipment from Liberty Savings Bank, FSB of Wilmington, Ohio
• The Company's Tier I Risk Based Capital ratio was 13.96%, while its Total Risk Based Capital ratio was 15.22% and its Tier I Capital to Average Assets leverage ratio was 10.87% as of June 30, 2013
• Return on Average Common Equity was 12.66% for the second quarter of 2013

Credit quality indicators as compared to the first quarter of 2013

• Nonperforming loans were $69.5 million and 2.11% of total loans at June 30, 2013, down from $71.4 million and 2.22% of total loans at March 31, 2013
• At June 30, 2013, commercial criticized and classified loans(2) totaled $134.2 million, down from $138.5 million at March 31, 2013
• The allowance for loan losses as a percent of nonperforming loans was 120.19% at June 30, 2013, compared to 115.05% at March 31, 2013
• Credit costs(3) were a negative $498,000 for the second quarter of 2013, down from $859,000 for the first quarter of 2013

SECOND QUARTER 2013 - COMPARISON TO SECOND QUARTER 2012

• Revenue increased to $87.2 million for the second quarter of 2013, up $21.9 million, or 33.6%, from the second quarter of 2012
• Pre-tax, pre-provision operating earnings(4) increased to $31.1 million for the second quarter of 2013, up $6.0 million, or 24.0%, as compared to the second quarter of 2012
• Total commercial loans increased to $3.00 billion at June 30, 2013, up $397.6 million, or 15.3%, from June 30, 2012
• Core deposits grew to $2.83 billion at June 30, 2013, up $764.3 million, or 37.1%, from June 30, 2012
• Mortgage origination volume was $1.87 billion for the second quarter of 2013, up $914 million, or 95.2%, from the second quarter of 2012
• At June 30, 2013, commercial criticized and classified loans(2) totaled $134.2 million, down from $139.9 million at June 30, 2012
• Return on Average Common Equity was 12.66% for the second quarter of 2013 as compared to 15.86% for the second quarter of 2012

SECOND QUARTER 2013 PERFORMANCE OVERVIEW

Results of Operations - Comparisons to First Quarter 2013

Net income for the second quarter of 2013 was $15.6 million, compared to $17.3 million for the first quarter of 2013, a decrease of 9.8%. Net income applicable to common stockholders for the second quarter of 2013 was $11.8 million, compared to $13.6 million for the first quarter of 2013.

Income before income taxes was $26.2 million for the second quarter of 2013, compared to $28.3 million for the first quarter of 2013, a decrease of 7.4%. The decrease was primarily due to the $5.4 million of early extinguishment of debt cost this quarter.

Pre-tax, pre-provision operating earnings totaled $31.1 million for the second quarter of 2013, compared to $29.2 million for the first quarter of 2013, an increase of 6.5%.

Revenue

Revenue totaled $87.2 million for the second quarter of 2013, compared to $80.4 million for the first quarter of 2013, an increase of 8.5%.

Net interest income was $41.1 million for the second quarter of 2013, as compared to $40.7 million for the first quarter of 2013. The overall tax equivalent net interest margin was down 4 basis points, from 3.20% for the first quarter of 2013 to 3.16% for the second quarter of 2013, primarily as a result of a 10 basis point decrease in the yield on commercial loans to 3.96%, which was partially offset by a 7 basis point decrease in the cost of interest bearing liabilities to 0.71%.

Noninterest income, excluding investment security gains and losses, was $46.1 million for the second quarter of 2013, compared to $39.7 million for the first quarter of 2013, an increase of 16.1%. The increase was primarily due to an increase in mortgage banking revenue comprised of a $2.9 million increase in origination revenue and a $3.6 million increase in mortgage servicing revenue. The increase in mortgage origination revenue was primarily the result of a favorable shift in the mix of loans originated along with an increase in the servicing value of loans self-originated, partially offset by a 2.0% decline in mortgage origination volume in the second quarter. The increase in mortgage servicing revenue was the result of growth in the mortgage servicing rights ("MSR") portfolio from both purchased as well as self-originated MSR. In addition, mortgage servicing revenue increased due to growth in the fair market value of the MSR asset, net of hedging, as a result of the increase in interest rates this quarter.

Noninterest Expense

Noninterest expense, excluding nonperforming asset expense and early extinguishment of debt expense, was $56.1 million for the second quarter of 2013, compared to $51.2 million for the first quarter of 2013. The increase of $4.9 million, or 9.6%, was primarily the result of a $3.3 million increase in performance-based incentives as a result of improved performance, as well as an increase in salary cost related to an increase in the total number of employees at Cole Taylor Mortgage.

Results of Operations - Comparisons to Second Quarter 2012

Net income for the second quarter of 2013 was $15.6 million, compared to $14.2 million for the second quarter of 2012, an increase of 9.9%. Net income applicable to common stockholders for the second quarter of 2013 was $11.8 million, compared to $12.5 million for the second quarter of 2012.

Income before income taxes was $26.2 million for the second quarter of 2013, compared to $24.2 million for the second quarter of 2012, an increase of 8.3%.

Pre-tax, pre-provision operating earnings totaled $31.1 million for the second quarter of 2013, as compared to $25.1 million in the second quarter of 2012, an increase of 23.9%.

Revenue

Revenue totaled $87.2 million for the second quarter of 2013, compared to $65.2 million in the second quarter of 2012, an increase of 33.7%.

Net interest income was $41.1 million for the second quarter of 2013, compared to $36.4 million for the second quarter of 2012, an increase of 12.9%. The increase was primarily due to growth in loan balances, the repayment of the Bank's $60 million of 10% subordinated notes in the third quarter of 2012 and lower deposit funding costs.

Noninterest income, excluding investment security gains and losses, was $46.1 million for the second quarter of 2013, compared to $28.9 million for the second quarter of 2012, an increase of 59.5%. The increase was primarily due to a $15.5 million increase in mortgage banking revenue. The increase in mortgage banking revenue was in both originations and servicing. Mortgage loan origination income increased $8.9 million between the periods as mortgage loan origination volume increased 95.2% to $1.87 billion. Net mortgage servicing revenue increased 259.1% to $9.2 million in the period as the mortgage servicing book more than doubled.

Noninterest Expense

Noninterest expense, excluding nonperforming asset expense and early extinguishment of debt expense, was $56.1 million for the second quarter of 2013, compared to $40.2 million in the second quarter of 2012, an increase of 39.6%. The increase of $15.9 million is primarily due to a $9.0 million increase in salaries and employee benefits due to growth in the number of employees, as well as volume-related loan and outside service expenses as a result of increased expenses resulting from increased loan origination volumes and servicing at Cole Taylor Mortgage.

Credit Quality

Loan Portfolio Performance and Credit Quality

Total commercial criticized and classified loans were $134.2 million at June 30, 2013, down from $138.5 million at March 31, 2013 and $139.9 million at June 30, 2012.

Nonperforming loans were $69.5 million at June 30, 2013, down from $71.4 million at March 31, 2013, and $74.1 million at June 30, 2012. The overall decrease in nonperforming loans is reflective of the continued focus to strengthen credit quality combined with an active resolution process.

Other real estate owned ("OREO") and repossessed assets were $19.8 million at June 30, 2013, down from $27.2 million at March 31, 2013 and $32.6 million at June 30, 2012. The decrease in OREO assets compared to the prior quarter was primarily due to sales.

Total nonperforming assets were $89.3 million at June 30, 2013, down from $98.6 million at March 31, 2013 and $106.7 million at June 30, 2012. Nonperforming assets to total assets were 1.51% at June 30, 2013, compared to 1.71% at March 31, 2013 and 2.22% at June 30, 2012.

Allowance and Provision for Loan Losses

The allowance for loan losses was $83.6 million at June 30, 2013 compared to $82.2 million at March 31, 2013 and $87.0 million at June 30, 2012. The allowance for loan losses as a percent of nonperforming loans was 120.19% at June 30, 2013, as compared to 115.05% at March 31, 2013 and 117.39% at June 30, 2012.

The provision for loan losses was $700,000 for the second quarter of 2013, compared to $300,000 for the first quarter of 2013 and $100,000 in the second quarter of 2012. The $400,000 increase this quarter in the loan loss provision reflected an increase in the specific reserve and growth in the loan portfolio, partially offset by net recoveries during the second quarter of 2013.

Balance Sheet

Assets

Total assets at June 30, 2013 were $5.90 billion, compared to $5.77 billion at March 31, 2013.

Investment securities were $1.43 billion at June 30, 2013, flat to $1.43 billion at March 31, 2013. While the overall portfolio was essentially unchanged, there was an increase in certain tax exempt investment securities with attractive tax equivalent yields, partially offset by a reduction in the unrealized gain position of the available for sale investment securities portfolio due to an increase in interest rates this quarter.

Loans held for sale were $693.9 million at June 30, 2013, an increase of 3.7% from March 31, 2013. The increase was primarily the result of the transfer of $113.3 million of the residential jumbo mortgages from the portfolio held for investment to loans held for sale partially offset by the timing of mortgage loan sales.

Net loans at June 30, 2013 were $3.22 billion, up $78.3 million from $3.14 billion at March 31, 2013. Commercial and Industrial loans were $1.71 billion at June 30, 2013, an increase of 8.3% from $1.58 billion at March 31, 2013. Our Chicago-based middle market lending, asset based lending and equipment financing groups all contributed significantly to this increase. Commercial real estate secured loans were $1.04 billion at June 30, 2013, an increase of 2.3% from March 31, 2013. Consumer loans were $311.1 million at June 30, 2013, down $100.8 million from March 31, 2013 as a portion of this portfolio was transferred to loans held for sale.

Mortgage servicing rights increased $39.2 million in the second quarter to $145.7 million as of June 30, 2013. The unpaid principal balance of loans serviced was $12.7 billion as of June 30, 2013, up 21.0% from March 31, 2013. As part of our strategy to diversify the revenue streams of Cole Taylor Mortgage, we continue to invest in mortgage servicing and to retain servicing of most mortgage loans we originate. The increase also reflects the purchase of $5.6 million of MSR related to approximately 4,600 loans as part of the Liberty transaction as well as an increase in the value of the asset due to a rise in rates.

Liabilities and Stockholders' Equity

Total liabilities at June 30, 2013 were $5.34 billion, as compared to $5.20 billion at March 31, 2013.

Total deposits were $3.69 billion at June 30, 2013, compared to $3.79 billion at March 31, 2013. The decrease was largely due to an expected decline in consumer demand deposit account balances, partially offset by on-going deposit raising efforts.

Average total deposits for the second quarter of 2013 decreased to $3.69 billion from $3.76 billion in the first quarter of 2013, primarily due to the previously mentioned decrease in noninterest-bearing deposit balances.

Short term borrowings increased $292.3 million in the second quarter to $1.43 billion as of June 30, 2013, due to increased funding needs, primarily as a result of a commercial loan growth.

Subordinated notes decreased $33.5 million due to the full repayment of the 8% subordinated notes originally due in 2020.

Total stockholders' equity decreased from $573.3 million at March 31, 2013 to $560.3 million at June 30, 2013, primarily due to a $25.8 million decrease in accumulated other comprehensive income resulting from a reduction in the unrealized gain on available for sale securities due to an increase in interest rates this quarter. This decline was partially offset by retaining the net income available to common stockholders earned in the second quarter of 2013.

Capital

At June 30, 2013, the Company's Tier I Risk Based Capital ratio was 13.96%, while its Total Risk Based Capital ratio was 15.22% and its Tier I Capital to Average Assets leverage ratio was 10.87%.

Each of these Company ratios exceeded the regulatory requirements for well-capitalized banks of 6.00% for the Tier I Risk Based Capital ratio, 10.00% for the Total Risk Based Capital ratio and 5.00% for the Tier I Capital to Average Assets leverage ratio.

Conference Call

A conference call hosted by Taylor Capital Group President & CEO Mark A. Hoppe will be held on Monday, July 15, 2013 at 9:00 a.m. Central Time (10:00 a.m. Eastern Time). Investors, news media and others may access the call by telephone at 866-515-2915 and entering the passcode 95046331.  Participants are encouraged to dial into the call approximately 10 minutes prior to the start time.

This call is being webcast and the investor slides can be accessed via a live Internet broadcast at http://www.taylorcapitalgroup.com.

A replay of the conference call will be made available after approximately 11:00 a.m. Central Time on July 15, 2013 through August 15, 2013 by telephone by dialing 888-286-8010 and entering the passcode 12001306.

Accompanying Financial Statements and Tables
This press release is accompanied by the following unaudited financial information:

• Condensed Consolidated Balance Sheets
• Consolidated Statements of Income
• Summary of Key Quarterly Financial Data
• Summary of Key Year-to-Date Financial Data
• Summary of Key Period-End Financial Data
• Composition of Loan Portfolio
• Credit Quality
• Loan Portfolio Aging
• Funding Liabilities
• Reconciliation of U.S. GAAP Financial Measures

About Taylor Capital Group, Inc. (NASDAQ: TAYC)
Taylor Capital Group, Inc. is the holding company of Cole Taylor Bank, a commercial bank headquartered in Chicago with assets of $5.9 billion as of June 30, 2013. Cole Taylor specializes in serving the banking needs of closely held businesses and the people who own and manage them. With 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. Cole Taylor is a member of the FDIC and is an Equal Housing Lender.

Endnotes:
(1) Revenue is defined as net interest income plus noninterest income less investment securities gains and losses and impairment of investment securities.
(2) Commercial criticized and classified loans are defined as special mention, substandard, and nonaccrual loans in commercial and industrial, commercial real estate, residential construction and land, and commercial construction and land, excluding consumer loans.
(3) Credit costs are defined as provision for loan losses plus nonperforming asset expense.
(4) Schedules reconciling earnings in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") to the non-GAAP measurement of revenue and pre-tax, pre-provision operating earnings are provided in the attached tables.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This press release includes forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects and opportunities. We have tried to identify these forward-looking statements by using words including "may," "might", "contemplate", "plan", "predict", "potential", "should", "will," "expect," "anticipate," "believe," "intend," "could" and "estimate" and similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities in 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:

• 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.
• Changes in interest rates may change the value of our mortgage servicing rights ("MSRs") portfolio, which may increase the volatility of our earnings.
• 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.
• Our mortgage loan repurchase reserve for losses could be insufficient.
• A significant increase in certain loan balances associated with our mortgage business may result in liquidity risk related to the funding of these loans.
• We are subject to interest rate risk, including interest rate fluctuations that could have a material adverse effect on us.
• Competition from financial institutions and other financial services providers may adversely affect our growth and profitability and have a material adverse effect on us.
• 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.
• 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.
• 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.
• 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.
• We may not be able to access sufficient and cost-effective sources of liquidity.
• We are subject to liquidity risk, including unanticipated deposit volatility.
• The 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.
• Changes in certain 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.
• As a bank holding company, our sources of funds are limited.
• 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.
• We are dependent on outside third parties for processing and handling of our records and data.
• System failure or breaches of our network security, including with respect to our internet banking activities, could subject us to increased operating costs as well as litigation and other liabilities.
• We have counterparty risk and therefore we may be materially and adversely affected by the soundness of other financial institutions.
• We are subject to lending concentration risks.
• We are subject to mortgage asset concentration risks.
• Our business strategy is dependent on our continued ability to attract, develop and retain highly qualified and experienced personnel in senior management and customer relationship positions.
• Our reputation could be damaged by negative publicity.
• New lines of business, new products and services or new customer relationships may subject us to certain additional risks.
• We may experience difficulties in managing our future growth.
• We and our subsidiaries are subject to changes in federal and state tax laws and changes in interpretation of existing laws.
• Regulatory requirements, including rules jointly proposed (and subsequently indefinitely delayed) 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.
• We have not paid a dividend on our common stock since the second quarter of 2008. In addition, regulatory restrictions and liquidity constraints at the holding company level could impair our ability to make distributions on our outstanding securities.

For further information about these and other risks, uncertainties and factors, please review the disclosure included in the section captioned "Risk Factors" in our December 31, 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 8, 2013, as updated by our quarterly reports on Form 10-Q, Current Reports on Form 8-K and other filings we have made with the SEC. 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 press release.

The Company's accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP") and general practice within the banking industry. Management uses certain non-GAAP financial measures to evaluate the Company's financial performance and has provided the non-GAAP measures of pre-tax, pre-provision operating earnings and of revenue. In the pre-tax, pre-provision operating earnings non-GAAP financial measure, the provision for loan losses, nonperforming asset expense and certain non-recurring items, such as gains and losses on investment securities, early extinguishment of debt and impairment of investment securities are excluded from the determination of operating results. The non-GAAP measure of revenue is calculated as the sum of net interest income and noninterest income adjusted by investment securities gains and losses and impairment of investment securities. Management believes that these measures are useful because they provide a more comparable basis for evaluating financial performance from period to period.

SOURCE Taylor Capital Group, Inc.