Taylor Capital Group Reports Net Income of $9.8 Million for the Third Quarter of 2011

CHICAGO, Oct. 20, 2011 /PRNewswire/ -- Taylor Capital Group, Inc. (the "Company") (NASDAQ: TAYC), the parent company of Cole Taylor Bank (the "Bank"), today reported earnings for the third quarter of 2011.

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Net income for the third quarter of 2011 was $9.8 million, compared to a net loss of $1.4 million for the second quarter of 2011.  Net income applicable to common stockholders was $7.3 million, or $0.35 per diluted share, for the third quarter of 2011, compared to a net loss applicable to common stockholders of $3.9 million, or $0.19 per diluted share, for the second quarter of 2011.

Net income for the nine months ended September 30, 2011 was $8.8 million, compared to a net loss of $8.2 million for the nine months ended September 30, 2010.  Net income applicable to common stockholders was $1.4 million, or $0.07 per diluted share, for the nine months ended September 30, 2011, compared to a net loss applicable to common stockholders of $31.2 million, or $2.19 per diluted share, for the nine months ended September 30, 2010(1).  

"The third quarter of 2011 was very positive for Taylor Capital," said Mark A. Hoppe, President and Chief Executive Officer of Taylor Capital Group.  "We earned $9.8 million in the third quarter, and as a result are profitable year to date. Starting in 2008, with the addition of new management and the support of new investors and board members, we set out to reposition the balance sheet, strengthen asset quality and diversify revenue to drive earnings.  This quarter is clear evidence that we are well on our way to achieving these strategic goals."

Hoppe continued, "Enhanced profitability this quarter is a result of improved net interest margin resulting from lower funding costs and deposit repricing, as well as higher fee income from our commercial banking and mortgage units.  We also showed continued improvement in asset quality, including a 15% drop in nonperforming loans, a 14% reduction in commercial criticized and classified balances, and a 14% improvement in the coverage ratio of allowance for loan losses to nonperforming loans.  All in all, this quarter was one of the most positive in several years, and is indicative of progress resulting from the immense efforts focused on our 'fix and grow' strategy. Today we are also announcing that we plan to convert our Series C and E Preferred into common stock, and are contemplating a common stock rights offering of up to $35 million in the next few months."

THIRD QUARTER 2011 HIGHLIGHTS

Pre-tax, pre-provision operating earnings up 80.2% in 3Q 2011 from 2Q 2011

• Pre-tax, pre-provision operating earnings(2) totaled $23.8 million for the third quarter of 2011, up from $13.2 million for the second quarter of 2011.  
• Revenue(2), excluding gains and losses on investment securities and derivative termination costs, was up 28.4% from $39.0 million for the second quarter of 2011 to $50.1 million for the third quarter of 2011.
• Noninterest expense, excluding nonperforming asset expense and nonrecurring early extinguishment of debt expense, was $26.4 million for the third quarter of 2011, up 2.3% from $25.8 million in the second quarter of 2011.
• Net interest margin was 3.25% for the third quarter of 2011, up from 3.09% for the second quarter of 2011.

Asset quality indicators again improved, including a 15.0% reduction in nonperforming loans  

• Nonperforming loans were $121.5 million, or 4.02% of total loans at September 30, 2011, down from $143.1 million, or 4.91% of total loans at June 30, 2011.
• At September 30, 2011, commercial criticized and classified loans(3) totaled $221.1 million, down 14.5% from $258.5 million at June 30, 2011.  
• At September 30, 2011, the allowance for loan losses was $105.8 million, compared to $109.0 million at June 30, 2011.
• The allowance for loan losses as a percent of nonperforming loans increased to 87.06% at September 30, 2011, from 76.22% at June 30, 2011.
• Provision for loan losses was $16.2 million for the third quarter of 2011, up from $11.8 million for the second quarter of 2011.

THIRD QUARTER 2011 PERFORMANCE OVERVIEW

Results of Operations

Net income for the third quarter of 2011 was $9.8 million, compared to a net loss of $1.4 million for the second quarter of 2011.  Net income applicable to common stockholders was $7.3 million, or $0.35 per diluted share, for the third quarter of 2011, compared to a net loss applicable to common stockholders of $3.9 million, or $0.19 per diluted share, for the second quarter of 2011.

Net income for the nine months ended September 30, 2011 was $8.8 million, compared to a net loss of $8.2 million for the nine months ended September 30, 2010.  Net income applicable to common stockholders was $1.4 million, or $0.07 per diluted share, for the nine months ended September 30, 2011, compared to a net loss applicable to common stockholders of $31.2 million, or $2.19 per diluted share for the nine months ended September 30, 2010(1).  

Income before income taxes was $9.8 million for the third quarter of 2011, compared to a loss before income taxes of $1.0 million in the second quarter of 2011.  This improvement was largely due to a $10.6 million increase in pre-tax, pre-provision operating earnings offset by a $757,000 increase in credit costs (provision for loan losses and nonperforming asset expense).  In addition, there were nonrecurring items that affected income before income taxes, including $4.9 million of gains on the sales of investment securities, taken to mitigate potential prepayment risk, offset by an $896,000 loss in other derivative income associated with the termination of certain derivative contracts and $3.4 million in expenses for the early extinguishment of debt.  The termination of certain derivatives and the early extinguishment of debt were completed to lower funding costs.  The net impact of these nonrecurring items on income before income taxes was $598,000 for the third quarter of 2011.

Pre-tax, Pre-provision Operating Earnings

Pre-tax, pre-provision operating earnings totaled $23.8 million for the third quarter of 2011, compared to $13.2 million for the second quarter of 2011.  This increase was largely due to a $5.3 million increase in mortgage origination revenue, $3.4 million in higher derivative income (excluding a loss on the termination of certain derivative contracts) and a $2.5 million improvement in net interest income.

Revenue

Revenue was $50.1 million for the third quarter of 2011, up from $39.0 million for the second quarter of 2011, a 28.4% increase.  

Net interest income was up 7.8% at $34.7 million for the third quarter of 2011, compared to $32.2 million for the second quarter of 2011.  This improvement was made up of a $2.0 million decline in interest expense and a $478,000 increase in interest income.  The net interest margin was 3.25% for the third quarter of 2011, up 16 basis points from 3.09% for the second quarter of 2011.  

Lower funding costs drove the improvement in net interest income and the net interest margin.  There was significant, anticipated deposit repricing, largely in customer certificates of deposit and brokered certificates of deposit during the third quarter 2011, which benefited the net interest margin.  The decline in funding costs was also the result of funding-related transactions, including the termination of certain derivative contracts and early extinguishment of debt.  It was determined that these actions were in the best long-term economic interest of the Company, despite short-term losses and expenses, as it is expected that these actions will continue to benefit the net interest margin going forward.  

Interest income increased despite a decline in the yield on earning assets from 4.46% for the second quarter of 2011 to 4.41% for the third quarter of 2011.  This variance was in part driven by growth in mortgage loans originated by Cole Taylor Mortgage, which increased average earning assets, but lowered the yield on earning assets.  

Noninterest income was $15.4 million, excluding $4.9 million in gains on the sales of investment securities and an $896,000 loss associated with the termination of certain derivative contracts, compared to $6.8 million for the second quarter of 2011, which excluded a $381,000 impairment loss on an investment security.  The sales of investment securities were executed during the third quarter as these securities had higher repayment risk due to the underlying collateral refinance uncertainty.    

Higher mortgage origination revenue and other derivative income contributed to the quarter-over-quarter increase in revenue.  The increase in mortgage origination revenue, from $2.2 million in the second quarter of 2011 to $7.6 million in the third quarter of 2011, was a result of increased loan fundings in the third quarter of 2011 at Cole Taylor Mortgage.  Loan fundings were $521.5 million, up from $318.3 million in the second quarter of 2011.  The increased volume was due to lower mortgage interest rates in the third quarter, further bolstered by the continued expansion of the unit's national platform.

The increase in other derivative fee income from $194,000 in the second quarter of 2011 to $3.4 million (excluding a loss on the termination of certain derivative contracts) in the third quarter of 2011 was the result of a higher volume of interest rate swap agreements entered into by commercial clients of Cole Taylor Commercial Banking and Cole Taylor Commercial Real Estate Banking, two of the Bank's commercial lending units.

Noninterest Expense

Noninterest expense was $28.2 million for the third quarter of 2011, compared to $27.8 million for the second quarter of 2011.  This increase was primarily the result of $3.4 million in nonrecurring expense related to the early extinguishment of debt, offset somewhat by the reversal of nonperforming asset expense of $1.6 million, primarily the result of reversals of reserves for unfunded commitments associated with nonperforming loans that were resolved during the third quarter of 2011.  These items are excluded from pre-tax, pre-provision operating earnings.  Noninterest expense excluding these items was $26.4 million for the third quarter of 2011, compared to $25.8 million for the second quarter of 2011.

Credit Quality

Nonperforming loans decreased $21.5 million, or 15.0%, and nonperforming assets were down $20.1 million, or 11.8%, from the second quarter of 2011 to the third quarter of 2011.  The watch list of commercial criticized and classified loans(3) decreased for the fifth consecutive quarter.  The watch list of commercial criticized and classified loans, a key indicator of asset quality, was down from $258.5 million in the second quarter of 2011 to $221.1 million in the third quarter of 2011, or less than half its balance of $453.1 million at the historical peak of June 30, 2009.  

Credit costs in the third quarter of 2011 were $14.6 million up from $13.8 million in the second quarter of 2011.  However, year to date credit costs declined 55.3% from $93.7 million for the nine months ended September 30, 2010, to $41.9 million for the nine months ended September 30, 2011.  

Loan Portfolio Performance and Credit Quality

Nonaccrual loans decreased to $121.5 million at September 30, 2011, compared to $143.1 million at June 30, 2011.  The total decline of $21.6 million consisted of a reduction of $11.1 million in commercial and industrial nonaccrual loans, $7.3 million in commercial real estate secured nonaccrual loans and $2.4 million in residential land and construction nonaccrual loans.  The balance of the decline was in commercial land and construction nonaccrual loans and all other nonaccrual loans.

Other real estate and repossessed assets increased slightly to $29.2 million at September 30, 2011 from $27.9 million at June 30, 2011, principally the result of one completed foreclosure in the third quarter of 2011, offset by several property sales.  The net proceeds from these sales during the third quarter of 2011 were higher than their total net carrying value.  

Nonperforming assets were $150.8 million at September 30, 2011, compared to $170.9 million at June 30, 2011.  Nonperforming assets to total assets declined to 3.35% at September 30, 2011, compared to 3.89% at June 30, 2011.  

Loans contractually past due 30 through 89 days and still accruing were $5.6 million at September 30, 2011, compared to $5.7 million at June 30, 2011.  The decrease was principally the result of having no commercial loans past due 30 through 89 days at September 30, 2011, and a slight reduction in consumer loans past due.

Commercial criticized and classified loans were $221.1 million at September 30, 2011, compared to $258.5 million at June 30, 2011, or a decrease of 14.5%.  This decrease was largely the result of pay downs and charge-offs during the third quarter of 2011, partially offset by new loans being placed on criticized and classified status.

Allowance and Provision for Loan Losses

The allowance for loan losses was $105.8 million at September 30, 2011, down from $109.0 million at June 30, 2011.  This decline during the third quarter of 2011 resulted from net charge-offs exceeding the provision for loan losses by $3.2 million, as credit quality trends continue to improve and the watch list of criticized and classified loans declines.  The coverage ratio of the allowance for loan losses as a percent of nonperforming loans was 87.06% at September 30, 2011, up from 76.22% at June 30, 2011.

The provision for loan losses was $16.2 million for the third quarter of 2011, up from $11.8 million for the second quarter of 2011.  The increase in provision was largely the result of higher specific reserves on two nonperforming loans and higher charge-offs.  The provision year-to-date was $38.3 million for the nine months ended September 30, 2011, down 54.0% from $83.2 million for the nine months ended September 30, 2010.

Balance Sheet

Assets

Total assets at September 30, 2011 were $4.50 billion, compared to $4.40 billion at June 30, 2011.

Investment securities were $1.31 billion at September 30, 2011, compared to $1.33 billion at June 30, 2011.  Loans held for sale were $148.7 million at September 30, 2011, compared to $86.1 million at June 30, 2011, a result of higher mortgage origination volumes at Cole Taylor Mortgage in the third quarter of 2011.

Loans, net of allowance for loan losses, were $2.77 billion at September 30, 2011, compared to $2.72 billion at June 30, 2011. Commercial and industrial loans, including commercial owner-occupied real estate loans were $1.82 billion, up from $1.81 billion.  Consumer-oriented loans were $266.8 million, up from $182.4 million, primarily the result of certain mortgages originated by Cole Taylor Mortgage being held in portfolio, rather than sold to the secondary market.  Offsetting these increases was a decrease in real estate related loans, excluding commercial owner-occupied real estate loans, to $789.5 million at September 30, 2011, from $835.4 million at June 30, 2011.  This decline was due to pay downs and nonperforming loan resolutions during the third quarter of 2011.

Liabilities and Stockholders' Equity

Total liabilities at September 30, 2011 were $4.21 billion, compared to $4.15 billion at June 30, 2011.  

Total deposits were $2.93 billion at September 30, 2011, compared to $2.91 billion at June 30, 2011.  The largest increases were in NOW accounts and noninterest bearing deposits, as well as out-of-local market certificates of deposit and brokered certificates of deposit.  These increases more than offset declines in customer certificates of deposit and in money market accounts.  

Other borrowings were down from $270.4 million at June 30, 2011 to $180.8 million at September 30, 2011, primarily due to the termination of a repurchase agreement for which the Company paid early extinguishment penalties.  This decrease in other borrowings was offset by an increase in notes payable and other advances from $740.0 million to $872.5 million due to an increase in Federal Home Loan Bank advances.  These actions were taken to shift the funding mix to lower the overall cost of funds.

Total stockholders' equity increased to $288.9 million at September 30, 2011, from $242.6 million at June 30, 2011.  The increase was due to net income available to common stockholders in the third quarter of 2011, as well as an increase in accumulated other comprehensive income due to an improvement in the unrealized gain position of the investment securities portfolio.

Capital

Simultaneously with the release of this earnings announcement, the Company filed a preliminary proxy statement with the Securities and Exchange Commission which includes information regarding the planned conversion of the Company's 8% Non-Cumulative Convertible Perpetual Preferred Stock, Series C, and 8% Non-Cumulative Convertible Perpetual Preferred Stock, Series E, into shares of common stock, or in the case of some shareholders Nonvoting, Non-Cumulative, Convertible Perpetual Preferred Stock, Series G.  The preliminary proxy statement also includes information about a common stock rights offering being contemplated.  

At September 30, 2011, the Company's Tier I Risk Based Capital ratio was 10.08%, while its Total Risk Based Capital ratio was 13.63% and its Tier I Capital to Average Assets leverage ratio was 7.83%.

All the Company's regulatory capital ratios exceeded the regulatory requirements for well-capitalized bank holding companies of 6.00% for Tier I Risk Based Capital, 10.00% for Total Risk Based Capital and 5.00% for Tier I Capital to Average Assets.

This press release does not constitute an offer to sell or a solicitation of an offer to buy any securities of the Company.

Conference Call and Slide Presentation

The Company will host a webcast and conference call on Thursday, October 20, 2011, at 10:00 am Central Time (11:00 am Eastern Time) to discuss the third quarter of 2011 earnings and other matters.  To access the call, please dial 1-877-317-6789 (toll-free) or 1-412-317-6789, and request the Taylor Capital Group Earnings Call.  To access streaming audio, please go to www.taylorcapitalgroup.com.  

The Company will also provide a slide presentation, which management will speak to during the discussion.  A copy of the presentation will be available for download prior to the start of the call at www.taylorcapitalgroup.com.  The presentation will not be webcast live. If you have any trouble obtaining a copy of the presentation, please call Investor Relations at 1-847-653-7166.

Accompanying Financial Statements and Tables

This press release is accompanied by the following unaudited financial information:

• Condensed Consolidated Balance Sheets
• Consolidated Statements of Operations
• 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 and Held for Sale Aging
• Funding Liabilities
• Reconciliation of U.S. GAAP Financial Measures

About Taylor Capital Group, Inc.  (NASDAQ: TAYC)

Taylor Capital Group, Inc. is a $4.5 billion bank holding company for Cole Taylor Bank, a Chicago-based commercial bank specializing in serving the banking needs of closely held businesses and the people who own and manage them.  Cole Taylor is a member of the FDIC and an Equal Housing Lender.

Endnotes:

(1) The net loss applicable to common stockholders for the nine months ended September 30, 2010 included a non-cash, non-capital impacting implied divided of $15.8 million in the second quarter of 2010, representing an inducement to the holders of all of the Company's Series A Preferred who converted to common stock in the second quarter of 2010.

(2) Schedules reconciling earnings in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") to the non-GAAP measurement of pre-tax, pre-provision operating earnings and revenue are provided in the attached tables.

(3) Commercial criticized and classified loans (special mention, substandard, and nonaccrual loans) in commercial & industrial, commercial real estate, residential construction and land, and commercial construction and land Federal collateral codes. Excludes consumer loans.

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," "prudent," "potential," "should," "will," "expect," "anticipate," "believe," "intend," "could" and "estimate" and similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities in 2011 and beyond to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include, without limitation: the risk that our regulators could require us to maintain regulatory capital in excess of the levels needed to be considered well capitalized; the risk that our allowance for loan losses may prove insufficient to absorb probable losses in our loan portfolio; possible volatility in loan charge-offs and recoveries between periods; negative developments and further disruption in the credit and lending markets impacting our business and the businesses of our customers, as well as other banks and lending institutions with which we have commercial relationships; the continued decline in residential real estate sales volume and the likely potential for continuing illiquidity in the real estate market, including within the Chicago metropolitan area; the risks associated with the high volume of loans secured by commercial real estate in our portfolio; the uncertainties in estimating the fair value of developed real estate and undeveloped land in light of declining demand for such assets and continuing illiquidity in the real estate market; the risks associated with the planned growth of our new mortgage unit, including the expansion into new geographic markets and regulatory changes; lending concentration risks; the risks associated with attracting and retaining experienced and qualified personnel, including our senior management and other key personnel in our core business lines; uncertainty in estimating the fair value of loans held for sale and the possibility that we will not be able to dispose of these assets on terms acceptable to us; security risks relating to our internet banking activities that could damage our reputation and our business; the potential impact of certain operational risks, including, but not limited to, data processing system failures and errors and customer or employee fraud; the risks associated with implementing our business strategy and managing our growth effectively, including our ability to preserve and access sufficient capital to execute on our strategy; the effect on our profitability if interest rates fluctuate, as well as the effect of our customers' changing use of our deposit products; the ability to use net operating loss carryforwards to reduce future tax payments if an ownership change of the Company is deemed to have occurred for tax purposes; the possibility that our wholesale funding sources may prove insufficient to replace deposits at maturity and support our growth; continuation of volatility in the capital markets; the effectiveness of our hedging transactions and their impact on our future results of operations; the conditions of the local economy in which we operate and continued weakness in the local economy; changes in general economic and capital market conditions, interest rates, our debt credit ratings, deposit flows, loan demand, loan syndication opportunities and competition; regulatory restrictions and liquidity constraints at the holding company level that could impair our ability to pay dividends or interest on our outstanding securities; significant restrictions on our operations as a result of our participation in the TARP Capital Purchase Program; the impact of changes in legislation, including the Dodd-Frank Act, or regulatory and accounting principles, policies or guidelines affecting our business, including those relating to capital requirements; and other economic, competitive, governmental, regulatory and technological factors impacting our operations.

For further information about these and other risks, uncertainties and factors, please review the disclosure included in the section captioned "Risk Factors" in our December 31, 2010 Annual Report on Form 10-K filed with the SEC on March 22, 2011. You should not place undue reliance on any forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements or risk factors, whether as a result of new information, future events, changed circumstances or any other reason after the date of this 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 of loan losses, nonperforming asset expense and certain non-recurring items, such as gains and losses on investment securities, are excluded from the determination of operating results.  The non-GAAP measure of revenue is calculated as the sum of net interest income and noninterest income less investment securities gains and losses.  Management believes that these measures are useful because they provide a more comparable basis for evaluating financial performance from core operations period to period.

SOURCE Taylor Capital Group, Inc.