Taylor Capital Reports Net Income of $21.5 Million for the Fourth Quarter of 2012

CHICAGO, Jan. 24, 2013 /PRNewswire/ -- Taylor Capital Group, Inc. (the "Company") (NASDAQ: TAYC), the parent company of Cole Taylor Bank (the "Bank"), today reported results for the fourth quarter of 2012 and for the full year 2012.

FULL YEAR 2012 HIGHLIGHTS

Reported income before taxes of $103.6 million for 2012, up from $18.0 million in 2011

• Net income for 2012 was $61.9 million, compared to $91.1 million for 2011.  The 2011 results included after tax income of $73.2 million resulting from the reversal of a valuation allowance on the Company's net deferred tax asset 
• Earnings per diluted share were $1.79 for 2012 compared to $3.45 per diluted share for 2011.  Excluding the favorable impact of the reversal of the valuation allowance, 2011 loss per diluted share was $0.08 
• Revenue(1) increased to $299.6 million for 2012, up $119.4 million or 66%
• Net interest margin on a tax equivalent basis increased by nine basis points to 3.25% for 2012 from 3.16% for 2011
• Mortgage banking revenue increased to $125.5 million, up $105.1 million or 516%
• Commercial and industrial loans grew $164.4 million, or 11.5% for the year
• Core deposits grew $714.3 million, or 39% for the year
• Service charges increased 18%

Credit quality indicators improved in 2012, including a 42.3% reduction in nonperforming loans

• Nonperforming loans were $59.5 million and 1.88% of total loans at December 31, 2012, down from $103.1 million and 3.52% of total loans at December 31, 2011
• The allowance for loan losses as a percent of nonperforming loans was 138.1% at December 31, 2012, up from 100.7% at December 31, 2011
• At December 31, 2012, commercial criticized and classified loans(2) totaled $131.6 million, down from $182.6 million at December 31, 2011

FOURTH QUARTER 2012 HIGHLIGHTS

Reported earnings per diluted share of $0.65 in the fourth quarter of 2012, up from $0.49 per diluted share in the third quarter of 2012

• Revenue increased to a record $91.0 million for the fourth quarter of 2012, up $6.5 million or 8% from the third quarter of 2012
• Net interest margin on a tax equivalent basis increased by seven basis points to 3.28% for the fourth quarter of 2012 from 3.21% for the third quarter  
• Mortgage banking revenue increased to $44.3 million, up $3.6 million or 9% over the third quarter
• Mortgage origination volume increased to $1.95 billion, up 41% from the third quarter
• Commercial and industrial loans grew $53.3 million, or 3.5% in the fourth quarter
• Core deposits grew by $95.2 million in the fourth quarter of 2012 to $2.54 billion
• A $100 million preferred stock offering was completed      

Key credit quality indicators for the fourth quarter of 2012 were as follows:

• Nonperforming loans were $59.5 million and 1.88% of total loans at December 31, 2012, down 4.1% from $62.1 million and 2.01% of total loans at September 30, 2012
• The allowance for loan losses as a percent of nonperforming loans was 138.1% at December 31, 2012, up from 128.3% at September 30, 2012
• At December 31, 2012, commercial criticized and classified loans totaled $131.6 million, up from $114.7 million at September 30, 2012

"Our results for 2012 have reinforced the value of our dual strategy of focusing on the fundamentals while continuing to diversify our revenue sources," said Mark A. Hoppe, President and Chief Executive Officer of Taylor Capital Group.  "Pre-tax, pre-provision operating earnings of $120.5 million for the year were up 66% from 2011, and were at a record level for the fourth quarter.  Cole Taylor Mortgage had an outstanding year and quarter.  Fourth quarter origination volume of nearly $2 billion was up 41% from the third quarter, while the mortgage servicing portfolio increased 37% to $8.5 billion.  Our efforts in the banking segment to add new commercial business were also very successful during 2012, as commercial and industrial loans increased more than 11% for the year and core deposits increased 39%."

"As we grow and diversify the business, we have continued our emphasis on improving asset quality and further strengthening our capital.  The ratio of nonperforming assets to total assets at the end of the year improved to 1.44%, down from 2.96% a year ago, while the Company's Tier 1 capital ratio at year end increased by approximately 300 basis points from the end of 2011.  The Company's strong performance in 2012 enabled us to make investments for further diversification and expansion in our lines of business and facilitated the completion of a $100 million preferred stock offering in the fourth quarter, which will help to support our growth in 2013 and beyond."  Hoppe concluded.

FULL YEAR 2012 AND FOURTH QUARTER 2012 PERFORMANCE OVERVIEW

Results of Operations – Full Year 2012

Revenue

For 2012, revenue was $299.6 million, up 66.3% from $180.2 million for 2011.

Net interest income was $149.9 million for 2012, up 11.5% from $134.4 million for 2011.  The increase in net interest income was the result of lower funding costs driven by deposit repricing and favorable shifts in the funding mix and increased balances of loans held for sale, partially offset by lower yields on investment securities.  Net interest margin on a tax equivalent basis was 3.25% for 2012, up from 3.16% for 2011.  The increase in net interest margin was the result of reduced funding costs, partially offset by lower earning asset yields.  

Noninterest income, excluding gains and losses on investment securities and derivative termination expense, was $149.7 million for 2012, up 227% from $45.8 million for 2011.  This increase was due primarily to higher mortgage banking revenue, which increased from $20.4 million in 2011 to $125.5 million in 2012 resulting from growth in mortgage originations and increased mortgage servicing.  Service charges increased 18% from $11.5 million in 2011 to $13.5 million in 2012 due to pricing adjustments which began in the first quarter of 2012, the introduction of new products and new customers.  Other derivative income decreased from $7.0 million in 2011 to $4.3 million in 2012 primarily due to a decrease in the volume of customer swap transactions and related fee income.    

Noninterest Expense

Noninterest expense, excluding nonperforming asset expense and early extinguishment of debt expense, was $179.1 million in 2012, up from $107.7 million for 2011.  Salaries and employee benefits increased from $64.7 million in 2011 to $124.9 million in 2012 due to an increase of 300 headcount or 47% in 2012 and an increase in performance-based incentive compensation both primarily related to growth of Cole Taylor Mortgage.  Loan expense increased from $3.0 million in 2011 to $6.8 million in 2012 primarily due to an increase in mortgage originations at Cole Taylor Mortgage.  Outside services increased from $2.1 million in 2011 to $3.9 million in 2012 primarily due to an increase in sub-servicing expense resulting from growth in the mortgage servicing portfolio.     

Income Tax Expense

Income tax expense was $41.7 million for 2012, compared to an income tax benefit of $73.1 million in 2011. The income tax benefit in 2011 was almost entirely due to the income tax benefit that resulted from the reversal of the $73.2 million valuation allowance on the Company's net deferred tax asset. 

Results of Operations – Fourth Quarter 2012

Revenue

Revenue totaled $91.0 million for the fourth quarter of 2012, compared to $84.4 million for the third quarter of 2012, a 7.8% increase.    

Net interest income increased to $40.5 million for the fourth quarter of 2012, up from $37.2 million for the third quarter of 2012, due to interest income from an increase in loans held for sale and lower interest costs on subordinated notes as a result of the prepayment of $60 million of the Bank's 10% subordinated notes in the third quarter.  The tax equivalent net interest margin increased seven basis points, from 3.21% for the third quarter of 2012 to 3.28% for the fourth quarter of 2012, primarily as a result of lower interest costs on the subordinated notes, partially offset by an increase in the lower-yielding held for sale portfolio.  

Noninterest income, excluding investment security gains and losses, was $50.5 million for the fourth quarter of 2012, compared to $47.3 million for the third quarter of 2012. The increase was primarily due to a $3.6 million increase in mortgage banking revenue driven by an increase in net servicing revenue as the mortgage servicing portfolio increased 37% and an increase in loan originations of 41% in the fourth quarter of 2012.   

Noninterest Expense

Noninterest expense, excluding nonperforming asset expense and early extinguishment of debt expense, was $52.4 million for the fourth quarter of 2012, compared to $51.6 million for the third quarter of 2012.  The increase is primarily due to volume-related loan and sub-servicing expense at Cole Taylor Mortgage.  Partially offsetting these increases, salaries and employee benefits decreased from $37.0 million in the third quarter of 2012 to $36.0 million.  The decrease in these expenses was primarily due to lower performance-based incentive compensation expense, partially offset by an increase in salary costs related to an increase of 46 headcount or 11% at Cole Taylor Mortgage.   

Credit Quality – Full Year 2012

Loan Portfolio Performance and Credit Quality

Significant asset quality improvement was achieved during 2012.  Nonperforming loans declined by $43.6 million, or 42.3%, from $103.1 million at year end 2011 to $59.5 million at year end 2012. The two largest reductions were a $26.2 million decrease in nonperforming commercial and industrial nonaccrual loans and a $20.6 million decline in secured commercial real estate nonaccrual loans primarily due to payoffs and other remediation efforts.  

Other real estate owned ("OREO") was $24.3 million at December 31, 2012, compared to $35.6 million at December 31, 2011.  Total nonperforming assets were $83.8 million at December 31, 2012, down from $138.7 million at December 31, 2011 as sales and write downs exceeded new additions.  The amount of nonperforming loans declined due to payoffs, loan workouts and other remediation efforts.  Nonperforming assets to total assets were 1.44% at December 31, 2012, down from 2.96% at December 31, 2011.

Commercial criticized and classified loans were $131.6 million at December 31, 2012, down 27.9% from $182.6 million at December 31, 2011.  These improvements are the result of significant nonperforming asset resolutions, combined with a slowdown in both migrations to nonperforming status and inflows to criticized and classified status.

Allowance and Provision for Loan Losses

The allowance for loan losses declined to $82.2 million at December 31, 2012, from $103.7 million at December 31, 2011, as credit quality trends continued to improve as demonstrated by declines in nonperforming loans.  The decline in the allowance for loan losses resulted from net charge-offs exceeding the provision for loan losses.  The allowance for loan losses as a percent of nonperforming loans increased to 138.1% at December 31, 2012, from 100.7% at December 31, 2011.  For 2012, the provision for loan losses was $9.6 million, down from $49.3 million in 2011. 

Credit Quality – Fourth Quarter 2012

Loan Portfolio Performance and Credit Quality

Total commercial criticized and classified loans increased $16.9 million to $131.6 million at December 31, 2012, compared to $114.7 million at September 30, 2012, primarily due to an increase in loans classified as special mention.

Nonperforming loans declined to $59.5 million at December 31, 2012, compared to $62.1 million at September 30, 2012, primarily due to paydowns and other resolutions partially offset by one commercial construction and land loan migrating to nonperforming status.    

OREO and repossessed assets decreased by $4.6 million to $24.3 million at December 31, 2012, compared to $28.9 million at September 30, 2012, primarily due to portfolio write-downs and two asset sales. 

Nonperforming assets were $83.8 million at December 31, 2012, down from $91.0 million at September 30, 2012.  Nonperforming assets to total assets were 1.44% at December 31, 2012, compared to 1.77% at September 30, 2012.

Allowance and Provision for Loan Losses

The allowance for loan losses was $82.2 million at December 31, 2012, up from $79.7 million at September 30, 2012, primarily due to recoveries exceeding charge-offs by $1.3 million and the $1.2 million provision for loan losses.  The allowance for loan losses as a percent of nonperforming loans was 138.1% at December 31, 2012, compared to 128.3% at September 30, 2012. The provision for loan losses was $1.2 million for the fourth quarter of 2012, compared to $900,000 for the third quarter of 2012.   

Balance Sheet – Full Year 2012

Assets

Total assets at December 31, 2012, were $5.80 billion, up from $4.69 billion at December 31, 2011.

Cash and cash equivalents increased to $166.4 million at December 31, 2012, from $121.2 million at December 31, 2011, primarily to cover increased transactional needs for cash as a result of an increase in noninterest-bearing deposits.  

Loans held for sale were $938.4 million at December 31, 2012, up from $186.0 million at December 31, 2011.  The increase in loans held for sale is a result of continued growth in mortgage originations in 2012 and the timing of loan sales.

Net loans, excluding loans held for sale, at December 31, 2012, were $3.09 billion, up from $2.82 billion at December 31, 2011. Commercial loans were $2.76 billion at December 31, 2012, up from $2.63 billion at December 31, 2011, primarily due to increased commercial and industrial loans and new loans and leases closed by Cole Taylor Equipment Finance.  Consumer-oriented loans were $416.6 million at December 31, 2012, up from $300.3 million at December 31, 2011, primarily the result of certain mortgages originated by Cole Taylor Mortgage being held in the loan portfolio. 

Investment in Federal Home Loan Bank and Federal Reserve Bank stock was $75.0 million at December 31, 2012, up from $56.8 million at December 31, 2011.  The increase in these investments is related to balance sheet growth and an increase in Federal Home Loan Bank advances.

Mortgage servicing rights increased to $78.9 million as of December 31, 2012, compared to $8.7 million at December 31, 2011.  The increase in the servicing portfolio is part of our diversification strategy to build a full service mortgage business and includes both self originated and acquired servicing.   

Liabilities and Stockholders' Equity

Total liabilities at December 31, 2012, of $5.24 billion increased from the December 31, 2011, total of $4.28 billion.

Total deposits were $3.53 billion at December 31, 2012, compared to $3.12 billion at December 31, 2011.  The largest changes in deposits during 2012 were in core funding categories, including increases in noninterest-bearing deposits of $377.2 million, NOW accounts of $248.3 million and money market accounts of $87.3 million.  Partially offsetting these increases were declines during 2012 in time deposits of $337.0 million, due to planned runoff of higher-priced deposits. 

Accrued interest, taxes and other liabilities increased from $61.2 million at December 31, 2011, to $131.5 million at December 31, 2012, primarily due to accrued operating expenses, including incentive costs, and a $27.7 million increase in accrued liabilities primarily for the purchase of securities that had not settled at year end. 

Short-term borrowings, comprised primarily of Federal Home Loan Bank advances and purchased fed funds, increased from $768.1 million at December 31, 2011, to $1.46 billion at December 31, 2012, and provided funding for the growth in loans held for sale.

Long-term borrowings were zero at December 31, 2012, down from $147.5 million at December 31, 2011.  The decrease is due to maturities and early extinguishments as the Bank's need for longer-term borrowings from a duration perspective decreased.      

Subordinated notes decreased from $89.6 million at December 31, 2011, to $33.4 million at December 31, 2012, due to the prepayment of the Bank's $60.0 million of 10% subordinated notes during the third quarter of 2012, which reduced interest costs.

Total stockholders' equity increased to $559.6 million at December 31, 2012, from $409.5 million at December 31, 2011.  The increase was primarily due to the issuance and sale of $100 million of preferred stock in the fourth quarter of 2012 and net income of $61.9 million for the year.

Balance Sheet – Fourth Quarter 2012

Assets

Total assets at December 31, 2012, increased to $5.80 billion, compared to $5.14 billion at September 30, 2012.

Investment securities were $1.27 billion at December 31, 2012, an increase of $55.6 million compared to September 30, 2012, primarily due to an increase in available for sale municipal bonds as we have increased our holdings of certain tax-exempt securities that offer attractive risk-adjusted yields.   

Loans held for sale were $938.4 million at December 31, 2012, compared to $422.6 million at September 30, 2012. The increase in loans held for sale is a result of continued growth in mortgage originations in the fourth quarter of 2012 and the timing of loan sales.

Net loans at December 31, 2012, excluding loans held for sale, were $3.09 billion, compared to $3.01 billion at September 30, 2012.  Commercial loans were $2.76 billion at December 31, 2012, compared to $2.67 billion at September 30, 2012.  The increase of $85.9 million was primarily due to new loans and leases closed by Cole Taylor Equipment Finance as well as additional commercial and industrial loans. 

Investment in Federal Home Loan Bank and Federal Reserve Bank stock was $75.0 million at December 31, 2012 up from $52.8 million at September 30, 2012.  The increase in these investments is related to balance sheet growth and an increase in Federal Home Loan Bank advances.

Mortgage servicing rights increased $25.7 million in the fourth quarter to $78.9 million as of December 31, 2012, primarily due to an increase in the principal balance of loans serviced to $8.53 billion as of December 31, 2012, from $6.24 billion as of September 30, 2012.  

Other assets decreased $37.2 million in the fourth quarter to $149.6 million as of December 31, 2012, primarily due to a decrease in the fair value of mortgage derivatives for the mortgage pipeline.   

Liabilities and Stockholders' Equity

Total liabilities at December 31, 2012, increased to $5.24 billion, compared to $4.69 billion at September 30, 2012.

Total deposits decreased to $3.53 billion at December 31, 2012, compared to $3.56 billion at September 30, 2012.  The decrease was primarily due to runoff of time deposit balances of $136.1 million.  In addition, noninterest-bearing deposits decreased $94.9 million primarily due to a seasonal impact on certain balances.  Partially offsetting these decreases was a $155.4 million increase in NOW accounts from new customers and increased balances from existing customers.       

Short-term borrowings increased $592.6 million in the fourth quarter to $1.46 billion as of December 31, 2012, primarily due to an increase in short term Federal Home Loan Bank advances and purchased fed funds, which were used to fund loan growth. 

Total stockholders' equity increased from $447.6 million at September 30, 2012, to $559.6 million at December 31, 2012, primarily due to the issuance and sale of $100 million of preferred stock in the fourth quarter and net income of $21.5 million generated during the period. 

Capital

At December 31, 2012, the Company's Tier I Risk Based Capital ratio was 14.21%, while its Total Risk Based Capital ratio was 16.27% and its Tier I Capital to Average Assets leverage ratio was 11.14%.

Each of these 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 and Slide Presentation

A conference call hosted by Taylor Capital Group President & CEO Mark A. Hoppe will be held on Thursday, January 24, 2013, at 10:00 a.m. Central Time (11:00 a.m. Eastern Time). Investors, news media and others may access the call by telephone at 877-883-0383 (toll-free) or 412-902-6506 and entering the code 2767436. Participants are encouraged to dial into the call approximately 10 minutes prior to the start time.

This call is being webcast and can be accessed via a live Internet audio broadcast at Taylor Capital Group's website at www.taylorcapitalgroup.com.

Presentation slides to be addressed by management during the call will be available for download on the Company's Investor Relations web page at www.taylorcapitalgroup.com.

A replay of the conference call will be made available after approximately 1:00 p.m. Central Time (2:00 p.m. Eastern Time) on January 24, 2013, through February 15, 2013, and the instructions for accessing the replay will be available on the Company's website during that period.

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 $5.8 billion as of December 31, 2012. The Bank specializes in serving the banking needs of closely held businesses and the people who manage them. With its national businesses, Cole Taylor Business Capital, Cole Taylor Equipment Finance and Cole Taylor Mortgage, the Bank also provides asset based lending, commercial equipment leasing and residential mortgage lending 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 adjusted by investment securities gains and losses, derivative termination fees and impairment of investment securities.  Schedules reconciling earnings in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") to non-GAAP measurement of pre-tax, pre-provision operating earnings and revenue are provided in the attached tables. 

(2) Commercial criticized and classified loans (special mention, substandard, and nonaccrual loans) in commercial and industrial, commercial real estate, residential construction and land, and commercial construction and land, 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 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:

• Our business may be adversely affected by the highly regulated environment in which we operate.
• Competition from financial institutions and other financial services providers may adversely affect our growth and profitability.
• Our business is subject to the conditions of the local economy in which we operate and continued weakness in the local economy and the real estate markets may adversely affect us.
• Our business is subject to domestic and, to a lesser extent, international economic conditions and other factors, many of which are beyond our control and could adversely affect our business.
• The preparation of our consolidated financial statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.
• Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
• Our mortgage loan repurchase reserve for losses could be insufficient.
• We are subject to interest rate risk, including interest rate fluctuations that could reduce our profitability.
• Increasing our mortgage servicing rights ("MSR") portfolio may increase the volatility of our earnings, and certain hedging strategies that we use to manage investment in MSRs may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.
• If we are required to reduce the carrying value of the asset relating to our MSRs, our financial condition and results of operations would be negatively affected. 
• 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 resell a high volume of mortgage loans.
• We have counterparty risk and therefore we may be adversely affected by the soundness of other financial institutions.
• We are subject to certain operational risks, including, but not limited to, data processing system failures and errors and customer or employee fraud.  Our controls and procedures may fail or be circumvented.
• We are dependent upon 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 are subject to lending concentration risks.
• We may not be able to access sufficient and cost-effective sources of liquidity.
• We are subject to liquidity risk, including unanticipated deposit volatility.
• The recent repeal of federal prohibitions on payment of interest on business demand deposits could increase our interest expense and have a material adverse effect on us.
• Changes in our credit ratings could increase our financing costs or make it more difficult for us to obtain funding or capital on commercially acceptable terms.
• As a bank holding company, we are dependent on the ability of our banking subsidiary to make dividends and distributions to us, and our other sources of funds are limited.
• Our business strategy is dependent on our continued ability to attract, develop and retain highly qualified and experienced personnel in senior management and customer relationship positions.
• Our reputation could be damaged by negative publicity.
• New lines of business or new products and services may subject us to certain additional risks.
• We may experience difficulties in managing our future growth.
• We are subject to changes in federal and state tax laws and changes in interpretation of existing laws.
• Regulatory requirements including rules jointly proposed (and recently 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 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, 2011 Annual Report on Form 10-K filed with the SEC on March 9, 2012 as updated by our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings we have made with the Securities and Exchange Commission. 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.

SOURCE Taylor Capital Group, Inc.