5 Chicago Banks Poised for Long-Term Growth

5. Taylor Capital

Company Profile

Taylor Capital Group (TAYC) of Rosemont, Ill. has seen its shares nearly double over the past year, closing at $12.40 Thursday.

In late October, Taylor received regulatory approval to raise funds through offerings of convertible preferred stock and subordinate debt after a $75 million deal made with private investors during the second quarter. According to SNL Financial, the company has raised $43.1 million in preferred equity during 2010.

Income Statement

Third-quarter net income applicable to common shareholders was $30.7 million, of $1.57 a share, following a loss of $48.3 million, or $3.35 a share, the previous quarter and a net loss to common shareholders of $5.3 million, or 51 cents a share during the third quarter of 2009. Net income to common shareholders excludes dividends on preferred shares, including $104.8 million held by the U.S. Treasury Department for TARP assistance.

The third-quarter profit was driven by a $32.8 million in gains on securities sales and a decline in the provision for loan losses to $18.1 million, from $43.9 million the previous quarter. In the third quarter of 2009, the provision for loan losses was $15.5 million. Pre-provision earnings - which also excluded the securities gains and expenses from nonperforming assets - increased to $20.6 million during the third quarter from $17.3 million in the second quarter and $15.2 million in the third quarter of 2009.

Taylor Capital's net interest margin - essentially the difference between the average yield on loans and securities investments and the average cost of funds - was 3.25% for the third quarter, and had improved for eight straight quarters, according to the company.

Balance Sheet

Taylor Capital had $4.7 billion in total assets as of September 30. Nonperforming assets - including nonaccrual loans, a very small amount of accruing loans past due more than 90 days, and repossessed assets - totaled $157.5 million or 3.38% of total assets as of September 30, improving from 3.98% in June and 3.81% in September 2009.

Net charge-offs - loan losses less recoveries - totaled $24.5 million during the third quarter, meaning that the company "released" $6.4 million in loan loss reserves. The annualized ratio of net charge-offs to average loans for the third quarter was 3.25% and reserves covered 3.10% of total loans as of September 30.

Taylor Capital had a Tier 1 leverage ratio was 8.04% and its total risk-based capital ratio was 14.15%, exceeding the 5% and 10% required for most banks and thrifts to be considered well-capitalized by regulators. However, the tangible common equity ratio - which is of far-more interest to investors for a TARP bank - was 3.15% according to SNL Financial, indicating that a common equity raise will probably be needed for the company to be approved by regulators to repay TARP.

Stock Ratios

The shares trade for 1.5 times tangible book value according to SNL and 20.7 times the consensus earnings estimate of 60 cents a share for 2012, among analysts polled by Thomson Reuters.

Analyst Ratings

Out of the three analysts covering Taylor Capital, two have hold ratings and the remaining analyst recommends investors sell the shares.

In a report published after the company's third-quarter earnings announcement, Brian Martin of FIG Partners said Taylor remained "a work in progress with a possible significant upside if plans continue to go according to schedule." Martin has a "market perform" or hold rating on the shares, "given current capital levels and the precarious state of the economy."

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