Diversification, Revenue Growth Drive Taylor Capital's Return to Profitability

Mark Hoppe waited 991 days for a profit.

Hoppe is the president and chief executive of Taylor Capital Group Inc. in Rosemont, Ill. In the third quarter his company delivered, earning $33.4 million, its first profit in 11 quarters.

The details of Taylor's turnaround are emblematic of community banks that are fighting to show revenue is growing, not just that credit losses are shrinking, analysts said.

"Its construction problems are winding down and the growth strategy is beginning to take hold," said Brian Martin, a Chicago-based analyst with FIG Partners. "After a while, all the hard work starts to pay dividends."

Taylor's swing to the black was primarily driven by the sale of securities, so analysts viewed the quarter as essentially a break-even. However, the work the company has put into reshaping itself made an impact, and the quarter has the potential to be looked back upon as a more of a breakthrough for Taylor.

"Things are certainly moving in the right direction," said John Rodis, an analyst with Howe Barnes Hoefer & Arnett Inc. "I still think the next couple of quarters are going to be a challenge for them and for a lot of Chicago banks, but there were a lot of positives this quarter so we will just have to see what comes next."

Hoppe shares Rodis' guarded optimism about the future.

"We won some nice battles in the third quarter," the CEO said in an interview late last month. "We are not declaring victory yet, but we do think that things are starting to turn."

The company calls it its "fix and grow strategy."

The "fix" is the credit issues. Before Hoppe's arrival in early 2008, Taylor was a major financier of construction projects in Chicago that soured in the downturn. At Sept. 30, nonperforming assets made up 3.38% of total assets and totaled $157.5 million, down 13% from the second quarter and down 20% from a year earlier.

The company's provision totaled $18 million for the quarter, up 20% from a year earlier, but down 60% from the second quarter. Hoppe said the migration of nonperforming assets slowed to $27 million in the quarter. "That's the lowest amount since I've been at the bank," he said.

Rodis said the company has been very aggressive with its chargeoffs. He added that, though Taylor appears to be hitting a bottom with construction loan problems, there is some worry in other sectors, such as commercial real estate.

"It remains to be seen how the CRE portfolio is going to hold up, but it shouldn't be as bad as the construction portfolio," Rodis said.

The "grow" part of the strategy has involved diversification. Hoppe, formerly the CEO of LaSalle Bank Midwest, was brought in to take advantage of the market disruption in Chicago caused by ABN Amro Holding NV's sale of LaSalle to Bank of America Corp. in late 2007.

At the time, commercial and industrial lending made up less than 40% of the portfolio. At the end of the third quarter it made up 57% and Hoppe said the goal is to increase that eventually to 75%. Alongside that initiative, Taylor has increased its focus on asset-based lending.

The company also picked up a mortgage lending team that has provided a significant boost to noninterest income. At Sept. 30, mortgage origination revenue totaled $6.3 million, up 230% from the second quarter. A year earlier Taylor had no such revenue stream.

On a pretax, pre-provision basis, Taylor earned $20.6 million in the quarter, up 19% from the second quarter.

Without the securities gain, it made $931,000, compared with a loss of $2.3 million a year earlier and a loss of $30.6 million in the second quarter.

Though analysts were generally pleased with the results, capital was one point of contention.

Taylor is exceedingly well capitalized, with a total risk-based capital ratio of 14.15%, but analysts pointed out that its tangible common equity ratio is a thin 3.15%. Tangible common equity is not a regulatory ratio but has become an increasingly important benchmark. Analysts like that ratio to be at least 5%.

Hoppe said Taylor focuses on managing its ratios for regulatory purposes and wants to avoid diluting its shareholders through a common equity raise for now. It raised $75 million of mandatorily convertible preferred stock and subordinated debt in the second quarter in an oversubscribed offering. It initially set out to raise $45 million.

Rodis said the tangible ratio is thin, but that he isn't worried about the company's ability to raise it. "They clearly have access to the markets. It is just a matter of when," he said.