To reach its profit goals, Taylor Capital Group Inc. in Rosemont, Ill., said it needs to add about 80 core commercial customers this year.
Through the end of the second quarter it had added seven.
That goes a long way toward explaining why the $3.4 billion-asset company's second-quarter earnings missed estimates by a wide margin - and why investors punished its stock last week.
The parent of Cole Taylor Bank reported last week that its earnings dropped 29% from a year earlier, to $6.2 million. Earnings per share fell 37%, to 59 cents, and missed the average estimate of analysts surveyed by Thomson Financial by 19 cents.
The company's stock plunged 13% Wednesday, the day after the earnings announcement, and fell another 5% Thursday, closing at $31.50. It rebounded slightly Friday and closed the week at $32.51.
In a conference call with analysts last week, Taylor Capital's chairman and chief executive officer, Jeffrey W. Taylor, attributed its earnings woes largely to fierce competition for deposits in the Chicago market.
While loan growth has been strong - commercial and industrial loans rose 15%, to $732 million - he said the company has struggled to attract deposits from its borrowers, forcing it to rely almost exclusively on expensive brokered deposits to fund its loans. In the first half out-of-market deposits - primarily brokered ones - rose 25%, to $794 million, while total in-market deposits fell 2%, to just under $1.9 billion.
"This is an attractive market, but it is also a competitive one," Mr. Taylor said. Even though Cole Taylor's client retention rate is about 98%, "winning new ones is the key, and that means taking business away from competing banks."
Kevin K. Reevey, an analyst with BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc. in New York, said that will not be easy.
"You have the local banks that are battling it out for wallet share, and then you have the outside banks that have come in over the last several quarters trying to get market share that have been very aggressive on pricing," Mr. Reevey said.
Mr. Taylor said his company plans to spend $1 million this year on marketing and is counting on new remote deposit-gathering products to bring in more of its borrowers' deposits. It also hired seven commercial bankers in the second quarter.
Daniel C. Stevens, Taylor Capital's chief financial officer, said the ideal Cole Taylor Bank customer is a company with $5 million to $50 million of annual revenue that is both a borrower and a depositor.
"Had we been able to fund our total earning asset growth with core deposits, our net interest margin would have been 3.61% for the period, and not 3.56%," he said in the conference call. "And virtually all of that margin would have dropped to the bottom line."
The taxable equivalent net interest margin dropped 23 basis points from a year earlier.
Still, not all of Taylor Capital's earnings troubles can be traced to deposits. The company more than doubled its loan-loss provision, to $2.1 million, because of problems with loans to a commercial real estate developer. Noninterest income plunged 44%, to $3.3 million, because of lower service charges, loan syndication fees, and derivative income.
Troy L. Ward, an analyst with A.G. Edwards & Sons Inc. in St. Louis, said the credit quality problems can be solved easily, but the core deposit issues, which are more important, would take more time to resolve.
After listening to the two executives' comments on the conference call, Mr. Ward said he is not optimistic about the company's reaching its commercial customer goal.
"I didn't hear anything that made me think the mousetrap had improved," he said.
Mr. Reevey said he expects Taylor Capital's deposit-gathering problems to continue, because of competition.
"We could continue to have a bloodbath in Chicago," he said. "Chicago is a market where banks want to be, especially if you are a small-business lender, because of the number of small businesses in the market." (In the conference call, Mr. Taylor said there are about 8,500 companies in Chicago with revenue of $5 million to $50 million a year.)
John J. Rowan, an analyst with Sidoti & Co. LLC in New York, said Taylor Capital has the products and services it needs to be competitive but has not gotten enough interest in them yet.
"They have the cash management. They know the depositor they are going after. It is not someone who needs the convenience of the 24-hour ATM. It is someone that needs a certain kind of service. They haven't been able to turn that into core deposit growth," he said.
