Fitch Downgrades Taylor Capital Group; Rating Watch Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the following long-term Issuer Default Ratings (IDRs) and Individual Ratings on Taylor Capital Group (TAYC) and Cole Taylor Bank:

Taylor Capital Group, Inc.

--Long-term IDR to 'BB-' from 'BB'

--Individual to 'D' from 'C/D';

Cole Taylor Bank

--Long-term IDR to 'BB' from 'BB+';

--Individual to 'C/D' from 'C';

In addition, Fitch has placed the long-term IDR, individual ratings, and long-term deposit rating on Negative Rating Watch. (See complete list of all ratings at the end of this release.)

Fitch has downgraded the ratings of TAYC and its subsidiaries due to continued deterioration in the bank's loan portfolio, most notably in the residential construction book. Nonperforming assets (NPAs) now total 6.5% of loans and foreclosed real estate, and TAYC recorded approximately $40 million in net charge-offs (NCOs) during the quarter. The higher credit costs, combined with a $47 million non-cash charge to establish a valuation reserve against the company's deferred tax asset (DTA), produced a substantial loss for the quarter.

Fitch has placed ratings for TAYC and its primary subsidiaries on Rating Watch Negative. In evaluating TAYC's ratings going forward, Fitch will be closely monitoring the following: nonperforming levels (particularly in the residential construction & land development portfolio), seasoning of the commercial and industrial (C&I) book, and access to additional capital. Negative rating actions would likely result if there is no evidence of a slowdown in the inflow of problem assets and no improvement with regard to the severity of loss in the residential builder portfolio. TAYC has booked significant C&I loan growth in 2008. Accordingly, Fitch will monitor the C&I portfolio closely to ensure credit weakness does not spread to this portfolio, which is particularly vulnerable in an economic downturn. Finally, if TAYC is unsuccessful in raising additional capital, this will also place pressure on TAYC's ratings.

TAYC was successful in completing its September 2008 capital raise, which included the issuance of $60 million of preferred stock and $60 million of bank level subordinated debt. However, the third quarter's elevated level of provision expenses and DTA charge eroded much of the capital contribution, and Tier 1 risk-based capital was down approximately 100 basis points (bps) at Sept. 30, 2008 as compared to the prior quarter. TAYC indicated that it has applied to the Capital Purchase Program, in which TAYC could potentially issue up to $105 million in preferred stock.

TAYC retained a portion of the proceeds from the September 2008 preferred stock issuance at the parent to provide additional liquidity. Despite the additional funds at the parent, liquidity at the parent level remains pressured given the bank's limited ability to upstream dividends to TAYC. Fitch also notes an increasing reliance on wholesale funding at Cole Taylor Bank, especially out-of-market deposits, to fund its C&I loan growth.

Fitch notes that TAYC has materially strengthened its senior management team and credit risk management staff, including loan review and special assets administration. In addition, TAYC management is making efforts to de-emphasize residential construction lending in favor of commercial and industrial lending. Although this initiative will help to diversify TAYC's loan portfolio over the long term, Fitch will monitor this loan growth in terms of the additional pressure it may place on reserves, capital, and funding. Due to substantial pressures remaining in the sectors that TAYC operates in, Fitch will monitor loan performance closely.

Fitch has downgraded the following ratings and placed them on Rating Watch Negative:

Cole Taylor Bank

--Long-term deposits to 'BB+' from 'BBB-';

--Short-term deposits to 'B' from 'F3'.

TAYC Capital Trust I

--Preferred stock to 'B' from 'B+'.

Fitch affirms the following:

Taylor Capital Group, Inc.

Cole Taylor Bank

--Short-term IDR 'B';

--Support Rating '5';

--Support Floor 'NF'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.