TAYLOR CAPITAL GROUP INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

Commission File No. 0-50034

TAYLOR CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

36-4108550

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

9550 West Higgins Road

Rosemont, IL 60018

(Address, including zip code, of principal executive offices)

(847) 653-7978

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate the number of outstanding shares of each of the issuer’s classes of common stock, as of the latest practicable date: At November 2, 2004, there were 9,589,275 shares of Common Stock, $0.01 par value, outstanding.

TAYLOR CAPITAL GROUP, INC.

INDEX


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets (unaudited) - September 30, 2004 and December 31, 2003	1
	Consolidated Statements of Income (unaudited) - For the three and nine months ended September 30, 2004 and 2003	2
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) - For the nine months ended September 30, 2004 and 2003	3
	Consolidated Statements of Cash Flows (unaudited) - For the nine months ended September 30, 2004 and 2003	4
	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	43

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Submission of Matters to a Vote of Security Holders	44

Item 5.	Other Information	44

Item 6.	Exhibits	44

	Signatures	47

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share and per share data)


	September 30, 2004			December 31, 2003
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	67,878		$	53,254
Short-term investments		3,049			3,550
Federal funds sold		20,500			31,700

Total cash and cash equivalents		91,427			88,504
Investment securities:
Available-for-sale, at fair value		553,659			487,777
Held-to-maturity, at amortized cost (fair value of $275 and $564 at September 30, 2004 and December 31, 2003, respectively)		275			525
Loans, net of allowance for loan losses of $38,204 and $34,356 at September 30, 2004 and December 31, 2003, respectively		2,083,637			1,927,652
Premises, leasehold improvements and equipment, net		17,210			20,548
Investments in Federal Home Loan Bank and Federal Reserve Bank stock, at cost		12,404			12,058
Other real estate and repossessed assets, net		1,563			164
Goodwill		23,354			23,354

Other assets		48,980			43,074

Total assets	$	2,832,509		$	2,603,656


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	480,259		$	445,193
Interest-bearing		1,768,514			1,567,891

Total deposits		2,248,773			2,013,084
Short-term borrowings		206,912			219,108
Accrued interest, taxes and other liabilities		44,606			39,479
Notes payable and FHLB advances		95,500			110,500
Junior subordinated debentures		87,638			45,000

Total liabilities		2,683,429			2,427,171

Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, Series A 9% noncumulative perpetual, 1,530,000 shares issued and outstanding at December 31, 2003, $25 stated and redemption value		—			38,250
Common stock, $.01 par value; 25,000,000 shares authorized; 9,895,922 and 9,809,731 shares issued at September 30, 2004 and December 31, 2003, respectively; 9,572,915 and 9,486,724 shares outstanding at September 30, 2004 and December 31, 2003, respectively		99			98
Surplus		145,662			143,918
Unearned compensation - stock grants		(885	)		(1,138	)
Retained earnings (deficit)		9,579			(2,106	)
Accumulated other comprehensive income		1,682			4,520
Treasury stock, at cost, 323,007 shares at September 30, 2004 and December 31, 2003		(7,057	)		(7,057	)

Total stockholders’ equity		149,080			176,485

Total liabilities and stockholders’ equity	$	2,832,509		$	2,603,656

See accompanying notes to consolidated financial statements

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2004		2003			2004			2003
Interest income:
Interest and fees on loans	$	29,116	$	28,752		$	83,080		$	85,676
Interest and dividends on investment securities:
Taxable		5,284		5,102			15,639			16,458
Tax-exempt		494		571			1,511			1,754
Interest on cash equivalents		78		151			121			348

Total interest income		34,972		34,576			100,351			104,236

Interest expense:
Deposits		7,267		7,021			20,209			22,101
Short-term borrowings		520		433			1,541			1,695
Notes payable and FHLB advances		1,097		1,148			3,269			3,472
Junior subordinated debentures		1,749		1,254			4,398			3,763

Total interest expense		10,633		9,856			29,417			31,031

Net interest income		24,339		24,720			70,934			73,205
Provision for loan losses		2,750		2,700			8,250			6,533

Net interest income after provision for loan losses		21,589		22,020			62,684			66,672

Noninterest income:
Service charges		2,736		3,129			8,367			9,412
Trust and investment management fees		1,322		1,319			3,893			3,502
Gain on sale of investment securities, net		345		—			345			—
Other noninterest income		222		142			999			1,188

Total noninterest income		4,625		4,590			13,604			14,102

Noninterest expense:
Salaries and employee benefits		8,834		10,205			29,159			31,642
Occupancy of premises		1,817		1,912			5,678			5,268
Furniture and equipment		943		895			2,997			2,467
Legal fees, net		423		569			1,426			292
Advertising and public relations		104		484			1,271			2,566
Corporate insurance		631		782			1,903			2,343
Computer processing		517		494			1,429			1,507
Other noninterest expense		3,041		3,664			9,646			10,593

Total noninterest expense		16,310		19,005			53,509			56,678

Income before income taxes		9,904		7,605			22,779			24,096
Income taxes		3,072		2,013			7,504			7,840

Net income	$	6,832	$	5,592		$	15,275		$	16,256

Preferred dividend requirements		—		(861	)		(1,875	)		(2,582	)

Net income applicable to common stockholders	$	6,832	$	4,731		$	13,400		$	13,674

Basic earnings per common share	$	0.72	$	0.50		$	1.41		$	1.45
Diluted earnings per common share		0.71		0.50			1.40			1.44

See accompanying notes to consolidated financial statements

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except per share data)


	Series A 9% Noncumulative Perpetual Preferred Stock			Common Stock		Surplus			Unearned Compensation - Stock Grants			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income/(Loss)			Treasury Stock			Total
Balance at December 31, 2003	$	38,250		$	98	$	143,918		$	(1,138	)	$	(2,106	)	$	4,520		$	(7,057	)	$	176,485
Redemption of preferred stock		(38,250	)		—		—			—			—			—			—			(38,250	)
Issuance of stock grants		—			—		150			(150	)		—			—			—			—
Forfeiture of stock grants		—			—		(68	)		19			—			—			—			(49	)
Amortization of stock grants		—			—		—			384			—			—			—			384
Exercise of stock options		—			1		1,488			—			—			—			—			1,489
Tax benefit on stock options exercised and stock awards		—			—		174			—			—			—			—			174
Comprehensive income:
Net income		—			—		—			—			15,275			—			—			15,275
Change in unrealized gain on available-for-sale investment securities, net of income taxes		—			—		—			—			—			(2,627	)		—			(2,627	)
Change in unrealized loss from cash flow hedging instruments, net of income taxes		—			—		—			—			—			(82	)		—			(82	)
Changes in deferred gain from termination of cash flow hedging instruments, net of income taxes		—			—		—			—			—			(129	)		—			(129	)

Total comprehensive income																						12,437

Dividends:
Preferred — $1.225 per share		—			—		—			—			(1,875	)		—			—			(1,875	)
Common — $0.18 per share		—			—		—			—			(1,715	)		—			—			(1,715	)

Balance at September 30, 2004	$	—		$	99	$	145,662		$	(885	)	$	9,579		$	1,682		$	(7,057	)	$	149,080

Balance at December 31, 2002	$	38,250		$	97	$	142,008		$	(1,088	)	$	(15,140	)	$	11,667		$	(7,057	)	$	168,737
Issuance of stock grants		—			—		321			(321	)		—			—			—			—
Forfeiture of stock grants		—			—		(129	)		60			—			—			—			(69	)
Amortization of stock grants		—			—		—			363			—			—			—			363
Exercise of stock options		—			1		984			—			—			—			—			985
Tax benefit on stock options exercised and stock awards		—			—		73			—			—			—			—			73
Comprehensive income:
Net income		—			—		—			—			16,256			—			—			16,256
Change in unrealized gain on available-for-sale investment securities, net of income taxes		—			—		—			—			—			(6,039	)		—			(6,039	)
Changes in net unrealized gain from cash flow hedging instruments, net of income taxes		—			—		—			—			—			1,966			—			1,966

Total comprehensive income																						12,183

Dividends:
Preferred — $1.6875 per share		—			—		—			—			(2,582	)		—			—			(2,582	)
Common — $0.18 per share		—			—		—			—			(1,701	)		—			—			(1,701	)

Balance at September 30, 2003	$	38,250		$	98	$	143,257		$	(986	)	$	(3,167	)	$	7,594		$	(7,057	)	$	177,989

See accompanying notes to consolidated financial statements

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)


	For the Nine Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	15,275		$	16,256
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and discounts, net		1,202			647
Gain on sale available-for-sale securities, net		(345	)		—
Deferred loan fee amortization		(2,317	)		(1,560	)
Provision for loan losses		8,250			6,533
Depreciation and amortization		2,576			3,006
Deferred income taxes		(877	)		(3,020	)
(Gain) loss on sales of other real estate		10			(79	)
Provision for other real estate		71			—
Gain on sale of credit card loans		—			(140	)
Other, net		423			(84	)
Changes in other assets and liabilities:
Accrued interest receivable		(2,136	)		(660	)
Other assets		1,019			1,727
Accrued interest, taxes and other liabilities		3,155			5,335

Net cash provided by operating activities		26,306			27,961

Cash flows from investing activities:
Purchases of available-for-sale securities		(175,700	)		(212,117	)
Proceeds from principal payments and maturities of available-for-sale securities		51,622			205,412
Proceeds from principal payments and maturities of held-to-maturity securities		250			300
Proceeds from sale available-for-sale securities		53,298			—
Net increase in loans		(163,519	)		(18,256	)
Sale of credit card loans		—			1,259
Investment in TAYC Capital Trust II		(1,239	)		—
Additions to premises, leasehold improvements and equipment		(1,080	)		(5,066	)
Proceeds from the sale of premises, leasehold improvements and equipment		2,099			—
Proceeds from sales of other real estate		121			1,069

Net cash used in investing activities		(234,148	)		(27,399	)

Cash flows from financing activities:
Net increase in deposits		237,459			61,700
Net decrease in short-term borrowings		(12,196	)		(16,715	)
Proceeds from notes payable and FHLB advances		—			15,000
Repayments of notes payable and FHLB advances		(15,000	)		(15,000	)
Proceeds from issuance of junior subordinated debentures		41,238			—
Redemption of preferred securities		(38,250	)		—
Trust preferred issuance costs		(390	)		—
Proceeds from exercise of employee stock options		1,489			985
Dividends paid		(3,585	)		(4,281	)

Net cash provided by financing activities		210,765			41,689

Net increase in cash and cash equivalents		2,923			42,251
Cash and cash equivalents, beginning of period		88,504			92,909

Cash and cash equivalents, end of period	$	91,427		$	135,160

Consolidated Statements of Cash Flows continued on next page

See accompanying notes to consolidated financial statements

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS – (unaudited) (Continued)

(in thousands)


	For the Nine Months Ended September 30,
	2004			2003
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	27,711		$	31,533
Income taxes		6,709			3,500
Supplemental disclosures of noncash investing and financing activities:
Other comprehensive loss, net of tax	$	(2,838	)	$	(4,073	)
Tax benefit on stock options exercised and stock awards		174			73

See accompanying notes to consolidated financial statements

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation:

These consolidated financial statements contain unaudited information as of September 30, 2004 and for the three and nine month periods ended September 30, 2004 and 2003. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America are not included herein. In Management’s opinion, these unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information when read in conjunction with the Company’s audited consolidated financial statements and the related notes. The income statement data for the three and nine month period ended September 30, 2004 are not necessarily indicative of the results that the Company may achieve for the full year. Amounts in the prior years’ consolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation.

Redemption of Series A Preferred Stock

On June 17, 2004, TAYC Capital Trust II, a wholly owned subsidiary of Taylor Capital Group, Inc., issued $40.0 million of trust preferred securities in a private placement. The trust preferred securities were sold under an exemption from registration under the Securities Act of 1933, as amended, and have not been registered under the Securities Act or any state securities laws. The proceeds from the issuance of the trust preferred securities by TAYC Capital Trust II were invested in junior subordinated debentures issued by Taylor Capital Group. Taylor Capital Group then used the proceeds from the junior subordinated debentures to redeem all of its outstanding shares of Series A 9% noncumulative perpetual preferred stock on July 16, 2004. The redemption price was the stated liquidation value of the Series A preferred stock of $25.00 per share, totaling $38.25 million, plus $153,000 of accrued and unpaid dividends since the last dividend distribution date. The remaining proceeds from the issuance of the junior subordinated debentures after issuance costs and redemption of the Series A preferred stock were used for general corporate purposes.

New Accounting Pronouncements

Beginning with the first quarter of 2004, the Financial Accounting Standards Board, or FASB, Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) guidance required the Company to deconsolidate TAYC Capital Trust I, a wholly owned subsidiary formed in October 2002 for the purpose of issuing trust preferred securities. Not consolidating TAYC Capital Trust I did not have a material impact on the Company’s reported results of operations or financial condition. Before January 1, 2004, the Company consolidated TAYC Capital Trust I and reported the $45.0 million trust preferred securities on the Consolidated Balance Sheets under the caption “guaranteed preferred beneficial interest in the Company’s junior subordinated debentures”. The cash distributions on the trust preferred securities of TAYC Capital Trust I were reported in interest expense, under a similar caption on the Consolidated Statements of Income. On January 1, 2004, the Company deconsolidated TAYC Capital Trust I. In addition, the Company does not consolidate TAYC Capital Trust II, which

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

was formed in June 2004. At September 30, 2004 a liability is reported for the total balance of the junior subordinated debentures issued to TAYC Capital Trust I and TAYC Capital Trust II (the “Trusts”), which corresponds to the sum of the trust preferred securities and the common equity of the Trusts. At September 30, 2004, the Company’s equity investments in the Trusts are reported in other assets on the Consolidated Balance Sheet. Interest expense on the junior subordinated debentures is reported in interest expense in the consolidated statements of income.

2. Investment Securities:

The amortized cost and estimated fair values of investment securities at September 30, 2004 and December 31, 2003 were as follows:


	September 30, 2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Available-for-sale:
U.S. government agency securities	$	204,186	$	546	$	(255	)	$	204,477
Collateralized mortgage obligations		124,308		303		(1,003	)		123,608
Mortgage-backed securities		180,467		1,000		(1,330	)		180,137
State and municipal obligations		43,080		2,357		—			45,437

Total available-for-sale		552,041		4,206		(2,588	)		553,659

Held-to-maturity:
Other debt securities		275		—		—			275

Total held-to-maturity		275		—		—			275

Total	$	552,316	$	4,206	$	(2,588	)	$	553,934


	December 31, 2003
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Available-for-sale:
U.S. government agency securities	$	176,888	$	3,355	$	—		$	180,243
Collateralized mortgage obligations		116,053		1,026		(779	)		116,300
Mortgage-backed securities		143,259		1,461		(1,648	)		143,072
State and municipal obligations		45,918		2,244		—			48,162

Total available-for-sale		482,118		8,086		(2,427	)		487,777

Held-to-maturity:
Other debt securities		525		39		—			564

Total held-to-maturity		525		39		—			564

Total	$	482,643	$	8,125	$	(2,427	)	$	488,341

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

3. Loans:

Loans classified by type at September 30, 2004 and December 31, 2003 were as follows:


	Sept. 30, 2004			Dec. 31, 2003
	(in thousands)
Commercial and industrial	$	603,406		$	589,987
Commercial real estate secured		722,840			642,364
Real estate-construction		493,859			364,294
Residential real estate mortgages		63,796			86,710
Home equity loans and lines of credit		217,635			253,006
Consumer		19,559			24,636
Other loans		964			1,330

Gross loans		2,122,059			1,962,327
Less: Unearned discount		(218	)		(319	)

Total loans		2,121,841			1,962,008
Less: Allowance for loan losses		(38,204	)		(34,356	)

Loans, net	$	2,083,637		$	1,927,652

Nonaccrual and impaired loans at September 30, 2004 were $18.6 million and $24.6 million, respectively, as compared to $18.1 million and $24.3 million at December 31, 2003, respectively.

4. Goodwill and Intangible Assets:

The Company has $23.4 million of goodwill, created from the 1997 acquisition of the Bank, which beginning on January 1, 2002 was no longer subject to amortization. The goodwill was tested for impairment as of July 1, 2004, and the Company determined that no impairment charge was necessary at that time. No additions or disposals to goodwill were recorded during the first nine months of 2004.

The Company also has $57,000 of other intangible assets subject to amortization that relate to the purchase of lines of trust business, which is included in other assets on the Consolidated Balance Sheets. No additions or disposals to intangible assets were recorded during the first nine months of 2004.

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

5. Interest-Bearing Deposits:

Interest-bearing deposits at September 30, 2004 and December 31, 2003 were as follows:


	Sept. 30, 2004		Dec. 31, 2003
	(in thousands)
NOW accounts	$	122,923	$	136,119
Savings accounts		87,639		90,177
Money market deposits		458,083		425,449
Time deposits:
Certificates of deposit		528,208		498,189
Out-of-local-market certificates of deposit		101,583		76,475
Brokered certificates of deposit		405,696		285,689
Public time deposits		64,382		55,793

Total time deposits		1,099,869		916,146

Total	$	1,768,514	$	1,567,891

At September 30, 2004 and December 31, 2003, time deposits in amounts $100,000 or more totaled $327.8 million and $282.0 million, respectively.

6. Short-Term Borrowings:

Short-term borrowings at September 30, 2004 and December 31, 2003 consisted of the following:


	Sept. 30, 2004		Dec. 31, 2003
	(in thousands)
Securities sold under agreements to repurchase	$	181,518	$	169,890
Federal funds purchased		25,269		40,613
U.S. Treasury tax and loan note option		125		8,605

Total	$	206,912	$	219,108

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

7. Notes Payable and FHLB Advances:

Notes payable and FHLB advances at September 30, 2004 and December 31, 2003 consisted of the following:


	Sept. 30, 2004		Dec. 31, 2003
	(in thousands)
Taylor Capital Group, Inc.:
Subordinated Debt – interest, at the Company’s election, at prime rate plus 2.50% or LIBOR plus 2.75%; interest rates at September 30, 2004 and December 31, 2003 were 4.52% and 3.92%, respectively; matures on November 27, 2009	$	10,000	$	10,000
Term Loan – interest, at the Company’s election, at the prime rate or LIBOR plus 1.15%, with a minimum interest rate of 3.50%; interest rate was 3.50% at both September 30, 2004 and December 31, 2003; matures on November 27, 2009		500		500
Revolving Credit Facility – $11.5 million maximum available; interest, at the Company’s election, at the prime rate or LIBOR plus 1.15%, with a minimum interest rate of 3.50%; matures November 27, 2004		—		—

Total notes payable		10,500		10,500
Cole Taylor Bank:
FHLB advance – 4.30%, due January 8, 2011, callable after January 8, 2002		25,000		25,000
FHLB advance – 4.55%, due January 8, 2011, callable after January 8, 2003		25,000		25,000
FHLB advance – 4.83%, due February 1, 2011, callable after January 8, 2004		25,000		25,000
FHLB advance – 3.94%, due November 23, 2004		10,000		10,000
FHLB advance – 1.50%, due January 29, 2004		—		15,000

Total FHLB advances		85,000		100,000

Total notes payable and FHLB advances	$	95,500	$	110,500

The notes payable require compliance with certain defined financial covenants. As of September 30, 2004, the Company is in compliance with these covenants.

The callable Federal Home Loan Bank, or FHLB, advances are callable at par at the option of the FHLB. Retirement prior to maturity by the Company is subject to prepayment penalties.

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

8. Junior Subordinated Debentures:

The following table summarizes the amount of junior subordinated debentures issued by the Company to each Trust as of September 30, 2004:


Trust Name	Issuance Date	Amount of Junior Subordinated Debentures		Amount of Trust Preferred Securities Issued by Trust		Annual Rate		Maturity Date
TAYC Capital Trust I	Oct. 2002	$	46,400	$	45,000	9.75	%	Oct. 21, 2032
TAYC Capital Trust II	June 2004		41,238		40,000	3-mo LIBOR + 2.68	%	June 17, 2034

		$	87,638	$	85,000

In June 2004, the Company formed TAYC Capital Trust II, a wholly owned subsidiary and a Delaware statutory trust. On June 17, 2004, TAYC Capital Trust II issued $40.0 million of floating rate trust preferred securities and invested the proceeds, along with $1.2 million received from the purchase of its common equity securities, in $41.2 million of floating rate junior subordinated debentures of the Company. The interest rate on both the trust preferred securities and the junior subordinated debentures equals the three-month LIBOR plus 2.68% and re-prices quarterly on the 17^th of September, December, March and June. The interest rate on both was 4.57% at September 30, 2004. The rates are payable and adjust quarterly. The Company may redeem all or part of the debentures at any time on or after June 17, 2009, subject to approval by the Federal Reserve Bank, at a redemption price equal to 100% of the aggregate liquidation amount of the debentures plus any accumulated and unpaid distributions thereon to the date of redemption. The trust preferred securities are subject to mandatory redemption when the junior subordinated debentures are paid at maturity in 2034 or upon any earlier redemption of the debentures. The trust preferred securities may also be redeemed at any time in the event of unfavorable changes in certain laws or regulations, provided that any redemption prior to June 17, 2009 would require the payment of a prepayment penalty.

In October 2002, the Company formed TAYC Capital Trust I, a wholly owned subsidiary and a Delaware statutory trust to issue $45.0 million of trust preferred securities. Proceeds from the sale of these trust preferred securities, along with $1.4 million received from the purchase of its common equity securities, were invested by TAYC Capital Trust I in $46.4 million of 9.75% junior subordinated debentures of the Company. Interest on both the trust preferred securities and junior subordinated debentures are payable quarterly at a rate of 9.75% per year. The Company may redeem all or part of these debentures at any time on or after October 21, 2007, subject to approval by the Federal Reserve Bank, at a redemption price equal to 100% of the aggregate liquidation amount of the debentures plus any accumulated and unpaid distributions thereon to the date of redemption. The trust preferred securities are subject to mandatory redemption when the junior subordinated debentures are paid at maturity in 2032 or upon any earlier redemption of the debentures. The trust preferred securities may also be redeemed at any time in the event of unfavorable changes in certain laws or regulations.

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

The Company may defer the payment of interest on each of the junior subordinated debentures at any time for a period not exceeding 20 consecutive quarters, provided that the deferral period does not extend past the stated maturity. During any such deferral period, distributions on the corresponding trust preferred securities will also be deferred and the Company’s ability to pay dividends on its common shares will be restricted. Issuance costs from each issuance of the trust preferred securities, consisting primarily of underwriting discounts and professional fees, were capitalized and are being amortized over five years, the original call protection period, to interest expense using the straight-line method.

9. Other Comprehensive Income/(Loss):

The following table presents other comprehensive income (loss) for the periods indicated:


	Before Tax Amount			Tax Effect			Net of Tax
	(in thousands)
For the Nine Months Ended September 30, 2004:
Unrealized gain/(loss) from securities:
Change in unrealized gain/(loss) on available-for-sale securities	$	(3,696	)	$	1,294		$	(2,402	)
Less: reclassification adjustment for gains included in net income		(345	)		120			(225	)

Change in unrealized gain/(loss) on available-for-sale securities, net of reclassification adjustment		(4,041	)		1,414			(2,627	)
Net unrealized loss from cash flow hedging instruments		(126	)		44			(82	)
Change in deferred gain from termination of cash flow hedging instruments		(199	)		70			(129	)

Other comprehensive loss	$	(4,366	)	$	1,528		$	(2,838	)

For the Nine Months Ended September 30, 2003:
Change in unrealized gain/(loss) on available-for-sale securities	$	(9,289	)	$	3,250		$	(6,039	)
Changes in net unrealized gain from cash flow hedging instruments		3,025			(1,059	)		1,966

Other comprehensive loss	$	(6,264	)	$	2,191		$	(4,073	)

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

10. Earnings per Share:

The following table sets forth the computation of basic and diluted earnings per common share. Stock options are the only common stock equivalents. For the quarterly and nine month periods ended September 30, 2004, stock options outstanding to purchase 214,600 common shares were not included in the computation of diluted earnings per share because the effect would have been antidilutive. In comparison, for the nine month period ended September 30, 2003, stock options outstanding to purchase 122,970 common shares were not included in the computation of diluted earnings per share because the effect would have been antidilutive. All stock options were included in the computation of diluted earnings per share for the third quarter of 2003.


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2004		2003			2004			2003
	(in thousands, except share and per share amounts)
Net income	$	6,832	$	5,592		$	15,275		$	16,256
Less preferred dividend requirements		—		(861	)		(1,875	)		(2,582	)

Net income available to common stockholders	$	6,832	$	4,731		$	13,400		$	13,674

Weighted average common shares outstanding		9,554,121		9,454,466			9,515,317			9,442,362
Dilutive effect of stock options		65,419		90,922			85,143			63,876

Diluted weighted average common shares outstanding		9,619,540		9,545,388			9,600,460			9,506,238

Basic earnings per common share	$	0.72	$	0.50		$	1.41		$	1.45
Diluted earnings per common share		0.71		0.50			1.40			1.44

11. Stock-based Compensation:

The Company accounts for the stock-based compensation plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” For the stock option program, no compensation cost is recognized in connection with the granting of stock options with an exercise price equal to the fair market value of the stock on the date of the grant. For the restricted stock program, the Company uses the fixed method of accounting and records compensation expense, over the vesting period of the grant, based upon the fair market value of the stock at the date of grant. In accordance with the disclosure requirements of Statement of Financial Accounting Standard, or SFAS, No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An amendment of FASB Statement No. 123”, the following table provides the pro forma effect on net income and earnings per share if the fair value method of accounting for stock-based compensation had been used for all awards:

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousand, except per share amounts)	2004			2003			2004			2003
Net income as reported	$	6,832		$	5,592		$	15,275		$	16,256
Add: Stock-based compensation, net of tax, included in the determination of net income, as reported		77			30			201			178
Deduct: Stock-based compensation, net of tax, that would have been reported if the fair value based method had been applied to all awards		(166	)		(142	)		(575	)		(585	)

Pro forma net income	$	6,743		$	5,480		$	14,901		$	15,849
Less preferred dividend requirements		—			(861	)		(1,875	)		(2,582	)

Pro forma net income available to common stockholders	$	6,743		$	4,619		$	13,026		$	13,267

Basic earnings per common share
As reported	$	0.72		$	0.50		$	1.41		$	1.45
Pro forma		0.71			0.49			1.37			1.40
Diluted earnings per common share
As reported	$	0.71		$	0.50		$	1.40		$	1.44
Pro forma		0.70			0.48			1.36			1.40

12. Derivative Financial Instruments:

The Company uses derivative financial instruments to assist in interest rate risk management. At both September 30, 2004 and December 31, 2003, the only derivative financial instruments outstanding were interest rate exchange agreements. The following table sets forth the activity in the notional amounts of derivative financial instruments during the first nine months of 2004.


	Fair Value Hedge			Cash Flow Hedge			Total
	(in thousands)
Balance at December 31, 2003	$	50,000		$	—		$	50,000
Additions		130,000			50,000			180,000
Terminations/calls		(25,000	)		—			(25,000	)
Maturities		—			—			—

Balance at September 30, 2004	$	155,000		$	50,000		$	205,000

Fair value at Sept. 30, 2004	$	(1,721	)	$	(126	)	$	(1,847	)

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)

Below is summary information regarding the derivative financial instruments outstanding at September 30, 2004.


	Notional Amount (in thousands)		Weighted Averages					Hedged Item
	Notional Amount (in thousands)		Receive Rate		Pay Rate		Life in Years	Hedged Item
Fair Value Hedge	$	155,000	3.28	%	1.70	%	5.7	Brokered certificates of deposits
Cash Flow Hedge		50,000	6.04	%	4.75	%	2.9	Variable rate commercial loans

Total	$	205,000	3.96	%	2.44	%	5.0

During the first nine months of 2004, interest rate exchange contracts, that were used to hedge brokered certificates of deposits, with a notional amount totaling $25.0 million were called by the counterparties. Because of these calls, the Company exercised its right to call the related hedged brokered certificates of deposit.

During the third quarter of 2004, the Company entered into an interest rate exchange contract, with a notional amount of $50 million, to hedge the variability in cash flows on $50.0 million of prime-based commercial loans. Under the terms of the interest rate exchange contract, the Company receives a fixed interest rate and pays a floating rate based upon the prime-lending rate. This contract is accounted for as a cash flow hedge and is expected to be highly effective, over the life of the swap, in hedging the variability of cash flows on prime-based loans due to movements in the prime-lending rate. The fair value of the interest rate swap is recorded as an asset or liability with the corresponding gain or loss recorded in other comprehensive income in stockholders’ equity, net of tax. The Company reviews the hedging relationship periodically for effectiveness, but expects any ineffective portion of the hedge to be immaterial.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a bank holding company headquartered in Rosemont, Illinois, a suburb of Chicago. We derive virtually all of our revenue from our subsidiary, Cole Taylor Bank. We provide a range of products and services to our commercial and consumer customers, and currently operate 11 banking facilities throughout the Chicago metropolitan area.

The following discussion and analysis presents our consolidated financial condition and results of operations as of and for the dates and periods indicated. This discussion should be read in conjunction with our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Form 10-Q and our December 31, 2003 Annual Report on Form 10-K which contain audited financial statements of Taylor Capital Group, Inc. as of December 31, 2003 and 2002 and for each of the years in the three-year period ended December 31, 2003.

OVERVIEW

We recorded net income applicable to common shareholders for the quarter ended September 30, 2004 of $6.8 million, or $0.71 per diluted common share, compared to $4.7 million, or $0.50 per diluted common share, for the same quarter during 2003. The increase in net income applicable to common shareholders was primarily due to lower noninterest expense and the redemption of the Series A preferred stock during the third quarter of 2004. During the first nine months of 2004, net income applicable to common shareholders was $13.4 million, or $1.40 per diluted share, compared to $13.7 million, or $1.44 per diluted share during the first nine months of 2003. For the year-to-date periods, a decline in net interest income and noninterest income and higher provisions for loan losses combined to produce the decrease. These decreases in income were partly offset by lower noninterest expense and the elimination of dividends on the Series A preferred stock that was redeemed July 16, 2004.

On June 17, 2004, TAYC Capital Trust II, our wholly owned subsidiary, issued $40.0 million of trust preferred securities in a private placement. TAYC Capital Trust II invested the proceeds, along with $1.2 million received from us for the purchase of its common equity securities, in $41.2 million of junior subordinated debentures issued by Taylor Capital Group. On July 16, 2004, we used the proceeds from this transaction to redeem all of our outstanding shares of Series A 9% noncumulative perpetual preferred stock. The redemption price was the stated liquidation value of $25.00 per share, which totaled $38.25 million, plus $153,000 of accrued and unpaid dividends since the last dividend distribution date. Our third quarter 2004 results reflect the benefit of refinancing the Series A preferred stock with the junior subordinated debentures. The lower interest rate and the tax deductibility of the interest on the junior subordinated debentures, as compared to the preferred stock dividends, resulted in after-tax savings of approximately $560,000 in the third quarter of 2004.

Total assets were $2.83 billion at September 30, 2004, an increase of $228.9 million, or 8.8%, over total assets at December 31, 2003. Total assets increased during the first nine months of 2004 as a result of commercial loan growth of $223.5 million, or 14.0%, as well as additions

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

to the investment securities portfolio. Total investment securities were $553.9 million at September 30, 2004, an increase of $65.6 million, or 13.4%, as compared to December 31, 2003. Stockholders’ equity was $149.8 million at September 30, 2004 compared to $176.5 million at December 31, 2003, a decrease of $27.4 million. Total stockholders’ equity declined during the first nine months of 2004 primarily due to the redemption of the $38.25 million of Series A preferred stock on July 16, 2004. Common stockholders’ equity, which excludes the $38.25 million of preferred stock, increased by $10.8 million during the first nine months of 2004 primarily due to net income of $15.3 million during the first nine months of 2004, net of $3.6 million of dividends.

Application of Critical Accounting Policies

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and general reporting practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Certain accounting policies require us to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities. We consider these policies to be critical accounting policies. The judgment and assumptions made by us are based upon historical experience or other factors that we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from these judgments and estimates which could have a material affect on our financial condition and results of operations.

The following accounting policies materially affect our reported earnings and financial condition and require significant judgments and estimates.

Allowance for Loan Losses

We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We maintain the allowance for loan losses at a level considered adequate to absorb probable losses inherent in our portfolio as of the balance sheet date. In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors including historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and criticized loans. In addition, we use information about specific borrower situations, including their financial position, work-out plans and estimated collateral values under various liquidation scenarios to estimate the risk and amount of loss for those borrowers. Finally, we also consider many qualitative factors including general and economic business conditions, duration of the current business cycle, the impact of competition on our underwriting terms, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. The significant uncertainties

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

surrounding our portfolio of borrowers’ abilities to successfully execute their business models through changing economic environments and competitive challenges as well as management and other changes greatly complicate the estimate of the risk of loss and amount of loss on any loan. Because of the degree of uncertainty and susceptibility of these factors to change, actual losses may vary from current estimates.

As a business bank, our loan portfolio is comprised primarily of commercial loans to businesses, which are inherently larger in amount than loans to individual consumers. The individually larger commercial loans can cause greater volatility in reported credit quality performance measures, such as total impaired or nonperforming loans. Our current credit risk rating and loss estimate with respect to a single material loan can have a material impact on our reported impaired loans and related loss exposure estimates. We review our estimates on a quarterly basis and, as we identify changes in estimates, the allowance for loan losses is adjusted through the recording of a provision for loan losses.

Goodwill Impairment

We have goodwill of $23.4 million that we recognized in connection with our 1997 acquisition of the Bank. We test this goodwill annually for impairment, or whenever events or significant changes in circumstances indicated that the carry value may not be recoverable. Most recently, we tested goodwill for impairment as of July 1, 2004 and no impairment charge was necessary. The evaluation for impairment includes comparing the estimated fair market value of the Bank to our carrying value for the Bank. Because there is not a readily observable market value for the Bank, the estimation of the fair market value is based on the market price of our common stock adjusted for the preferred stock, the junior subordinated debentures, and the notes payable at the holding company.

Income Taxes

At times, we apply different tax treatment for selected transactions for tax return purposes than for income tax financial reporting purposes. The different positions result from the varying application of statutes, rules, regulations, and interpretations, and our accruals for income taxes include reserves for these differences in position. Our estimate of the value of these reserves contains assumptions based upon our past experience and judgments about potential actions by taxing authorities, and we believe that the level of these reserves is reasonable. A reserve is utilized or reversed once the applicable statute of limitations has expired or the matter is otherwise resolved. It is likely that the ultimate resolution of these matters may be greater or less than the amounts we have accrued.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the difference between total interest income and fees earned on interest-earning assets, including investment securities and loans, and total interest expense paid on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is our principal source of earnings. The amount of net interest income is affected by changes in the volume and mix of earning assets and interest-bearing liabilities, the level of rates earned or paid on those assets and liabilities and the amount of loan fees earned.

Three Months Ended September 30, 2004 as Compared to the Three Months Ended September 30, 2003.

Net interest income was $24.3 million during the third quarter of 2004 compared to $24.7 million during the same quarter in 2003, a decrease of $381,000 or 1.5%. With an adjustment for tax-exempt income, our consolidated net interest income for the third quarter of 2004 was $24.6 million as compared to $25.1 million during the same quarter a year ago. Net interest income has declined because of compression in our net interest margin, despite an increase in average interest-earning assets.

The net interest margin, which is determined by dividing taxable equivalent net interest income by average interest-earning assets, was 3.70% during the third quarter of 2004 compared to 4.04% during the same quarter a year ago. The yield on our interest-earning assets declined 32 basis points from 5.62% during the third quarter of 2003 to 5.30% during the third quarter of 2004. Our cost of interest-bearing liabilities increased 2 basis points from 1.98% during the third quarter of 2003 to 2.00% during the third quarter of 2004.

The yield earned on loans was 5.63% during the third quarter of 2004, or 39 basis points lower than the yield of 6.02% earned on loans during the third quarter a year ago. The lower loan yield in 2004 was primarily due to lower loan fees in 2004. The recognition of loan fees can be uneven between periods as a result of fees associated with payoffs and prepayments or other special fees not related to loan origination. Such fees received on loans and immediately recognized as interest income were $504,000 in the third quarter of 2004; a total of $1.2 million less than the $1.7 million recognized in the third quarter of 2003.

The yield on investment securities was 4.22% during the third quarter of 2004, or 48 basis points lower than the 4.70% yield during the third quarter of 2003. The decline in the investment yield occurred because the proceeds from repayment and maturity of higher yielding securities were reinvested in new securities at lower market interest rates.

The cost of interest-bearing liabilities was adversely impacted by the issuance of $41.2 million of junior subordinated debentures in June 2004, which increased interest expense by $460,000 and the cost of interest-bearing liabilities by four basis points.

Average interest-earning assets increased $183.1 million, or 7.4%, to $2.65 billion for the third quarter of 2004 compared to $2.47 billion for the same quarter in 2003. The increase in

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

both average loans and investment securities produced the increase. Average loans increased by $160.5 million, or 8.5%, to $2.06 billion for the third quarter of 2004 compared to $1.90 billion for the third quarter of 2003. Average commercial and commercial real estate loans increased by $261.3 million, or 17.6%, during the third quarter of 2004 as compared to the same quarter last year. This increase was partially offset by declines in residential real estate mortgages and home equity and consumer loans, as we continue to de-emphasize the origination of these consumer-oriented loans. Average investment securities increased $63.2 million, or 12.4% to $572.7 million for the third quarter of 2004 compared to $509.4 million for the third quarter of 2003.

The increase in loans and investment securities for the third quarter of 2004 was funded primarily with deposits. Brokered certificates of deposits increased $92.9 million, or 30.4%, to $398.4 million for the third quarter of 2004 as compared to $305.4 million during the same quarter a year ago. In addition, noninterest bearing demand deposits increased $47.2 million, or 11.7%, to $452.2 million and interest-bearing demand deposits increased $19.9 million, or 3.6% to $579.5 million. The increase in deposits was partially offset by a $26.5 million decrease in average short-term borrowings and FHLB advances from the third quarter of 2003 to the third quarter of 2004.

While the third quarter 2004 net interest margin declined in comparison to the third quarter 2003, the net interest margin increased by 4 basis points as compared to the second quarter of 2004. The net interest margin was 3.70% for the third quarter of 2004, compared to 3.66% for the second quarter. The gradual rise in the Prime rate over the third quarter of 2004, had a positive impact on our net interest margin. The loan and total interest-earning asset yields increased by 24 and 20 basis, respectively between the third and second quarters of 2004. The cost of interest-bearing liabilities was 2.00% for the third quarter of 2004, or 17 basis points higher than the second quarter of 2004. The third quarter of 2004 included the incremental interest expense of $460,000 arising from the $41.2 million of junior subordinated debentures issued in June 2004, which lowered the net interest margin by almost seven basis points in the third quarter.

Nine Months Ended September 30, 2004 as Compared to the Nine Months Ended September 30, 2003.

Net interest income was $70.9 million during the first nine months of 2004 compared to $73.2 million during the same period in 2003, a decrease of $2.3 million or 3.1%. With an adjustment for tax-exempt income, our consolidated net interest income for the first three quarters of 2004 was $71.9 million as compared to $74.3 million during the same period a year ago. Net interest income has declined because of compression in our net interest margin, despite an increase in average interest-earning assets.

The net interest margin was 3.70% during the first nine months of 2004 compared to 4.06% during the same period in 2003. On a year to date basis, our yield on earning assets declined more than the cost of interest-bearing liabilities. The yield on our interest-earning assets declined 54 basis points from 5.75% during the first nine months of 2003 to 5.21% during the same period in 2004. Over the same time period, the cost of our interest-bearing liabilities

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

declined 20 basis points from 2.10% during the nine month period ended September 30, 2003 to 1.90% during the first nine months of 2004.

The yield earned on loans declined 54 basis points to 5.51% during the year-to-date 2004 period as compared to 6.05% during the same period in 2003. In addition, the yield on the investment securities portfolio declined 80 basis points to 4.23% in 2004 from 5.03% in 2003. The payoffs and maturities of higher yielding assets, which were replaced with lower yielding loans and investment securities, produced lower yields. In addition, a decline in loan fees directly recorded into interest income during the first nine months of 2004 as compared to the same period in 2003 also contributed to the lower earning asset yield.

An increase in average interest-earning assets partly offset the compression in the net interest margin. Average interest earning assets increased by $148.1 million, or 6.1%, to $2.60 billion for the first nine months of 2004 compared to $2.45 billion for the same period in 2003. Higher average loans and investment securities produced the increase. Average loans increased by $119.1 million, or 6.3%, to $2.02 billion for the first nine months of 2004. A $238.2 million, or 16.5%, increase in commercial and commercial real estate loans, which totaled $1.68 billion for the first nine months of 2004, accounted for the increase in average loans. Average investment securities increased by $59.2 million, or 11.7% to $566.9 million for the first three quarters of 2004 compared to $507.7 million for the same period in 2003.

The higher average interest-earning assets were funded with increased deposits. Average deposits for the first nine months of 2004 increased $138.4 million, or 7.0%, as compared to the same nine month period in 2003, primarily as a result of increased time deposits and noninterest bearing demand deposits. Average time deposit balances increased $85.5 million, or 9.1%, between the two year-to-date periods to $1.03 billion during 2004. Average brokered certificates of deposits increased by $60.5 million, or 20.3%, to $357.9 million, while average customer certificates of deposits increased by $35.9 million, or 7.6%, to $508.4 million during 2004. Average noninterest-bearing demand deposit accounts were $434.5 million in the first nine months of 2004, an increase of $52.0 million, or 13.6%, as compared to the same nine-month period in 2003.

The interest rate risk position of our overall balance sheet is asset sensitive, which means our assets are expected to re-price before our liabilities over the one-year horizon. This balance sheet structure provides opportunity for an increase in net interest margin during periods of rising interest rates, such as we experienced during the third quarter of 2004. If interest rates remain unchanged in future quarters, we would expect to be exposed to the negative impact of a large percentage of our interest-bearing liabilities repricing at current market rates-, while a large portion of our assets has already repriced. If interest rates continue to gradually rise in future quarters, we would expect our net interest margin to increase. See the section of this discussion and analysis captioned “Quantitative and Qualitative Disclosure About Market Risks” for further discussion on the impact of changes in interest rates.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

Tax Equivalent Adjustments to Yields and Margins

As part of our evaluation of net interest income, we review our consolidated average balances, our yield on average interest-earning assets, and the costs of average interest-bearing liabilities. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities. Because management reviews net interest income on a taxable equivalent basis, the analysis contains certain non-GAAP financial measures. In these non-GAAP financial measures, investment interest income, loan interest income, total interest income, and net interest income are adjusted to reflect tax-exempt interest income on an equivalent before-tax basis assuming an effective tax rate of 35%. This assumed rate may differ from our actual effective income tax rate. In addition, the earning asset yield, net interest margin, and the net interest rate spread are adjusted to a fully taxable equivalent basis. We believe that these measures and ratios present a more meaningful measure of the performance of interest-earning assets because they provide a better basis for comparison of net interest income regardless of the mix of taxable and tax-exempt instruments.

The following table reconciles the tax equivalent net interest income to net interest income as reported on the Consolidated Statements of Income. In addition, the earning asset yield, net interest margin and net interest spread are shown with and without the tax equivalent adjustment.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2004			2003			2004			2003
	(in thousands)
Net interest income as stated	$	24,339		$	24,720		$	70,934		$	73,205
Tax equivalent adjustment-investments		268			312			821			959
Tax equivalent adjustment-loans		40			43			131			131

Tax equivalent net interest income	$	24,647		$	25,075		$	71,886		$	74,295


Yield on earning assets without tax adjustment		5.25	%		5.56	%		5.16	%		5.69	%
Yield on earning assets - tax equivalent		5.30	%		5.62	%		5.21	%		5.75	%
Net interest margin without tax adjustment		3.65	%		3.98	%		3.65	%		4.00	%
Net interest margin - tax equivalent		3.70	%		4.04	%		3.70	%		4.06	%
Net interest spread - without tax adjustment		3.25	%		3.58	%		3.26	%		3.59	%
Net interest spread - tax equivalent		3.30	%		3.64	%		3.31	%		3.65	%

The following tables present, for the periods indicated, certain information relating to our consolidated average balances and reflect our yield on average interest-earning assets and costs of average interest-bearing liabilities. The table contains certain non-GAAP financial measures to adjust tax-exempt interest income on an equivalent before-tax basis assuming an effective tax rate of 35%.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)


	For the Three Months Ended September 30,
	2004							2003
	AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)⁽⁶⁾		AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)⁽⁶⁾
	(dollars in thousands)
INTEREST-EARNING ASSETS:
Investment securities ⁽¹⁾:
Taxable	$	529,510		$	5,284	3.99	%	$	460,528		$	5,102	4.43	%
Tax-exempt (tax equivalent) ⁽²⁾		43,146			762	7.07			48,892			883	7.22

Total investment securities		572,656			6,046	4.22			509,420			5,985	4.70

Cash Equivalents		21,844			78	1.40			62,522			151	0.95

Loans ^{(2) (3)}:
Commercial and commercial real estate		1,748,526			24,804	5.55			1,487,213			21,819	5.74
Residential real estate mortgages		66,582			874	5.25			101,349			1,447	5.71
Home equity and consumer		243,897			2,974	4.85			309,942			3,806	4.87
Fees on loans					504							1,723

Net loans (tax equivalent) ⁽²⁾		2,059,005			29,156	5.63			1,898,504			28,795	6.02

Total interest-earning assets ⁽²⁾		2,653,505			35,280	5.30			2,470,446			34,931	5.62

Allowance for loan losses		(37,631	)						(35,184	)
NON-EARNING ASSETS:
Cash and due from banks		59,518							58,578
Accrued interest and other assets		85,900							95,178

TOTAL ASSETS	$	2,761,292						$	2,589,018

INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits	$	579,485			1,134	0.78		$	559,607			1,078	0.76
Savings deposits		89,670			69	0.31			91,683			83	0.36
Time deposits		1,070,604			6,064	2.25			961,031			5,860	2.42

Total interest-bearing deposits		1,739,759			7,267	1.66			1,612,321			7,021	1.73

Short-term borrowings		194,338			520	1.06			205,804			433	0.83
Notes payable and FHLB advances		95,500			1,097	4.57			110,500			1,148	4.06
Junior subordinated debentures		87,638			1,749	7.98			45,000			1,254	11.15

Total interest-bearing liabilities		2,117,235			10,633	2.00			1,973,625			9,856	1.98

NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits		452,202							405,001
Accrued interest and other liabilities		43,901							38,950

Total noninterest-bearing liabilities		496,103							443,951

STOCKHOLDERS’ EQUITY		147,954							171,442

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,761,292						$	2,589,018

Net interest income (tax equivalent) ⁽²⁾				$	24,647						$	25,075

Net interest spread (tax equivalent) ^{(2) (4)}						3.30	%						3.64	%

Net interest margin (tax equivalent) ^{(2) (5)}						3.70	%						4.04	%

⁽¹⁾	Investment securities average balances are based on amortized cost.

⁽²⁾	Adjusted to reflect tax-exempt interest income on an equivalent before-tax basis assuming an effective income tax rate of 35%.

⁽³⁾	Nonaccrual loans are included in the above stated average balances.

⁽⁴⁾	Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

⁽⁵⁾	Net interest margin is determined by dividing taxable equivalent net interest income by average interest-earning assets.

⁽⁶⁾	Yield/Rates are annualized.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)


	For the Nine Months Ended September 30,
	2004							2003
	AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)⁽⁶⁾		AVERAGE BALANCE			INTEREST		YIELD/ RATE (%)⁽⁶⁾
	(dollars in thousands)
INTEREST-EARNING ASSETS:
Investment securities ⁽¹⁾:
Taxable	$	523,053		$	15,639	3.99	%	$	457,927		$	16,458	4.79	%
Tax-exempt (tax equivalent) ⁽²⁾		43,846			2,332	7.09			49,801			2,713	7.26

Total investment securities		566,899			17,971	4.23			507,728			19,171	5.03

Cash Equivalents		13,035			121	1.22			43,188			348	1.06

Loans ^{(2) (3)}:
Commercial and commercial real estate		1,684,104			69,198	5.40			1,445,901			64,416	5.87
Residential real estate mortgages		73,149			2,940	5.36			110,429			5,015	6.05
Home equity and consumer		258,489			9,423	4.87			340,349			12,868	5.05
Fees on loans					1,650							3,508

Net loans (tax equivalent) ⁽²⁾		2,015,742			83,211	5.51			1,896,679			85,807	6.05

Total interest-earning assets ⁽²⁾		2,595,676			101,303	5.21			2,447,595			105,326	5.75

Allowance for loan losses		(36,093	)						(35,353	)
NON-EARNING ASSETS:
Cash and due from banks		58,735							59,417
Accrued interest and other assets		89,648							98,168

TOTAL ASSETS	$	2,707,966						$	2,569,827

INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest-bearing demand deposits	$	564,900			2,997	0.71		$	563,707			3,653	0.87
Savings deposits		90,789			213	0.31			91,023			273	0.40
Time deposits		1,025,173			16,999	2.21			939,685			18,175	2.59

Total interest-bearing deposits		1,680,862			20,209	1.61			1,594,415			22,101	1.85

Short-term borrowings		223,177			1,541	0.92			224,675			1,695	1.01
Notes payable and FHLB advances		97,033			3,269	4.43			114,342			3,472	4.00
Junior subordinated debentures		62,353			4,398	9.40			45,000			3,763	11.15

Total interest-bearing liabilities		2,063,425			29,417	1.90			1,978,432			31,031	2.10

NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits		434,492							382,542
Accrued interest and other liabilities		41,907							37,751

Total noninterest-bearing liabilities		476,399							420,293

STOCKHOLDERS’ EQUITY		168,142							171,102

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,707,966						$	2,569,827

Net interest income (tax equivalent) ⁽²⁾				$	71,886						$	74,295

Net interest spread (tax equivalent) ^{(2) (4)}						3.31	%						3.65	%

Net interest margin (tax equivalent) ^{(2) (5)}						3.70	%						4.06	%

⁽¹⁾	Investment securities average balances are based on amortized cost.

⁽²⁾	Adjusted to reflect tax-exempt interest income on an equivalent before-tax basis assuming an effective income tax rate of 35%.

⁽³⁾	Nonaccrual loans are included in the above stated average balances.

⁽⁴⁾	Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

⁽⁵⁾	Net interest margin is determined by dividing taxable equivalent net interest income by average interest-earning assets.

⁽⁶⁾	Yield/Rates are annualized.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

Noninterest Income

The following table presents, for the periods indicated, our major categories of noninterest income:


	For Three Months Ended September 30,						For Nine Months Ended September 30,
	2004			2003			2004			2003
	(in thousands)
Service charges	$	2,736		$	3,129		$	8,367		$	9,412
Trust and investment management fees		1,322			1,319			3,893			3,502
Gain on sale of investment securities, net		345			—			345			—
Other noninterest income:
Standby letter of credit fees		115			237			441			522
Non-customer ATM fees		106			151			358			465
Mortgage banking operations		(111	)		(390	)		(85	)		(408	)
Gain (loss) on assets in employee deferred compensation plan		(20	)		93			120			270
Loss from equity/partnership investments		—			(29	)		(227	)		(172	)
Income from unconsolidated subsidiaries		48			—			118			—
Gain from sale of credit card portfolio		—			—			—			140
Other		84			80			274			371

Total noninterest income	$	4,625		$	4,590		$	13,604		$	14,102

Our noninterest income was $4.6 million during both the third quarter of 2004 and 2003. Between the two quarters, a decline in service charge revenue was largely offset by $345,000 of gains on the sale of available-for-sale investment securities. During the year-to-date period, noninterest income was $13.6 million during 2004 as compared to $14.1 million during the same nine month period in 2003, a decrease of $498,000, or 3.5%. Lower service charge revenue of $1.0 million was partly offset by an increase in trust and investment management fees and the gain on the sale of investment securities.

Service charges, principally on deposit accounts, were $2.7 million during the third quarter of 2004 compared to $3.1 million during the same quarter of 2003, a decrease of $393,000, or 12.6%. Service charges were $8.4 million during the first nine months of 2004, a $1.0 million, or 11.1%, decrease as compared to the $9.4 million of service charges during the same period in 2003. The decrease was mainly caused by lower commercial service charge income as a result of reduced activity fees.

Trust and investment management fees were $1.3 million during both the third quarter of 2004 and 2003. In the year-to-date comparison, trust and investment management fees increased $391,000, or 11.2%, to $3.9 million in 2004 compared to $3.5 million in 2003. An increase in corporate and exchange trust services produced most of the increase in fees.

During the third quarter of 2004, we recorded a $345,000 gain on the sale of $53.3 million of available for sale investment securities. We sold $49.8 million of U.S. Government Agency securities with short remaining maturities and reinvested the proceeds in higher yield, longer-term securities. In addition, we sold 26 low-balance mortgage-backed securities totaling

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

$3.5 million to enhance the operational efficiency of our investment portfolio. No sales of investment securities occurred in 2003.

Other noninterest income includes fees received from the issuance of standby letters of credits, fees for non-customer usage of our automated teller machines, revenues (losses) from mortgage banking operations, gains (losses) from equity or partnership investments, gains (losses) from earnings in assets in our employees’ deferred compensation plans, and other miscellaneous sources of revenues. The losses from mortgage banking operations primarily relate to payments under indemnification agreements on loans sold in prior years. Under our deferred compensation plan, employees are allowed to direct the investment of their share of plan assets into several mutual funds; however, we still maintain ownership of the assets. Any change in the fair value of plan assets results in a corresponding change in our obligation to these employees. We record a gain (loss) for changes in the fair value of the assets and additional compensation expense (reduction in expense) for the change in our obligation to the participants. Therefore, there is no impact on consolidated net income from the change in the fair value of the plan assets. In 2003, we recorded a $140,000 gain related to the sale of our credit card portfolio.

Noninterest Expense

The following table presents for the periods indicated the major categories of noninterest expense:


	For Three Months Ended September 30,					For Nine Months Ended September 30,
	2004		2003			2004		2003
	(in thousands)
Salaries and employee benefits	$	8,834	$	10,205		$	29,159	$	31,642
Occupancy of premises		1,817		1,912			5,678		5,268
Furniture and equipment		943		895			2,997		2,467
Holding company legal fees, net		152		161			552		(1,179	)
Bank legal fees, net		271		408			874		1,471
Advertising and public relations		104		484			1,271		2,566
Corporate insurance		631		782			1,903		2,343
Computer processing		517		494			1,429		1,507
Consulting		67		324			322		747
Other real estate and repossessed asset		54		(47	)		206		89
Other noninterest expense		2,920		3,387			9,118		9,757

Total noninterest expense	$	16,310	$	19,005		$	53,509	$	56,678

Noninterest expense declined in both the quarterly and year-to-date comparisons. Non-interest expense was $16.3 million during the third quarter of 2004 compared to $19.0 million during the same quarter in 2003, a decrease of $2.7 million or 14.2%. Lower salaries and benefits and advertising costs primarily produced the decline in expense. During the first nine months of 2004, noninterest expense was $53.5 million compared to $56.7 million during the year-to-date 2003 period, a decrease of $3.2 million, or 5.6%. As with the quarterly comparison, lower salaries and benefits and advertising costs primarily produced the decrease. In addition,

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

noninterest expense during 2003 benefited from a $2.1 million non-recurring legal fee reimbursement received during the first quarter of 2003.

Salaries and employee benefits expense decreased $1.4 million, or 13.4% to $8.8 million during the third quarter of 2004 compared to $10.2 million during the same quarter a year ago. As part of our expense management initiatives to reduce our operating expenses, we have reduced our work force and eliminated positions throughout our organization. During 2004, we eliminated positions representing approximately $3.0 million in annual salary and incentives. The decline in salaries and employee benefits was primarily a result of lower base salary expense of $740,000 and a $482,000 decline in employee benefits, including expenses related to the employee medical plans and employee benefits plans, such as the 401(k) and profit sharing plans. On a year-to-date basis, salaries and benefits decreased by $2.5 million or 7.8%. Base salary expense declined $1.1 million during the first nine months of 2004 as compared to the same period in 2003. This decrease was partly offset by a $683,000 increase in severance between the two year-to-date periods, and annual merit salary increases averaging three percent granted at the end of the first quarter. Severance during the first nine months of 2004 was $1.1 million compared to $405,000 during the same period in 2003. In addition, incentives and employee benefit expenses declined $460,000 and $493,000 respectively. In addition to severance costs, we also incurred outplacement costs, recorded in other noninterest expense, of approximately $176,000 during the first nine months of 2004. At September 30, 2004, we had 430 full time equivalent employees compared to 495 at the end of September 2003.

Occupancy expense was $1.8 million during the third quarter of 2004 compared to $1.9 million during the same quarter a year ago. Lower depreciation on buildings, leasehold improvement amortization, and repair and maintenance expense, partly offset by an increase in rent expense, combined to produce the lower occupancy costs. The lower depreciation on buildings was primarily due to the sale, in June of 2004, of our Burbank facility and lower amortization of leasehold improvements caused by the abandonment of our administrative offices at our Wheeling facility in December 2003. In connection with the Burbank sale, we leased back approximately one-half of the building to maintain a banking center and some administrative offices. On a year-to-date basis, occupancy of premises was $5.7 million during the first nine months of 2004 compared to $5.3 million during the same period in 2003, an increase of $410,000 or 7.8%. The increase in rent expense was primarily due to our corporate center consolidation, completed during the fourth quarter of 2003, and rent payments on the Burbank facility beginning in the third quarter of 2004. This increase in expense was partly offset by lower building depreciation, leasehold improvement amortization, and repair and maintenance expense.

Occupancy expense in the future will be impacted by our efforts to reduce the space at the facilities we vacated and by our opening or closing of other banking centers. In June 2004, we completed the sale of our Burbank facility and agreed to lease back approximately one-half of the space for a banking center and administrative offices. Upon sale, we realized a gain of approximately $245,000 that was deferred and is being amortized over the 10 year life of the lease. We expect to complete the sale of our Ashland facility in late 2004 or early 2005 and construct a new, smaller facility on that site by late 2005. We are also continuing to evaluate and

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

negotiate alternatives regarding our Wheeling facility. In order to avoid the uncertainty associated with leasing our excess space at the Wheeling facility, we are pursuing a transaction to exit our lease obligation, which would result in an additional charge to earnings if consummated. We also have agreed to sell our Broadview banking center land and building at its net book value, and expect to complete this sale in early 2005. In June 2004, we opened a 2,500 square foot facility in Itasca, Illinois, a northwest suburb of Chicago. We are currently negotiating a lease for a 2,800 square foot banking facility in the southern suburbs of Chicago. See the section captioned “Financial Condition—Non-earning Assets” for additional details.

The expense for furniture and equipment was $943,000 during the third quarter of 2004, compared to $895,000 in the same quarter in 2003, an increase of $48,000 or 5.4%. During the first nine months of 2004, furniture and equipment expense was $3.0 million, a $530,000, or 21.5%, increase as compared to the $2.5 million of expense in the same period in 2003. Depreciation expense relating to new furniture and equipment at our corporate center increased furniture and equipment expense in the both the quarterly and year-to-date periods.

Holding company legal fees were $152,000 during the third quarter of 2004 compared to $161,000 in the third quarter of 2003. On a year-to-date basis, holding company legal fees were $552,000 during 2004 compared to a net reimbursement of $1.2 million during the year-to-date 2003 period. We received a $2.1 million nonrecurring reimbursement of legal fees during the first quarter of 2003 associated with costs related to the defense and settlement of litigation concerning our 1997 acquisition of the Bank. We do not expect to receive any further reimbursements of holding company legal fees related to this litigation. Currently, holding company legal fees are for costs for general corporate matters, including securities law compliance and other costs associated with being a publicly traded company.

Bank legal fees relate to collection activities as well as general corporate and compliance matters. Bank legal fees were $271,000 during the third quarter of 2004 compared to $408,000 during the third quarter of 2003. On a year-to-date basis, Bank legal fees were $874,000 during 2004 compared to $1.5 million during the same period last year. The majority of the decline in legal fees in 2004 was in our special assets loan work out area. Not only did the amount we incurred decrease, we were also able to obtain more in reimbursements from these borrowers than in the prior year period.

Advertising and public relations expense declined significantly during the third quarter of 2004, as compared to the same period last year, due to a planned reduction in advertising. Advertising and public relations expense was $104,000 during the third quarter of 2004 compared to $484,000 during the third quarter of 2003. Similarly, on a year-to-date basis, advertising and public relations expense was $1.3 million during 2004 compared to $2.6 million in the same nine month period in 2003, a decrease of $1.3 million. In early 2003, we undertook a new media campaign to increase the Bank’s visibility in the business community. This campaign included television commercials and print advertising and significantly increased advertising expense during the first half of 2003. We reduced planned advertising activities in late 2003 and into 2004. In addition, during the second quarter of 2004, we decided to discontinue our television advertising campaign and we wrote-off the $398,000 of remaining

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

capitalized production costs of the television commercials. We had been amortizing these production costs over a three year period.

Corporate insurance premiums declined during both the quarterly and year-to-date periods. During the third quarter of 2004 corporate insurance expense decreased $151,000, or 19.3% to $631,000, while during the first nine months of 2004, the expense was $1.9 million, or $440,000, (18.8%), less than during the same nine month period in 2003. An adjustment in our Directors and Officers insurance coverage produced the decrease in expense.

Other noninterest expense principally includes certain professional fees, FDIC insurance, outside services, operating losses and other operating expenses such as telephone, postage, office supplies, and printing. Other noninterest expense was $3.0 million during the third quarter of 2004 compared to $3.6 million during the same period in 2003, a decrease of $530,000. On a year-to-date basis, other noninterest expense was $9.6 million in 2004 compared to $10.3 million during 2003, a decrease of $667,000. In both the quarterly and year-to-date periods, the decline in other noninterest expense was primarily due to a $500,000 charge recorded in the third quarter of 2003 related to interest receivable carried in connection with our indirect manufactured housing loan portfolio.

Income Taxes

We recorded income tax expense of $3.1 million during the third quarter of 2004 compared to $2.0 million during the third quarter of 2003. The effective income tax rate was 31.0% during the third quarter of 2004 and 26.5% during the third quarter of 2003. Higher pre-tax income primarily caused higher income tax expense during the current quarter. In addition, both quarters included the recognition of income tax benefits relating to expenses deducted on prior years’ tax returns for which the statute of limitations has expired. The amount of the tax benefits recognized was $600,000 in 2004 and $750,000 in 2003.

Income tax expense was $7.5 million during the first nine months of 2004 compared to $7.8 million during the same period in 2003. The lower level of pre-tax income primarily produced the decrease in expense between the two year-to-date periods. The effective income tax rate was 32.9% during 2004 compared to 32.5% during the same year-to-date period in 2003.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

FINANCIAL CONDITION

Overview

Our total assets increased $228.9 million, or 8.8%, to $2.83 billion at September 30, 2004 compared to $2.60 billion at December 31, 2003. The asset growth consisted of a $159.8 million increase in loans and a $65.6 million increase in investment securities. Total deposits increased by $235.7 million to $2.25 billion at September 30, 2004 compared to $2.01 billion at December 31, 2003. Total stockholders’ equity at September 30, 2004 was $149.1 million compared to $176.5 million at December 31, 2003. The decline in total stockholders’ equity was due, in part, to the redemption of the Series A preferred stock in July 2004. Common stockholders’ equity, which excludes the $38.25 million of preferred stock, increased by $10.8 million during the first nine months of 2004.

Cash and Cash Equivalents

Period-end cash and cash equivalents were $91.4 million at September 30, 2004 compared to $88.5 million at December 31, 2003. Cash equivalents consist of short-term, interest-bearing investments and federal funds sold.

Interest-Earning Assets

Total investment securities increased $65.6 million to $553.9 million at September 30, 2004, compared to $488.3 million at December 31, 2003. During the first nine months of 2004, we purchased $175.7 million of investment securities, including $98.3 million of mortgage-related securities and $77.4 million of U.S. Government Agency securities. These purchases were partly offset by $51.9 million in maturities and principal repayments received during the year. In addition, we sold $49.8 million of U.S. Government Agency securities with short remaining maturities and 26 low-balance mortgage-backed securities totaling $3.5 million. Other comprehensive income (loss) for the first nine months of 2004 reflected a $2.6 million, net of tax, decline in the fair value of the securities. At September 30, 2004, there are no investment securities that have been in a continuous unrealized loss position for 12 or more months. The decline in the fair value of the securities was due to changes in market interest rates. Further increases in interest rates in the future could result in higher levels of unrealized losses on available-for-sale investment securities.

Period-end total loans increased $159.8 million, or 8.1%, to $2.12 billion at September 30, 2004 compared to $1.96 billion at December 31, 2003. Our commercial loan portfolio, which includes commercial and industrial, commercial real estate secured, and real estate – construction loans, increased $223.5 million, or 14.0%, during the first nine months of 2004. Higher real estate construction loans of $129.6 million and commercial real estate secured loans of $80.5 million accounted for most of the increase in commercial loan balances. As expected, based on certain actions we took, our consumer-oriented loans, which include residential real estate mortgages, home equity loans and lines of credit, and consumer loans continue to decrease. During the first nine months of 2004, total consumer-oriented loans decreased $63.4 million to $301.0 million at September 30, 2004. Consumer-oriented loans as a percentage of total loans declined to 14% at September 30, 2004 from 19% at year-end 2003. In the fourth quarter of 2004, we signed an agreement to sell our Broadview banking facility as well as the

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

specific consumer loans originated at that facility. The loans totaled approximately $5 million at September 30, 2004 and will be sold for the outstanding principal value plus accrued interest at the date of closing. The sale is subject to regulatory approval and is expected to be closed in the first quarter of 2005.

Loan Quality and Nonperforming Assets

The following table sets forth the amounts of nonperforming assets as of the dates indicated:


	Sept. 30, 2004			Dec. 31, 2003
	(dollars in thousands)
Loans contractually past due 90 days or more but still accruing interest	$	4,146		$	4,728
Nonaccrual loans		18,596			18,056

Total nonperforming loans		22,742			22,784
Other real estate owned		1,552			141
Other repossessed assets		11			23

Total nonperforming assets	$	24,305		$	22,948

Nonperforming loans to total loans		1.07	%		1.16	%
Nonperforming assets to total loans plus repossessed property		1.14	%		1.17	%
Nonperforming assets to total assets		0.86	%		0.88	%
Restructured loans not included in nonperforming assets	$	—		$	130
Impaired loans	$	24,558		$	24,347

The level of nonperforming loans was $22.7 million at September 30, 2004 and $22.8 million at December 31, 2003. In addition, the ratio of nonperforming loans as a percentage of total loans was 1.07% and 1.16% at September 30, 2004 and December 31, 2003, respectively. Total nonperforming assets were $24.3 million at September 30, 2004 compared to $22.9 million at December 31, 2003. Higher real estate owned assets at September 30, 2004 produced the increase. Other real estate owned is carried at its estimated fair value less cost of disposal.

Impaired loans include all nonaccrual loans as well as accruing loans judged to have higher risk of noncompliance with the present contractual repayment schedule for both interest and principal. While impaired loans exhibit weaknesses that may inhibit repayment in compliance with the original note terms, the measurement of impairment may not always result in an allowance for loan loss for every impaired loan. Total impaired loans were $24.6 million at September 30, 2004 compared to $24.3 million at year-end 2003. Two commercial loans totaling $18.4 million considered impaired at the end of July 2004 remain current and accruing and are not considered impaired at September 30, 2004.

Certain homogenous loans, including residential mortgage and consumer loans, are collectively evaluated for impairment and therefore are excluded from impaired loans. Not included in the impaired loan amount are $14.6 million of loans to consumers secured by manufactured homes that we continue to monitor closely.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

Allowance for Loan Losses

We have established an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Although management believes that the allowance for loan losses is adequate to absorb probable losses on existing loans that may become uncollectible, there can be no assurance that our allowance will prove sufficient to cover actual loan losses in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of our allowance for loan losses. Such agencies may require us to make additional provisions to the allowance based upon their judgments about information available to them at the time of their examinations.

The following table shows an analysis of our consolidated allowance for loan losses and other related data:


	For Three Months Ended September 30,						For Nine Months Ended September 30,
	2004			2003			2004			2003
	(dollars in thousands)
Average total loans	$	2,059,005		$	1,898,504		$	2,015,742		$	1,896,679

Total loans at end of period	$	2,121,841		$	1,890,783		$	2,121,841		$	1,890,783

Allowance for loan losses:
Allowance at beginning of period	$	36,929		$	36,157		$	34,356		$	34,073
Total charge-offs		(1,769	)		(4,740	)		(5,714	)		(6,882	)
Total recoveries		294			385			1,312			778

Net charge-offs		(1,475	)		(4,355	)		(4,402	)		(6,104	)
Provision for loan losses		2,750			2,700			8,250			6,533

Allowance at end of period	$	38,204		$	34,502		$	38,204		$	34,502

Annualized net charge-offs to average total loans		0.29	%		0.92	%		0.29	%		0.43	%
Allowance to total loans at end of period		1.80	%		1.82	%		1.80	%		1.82	%
Allowance to nonperforming loans		167.99	%		179.43	%		167.99	%		179.43	%

Net charge-offs during the third quarter of 2004 were $1.5 million, or an annualized 0.29% of average loans. In comparison, net charge-offs during the third quarter of 2003 were $4.4 million representing an annualized 0.92% of average loans. For the first nine months of 2004, net charge-offs were $4.4 million, or 0.29% of average loans, compared to $6.1 million, or 0.43% of average loans, during the same nine month period in 2003. As a business bank, our loan portfolio is comprised primarily of commercial loans to businesses, the loans to which are inherently larger in amount than loans to individual consumers. The individually larger commercial loans can cause greater volatility in reported credit quality performance measures, such as total impaired or nonperforming loans. For example, our current credit risk rating and loss estimate with respect to a single material loan can have a material impact on our reported impaired loans and related loss exposure estimates. We review our estimates on a quarterly basis and, if necessary, adjust the allowance for loan losses through the recording of a provision for loan losses.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

Our allowance for loan losses increased to $38.2 million at September 30, 2004, or 1.80% of end-of-period loan balances and 167.99% of nonperforming loans. At December 31, 2003, the allowance for loan losses was $34.4 million, which represented 1.75% of end-of-period loan balances and 150.79% of nonperforming loans. At September 30, 2003, the allowance for loan losses was $34.5 million, which represented 1.82% of end-of-period loan balances and 179.43% of nonperforming loans.

Provision for Loan Losses

We determine a provision for loan losses that we consider sufficient to maintain an allowance covering probable losses inherent in our portfolio as of the balance sheet date. Our provision for loan losses was $2.75 million during the third quarter of 2004, or $50,000 higher than the provision of $2.70 million during the same quarter in 2003. In addition, the provision for loan losses was $8.3 million during the first nine months of 2004 compared to $6.5 million during the same nine-month period in 2003, and increase of $1.7 million. The increase in the provision in 2004 was primarily attributable to loan growth. Our loan loss provision is determined based upon an analysis of our portfolio performed on a quarterly basis, with ongoing monitoring by our Credit Policy Committee and Credit Administration function. We expect our provisioning to fluctuate as the circumstances of our individual commercial borrowers and the economic environment changes. Accordingly, the provision for loan losses in any accounting period is not an indicator of provisioning in subsequent reporting periods.

Non-earning Assets

Premises, leasehold improvements and equipment, net of accumulated depreciation and amortization, totaled $17.2 million at September 30, 2004 compared to $20.5 million at December 31, 2003. Depreciation expense during the first nine months of 2004 and the sale of our Burbank facility during the second quarter, which had a net book value of $1.8 million, combined to produce the decrease. Upon sale of the Burbank facility, we agreed to lease back space on the ground and fourth floors for the banking facility and operating departments still at that location. The gain of $245,000 realized upon sale will be deferred and amortized over the 10 year life of the lease.

We expect to complete the sale of our Ashland facility during late 2004 or early 2005. We reached an agreement to sell this facility in December of 2002, and, in connection with this sale, we recorded a $386,000 loss in 2002 and additional selling expenses of $250,000 and $59,000 in 2003 and 2004, respectively. We have already moved the existing banking center from this location to a temporary nearby storefront location. We expect a newly constructed banking center to be built on a portion of the former site by late 2005.

During the fourth quarter of 2003, we recorded a $3.5 million charge related to our abandonment of a portion of our leased Wheeling facility. The charge was comprised of a $976,000 write-off of leasehold improvements, furniture and other equipment that were abandoned and a $2,559,000 charge for the liability related to the operating lease. The charge for the lease abandonment liability was computed based upon the remaining lease payments reduced by estimated sublease rentals that could reasonably be obtained from the property. The

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

charge represents the estimated liability for the lease payments that we will incur for the remaining term of the lease for which we will receive no economic benefit other than through subleasing. During the first nine months of 2004, we reduced this liability by $266,000 to $2.3 million as we made rent payments. We are continuing to evaluate and negotiate alternatives for our Wheeling facility. In order to avoid the uncertainty associated with leasing our excess space at the Wheeling facility, we are pursuing a transaction to exit our lease obligation, which would result in an additional charge to earnings if consummated. However, we also expect that our occupancy of premises expense would decrease in the future if this transaction was consummated.

In June 2004, we opened a 2,500 square foot banking center located in an office building in Itasca, Illinois, a northwest suburb of Chicago. The facility is leased under an operating lease with a three year term. We have signed a letter of intent to lease approximately 2,800 square feet for a banking center located in the southern suburbs of Chicago. We are currently negotiating the final lease and expect to begin construction on the facility during the fourth quarter. In addition, we have entered into an agreement to sell our Broadview banking center land and building at its net book value. We expect to complete this sale in early 2005.

Funding Liabilities

During the first nine months of 2004, total deposits increased by $235.7 million, or 11.7%, to $2.25 billion at September 30, 2004, as compared to $2.01 billion at December 31, 2003. During the first nine months of 2004, our interest-bearing deposit accounts increased by $200.6 million, while our noninterest-bearing deposit accounts increased by $35.1 million. The increase in interest earning deposit accounts was primarily a result of increased time deposits, which increased $183.7 million, or 20.1%, to $1.10 billion at September 30, 2004. Brokered certificates of deposit balances increased $120.0 million to $405.7 million at September 30, 2004 from $285.7 million at December 31, 2003, while out-of-local-market certificates of deposit increased by $25.1 million to $101.6 million at September 30, 2004, as compared to $76.5 million at year-end 2003. Also, certificates of deposits from our customers increased $30.0 million during the first nine months of 2004 to $528.2 million. In addition to the increase in time deposits, our money market account balances increased $32.6 million during the first nine months of 2004, to $458.1 million at September 30, 2004.

We obtain our funding through several deposit generating sources; using a mix of wholesale and local customer funds based on cost effectiveness, fee income potential and liquidity dynamics. We manage potential liquidity risk associated with wholesale funding by extending and staggering maturities, pledging collateral and maintaining multiple sources within the wholesale marketplace to obtain funding. We expect that the wholesale funds market will remain a significant funding source for us. The cost and availability of funding may be a factor in our evaluation of opportunities to grow our earning assets.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

The following table sets forth, for the periods indicated, the distribution of our average deposit account balances and average cost of funds in each category of deposits:


	For the Nine Months Ended September 30, 2004						For the Nine Months Ended September 30, 2003
	Average Balance		Percent Of Deposits		Rate		Average Balance		Percent Of Deposits		Rate
	(dollars in thousands)
Noninterest-bearing demand deposits	$	434,492	20.5	%	—	%	$	382,542	19.4	%	—	%
Interest-bearing demand deposits		564,900	26.7		0.71			563,707	28.5		0.87
Savings deposits		90,789	4.3		0.31			91,023	4.6		0.40
Time deposits:
Certificates of deposit		508,412	24.1		2.34			472,553	23.9		2.65
Out-of-local-market certificates of deposit		91,758	4.3		2.58			96,574	4.9		3.05
Brokered certificates of deposit		357,899	16.9		2.08			297,397	15.0		2.57
Public Funds		67,104	3.2		1.47			73,161	3.7		1.59

Total time deposits		1,025,173	48.5		2.21			939,685	47.5		2.59

Total deposits	$	2,115,354	100.0	%			$	1,976,957	100.0	%

In the fourth quarter of 2004, we signed an agreement to sell our Broadview banking facility as well as the specific customer accounts opened and regularly transacting business at that facility. The aggregate deposits for the accounts identified totaled approximately $20 million at September 30, 2004. The sale is subject to regulatory approval and is expected to be finalized in the first quarter of 2005. The purchase price includes a premium based on actual amount of deposits transferred at the closing date.

Our short-term borrowings include federal funds purchased, securities sold under agreements to repurchase and U.S. Treasury tax and loan note option accounts. Period-end, short-term borrowings decreased $12.2 million to $206.9 million at September 30, 2004 as compared to $219.1 million at December 31, 2003. During the first nine months of 2004, federal funds purchased decreased by $15.3 million and our U.S. Treasury tax and loan note decreased by $8.5 million. These decreases were partly offset by an $11.6 million increase in securities sold under agreements to repurchase.

FHLB advances totaled $85.0 million at September 30, 2004 compared to $100.0 million at December 31, 2003. A maturity of a FHLB advance caused borrowings from the FHLB to decline $15.0 million. FHLB advances totaling $75 million are callable at the option of the FHLB. Retirement prior to final maturity by us is subject to prepayment penalties.

At both September 30, 2004 and December 31, 2003, we had aggregate borrowings of $10.5 million outstanding under a $10.0 million subordinated debt agreement and $500,000 term loan. We have an $11.5 million revolving credit facility that has not yet been drawn upon.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

In June 2004, we issued additional junior subordinated debentures of $41.2 million to TAYC Capital Trust II, our wholly owned subsidiary. TAYC Capital Trust II was formed for the purpose of issuing $40.0 million of trust preferred securities. The junior subordinated debentures have a floating interest rate of the three-month LIBOR rate plus 2.68%. The interest rate adjusts quarterly on the 17^th and was 4.57% on September 30, 2004. Proceeds from the issuance of the junior subordinated debentures were used to redeem our Series A 9% noncumulative perpetual preferred stock. This series of preferred stock was redeemed on July 16, 2004, at its stated liquidation value of $38.25 million, plus $153,000 of accrued dividends.

At September 30, 2004, we also had $46.4 million outstanding from the junior subordinated debentures issued TAYC Capital Trust I, our wholly-owned subsidiary formed in October 2002 for the purpose of issuing $45.0 million of trust preferred securities. The junior subordinated debentures have a fixed interest rate of 9.75%. Currently, neither TAYC Capital Trust I or TAYC Capital Trust II are consolidated for financial reporting purposes. Prior to January 1, 2004, TAYC Capital Trust I was consolidated. See the section captioned “New Accounting Pronouncements” for additional details.

CAPITAL RESOURCES

At both September 30, 2004 and December 31, 2003, both the holding company and the Bank were considered “well capitalized” under capital guidelines for bank holding companies and banks. During the first nine months of 2004, the Bank’s capital ratios declined as the growth in average and risk-weighted assets outpaced capital growth from retained earnings.

At the holding company level, an increase in average and risk-weighed assets and a change in the composition of regulatory capital combine to produce the lower ratios. In the third quarter of 2004, we redeemed the $38.25 million of Series A noncumulative perpetual preferred stock, all of which was classified as Tier I capital. This regulatory capital component was replaced with the issuance of $40.0 million of trust preferred securities by TAYC Capital Trust II on June 16, 2004. A portion of the trust preferred securities is classified as Tier I capital and the remainder is considered Tier II. As a result, the redemption of the preferred stock and the issuance of the trust preferred securities caused a decline in Tier I capital, but an increase in total capital (Tier I and Tier II). The Tier I capital to risk weighed asset ratio declined from 8.73% at December 31, 2003 to 6.97% at September 30, 2004, while the leverage ratio of Tier I capital to average assets declined from 7.64% at year-end 2003 to 6.21% at September 30, 2004. The decline in these ratios was due to a $23.5 million decrease in Tier I capital and higher average and risk-weighted assets. The ratio of total capital to risk weighted assets also decreased by 34 basis points from year-end 2003 to 10.10% at September 30, 2004 largely due to the increase in risk-weighted assets, partly offset by a $15.1 million increase in total capital.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company’s and the Bank’s capital ratios were as follows for the dates indicated:

ACTUAL

FOR CAPITAL
ADEQUACY

PURPOSES

TO BE WELL
CAPITALIZED UNDER
PROMPT

CORRECTIVE

ACTION PROVISIONS

AMOUNT

RATIO

AMOUNT

RATIO

AMOUNT

RATIO

(dollars in thousands)

As of September 30, 2004:

Total Capital (to Risk Weighted Assets)

Taylor Capital Group, Inc.

246,477

10.10

195,215

>8.00

244,018

>10.00

Cole Taylor Bank

253,034

10.37

>195,113

>8.00

>243,891

>10.00

Tier I Capital (to Risk Weighted Assets)

Taylor Capital Group, Inc.

170,013

6.97

>97,607

>4.00

>146,411

>6.00

Cole Taylor Bank

222,452

9.12

>97,556

>4.00

>146,335

>6.00

Leverage (to average assets)

Taylor Capital Group, Inc.

170,013

6.21

>109,497

>4.00

>136,872

>5.00

Cole Taylor Bank

222,452

8.14

>109,324

>4.00

>136,655

>5.00

As of December 31, 2003:

Total Capital (to Risk Weighted Assets)

Taylor Capital Group, Inc.

231,328

10.44

177,300

>8.00

221,625

>10.00

Cole Taylor Bank

237,702

10.75

>176,823

>8.00

>221,028

>10.00

Tier I Capital (to Risk Weighted Assets)

Taylor Capital Group, Inc.

193,543

8.73

>88,650

>4.00

>132,975

>6.00

Cole Taylor Bank

209,990

9.50

>88,411

>4.00

>132,617

>6.00

Leverage (to average assets)

Taylor Capital Group, Inc.

193,543

7.64

>101,357

>4.00

>126,697

>5.00

Cole Taylor Bank

209,990

8.31

>101,130

>4.00

>126,413

>5.00

During the first nine months of 2004, we declared common stock dividends of $0.18 per share, totaling $1.7 million. During 2004, we also declared preferred stock dividends of $1.225 per share, totaling $1.9 million. We redeemed the Series A preferred stock on July 16, 2004, and in the future, we expect to pay dividends only on our outstanding common stock. During the first nine months of 2003, we declared preferred stock dividends of $1.6875 per share, totaling $2.6 million, and common stock dividends of $0.18 per share, totaling $1.7 million.

The covenants in our senior notes payable agreement restrict the amount of common dividends that the Company can pay to shareholders and the amount of dividends that the Bank can pay to the Company. Each calendar year, the Company is restricted from paying annual cash common dividends to shareholders during a calendar year in excess of 25% of that year’s annual net income, while the Bank is restricted from paying annual cash dividends in a calendar year to the Company in excess of 60% of that year’s annual net income.

The Bank is also subject to dividend restrictions set forth by regulatory authorities. Under such restrictions, the Bank may not, without prior approval of regulatory authorities, declare dividends in excess of the sum of the current year’s earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends, as of September 30, 2004, that the Bank could declare and pay to the Company, without the approval of regulatory authorities, amounted to approximately $48.5 million. However, payment of such dividends is also subject to the Bank remaining in compliance with all applicable capital ratios.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

LIQUIDITY

From December 31, 2003 to September 30, 2004, our cash and cash equivalent balances increased $2.9 million to $91.4 million. During the first nine months of 2004, we primarily used deposits to fund loan growth and the expansion of the investment portfolio. Significant sources of funds included a $237.5 million net increase in deposits, $53.3 million of sales of available-for-sale investment securities, and $51.9 million of repayments and maturities in investment securities. The increase in deposits was produced by higher time deposit balances of $183.7 million, in particular, brokered and out-of-local-market certificates of deposits increased by $120.0 million and $25.1 million, respectively during the first nine months of 2004. In addition, noninterest bearing deposits also increased $35.1 million from year-end 2003. Uses of funds included the purchase of $175.7 million of investment securities, a net increase in loans of $163.5 million, and a $15.0 million maturity of a FHLB advance.

At the holding company level, we received proceeds of $40.8 million, net of issuance costs, from the issuance of $41.2 million of junior subordinated debentures to our wholly owned subsidiary, TAYC Capital Trust II. TAYC Capital Trust II was formed for the sole purpose of issuing $40.0 million of trust preferred securities on June 17, 2004. We deposited the funds at our subsidiary bank, which utilized the funds to reduce short-term borrowings. We used the proceeds from the issuance of the junior subordinated debentures on July 16, 2004 to redeem all of our outstanding Series A 9% noncumulative perpetual preferred stock. We redeemed this series of preferred stock at the stated liquidation value of $38.25 million plus $153,000 of accrued dividends. The remainder of the proceeds from the issuance of the junior subordinated debentures was used for general corporate purposes.

In addition to the issuance of the junior subordinated debentures, the holding company received dividends from the Bank of $8.0 million during the first nine months of 2004. The Bank did not pay any dividends to the holding company during 2003 because we maintained sufficient liquidity from the proceeds of our concurrent offering in 2002 of common and trust preferred securities. The holding company used liquidity to pay $3.6 million of common and preferred stock dividends during the nine month period ended September 30, 2004.

We maintain borrowing lines at both the Bank and holding company level to meet our expected commitments.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements include commitments to extend credit, financial guarantees, and derivative financial instruments. Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers. Derivative financial instruments are used to manage interest rate risk.

At September 30, 2004, we had $863.0 million of undrawn commitments to extend credit and $112.7 million of financial and performance standby letters of credit. We expect most of these letters of credit to expire undrawn and we expect no significant loss from our obligation under financial guarantees.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

At September 30, 2004, our only derivative financial instruments were interest-rate exchange contracts. We maintain interest rate exchange contracts with notional amounts of $155.0 million to hedge the fair values of certain brokered certificates of deposit and of $50 million to hedge the variability of cash flows of prime-based commercial loans. Under the contracts to hedge the fair value of brokered certificates of deposit, we receive a fixed interest rate equal to the rate paid on the brokered certificates of deposit and pay a floating interest rate based upon LIBOR. During the first nine months of 2004, a notional amount of $25.0 million relating to the hedged brokered certificates of deposit were called by the counter party and we called the related brokered certificates of deposit. We entered into a total additional notional amount of $130.0 million to hedge additions to brokered certificates of deposit in 2004. Under the contract to hedge the variability in cash flows from prime-based commercial loans, we receive a fixed interest rate and pay a floating rate based upon the prime-lending rate based on a notional amount of $50 million. This cash flow hedge is expected to be highly effective, in hedging the variability of cash flows on prime-based loans due to movements in the prime-lending rate.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Interest rate risk is the most significant market risk affecting us. Other types of market risk, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities. Interest rate risk can be defined as the exposure to a movement in interest rates that could have an adverse effect on our net interest income or the market value of our financial instruments. The ongoing monitoring and management of this risk is an important component of our asset and liability management process, which is governed by policies established by the Board of Directors and carried out by the Bank’s Asset/Liability Management Committee, or ALCO. ALCO’s objectives are to manage, to the degree prudently possible, our exposure to interest rate risk over both the one year planning cycle and the longer term strategic horizon and, at the same time, to provide a stable and steadily increasing flow of net interest income. Interest rate risk management activities include establishing guidelines for tenor and repricing characteristics of new business flow, the maturity ladder of wholesale funding and investment security purchase and sale strategies, as well as the use of derivative financial instruments.

We have used various interest rate contracts, including swaps, to manage interest rate and market risk. These contracts are designated as hedges of specific existing assets and liabilities. Our asset and liability management and investment policies do not allow the use of derivative financial instruments for trading purposes.

Our primary measurement of interest rate risk is earnings at risk, which is determined through computerized simulation modeling. The primary simulation model assumes a static balance sheet, a parallel interest rate rising or declining ramp and uses the balances, rates, maturities and repricing characteristics of all of the Bank’s existing assets and liabilities, including off-balance sheet financial instruments. Net interest income is computed by the model assuming market rates remaining unchanged and compares those results to other interest rate

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

scenarios with changes in the magnitude, timing, and relationship between various interest rates. The impact of imbedded options in products such as callable and mortgage-backed securities, real estate mortgage loans, and callable borrowings are considered. Changes in net interest income in the rising and declining rate scenarios are then measured against the net interest income in the rates unchanged scenario. ALCO utilizes the results of the model to quantify the estimated exposure of net interest income to sustained interest rate changes.

Our net interest margin increased in the third quarter of 2004 in response to the 75 basis point increase in our prime rate. Our loan interest income increased as our $1.1 billion in prime-indexed, floating-rate commercial loans adjusted to higher yields. Critical factors affecting our net interest margin in future periods will be our pricing strategy on deposit products and whether the current yield curve remains unchanged. Our modeling of the September 30, 2004 balance sheet using the market interest rates in effect on September 30, 2004, indicated increased pressure on the margin in future periods as many of our interest-bearing liabilities continue to re-price to current rates as they mature.

Our simulation modeling of a continued rising rate environment indicates that net interest income would increase. Net interest income for year one in a 200 basis points rising rate scenario was calculated to be $3.8 million, or 3.68%, higher than the net interest income in the rates unchanged scenario at September 30, 2004. Conversely, at September 30, 2004, net interest income at risk for year one in a 100 basis points falling rate scenario was calculated at $4.3 million, or 4.18%, lower than the net interest income in the rates unchanged scenario. These exposures were within the Bank’s policy guidelines of 10%. The direction of our one-year exposure to rising and declining interest rates at September 30, 2004 was generally consistent with our exposure at December 31, 2003. In the December 31, 2003 modeling, we used a 200 basis point rising and a 50 basis point falling rate scenarios.

Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including, among other factors, relative levels of market interest rates, product pricing, reinvestment strategies and customer behavior influencing loan and security prepayments and deposit decay and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions we may take in response to changes in interest rates. We cannot assure you that our actual net interest income would increase or decrease by the amounts computed by the simulations.

The following table indicates the estimated impact on net interest income for the 12 months following the indicated dates, assuming a gradual shift up or down in market rates reflecting a parallel change in rates across the entire yield curve:


	Change in Future Net Interest Income
	At September 30, 2004					At December 31, 2003
	(dollars in thousands)
Change in interest rates	Dollar Change			Percentage Change		Dollar Change			Percentage Change
+200 basis points over one year	$	3,817		3.68	%	$	3,280		3.39	%
- 50 basis points over one year		—		—			(2,225	)	(2.30	%)
- 100 basis points over one year		(4,342	)	(4.18	%)		—		—

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

LITIGATION

We are from time to time a party to litigation arising in the normal course of business. Management knows of no threatened or pending legal actions against us that are likely to have a material adverse impact on our business, financial condition, liquidity or operating results.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) which provided new accounting guidance on when to consolidate a variable interest entity. In December 2003, the FASB reissued Interpretation No. 46 (FIN 46R) with certain modifications and clarifications. Application of FIN 46R was effective for interests in certain variable interest entities as of December 31, 2003, and for all other types of variable interest entities for periods ending after March 15, 2004, unless FIN 46 was previously applied. Beginning with the first quarter of 2004, the FIN 46 guidance required us to deconsolidate TAYC Capital Trust I, our wholly owned subsidiary formed for the purpose of issuing trust preferred securities. Not consolidating the TAYC Capital Trust I did not have a material impact on our reported results of operations or financial condition.

Before January 1, 2004, we consolidated TAYC Capital Trust I and reported the $45.0 million trust preferred securities on our Consolidated Balance Sheets under the caption “guaranteed preferred beneficial interest in the Company’s junior subordinated debentures.” The cash distributions on the trust preferred securities of TAYC Capital Trust I were also reported in interest expense, under a similar caption on the Consolidated Statements of Income. On January 1, 2004, we deconsolidated TAYC Capital Trust I. In addition, we do not consolidate TAYC Capital Trust II, our wholly owned subsidiary formed in June 2004 for the purpose of issuing $40.0 million of trust preferred securities. We now report a liability for the total balance of the junior subordinated debentures from the Trusts, which corresponds to the sum of the trust preferred securities and the common equity of the Trusts. Our equity investments in the Trusts are reported in other assets on the Consolidated Balance Sheet at September 30, 2004. Interest expense on the junior subordinated debentures is reported in interest expense.

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

QUARTERLY FINANCIAL INFORMATION

The following table sets forth unaudited financial data regarding our operations for the last eight quarters. This information, in the opinion of management, includes all adjustments necessary to present fairly our results of operations for such periods, consisting only of normal recurring adjustments for the periods indicated. The operating results for any quarter are not necessarily indicative of results for any future period.


	2004 Quarter Ended						2003 Quarter Ended								2002 Quarter Ended
	Sep. 30		Jun. 30		Mar. 31		Dec. 31		Sep. 30		Jun. 30		Mar. 31		Dec. 31
	(in thousands, except per share amounts)
Interest income	$	34,972	$	32,869	$	32,510	$	32,648	$	34,576	$	34,873	$	34,787	$	35,942
Interest expense		10,633		9,376		9,408		9,123		9,856		10,567		10,608		10,957

Net interest income		24,339		23,493		23,102		23,525		24,720		24,306		24,179		24,985
Provision for loan losses		2,750		2,750		2,750		2,700		2,700		1,533		2,300		2,475
Noninterest income		4,280		4,304		4,675		4,939		4,590		4,977		4,535		4,526
Securities gains, net		345		—		—		—		—		—		—		—
Noninterest expense		16,310		18,416		18,783		22,545		19,005		19,223		18,450		21,022

Income before income taxes		9,904		6,631		6,244		3,219		7,605		8,527		7,964		6,014
Income taxes		3,072		2,324		2,108		728		2,013		2,988		2,839		2,099

Net income	$	6,832	$	4,307	$	4,136	$	2,491	$	5,592	$	5,539	$	5,125	$	3,915

Earnings per share:
Basic	$	0.72	$	0.35	$	0.35	$	0.17	$	0.50	$	0.50	$	0.45	$	0.35
Diluted		0.71		0.34		0.34		0.17		0.50		0.49		0.45		0.35

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report 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,” “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 2004 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: the effect on our profitability if historically low interest rates continue or if interest rates fluctuate as well as the effect of any imbalances in the interest rate sensitivities of our assets and liabilities; the possibility that our wholesale funding sources may prove insufficient to replace deposits at maturity and support our growth; the risk that our allowance for loan losses may prove insufficient to absorb potential losses in our loan portfolio; possible volatility in loan charge-offs and recoveries between periods; the potential impact on the holding company’s regulatory capital as a result of final standards on the inclusion of trust preferred securities ; the effectiveness of our hedging transactions and their impact on our future results of operations; the risks associated with implementing our business strategy and managing our growth effectively; the risks associated with our reliance on third party professionals who provide certain financial services to our customers; changes in general economic conditions, interest rates, deposit flows, loan demand, competition, legislation or

TAYLOR CAPITAL GROUP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

regulatory and accounting principles, policies or guidelines, as well as other economic, competitive, governmental, regulatory and technological factors impacting our operations.

For further information about these and other risks, uncertainties and factors, please review the disclosure included in our December 31, 2003 Annual Report on Form 10-K under the caption “Risk Factors.”

You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, 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 quarterly report.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The information contained in the section captioned “Management’s Discussion and Analysis—Quantitative and Qualitative Disclosure About Market Risks” is incorporated herein by reference.

Item 4.

Controls and Procedures

We maintain a system of disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

We have carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that such controls and procedures were effective as of the end of the period covered by this report, in all material respects, to ensure that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide reasonable assurance.

TAYLOR CAPITAL GROUP, INC.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

We are from time to time a party to litigation arising in the normal course of business. As of the date of this quarterly report, management knows of no threatened or pending legal actions against us that are likely to have a material adverse effect on our business, financial condition or results of operations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

We have filed the following exhibits with this quarterly report:


*Exhibit* *Number*		*Exhibit*

3.1		Amended and Restated Certificate of Incorporation of Taylor Capital Group, Inc. (incorporated by reference from Exhibit 3.1 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

3.2		Amended and Restated By-laws of Taylor Capital Group, Inc. (incorporated by reference from Exhibit 3.2 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.1		Certificate representing the Series A 9% Noncumulative Perpetual Preferred Stock (incorporated by reference from Exhibit 4.2 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.2		Certificate representing Taylor Capital Group, Inc. Common Stock (incorporated by reference from Exhibit 4.3 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

TAYLOR CAPITAL GROUP, INC.


*Exhibit* *Number*		*Exhibit*

4.3		Indenture between Taylor Capital Group, Inc. and LaSalle Bank National Association, as trustee (incorporated by reference from Exhibit 4.4 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.4		Junior Subordinated Debenture due 2032 (incorporated by reference from Exhibit 4.5 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.5		Certificate of Trust of TAYC Capital Trust I (incorporated by reference from Exhibit 4.6 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.6		Amended and Restated Trust Agreement of TAYC Capital Trust I (incorporated by reference from Exhibit 4.8 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.7		Preferred Securities Guarantee Agreement (incorporated by reference from Exhibit 4.9 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.8		Agreement as to Expenses and Liabilities by and between Taylor Capital Group, Inc. and TAYC Capital Trust I (incorporated by reference from Exhibit 4.10 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.9		Certificate representing TAYC Capital Trust I Trust Preferred Security (incorporated by reference from Exhibit 4.11 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).

4.12		Certificate of Trust of TAYC Capital Trust II (incorporated by reference from Exhibit 4.12 of the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).

4.13		Amended and Restated Declaration of Trust by and among Wilmington Trust Company, as Delaware and Institutional Trustee, Taylor Capital Group, Inc., as Sponsor, Jeffrey W. Taylor, Bruce W. Taylor and Robin Van Castle, as Administrators (incorporated by reference from Exhibit 4.13 of the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).

4.14		Indenture between Taylor Capital Group, Inc. and Wilmington Trust Company, as trustee (incorporated by reference from Exhibit 4.14 of the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).

4.15		Guarantee Agreement by and between Taylor Capital Group, Inc. and Wilmington Trust Company (incorporated by reference from Exhibit 4.15 of the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).

TAYLOR CAPITAL GROUP, INC.


Exhibit Number		*Exhibit*

4.16		Certificate representing Floating Rate Capital Securities of TAYC Capital Trust II (incorporated by reference from Exhibit 4.16 of the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).

4.17		Certificate representing Floating Rate Common Securities of TAYC Capital Trust II (incorporated by reference from Exhibit 4.17 of the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).

4.18		Floating Rate Junior Subordinated Deferrable Interest Debenture due 2034 (incorporated by reference from Exhibit 4.18 of the Company’s Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Security Exchange Act of 1934.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Security Exchange Act of 1934.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

TAYLOR CAPITAL GROUP, INC.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				TAYLOR CAPITAL GROUP, INC.
Date: November 5, 2004

				/s/ BRUCE W. TAYLOR
				Bruce W. Taylor
				Interim Chief Financial Officer
				(Principal Financial and Accounting Officer)

				/s/ JEFFREY W. TAYLOR
				Jeffrey W. Taylor
				Chairman and Chief Executive Officer
				(Principal Executive Officer)