##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K



---



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT
OF 1934



For the fiscal year ended December 31, 2006



Commission file number 0-50034



---



TAYLOR CAPITAL GROUP, INC.

(Exact name of registrant as specified in its
charter)



---



|                                                              |  |                                       
|------------------------------------------------------------- |  | --------------------------------------
|Delaware                                                      |  | 36-4108550                            
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification Number)



9550 West Higgins
Road

Rosemont, Illinois 60018

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



(847) 653-7978

(Registrants telephone number, including area code)



---



Securities registered pursuant to Section 12(b) of the Act:



|                                                                                                                                               |  |                                    
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------
|Common Stock, par value $0.01 per share 9.75% Trust Preferred Securities Issued by TAYC Capital Trust I and the Guarantee With Respect Thereto |  | The NASDAQ Stock Market, LLC       
|(Title of Class)                                                                                                                               |  | (Name of Exchange Which Registered)



Securities
registered pursuant to Section 12(g) of the Act:



None



---



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x



Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes ̈No  x



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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈



Indicate by check mark
whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x



The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on the Nasdaq National Market System on June 30, 2006, the last
business day of the registrants most recently completed second fiscal quarter was approximately $243,183,525.



At March 2, 2007, there were 11,125,582 shares of the registrants common stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on June 7, 2007 are incorporated by reference into Part III hereof.



---



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.



INDEX



|          |  |                                                                                                                  |  |         
|--------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------
|          |  |                                                                                                                  |  | Page No.
|Part I.   |  |                                                                                                                  |  |         
|          |  |                                                                                                                 
|Item 1.   |  | Business                                                                                                         |  | 1       
|Item 1A.  |  | Risk Factors                                                                                                     |  | 9       
|Item 1B.  |  | Unresolved Staff Comments                                                                                        |  | 13      
|Item 2.   |  | Properties                                                                                                       |  | 13      
|Item 3.   |  | Legal Proceedings                                                                                                |  | 14      
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                              |  | 14      
|          |  |                                                                                                                 
|Part II.  |  |                                                                                                                  |  |         
|          |  |                                                                                                                 
|Item 5.   |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer     Purchases of Equity Securities |  | 15      
|Item 6.   |  | Selected Financial Data                                                                                          |  | 18      
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of     Operations                        |  | 20      
|Item 7A.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 60      
|Item 8.   |  | Financial Statements and Supplementary Data                                                                      |  | 61      
|Item 9.   |  | Changes in and Disagreements With Accountants on Accounting and Financial     Disclosure                         |  | 105     
|Item 9A.  |  | Controls and Procedures                                                                                          |  | 105     
|Item 9B.  |  | Other Information                                                                                                |  | 107     
|          |  |                                                                                                                 
|Part III. |  |                                                                                                                  |  |         
|          |  |                                                                                                                 
|Item 10.  |  | Directors, Executive Officers and Corporate Governance                                                           |  | 108     
|Item 11.  |  | Executive Compensation                                                                                           |  | 108     
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related     Stockholder Matters               |  | 108     
|Item 13.  |  | Certain Relationships and Related Transactions, and Director Independence                                        |  | 108     
|Item 14.  |  | Principal Accountant Fees and Services                                                                           |  | 108     
|          |  |                                                                                                                 
|Part IV.  |  |                                                                                                                  |  |         
|          |  |                                                                                                                 
|Item 15.  |  | Exhibits, Financial Statement Schedules                                                                          |  | 109     







---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.



PART I



Item 1. Business



Our Business



We are a bank holding company headquartered in Rosemont,
Illinois, a suburb of Chicago, and we derive substantially all of our revenue from our wholly-owned subsidiary, Cole Taylor Bank. Cole Taylor Bank was founded in 1929 by forefathers of the Taylor family and has served the Chicago metropolitan area
for over 75 years. Taylor Capital Group, Inc. was formed in 1996 and acquired Cole Taylor Bank in 1997. We provide a range of products and services primarily to closely-held commercial customers and their owner operators in the Chicago metropolitan
area. At December 31, 2006, we had assets of approximately $3.4 billion, deposits of approximately $2.6 billion, and stockholders equity of $271.2 million.



Our primary business is commercial banking and, as of December 31, 2006, over 90% of our loan portfolio was comprised
of commercial loans. Our targeted commercial lending customers are closely-held, Chicago-area businesses in industries such as manufacturing, wholesale and retail distribution, transportation, construction contracting and professional services. Our
commercial lending activities primarily consist of providing loans for working capital, business expansion or acquisition, owner-occupied commercial real estate financing, revolving lines of credit and stand-by and commercial letters of credit.



Our real estate lending activities primarily consist of
providing loans to professional homebuilders, condominium and commercial real estate developers and investors. Our real estate development customers typically seek acquisition, development and construction loans and stand-by letters of credit. The
majority of our development and construction lending is for residential home development, primarily in the Chicago metropolitan area, although we will lend to our existing homebuilder customers in connection with development projects outside of the
Chicago metropolitan area. Our real estate investment customers typically seek term financing on selected income producing properties, including multi-family, retail, office and industrial properties.



In addition to our lending activities, we offer deposit, treasury management
and corporate trust services to our commercial customers. Our treasury cash management services, which include internet balance reporting, remote deposit capture, automated clearing house products, imaged lock-box processing, controlled
disbursement, and account reconciliation, help our commercial banking customers meet their treasury cash management needs.



We also cross-sell products and services to the owners and executives of our business customers designed to help them meet their personal financial goals.
Our product offerings currently include personal customized credit and wealth management services. We use third-party providers to augment our offerings to include investment management and brokerage services.



We offer deposit products such as checking, savings and money market
accounts, time deposits and repurchase agreements to our business customers and community-based customers, typically individuals and small, local businesses, located near our banking centers.



Our Strategy



Our strategy to build stockholder value is based on a focused plan to be Chicagos banking specialists for closely-held
businesses. Providing commercial banking services to this market niche has been an integral part of Cole Taylor Banks strategy since it was founded in 1929. We plan to continue our success by further leveraging the following competitive
strengths:



| |  |  | Relationship-oriented customer experience. Our customers are the center of what we do so we partner with our customers to understand the dynamics of the
businesses that we serve. Speed and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



1



---

##### Table of Contents

| | responsiveness are critical elements of the customer experience and we do our utmost to be available anytime and any place to meet their needs. We believe
closely-held business owners value a long-term relationship with a quality banker who provides innovative advice and creative ideas and understands the challenges and opportunities they face. For this reason, we believe our relationship managers are
the number one product we bring to the market and that our customers value their access to our top management.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Focus on our targeted customers. We focus our time and resources on closely-held businesses and the owners and managers of these businesses. We identify and
pursue customer niches as a natural extension of our focused strategy. We also seek to leverage our commercial relationships by cross-selling products and services to address the personal financial needs of these business owners and managers.
Expanding on the relationships we have built with these key decision-makers by helping them meet their personal financial goals through products such as personal customized credit, financial planning and wealth management services, in addition to
our array of deposit products, is an opportunity for us.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Optimal position in our market. We believe we are well positioned to meet the needs of our target market. We are large enough to handle more complex credit
facilities and treasury cash management services, yet small enough to provide more personalized customer service. We also believe it is important to our customers to have access to senior management who understand what it means to run an
owner-operated business. This relationship banking approach, coupled with our ability to offer customized products and financial solutions, is what we believe sets us apart from our competition.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Efficient, organic growth. Since 1997, we have achieved stable organic growth and we expect to continue to increase our profitability by growing our loans
outstanding over an efficient expense base and cross-selling other products and services to our commercial lending customers and the owners and managers of those businesses. We believe that we can achieve greater profitability by leveraging our
current infrastructure and holding increases in our expense base to levels generally consistent with inflation. We also plan to generate and develop new customer relationships by, among other things, continuing to market and promote our brand in the
Chicago metropolitan area.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Competition



We encounter intense competition for all of our products and services,
including substantial competition in attracting and retaining deposits and in obtaining loan customers. The principal competitive factors in the banking and financial services industry are quality of services to customers, ease of access to services
and pricing of services, including interest rates paid on deposits, interest rates charged on loans, as well as credit terms and underwriting requirements, and fees charged for trust, investment and other professional services. Our principal
competitors are numerous and include other commercial banks, savings and loan associations, mutual funds, money market funds, finance companies, credit unions, mortgage companies, the United States Government, private issuers of debt obligations and
suppliers of other investment alternatives, such as securities firms.



Many of our competitors are significantly larger than us and have access to greater financial and other resources. In addition, many of our non-bank competitors are not subject to the same federal regulations that govern bank holding
companies and federally insured banks or the state regulations governing state chartered banks. As a result, our non-bank competitors may have advantages over us in providing some services.



Employees



Together with the Bank, we had approximately 421 full-time equivalent employees as of December 31, 2006. None of our
employees is subject to a collective bargaining agreement. We consider our relationships with our employees to be good.



2



---

##### Table of Contents

Supervision and Regulation



General



Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, our growth and
earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including
the Illinois Department of Financial and Professional Regulation (the DFPR), the Board of Governors of the Federal Reserve System (the Federal Reserve) and the Federal Deposit Insurance Corporation (the
FDIC). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities and securities laws administered by the Securities and Exchange Commission (the SEC) and state securities
authorities have an impact on our business. The effect of these statutes, regulations and regulatory policies may be significant, and cannot be predicted with a high degree of certainty.



Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches,
mergers and consolidations and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for our operations and those of our subsidiaries and is intended primarily for the protection of the FDIC
insurance fund and depositors of the Bank, rather than stockholders.



The following is a summary of the material elements of the regulatory framework that applies to us and our subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of
the requirements of those that are described. As such, the following is qualified in its entirety by reference to applicable law and regulations. Any change in statutes, regulations or regulatory policies may have a material effect on our
business and the business of our subsidiaries.



The Company



General. We, as the sole stockholder of the Bank, are a
bank holding company. As a bank holding company, we are registered with, and are subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the BHCA). In accordance with Federal Reserve
policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal
Reserve. We are required to file with the Federal Reserve periodic reports of our operations and such additional information regarding us and our subsidiaries as the Federal Reserve may require. We are also subject to regulation by the DFPR
under Illinois law.



Acquisitions, Activities and Change
in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank
holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of
the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured
depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target
bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.



The BHCA generally prohibits us from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than that of



3



---

##### Table of Contents

banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be so closely related to banking  as to be a proper incident
thereto. This authority would permit us to engage in a variety of banking-related businesses, including the operation of a thrift, consumer finance, equipment leasing, the operation of a computer service bureau (including software
development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.



Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate
as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the
Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a
substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, we have not elected to operate as a financial holding company, although we believe we would qualify to do so.



Federal law also prohibits any person or company from
acquiring control of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. Control is conclusively presumed to exist upon the acquisition of 25% or more
of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances at 10% ownership.



Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital
adequacy guidelines. If capital levels fall below the minimum required levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.



The Federal Reserves capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based requirement expressed as a percentage of total assets weighted according to risk; and (ii) a leverage requirement expressed as a percentage of total assets. The
risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio of Tier 1 capital
to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders equity less intangible assets
(other than certain loan servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments that do not qualify as Tier 1 capital and a portion of the
companys allowance for loan and lease losses.



The
risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal
Reserves capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well
above the minimum levels. As of December 31, 2006, we had regulatory capital in excess of the Federal Reserves minimum requirements.



Dividend Payments. Our ability to pay dividends to our stockholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, we are subject to the limitations of the Delaware General Corporation Law (the DGCL). The DGCL allows us to pay dividends only out
of our surplus (as defined and computed in accordance with the



4



---

##### Table of Contents

provisions of the DGCL) or if we have no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding companys financial health,
such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.



Federal Securities Regulation. Our common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the Exchange Act). Consequently, we are subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act, including the
Sarbanes-Oxley Act of 2002, as amended, and SEC regulations passed pursuant thereto.



The Bank



General. The Bank is
an Illinois-chartered bank, the deposit accounts of which are insured by the FDICs Deposit Insurance Fund (DIF). The Bank is also a member of the Federal Reserve System (member bank). As an Illinois-chartered,
FDIC-insured member bank, the Bank is presently subject to the examination, supervision, reporting and enforcement requirements of the DFPR, the chartering authority for Illinois banks, the Federal Reserve, as the primary federal regulator of member
banks, and the FDIC, as administrator of the DIF.



Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC based upon a risk classification system established by the agency comprised of four categories
that are distinguished by capital ratios and supervisory ratings. Each banks risk-based assessment category will be determined, and assessments will be collected, on a quarterly basis.



During the year ended December 31, 2006, DIF assessments ranged from 0%
of deposits to 0.27% of deposits. The Bank qualified for the 0% rate deposit insurance in 2006. In 2007, the assessment rate for deposits will range from 5 basis points to 43 basis points for every $100 of qualified deposits. The FDIC has
preliminarily indicated that the Banks annual assessment rate for 2007 will be approximately 5 to 7 basis points per $100 of deposits. The FDIC has allowed eligible insured institutions to share in an one-time assessment credit for
institutions in existence at December 31, 1996 and paid deposit insurance assessments prior to that date. The Bank estimates that its one-time assessment credit will offset deposit assessments in 2007 and reduce the 2008 assessment.



FICO Assessments. Since 1987, a portion of the deposit
insurance assessments paid by members of the FDICs Savings Association Insurance Fund (SAIF) has been used to cover interest payments due on the outstanding obligations of the Financing Corporation (FICO). FICO was
created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIFs predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, members of
both SAIF and the Bank Insurance Fund (BIF) (both now merged into the DIF, as discussed below) became subject to assessments to cover the interest payments on outstanding FICO obligations until the final maturity of such obligations in
2019. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2006, the FICO assessment rate for DIF members was approximately 0.01% of deposits. During the year ended
December 31, 2006, the FICO assessment rate for DIF members was approximately 0.01% of deposits. The Banks FICO assessment expense for 2006 was $320,000. Management believes this expense will be comparable in 2007.



Supervisory Assessments. All Illinois banks are required to pay
supervisory assessments to the DFPR to fund the operations of the DFPR. The amount of the assessment is calculated on the basis of the banks total assets. During the year ended December 31, 2006, the Bank paid supervisory assessments to
the DFPR totaling $353,000.



5



---

##### Table of Contents

Capital Requirements. Banks are generally required to maintain capital levels in excess of
other businesses. The regulations of the Federal Reserve establish the following minimum capital standards for the banks regulated by the Federal Reserve: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum
ratio of Tier 1 capital to total risk-weighted assets of 4%. In general, the components of Tier 1 capital and total capital are the same as those for bank holding companies discussed above.



The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, regulations of the Federal Reserve provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.



Further, federal law and regulations provide various incentives for financial institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is well-capitalized may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities and may qualify for
expedited processing of other required notices or applications. Additionally, one of the criteria that determines a bank holding companys eligibility to operate as a financial holding company is a requirement that all of its financial
institution subsidiaries be well-capitalized. Under the regulations of the Federal Reserve, in order to be well-capitalized a financial institution must maintain a ratio of total capital to total risk-weighted assets of 10%
or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater.



Federal law also provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators powers depends on whether the institution in question is adequately capitalized, undercapitalized, significantly undercapitalized or critically
undercapitalized, in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institutions asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired;
(iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that
senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of
principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.



As of December 31, 2006: (i) the Bank was not subject to a directive from the Federal Reserve to increase its capital to an amount in
excess of the minimum regulatory capital requirements; (ii) the Bank exceeded its minimum regulatory capital requirements under Federal Reserve capital adequacy guidelines; and (iii) the Bank was well-capitalized, as
defined by Federal Reserve regulations.



Dividend
Payments. Our primary source of funds is dividends from the Bank. Under the Illinois Banking Act, Illinois-chartered banks generally may not pay dividends in excess of their net profits. Without Federal Reserve approval, a state member bank
may not pay dividends in any calendar year that, in the aggregate, exceed the banks calendar year-to-date net income plus the banks retained net income for the two preceding calendar years.



The payment of dividends by any financial institution or its holding company
is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the
institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2006. As of December 31, 2006, approximately $84.6 million was available to be



6



---

##### Table of Contents

paid as dividends by the Bank. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any
dividends by the Bank if the Federal Reserve determines such payment would constitute an unsafe or unsound practice.



Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on extensions of credit to us, on investments in
our stock or other securities and the acceptance of our stock or other securities as collateral for loans made by the Bank. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and
officers, to our directors and officers, to our principal stockholders and to related interests of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person
who is one of our directors or officers, a director or officer of the Bank or one of our principal stockholders may obtain credit from banks with which the Bank maintains a correspondent relationship.



Safety and Soundness Standards. The federal banking agencies
have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.



In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institutions primary federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an
order directing the institution to cure the deficiency. Until the deficiency cited in the regulators order is cured, the regulator may restrict the institutions rate of growth, require the institution to increase its capital, restrict
the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute
grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.



Branching Authority. Illinois banks, such as the Bank, have the authority under Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory approvals.



Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging
bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is permitted only in those states the laws of which expressly authorize such expansion.



State Bank Investments and Activities. The Bank generally is permitted to make investments and engage in activities directly or through
subsidiaries as authorized by Illinois law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank
unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not
had, and are not currently expected to have, a material impact on the operations of the Bank.



Federal Reserve System. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking



7



---

##### Table of Contents

accounts), as follows: for transaction accounts aggregating $48.3 million or less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $48.3 million, the reserve requirement is $1.215 million plus 10% of the aggregate amount of total transaction accounts in excess of $48.3 million. The first $7.8 million of otherwise reservable
balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank is in compliance with the foregoing requirements.



USA Patriot Act.In response to the terrorist events of
September 11, 2001, Congress passed the Uniting and Strengthening of America by Providing Tools to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act). The Patriot Act imposed new obligations upon the bank with respect to
anti-money laundering policies and procedures, information sharing with regulatory agencies and law enforcement, and other related obligations. The Bank has established policies and procedures designed to comply with the Patriot Act.



Recent Regulatory Developments



On February 8, 2006, President Bush signed the Federal Deposit
Insurance Reform Act of 2005 (FDIRA) into law as part of the Deficit Reduction Act of 2005. On February 15, 2006, President Bush signed into law the technical and conforming amendments designed to implement FDIRA. FDIRA
provides for legislative reforms to modernize the federal deposit insurance system.



Among other things, FDIRA: (i) permitted the FDIC to merge the BIF and SAIF into a single deposit insurance fund, the DIF, which occurred on March 31, 2006 (ii) increases the deposit insurance limit for
certain retirement account deposits from $100,000 to $250,000; (iii) permits an indexing to inflation calculation with respect to deposit insurance coverage on individual accounts beginning in 2010; (iv) replaces the fixed designated
reserve ratio of 1.25% with a reserve ratio range of 1.15%-1.50%, with the specific reserve ratio to be determined annually by the FDIC by regulation (see below); (v) permits the FDIC to revise the risk-based assessment system by regulation;
and (vi) provides a one-time credit against future assessments based upon the assessment base of the institution on December 31, 1996 to each insured depository institution that was in existence as of December 31, 1996 and paid a
deposit insurance assessment prior to that date (or a successor to any such institution) (see the discussion above with respect to the Banks proposed assessment credit).



Pursuant to FDIRA, the FDIC set the designated reserve ratio for the DIF at 1.25% effective January 1, 2007. The
FDICs new risk-based assessment system authorized by the FDIRA was officially published on November 30, 2006.



Available Information



Our website is www.taylorcapitalgroup.com. We make available on this website under the caption Stock Information, free of charge, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. Materials that we file or furnish
to the SEC may also be read and copied at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Also, the
SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC.



8



---

##### Table of Contents

Item 1A. Risk Factors



You should read carefully and consider the following risks and uncertainties because they could materially and adversely affect our business, financial condition, results of operations and prospects.



Fluctuations in interest rates could reduce our profitability.



We are subject to interest rate risk. We realize income primarily from the
difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the
relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products (e.g., LIBOR and prime) may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, our earnings
may be negatively affected. In addition, loan volume and quality and deposit volume and mix can be affected by market interest rates. Changes in levels of market interest rates could materially adversely affect our net interest spread, asset
quality, origination volume and overall profitability.



As of
December 31, 2006, our internal financial models indicated an exposure to our net interest income from either declining or flat rates. If market interest rates were to remain flat and we experienced no change in the volume and mix of our
earning assets or funding liabilities, we expect that our earning asset yields would likely remain flat and our liability rates would likely increase, resulting in a reduced net interest spread. Our net interest income would also likely decline if
rates were to fall. We estimate that, as of December 31, 2006, our net interest income at risk for year one in a falling rate scenario of 200 basis points would be approximately $2.4 million, or 2.23%, lower than our net interest income in a
rates unchanged scenario. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan and security prepayments, deposit decay and pricing and
reinvestment strategies and should not be relied upon as indicative of actual results.



We manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities and using derivative financial instruments to hedge interest rate risk associated with specific hedged items.
In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.



Our wholesale funding sources may prove insufficient to replace deposit
withdrawals and support our future growth.



We must
maintain sufficient funds to respond to the needs of depositors and borrowers. As part of our liquidity management, we use a number of funding sources in addition to what is provided by in-market deposits and repayments and maturities of loans and
investments. As we continue to grow, we are likely to become more dependent on these sources, which include brokered money market accounts and certificates of deposits, out-of-local-market certificates of deposit, broker/dealer repurchase
agreements, federal funds purchased and Federal Home Loan Bank, or FHLB, advances. At December 31, 2006, we had uncollateralized funding of $65.1 million of brokered money market deposits, $551.8 million of brokered time deposits and $105.1
million of out-of-local-market time deposits. Adverse operating results or changes in industry conditions could lead to an inability to obtain the necessary funding at maturity. Our financial flexibility will be severely constrained if we are unable
to maintain our access to funding or if adequate financing is not available at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase
proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.



9



---

##### Table of Contents

We may be unable to respond cost effectively to deposit volatility created by significant deposit customers.



As a part of our liquidity management, we must ensure
we can respond effectively to potential volatility in our customers deposit balances. We have customers that maintain significant deposit balances, the immediate withdrawal of which would be material to our daily liquidity management. We could
encounter difficulty meeting a significant deposit outflow which could negatively impact our profitability or reputation. We use primarily FHLB borrowings, broker/dealer repurchase agreements and federal funds purchased to meet immediate liquidity
needs. In addition, the Bank is able to borrow from the Federal Reserve Bank through the Borrower-in-Custody (BIC) program. At December 31, 2006, the Bank maintained pre-approved overnight federal funds borrowing lines at various
correspondent banks totaling $200 million, repurchase agreement availability with major brokers and banks totaling $750 million and collateral under the BIC program for borrowings totaling $315 million. While we believe these alternative funding
sources are adequate to meet any significant unanticipated deposit withdrawal, we may not be able to manage the risk of deposit volatility effectively.



Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.



Like all financial institutions, we maintain an allowance for loan losses to
provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance
sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.



In evaluating the adequacy of our allowance for loan losses, we consider
numerous quantitative factors, including our 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 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. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers abilities to successfully execute
their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.



In addition, over 50% of our loan portfolio is secured by real
estate and therefore could be negatively impacted by a decline in residential real estate sales volumes. In particular, a decline in residential home sales increases the potential for illiquidity in the real estate market, which could result in an
increase in nonperforming loans and a decrease in collateral values.



Federal and state regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our
allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition
and results of operations.



Our business is subject to lending
concentration risks.



As a business bank, our loan
portfolio is comprised primarily of commercial loans to businesses. These loans are typically larger in amount than loans to individual consumers. Individually larger commercial loans also can cause greater volatility in reported credit quality
performance measures, such as total impaired or



10



---

##### Table of Contents

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. Because our loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of any one or a few of these loans
may cause a significant increase in uncollectible or nonaccrual loans that could have an adverse impact on our results of operations and financial condition.



Our business is subject to the conditions of the local economy in which we operate.



Our success is dependent to a significant extent upon economic conditions in the Chicago metropolitan area, where
substantially all of our loans are originated. For example, our small- and middle-market business and commercial real estate customers in the Chicago metropolitan area could be significantly affected by a local recession or economic downturn, which
may result in an increase of defaults on outstanding loans and reduced demand for future loans, both of which could adversely affect us. Adverse changes in the economy of the Chicago metropolitan area could also impair our ability to gather deposits
and could otherwise have a negative effect on our business, including the demand for new loans, the ability of customers to repay loans and the value of the collateral securing loans.



Furthermore, as of December 31, 2006, 69% of our loan portfolio consists of loans that are to some degree secured by
real estate located primarily within the Chicago metropolitan area. In the event that real estate values in the Chicago area decline, the value of this collateral may be impaired.



Competition from financial institutions and other financial services providers may adversely affect our growth and profitability.



We operate in a highly competitive industry and
experience intense competition from financial institutions and other financial service providers in our market. We compete with these institutions in making loans, attracting deposits and recruiting and retaining talented people. Many of our
competitors are well-established, larger financial institutions. We have observed that the competition in our market for making commercial loans has resulted in more competitive pricing and credit structure as well as intense competition for skilled
commercial lending officers. These trends could have a material adverse effect on our ability to grow and remain profitable. Significant discounting of interest rates offered on loans negatively impacts interest income and can therefore adversely
impact net interest income. More liberal credit structures can expose a financial institution to higher losses from lending activities. An inability to recruit and retain skilled commercial loan officers poses a significant barrier to retaining and
growing our customer base.



While we believe we can and do
successfully compete with other financial institutions in our market, we may face a competitive disadvantage as a result of our smaller size and lack of geographic diversification. Although our competitive strategy is to provide a distinctly
superior customer and employee experience, we can give no assurance this strategy will be successful.



Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the
transactions. For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. The process of eliminating banks as intermediaries could result in the loss of customer deposits
and fee income. The loss of these potentially lower cost deposits as a source of funds could have an adverse impact on our results of operations and financial condition.



Our business strategy is dependent on our ability to attract, develop and retain highly skilled and experienced personnel.



Our success depends, in large part, on our ability to
attract and retain skilled people. The unexpected loss of one or more of our key personnel could have an adverse impact on our business because of the loss of their skills,



11



---

##### Table of Contents

knowledge of our business and years of experience. In addition, we may face difficulty in promptly finding qualified replacement personnel and our existing
personnel could be overburdened during that period, which could limit their effectiveness. Furthermore, turnover in key management positions can generate uncertainty and adversely affect relationships with employees, customers or regulatory
authorities. Competition for experienced personnel is intense, and we currently do not have employment or non-competition agreements with most of our key personnel. Therefore, we cannot assure you that we will be able to successfully attract and
retain such personnel or prevent them from competing with us should we lose their services.



Additionally, our competitive strategy is to provide each of our commercial customers with a highly skilled relationship manager that will serve as the customers key point of contact with us and that can deliver
greater value to our customers than our competitors. Achieving the status of a trusted advisor for our customers also requires that we minimize relationship manager turnover and provide stability to the customer relationship. In
addition, the loss of highly skilled relationship managers, should they enter into an employment relationship with one of our competitors, could result in the loss of some of our customers.



We may not be able to execute our growth strategy.



Our future success depends on our achieving growth in commercial banking
relationships that result in increased commercial loans outstanding at yields that are profitable to us. Achieving our growth targets requires us to attract customers that currently bank at other financial institutions in our market, thereby
increasing our share of the market. Our strategy is to provide a local, high-touch relationship servicing experience that we believe is attractive to customers in our marketplace. We cannot assure you that we will be able to expand our market
presence or that any such expansion will not adversely affect our results of operations.



Our strategy for future growth also may place a significant strain on our management, personnel, systems and resources. Maintaining strong credit quality while growing our loan portfolio is critical to achieving and
sustaining profitable growth. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed.



Our business may be adversely affected by the highly regulated environment in which we operate.



We are subject to extensive federal and state regulation and supervision,
which is primarily for the protection of depositors and customers rather than for the benefit of investors. As a bank holding company, we are subject to regulation and supervision primarily by the Federal Reserve. Cole Taylor Bank, as an
Illinois-chartered member bank, is subject to regulation and supervision by the DFPR and by the Federal Reserve. We must undergo periodic examinations by our regulators, who have extensive discretion and power to prevent or remedy unsafe or unsound
practices or violations of law by banks and bank holding companies. Our failure to comply with state and federal regulations can lead to, among other things, termination or suspension of our licenses, rights of rescission for borrowers, class action
lawsuits and administrative enforcement actions. We cannot assure you that we will be able to fully comply with these regulations. Recently enacted, proposed and future legislation and regulations have had, and will continue to have, a significant
impact on the financial services industry. Regulatory or legislative changes could cause us to change or limit some of our loan products or the way we operate our business and could adversely affect our profitability.



12



---

##### Table of Contents

Our business is subject to the vagaries of domestic and international economic conditions and other factors, many
of which are beyond our control and could significantly harm our business.



Our business is directly affected by domestic and international factors that are beyond our control, including economic, political and market conditions, broad trends in industry and finance, legislative and
regulatory changes, competition, changes in government monetary and fiscal policies, consolidation within our customer base and within our industry and inflation. For example, significant decline in general economic conditions, such as recession,
increased unemployment and other factors beyond our control, would significantly impact our business. Deterioration in economic conditions may result in a decrease in demand for commercial credit and a decline in real estate and other asset values.
Delinquencies, foreclosures and losses generally increase during economic slowdowns and recessions, and we therefore expect that our servicing costs and credit losses would increase during such periods. Alternatively, increases in the level of
interest rates could negatively impact the real estate market resulting in reduced real estate development activity and reduced debt service coverage.



We are subject to certain operational risks, including, but not limited to, data processing system failures and errors and customer or employee fraud.



There have been a number of highly publicized cases
involving fraud or other misconduct by employees of financial services firms in recent years. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or
improper use of confidential information. Employee fraud, errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It is not always possible to prevent employee
errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to civil claims for negligence.



We maintain a system of internal controls and procedures designed to reduce
the risk of loss from employee or customer fraud or misconduct and employee errors as well as insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our
internal controls fail to prevent or detect an occurrence, or if an occurrence is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition or results of operations.



We are subject to security risks relating to our internet banking activities that
could damage our reputation and our business.



Security
breaches in our internet banking activities could expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of
confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our
security measures that could result in damage to our reputation and our business.



Item 1B. Unresolved Staff Comments



We have no unresolved staff comments.



Item 2. Properties



Our
principal offices are located at our Corporate Center at 9550 West Higgins Road, Rosemont, Illinois. We lease approximately 112,000 square feet for our Corporate Center under an operating lease that commenced on September 10, 2003 and expires
on August 31, 2014. We have the option to renew the lease for up to two additional five year terms, which would extend the lease to August 31, 2024. In 2006, we opened an approximately 4,000 square foot banking center on the first floor of
the building where our Corporate Center is located for a customer banking center.



13



---

##### Table of Contents

In January 2007, we announced that we had entered into an operating lease for approximately 36,000 square
feet of general office space at 225 West Washington in Chicago, Illinois. The term of the lease is 15 years with two five year renewal options. We plan to move our administrative offices, which are currently located at another leased facility at 111
West Washington, to the new space when our existing lease expires in December 2007. We plan on maintaining the banking center located on the first floor of our 111 West Washington facility.



We currently have eleven banking center locations in the Chicago metropolitan
area. We continually evaluate our banking center locations, considering the physical location, size of operations and lease terms. On January 31, 2007, we closed our banking center located in Itasca, Illinois. The operating lease on the Itasca
facility was scheduled to expire in August 2007. We completed the sale of our Broadview banking center on January 27, 2005. In addition to selling the physical land and building, we sold approximately $19.7 million of deposit balances and $5.3
million of loans associated with the banking center. We recorded a $1.6 million gain on the sale of this banking center during the first quarter of 2005.



Of our current eleven banking center locations, we own five of the buildings from which the banking centers are operated, including our Ashland, Skokie,
Yorktown, Old Orchard, and Milwaukee locations. We lease the land under the buildings at Yorktown, Old Orchard and Milwaukee. We lease the buildings for our Wheeling (term to February 2015), Burbank (term to June 2014), Woodlawn (term to May 2007),
West Washington (term to December 2007), Orland Park (term to March 2008), and Rosemont (term to August 2014) banking facilities.



The following is a list of our administrative and customer banking locations:



|                    |  |                                                     |  |            
|------------------- |  | --------------------------------------------------- |  | -----------
|Facility            |  | Address                                             |  | Square Feet
|Corporate Center    |  | 9550 West Higgins Road, Rosemont, Illinois          |  | 112,212    
|West Washington     |  | 111 West Washington, Chicago, Illinois              |  | 40,662     
|West Washington (1) |  | 225 West Washington, Chicago, Illinois              |  | 35,931     
|Milwaukee           |  | 1965 North Milwaukee, Chicago, Illinois             |  | 27,394     
|Burbank             |  | 5501 West 79th Street, Burbank, Illinois            |  | 20,318     
|Skokie              |  | 4400 West Oakton, Skokie, Illinois                  |  | 15,800     
|Yorktown            |  | One Yorktown Center, Lombard, Illinois              |  | 12,400     
|Old Orchard         |  | Golf Road and Skokie Boulevard, Skokie, Illinois    |  | 10,000     
|Wheeling            |  | 350 East Dundee Road, Wheeling, Illinois            |  | 8,274      
|Ashland             |  | 1542 W. 47thStreet, Chicago, Illinois               |  | 6,000      
|Orland Park         |  | 15014 LaGrange Road, Orland Park, Illinois          |  | 2,790      
|Itasca (2)          |  | 1250 North Arlington Heights Road, Itasca, Illinois |  | 2,470      
|Woodlawn            |  | 824 E. 63rd Street, Chicago, Illinois               |  | 2,100      

---

|(1) | Operating lease entered into in January 2007, lease is set to commence in November 2007.
|--- | ----------------------------------------------------------------------------------------

|(2) | Banking center closed on January 31, 2007, but lease expires in August 2007.
|--- | ----------------------------------------------------------------------------



On an ongoing basis we evaluate additional potential sites for new banking center locations. We carefully assess local
market opportunities and explore facility options from leasing to acquisition and construction. In connection with those activities, we sometimes enter into non-binding letters of intent. No firm commitments have been executed for additional sites
at this time.



Item 3. Legal Proceedings



We are a party to litigation from time to time arising in the normal course of business. As of the date of this annual 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 4. Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of security holders during the fourth quarter of 2006.



14



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.



PART II



Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.



Our common stock trades on the NASDAQ National Market under the symbol TAYC. In July 2006, the NASDAQ National Market was renamed the NASDAQ
Global Market. In conjunction with this change, NASDAQ created the new NASDAQ Global Select Market. As a result, our common stock is now quoted on the NASDAQ Global Select Market. We will use the term NASDAQ to describe the NASDAQ
National Market and the NASDAQ Global Select Market. The high and low sales price per share our common stock for the periods indicated is set forth below:



|                           |  |      |       |     |   |      
|-------------------------- |  | ---- | ----- | --- | - | -----
|                           |  | High |       | Low
|2006                       |  |      |       |     |   |      
|Quarter Ended March 31     |  | $    | 43.18 |     | $ | 36.88
|Quarter Ended June 30      |  |      | 42.99 |     |   | 37.63
|Quarter Ended September 30 |  |      | 42.07 |     |   | 28.61
|Quarter Ended December 31  |  |      | 38.00 |     |   | 29.22
|                           |  |     
|2005                       |  |      |       |     |   |      
|Quarter Ended March 31     |  | $    | 34.15 |     | $ | 30.02
|Quarter Ended June 30      |  |      | 39.50 |     |   | 30.89
|Quarter Ended September 30 |  |      | 39.75 |     |   | 36.00
|Quarter Ended December 31  |  |      | 41.99 |     |   | 37.10



As of March 2,
2007, the closing price per share of our common stock as reported on the NASDAQ was $34.91.



As of March 2, 2007, there were 70 stockholders of record of our common stock, based upon securities position listings furnished to us by our transfer agent. We believe the number of beneficial owners is greater
than the number of record holders because a large portion of our common stock is held of record through brokerage firms in street name.



The following table sets forth, for each quarter in 2006 and 2005, the dividends declared on our common stock:



|               |  |                                          |      |                                          |   |     
|-------------- |  | ---------------------------------------- | ---- | ---------------------------------------- | - | ----
|               |  | 2006 Dividends Per Share of Common Stock |      | 2005 Dividends Per Share of Common Stock
|First quarter  |  | $                                        | 0.06 |                                          | $ | 0.06
|Second quarter |  |                                          | 0.06 |                                          |   | 0.06
|Third quarter  |  |                                          | 0.06 |                                          |   | 0.06
|Fourth quarter |  |                                          | 0.10 |                                          |   | 0.06



Holders of our common
stock are entitled to receive any cash dividends that may be declared by our Board of Directors. Since 1997, we have paid regular cash dividends on our common stock. The declaration and payment of future dividends to holders of our common stock will
be at the discretion of our Board of Directors and will depend upon our earnings and financial condition, the capital requirements of the company and our subsidiaries, regulatory conditions and considerations and other factors as our Board of
Directors may deem relevant.



It is our intention to continue
to pay cash dividends on the common stock to the extent permitted by applicable banking regulations and the terms of the junior subordinated debentures. As a holding company, we



15



---

##### Table of Contents

ultimately are dependent upon the Bank to provide funding for our operating expenses, debt service, and dividends. Various banking laws applicable to the
Bank limit the payment of dividends, management fees and other distributions by the Bank to us, and may therefore limit our ability to pay dividends on our common stock. We will also be prohibited from paying dividends on our common stock if we fail
to make distributions or required payments on the trust preferred securities. See the section of Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation, captioned Liquidity for additional
details of restrictions on our ability to pay dividends and the ability of the Bank to pay dividends to us.



We did not repurchase any shares of our common stock during the fourth quarter of 2006. We currently do not have any Board of Director authorized share
repurchase programs.



In 2006, we did not make any unregistered
sales of equity securities.



16



---

##### Table of Contents

Stock Performance Graph



The graph below compares our cumulative stockholder return on our common stock from October 16, 2002 through December 31, 2006, with the
composite index for all U.S. companies included in the NASDAQ Stock Market and the SNL NASDAQ Stock Market Bank Index. The source for the information below is SNL Financial LC, Charlottesville, VA.



Since October 16, 2002, our common stock has been traded principally on
the NASDAQ under the symbol TAYC.



LOGO



|                           |  |               |  |          |  |          |  |          |  |          |  |         
|-------------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                           |  | Period Ending
|Index                      |  | 10/16/02      |  | 12/31/02 |  | 12/31/03 |  | 12/31/04 |  | 12/31/05 |  | 12/31/06
|Taylor Capital Group, Inc. |  | 100.00        |  | 110.11   |  | 153.34   |  | 202.36   |  | 245.63   |  | 224.34  
|NASDAQ Composite           |  | 100.00        |  | 108.27   |  | 163.22   |  | 178.16   |  | 182.04   |  | 200.96  
|SNL NASDAQ Bank Index      |  | 100.00        |  | 100.94   |  | 130.29   |  | 149.32   |  | 144.77   |  | 162.53  



This graph is not
deemed to be soliciting material or to be filed with the SEC or subject to the SECs proxy rules or to the liabilities of Section 18 of the Exchange Act, and the graph shall not be deemed to be incorporated by
reference into any prior or subsequent filing by us under the Securities Act or the Exchange Act.



17



---

##### Table of Contents

Item 6: Selected Financial Data



The selected consolidated financial data presented below under the caption Taylor Capital Group, Inc. as of and for the five years ended December 31, 2006, is derived from our historical financial statements. The selected
financial information presented below under the caption of Cole Taylor Bank is derived from unaudited financial statements of the Bank or from the audited consolidated financial statements of Taylor Capital Group, Inc. You should read
this information in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes included elsewhere in this annual report.
Results from past periods are not necessarily indicative of results that may be expected for any future period. All share and per share information in 2002 has been adjusted for a three-for-two split of our common stock that was effected as a
dividend to stockholders of record as of October 2, 2002.



|                                                     |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|---------------------------------------------------- |  | --------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | --
|                                                     |  | Year Ended December 31,                       |           
|                                                     |  | 2006                                          |            |   | 2005 |   |            | 2004 |  |   | 2003      |   |  | 2002 |          
|                                                     |  | (dollars in thousands, except per share data) |           
|TAYLOR CAPITAL GROUP, INC. (consolidated):           |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Income Statement Data:                               |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Net interest income                                  |  | $                                             | 111,192    |   |      | $ | 108,607    |      |  | $ | 94,523    |   |  | $    | 95,730    |   |  | $ | 101,335   |   
|Provision for loan losses                            |  |                                               | 6,000      |   |      |   | 5,523      |      |  |   | 10,083    |   |  |      | 9,233     |   |  |   | 9,900     |   
|                                                     |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Net interest income after provision for loan losses  |  |                                               | 105,192    |   |      |   | 103,084    |      |  |   | 84,440    |   |  |      | 86,497    |   |  |   | 91,435    |   
|Noninterest income:                                  |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Service charges                                      |  |                                               | 7,738      |   |      |   | 9,022      |      |  |   | 10,854    |   |  |      | 12,336    |   |  |   | 12,206    |   
|Trust and investment management fees                 |  |                                               | 4,155      |   |      |   | 4,545      |      |  |   | 5,331     |   |  |      | 4,852     |   |  |   | 5,267     |   
|Gain on sale of investment securities, net           |  |                                               |           |   |      |   | 127        |      |  |   | 144       |   |  |      |          |   |  |   | 2,076     |   
|Sale of branch and land trusts                       |  |                                               |           |   |      |   | 3,572      |      |  |   |          |   |  |      |          |   |  |   |          |   
|Other derivative income (expense)                    |  |                                               | 494        |   |      |   | (3,203     | )    |  |   | 2,193     |   |  |      |          |   |  |   |          |   
|Other noninterest income                             |  |                                               | 3,878      |   |      |   | 3,802      |      |  |   | 2,997     |   |  |      | 2,853     |   |  |   | 2,430     |   
|                                                     |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Total noninterest income                             |  |                                               | 16,265     |   |      |   | 17,865     |      |  |   | 21,519    |   |  |      | 20,041    |   |  |   | 21,979    |   
|Noninterest expense:                                 |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Salaries and employee benefits                       |  |                                               | 40,652     |   |      |   | 40,255     |      |  |   | 38,951    |   |  |      | 41,066    |   |  |   | 43,780    |   
|Legal fees, net                                      |  |                                               | 2,166      |   |      |   | 1,891      |      |  |   | 1,808     |   |  |      | 943       |   |  |   | 4,098     |   
|Lease abandonment and termination charges            |  |                                               |           |   |      |   |           |      |  |   | 984       |   |  |      | 3,534     |   |  |   |          |   
|Litigation settlement charge                         |  |                                               |           |   |      |   |           |      |  |   |          |   |  |      |          |   |  |   | 61,900    |   
|Other noninterest expense                            |  |                                               | 30,441     |   |      |   | 27,509     |      |  |   | 29,930    |   |  |      | 33,680    |   |  |   | 33,376    |   
|                                                     |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Total noninterest expense                            |  |                                               | 73,259     |   |      |   | 69,655     |      |  |   | 71,673    |   |  |      | 79,223    |   |  |   | 143,154   |   
|                                                     |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Income (loss) before income taxes                    |  |                                               | 48,198     |   |      |   | 51,294     |      |  |   | 34,286    |   |  |      | 27,315    |   |  |   | (29,740   | ) 
|Income taxes                                         |  |                                               | 2,035      |   |      |   | 19,523     |      |  |   | 11,313    |   |  |      | 8,568     |   |  |   | 11,675    |   
|                                                     |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Net income (loss)                                    |  |                                               | 46,163     |   |      |   | 31,771     |      |  |   | 22,973    |   |  |      | 18,747    |   |  |   | (41,415   | ) 
|Preferred dividend requirements                      |  |                                               |           |   |      |   |           |      |  |   | (1,875    | ) |  |      | (3,443    | ) |  |   | (3,442    | ) 
|                                                     |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Net income (loss) applicable to common stockholders  |  | $                                             | 46,163     |   |      | $ | 31,771     |      |  | $ | 21,098    |   |  | $    | 15,304    |   |  | $ | (44,857   | ) 
|                                                     |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|                                                     |  |                                               |            |   |     
|Common Share Data: (1)                               |  |                                               |            |   |      |   |            |      |  |   |           |   |  |      |           |   |  |   |           |   
|Basic earnings (loss) per share                      |  | $                                             | 4.22       |   |      | $ | 3.16       |      |  | $ | 2.21      |   |  | $    | 1.62      |   |  | $ | (6.12     | ) 
|Diluted earnings (loss) per share                    |  |                                               | 4.15       |   |      |   | 3.09       |      |  |   | 2.19      |   |  |      | 1.61      |   |  |   | (6.12     | ) 
|Cash dividends per share                             |  |                                               | 0.28       |   |      |   | 0.24       |      |  |   | 0.24      |   |  |      | 0.24      |   |  |   | 0.24      |   
|Book value per share                                 |  |                                               | 24.36      |   |      |   | 19.99      |      |  |   | 16.12     |   |  |      | 14.57     |   |  |   | 13.87     |   
|Dividend payout ratio                                |  |                                               | 6.75       | % |      |   | 7.77       | %    |  |   | 10.96     | % |  |      | 14.91     | % |  |   | (3.92     | )%
|Weighted average shares  basic earnings per share   |  |                                               | 10,940,162 |   |      |   | 10,045,358 |      |  |   | 9,539,242 |   |  |      | 9,449,336 |   |  |   | 7,323,979 |   
|Weighted average shares  diluted earnings per share |  |                                               | 11,118,818 |   |      |   | 10,286,647 |      |  |   | 9,644,515 |   |  |      | 9,528,785 |   |  |   | 7,323,979 |   
|Shares outstanding  end of year                     |  |                                               | 11,131,059 |   |      |   | 10,973,829 |      |  |   | 9,653,549 |   |  |      | 9,486,724 |   |  |   | 9,410,660 |   



18



---

##### Table of Contents

|                                                                        |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |   
|----------------------------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | --
|                                                                        |  | Year Ended December 31,                       |          
|                                                                        |  | 2006                                          |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|                                                                        |  | (dollars in thousands, except per share data) |          
|TAYLOR CAPITAL GROUP, INC. (consolidated):                              |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |   
|Balance Sheet Data (at end of year):                                    |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |   
|Total assets                                                            |  | $                                             | 3,379,667 |   |      | $ | 3,280,672 |      |  | $ | 2,889,048 |   |  | $    | 2,603,656 |   |  | $ | 2,535,461 |   
|Investment securities                                                   |  |                                               | 669,085   |   |      |   | 656,753   |      |  |   | 533,619   |   |  |      | 488,302   |   |  |   | 501,606   |   
|Total loans                                                             |  |                                               | 2,500,685 |   |      |   | 2,384,931 |      |  |   | 2,211,606 |   |  |      | 1,962,008 |   |  |   | 1,879,474 |   
|Allowance for loan losses                                               |  |                                               | 37,516    |   |      |   | 37,481    |      |  |   | 37,484    |   |  |      | 34,356    |   |  |   | 34,073    |   
|Goodwill                                                                |  |                                               | 23,237    |   |      |   | 23,237    |      |  |   | 23,354    |   |  |      | 23,354    |   |  |   | 23,354    |   
|Total deposits                                                          |  |                                               | 2,639,927 |   |      |   | 2,543,644 |      |  |   | 2,284,697 |   |  |      | 2,013,084 |   |  |   | 1,963,749 |   
|Other borrowings                                                        |  |                                               | 262,319   |   |      |   | 298,426   |      |  |   | 229,547   |   |  |      | 219,108   |   |  |   | 215,360   |   
|Notes payable and FHLB advances                                         |  |                                               | 80,000    |   |      |   | 75,000    |      |  |   | 85,500    |   |  |      | 110,500   |   |  |   | 110,500   |   
|Junior subordinated debentures                                          |  |                                               | 86,607    |   |      |   | 87,638    |      |  |   | 87,638    |   |  |      | 45,000    |   |  |   | 45,000    |   
|Preferred stock                                                         |  |                                               |          |   |      |   |          |      |  |   |          |   |  |      | 38,250    |   |  |   | 38,250    |   
|Common stockholders equity                                             |  |                                               | 271,192   |   |      |   | 219,318   |      |  |   | 155,573   |   |  |      | 138,235   |   |  |   | 130,487   |   
|Total stockholders equity                                              |  |                                               | 271,192   |   |      |   | 219,318   |      |  |   | 155,573   |   |  |      | 176,485   |   |  |   | 168,737   |   
|Earnings Performance Data:                                              |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |   
|Return on average assets                                                |  |                                               | 1.40      | % |      |   | 1.05      | %    |  |   | 0.84      | % |  |      | 0.73      | % |  |   | (1.70     | )%
|Return on average stockholders equity                                  |  |                                               | 19.55     |   |      |   | 17.41     |      |  |   | 14.00     |   |  |      | 10.86     |   |  |   | (26.29    | ) 
|Net interest margin (non tax-equivalent) (2)                            |  |                                               | 3.49      |   |      |   | 3.75      |      |  |   | 3.60      |   |  |      | 3.91      |   |  |   | 4.37      |   
|Noninterest income to revenues                                          |  |                                               | 6.86      |   |      |   | 9.13      |      |  |   | 13.54     |   |  |      | 12.85     |   |  |   | 13.08     |   
|Efficiency ratio (3)                                                    |  |                                               | 57.48     |   |      |   | 55.13     |      |  |   | 61.84     |   |  |      | 68.43     |   |  |   | 118.08    |   
|Loans to deposits                                                       |  |                                               | 94.72     |   |      |   | 93.76     |      |  |   | 96.80     |   |  |      | 97.46     |   |  |   | 95.71     |   
|Average interest earning assets to average interest bearing liabilities |  |                                               | 122.42    |   |      |   | 123.83    |      |  |   | 125.99    |   |  |      | 124.71    |   |  |   | 124.48    |   
|Ratio of earnings to fixed charges: (4)                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |   
|Including interest on deposits                                          |  |                                               | 1.43x     |   |      |   | 1.72x     |      |  |   | 1.65x     |   |  |      | 1.47x     |   |  |   | 0.32x     |   
|Excluding interest on deposits                                          |  |                                               | 2.92x     |   |      |   | 3.61x     |      |  |   | 2.85x     |   |  |      | 2.17x     |   |  |   | (1.18     | )x
|Asset Quality Ratios:                                                   |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |   
|Allowance for loan losses to total loans                                |  |                                               | 1.50      | % |      |   | 1.57      | %    |  |   | 1.69      | % |  |      | 1.75      | % |  |   | 1.81      | % 
|Allowance for loan losses to nonperforming loans (5)                    |  |                                               | 113.15    |   |      |   | 278.69    |      |  |   | 265.98    |   |  |      | 150.79    |   |  |   | 186.62    |   
|Net loan charge-offs to average total loans                             |  |                                               | 0.25      |   |      |   | 0.24      |      |  |   | 0.34      |   |  |      | 0.47      |   |  |   | 0.39      |   
|Nonperforming assets to total loans plus repossessed property (6)       |  |                                               | 1.34      |   |      |   | 0.61      |      |  |   | 0.64      |   |  |      | 1.17      |   |  |   | 1.00      |   
|Capital Ratios:                                                         |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |   
|Total stockholders equity to assets  end of year                      |  |                                               | 8.02      | % |      |   | 6.69      | %    |  |   | 5.38      | % |  |      | 6.78      | % |  |   | 6.66      | % 
|Average stockholders equity to average assets                          |  |                                               | 7.18      |   |      |   | 6.05      |      |  |   | 5.99      |   |  |      | 6.73      |   |  |   | 6.45      |   
|Leverage ratio                                                          |  |                                               | 10.17     |   |      |   | 8.90      |      |  |   | 6.49      |   |  |      | 7.64      |   |  |   | 7.21      |   
|Tier 1 risk-based capital ratio                                         |  |                                               | 12.10     |   |      |   | 10.44     |      |  |   | 7.29      |   |  |      | 8.73      |   |  |   | 8.82      |   
|Total risk-based capital ratio                                          |  |                                               | 13.35     |   |      |   | 12.02     |      |  |   | 10.27     |   |  |      | 10.44     |   |  |   | 10.61     |   
|                                                                        |  |                                               |           |   |     
|COLE TAYLOR BANK:                                                       |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |   
|Net income                                                              |  | $                                             | 40,247    |   |      | $ | 40,089    |      |  | $ | 28,314    |   |  | $    | 24,042    |   |  | $ | 25,387    |   
|Return on average assets                                                |  |                                               | 1.22      | % |      |   | 1.33      | %    |  |   | 1.04      | % |  |      | 0.94      | % |  |   | 1.04      | % 
|Stockholders equity to assets  end of year                            |  |                                               | 9.38      |   |      |   | 8.58      |      |  |   | 8.82      |   |  |      | 9.16      |   |  |   | 8.72      |   
|Leverage ratio                                                          |  |                                               | 9.04      |   |      |   | 8.46      |      |  |   | 8.29      |   |  |      | 8.31      |   |  |   | 7.52      |   
|Tier 1 risk-based capital ratio                                         |  |                                               | 10.76     |   |      |   | 9.91      |      |  |   | 9.30      |   |  |      | 9.50      |   |  |   | 9.22      |   
|Total risk-based capital ratio                                          |  |                                               | 12.01     |   |      |   | 11.16     |      |  |   | 10.55     |   |  |      | 10.75     |   |  |   | 10.47     |   

---

|(1) | All share and per share information in 2002 has been adjusted for a three-for-two split of our common stock that was effected as a dividend to stockholders of record as of
October 2, 2002.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Net interest margin is determined by dividing net interest income, as reported, by average interest-earning assets.
|--- | -------------------------------------------------------------------------------------------------------------------

|(3) | The efficiency ratio is determined by dividing noninterest expense by an amount equal to net interest income plus noninterest income, less investment securities gains.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | For purposes of calculating the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus interest and rent expense. Fixed charges consist of
interest expense, rent expense and preferred stock dividend requirements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Nonperforming loans consists of nonaccrual loans and loans contractually past due 90 days or more but still accruing interest.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(6) | Nonperforming assets consists of nonperforming loans, other real estate, and other repossessed assets.
|--- | ------------------------------------------------------------------------------------------------------



19



---

##### Table of Contents

Item 7: Managements Discussion And Analysis Of Financial Condition And Results Of Operations



Introduction



We are a bank holding company headquartered in Rosemont, Illinois, a suburb of Chicago. We derive substantially all of our revenue from our wholly-owned
subsidiary, Cole Taylor Bank. We provide a range of banking services to our customers, with a primary focus on serving closely-held businesses in the Chicago metropolitan area and the people who own and manage them.



The following discussion and analysis presents our consolidated financial
condition at December 31, 2006 and 2005 and the results of operations for the years ended December 31, 2006, 2005 and 2004. This discussion should be read together with the Selected Consolidated Financial Data, our audited
consolidated financial statements and the notes thereto and other financial data contained elsewhere in this annual report. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that
involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and forward-looking statements as a result of certain factors, including those discussed in the section captioned Risk
Factors and elsewhere in this Annual Report on Form 10-K.



Overview



We reported net income for the year ended
December 31, 2006 of $46.2 million, or $4.15 per diluted common share, compared with $31.8 million, or $3.09 per diluted common share, for the year ended December 31, 2005. The increased net income was primarily a result of the reversal of
accrued income tax liabilities totaling $15.5 million, or $1.39 per diluted common share, relating to tax uncertainties in prior years. These tax benefits were recognized in the second half of 2006 because of the expiration of the statute of
limitations on our 2002 income tax return and the completion of certain taxing authority examinations. Pre-tax income decreased $3.1 million, or 6.0%, during 2006 to $48.2 million compared to $51.3 million during 2005. The decrease in pre-tax income
was largely due to an increase in noninterest expense of $3.6 million, or 5.2%, and decrease in noninterest income of $1.6 million, or 9.0%. These decreases in pre-tax income were partly offset by higher net interest income of $2.6 million, or 2.4%.
Total assets increased by $99.0 million, or 3.0%, from year-end 2005 to $3.38 billion at December 31, 2006.



We reported net income applicable to common stockholders for the year ended December 31, 2005 of $31.8 million, or $3.09 per diluted common share,
compared with $21.1 million, or $2.19 per diluted common share, for the year ended December 31, 2004. The increased net income applicable to common stockholders was primarily a result of higher net interest income and lower provisions for loan
losses, while lower noninterest income was substantially offset by lower noninterest expense. In addition, we had no preferred dividends in 2005 because we redeemed all of our outstanding shares of preferred stock in July 2004. Net interest income
increased $14.1 million, or 14.9%, for the year ended December 31, 2005 as compared with 2004. The provision for loan losses was $5.5 million for the year ended December 31, 2005, compared to $10.1 million for 2004. Total assets increased
by $391.6 million, or 13.6%, from year-end 2004 to $3.28 billion at December 31, 2005.



Capital Transactions



On August 17, 2005, we completed a public offering of 1,000,000 shares of our common stock at a public offering price of $36.30 per share. On September 2, 2005, we issued an additional 150,000 shares in connection with an
over-allotment option granted to our underwriters. We received $38.95 million, after offering expenses, from this offering. The offering helped increase our tangible equity to assets ratio and has had the effect of increasing the daily trading
volume of our common stock. We used $10.5 million of the proceeds to reduce notes payable and the remainder of the proceeds have been retained at the holding company to support our continued growth. In connection with our capital stock offering, the
Taylor family reduced their stock holdings in the Company by selling 500,000 shares of common stock in the offering. We did not receive any proceeds from the sale of common stock by the Taylor family. As a result of the Taylor familys sale of
stock, the Taylor familys ownership of the Company has declined below 50%.



20



---

##### Table of Contents

On June 17, 2004, TAYC Capital Trust II, our wholly owned (non-consolidated) 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 the Company. On July 16, 2004, we used the proceeds from the junior subordinated debentures to redeem all of our outstanding shares of Series A 9% noncumulative perpetual preferred stock. 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.



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. Our accounting policies are described in the section of this annual report captioned Notes to Consolidated Financial StatementsSummary of Significant Accounting and Reporting Policies.



The preparation of financial statements in conformity with
these accounting principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on
information available to us as of the date of the consolidated financial statements and, accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements.
Certain accounting policies inherently have greater reliance on the use of estimates, assumptions and judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. We consider
these policies to be critical accounting policies. The estimates, assumptions and judgments made by us are based upon historical experience or other factors that we believe to be reasonable under the circumstances.



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



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. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include a general allowance computed by applying loss factors to categories of loans outstanding in the
portfolio, specific allowances for identified problem loans and portfolio segments, and an unallocated allowance. 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 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.



21



---

##### Table of Contents

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 $23.2 million that we recognized in connection with our 1997 acquisition of the Bank. We test this goodwill annually on July 1
for impairment, or whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. We tested goodwill for impairment as of July 1, 2006 and we determined that 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 junior subordinated debentures and the notes payable at the holding company level.



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.



Derivative Financial Instruments



We use derivative financial instruments (derivatives), including interest rate exchange and floor and collar agreements, to assist in our interest rate
risk management. In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), all derivatives are measured and reported at fair value on
our consolidated balance sheet as either an asset or a liability. For derivatives that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the
effective portion of the hedged risk, are recognized in current earnings during the period of the change in the fair values. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the
derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For all hedging relationships, derivative gains and losses that
are not effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings during the period of the change. Similarly, the changes in the fair value of derivatives that do not
qualify for hedge accounting under SFAS 133 are also reported currently in earnings.



At the inception of the hedge and quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivatives have been highly effective in offsetting the
changes in the fair values or cash flows of the hedged item and whether they are expected to be highly effective in the future. If it is determined that the derivative is not highly effective as a hedge, hedge accounting is discontinued for the
period. Once hedge accounting is terminated, all changes in fair value of the derivative flow through the consolidated statements of income in other noninterest income, which results in greater volatility in our earnings.



22



---

##### Table of Contents

The estimates of fair values of our derivatives are calculated using independent valuation models to
estimate mid-market valuations. The fair values produced by these proprietary valuation models are in part theoretical and therefore can vary between derivative dealers and are not necessarily reflective of the actual price at which the contract
could be traded. Small changes in assumptions can result in significant changes in valuation. The risks inherent in the determination of the fair value of a derivative may result in income statement volatility.



Results of Operations as of and for the years ended December 31, 2006, 2005, and 2004



Net Interest Income



Net interest income is the difference between total interest income 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 interest-earning assets and interest-bearing liabilities, and the level of rates earned or paid on those assets and liabilities.



Year Ended December 31, 2006 as Compared to Year Ended
December 31, 2005. Net interest income was $111.2 million during the year ended December 31, 2006, as compared to $108.6 million during 2005, an increase of $2.6 million, or 2.4%. With an adjustment for tax-exempt income, our
consolidated net interest income was $114.5 million, an increase of $4.3 million, or 3.9%, as compared to $110.2 million during 2005. These non-GAAP tax-equivalent measures are discussed more fully below. The net interest income increased as a
result of higher average interest-earning assets, partly offset by a decline in our net interest margin.



The tax-equivalent net interest margin was 3.60% during 2006 compared to 3.80% during 2005, a decrease of 20 basis points. The margin in 2006 was
negatively impacted by competitive pricing pressure for loans and deposits, as well as changes in our earning asset and funding mix in 2006 as compared to 2005.



The tax-equivalent net interest spread, which is determined by subtracting the yield on interest-earning assets from the cost of interest-bearing
liabilities, declined 40 basis points during 2006 to 2.83% compared to 3.23% in 2005. While our yield on our interest-earning assets increased 86 basis points to 7.05% during 2006 from 6.19% during 2005, the cost of our interest-bearing liabilities
increased to a greater extent. The cost of our interest-bearing liabilities increased 126 basis points to 4.22% during 2006 from 2.96% during 2005.



Average interest-earning assets increased $284.1 million, or 9.8%, to $3.18 billion for 2006 compared to $2.90 billion for 2005. Average loans increased
$158.9 million, or 7.0%, to $2.43 billion during 2006 compared to $2.27 billion for 2005. Average commercial loans accounted for most of the increase, as these balances increased $208.0 million, or 10.4%, between the two periods. Our portfolio of
home equity and consumer loans decreased by $51.5 million, or 25.3%. The yield earned on our loan portfolios benefited from the rising interest rate environment and the increase in the prime lending rate from June 2004 to June 2006. However, we
experienced a decline in the interest rate spread above the prime lending rate on our prime-based loans due to competitive pressures within our marketplace. In addition, our investment portfolio was larger in 2006 and the yield on our investment
securities is generally lower than the yield on our loans. Average investment balances increased $116.8 million, or 19.8%, to $707.9 million in 2006 compared to $591.1 million in 2005.



The growth in average earning assets during 2006 was funded primarily with interest-bearing deposits. Average
interest-bearing deposits balances were $2.17 billion during 2006, a $246.0 million, or 12.8% increase from average interest-bearing deposit balances of $1.92 billion in 2005. During 2006, average money market balances increased $168.0 million, or
33.0%, and average brokered certificates of deposits (CDs) increased $128.7 million, or 27.8%. While these balances increased, the balances of our lower cost deposits, such as NOW accounts, savings accounts, and non-interest bearing
deposits, all decreased. The shift in balances towards the higher rate deposit products contributed to the downward pressure on our net interest margin during 2006. See the section of this discussion and analysis captioned Deposits below
for further discussion on changes in deposit balances during 2006.



23



---

##### Table of Contents

We believe, based on our internal modeling using our balance sheet as of December 31, 2006, that our
net interest margin would likely decline over the next year if our balance sheet remained static and there were no further increases in prevailing market interest rates, including the prime lending rate that we use for many of our loans. Our net
interest margin would be subject to downward pressure as more of our interest-bearing liabilities would reprice to current rates, while the yield on our interest-earning assets largely reflects current rates. Additional factors, including those
described above that negatively impacted the 2006 net interest margin, may put additional pressure on our net interest margin in 2007. 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.



Year Ended December 31, 2005 as Compared to Year Ended December 31, 2004. Net interest income was $108.6 million during the year ended December 31, 2005, as compared to $94.5 million during 2004,
an increase of $14.1 million, or 14.9%. With an adjustment for tax-exempt income, our consolidated net interest income was $110.2 million, an increase of $14.5 million, or 15.1%, as compared to $95.8 million during 2004. The net interest income
increased as a result of the increase in our average interest-earning assets and in our net interest margin.



The tax-equivalent net interest margin was 3.80% during 2005 compared to 3.65% during 2004. Our net interest margin benefited from the increase in market
interest rates that began at the end of the second quarter of 2004. The net interest margin incorporates the impact on noninterest-bearing funds. Because the average volume of earning assets was $558.0 million greater than the volume of interest
bearing liabilities and the yield on earning assets increased during 2005, the net interest margin increased.



The tax-equivalent net interest spread was unchanged at 3.23% during both 2005 and 2004. The yield on our interest-earning assets increased 91 basis
points to 6.19% during 2005 from 5.28% during 2004. The cost of our interest-bearing liabilities also increased 91 basis points to 2.96% during 2005 from 2.05% during 2004.



Average interest-earning assets increased $276.1 million, or 10.5%, to $2.90 billion for 2005 compared to $2.62 billion for
2004. Average loans increased $226.0 million, or 11.0%, to $2.27 billion during 2005 compared to $2.05 billion for 2004. Average commercial loans increased $283.3 million, or 16.4%, between the two periods, while our portfolio of home equity and
consumer loans decreased by $47.9 million, or 19.0%.



The
$276.1 million increase in average earning assets from 2004 to 2005 was funded primarily with the $250.8 million increase in deposits. From 2004 to 2005, average brokered and out-of-local-market CDs increased $135.6 million, or 29.1%, average money
market accounts increased $79.1 million, or 18.4%, and average local-customer CDs increased $36.7 million, or 6.4%. Deposits in noninterest bearing and lower-rate products, including NOW and savings accounts, declined.



Tax-Equivalent Measures. 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, interest income and net interest income are
adjusted to reflect tax-exempt interest income on an equivalent before-tax basis assuming a 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.



24



---

##### Table of Contents

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 Year Ended December 31, |        
|                                               |  | 2006                            |         |   | 2005 |   |         | 2004 | 
|                                               |  | (dollars in thousands)          |        
|Net interest income as stated                  |  | $                               | 111,192 |   |      | $ | 108,607 |      |  | $ | 94,523 |  
|Tax equivalent adjustment-investments          |  |                                 | 2,991   |   |      |   | 1,429   |      |  |   | 1,085  |  
|Tax equivalent adjustment-loans                |  |                                 | 353     |   |      |   | 209     |      |  |   | 172    |  
|                                               |  |                                 |         |   |      |   |         |      |  |   |        |  
|Tax equivalent net interest income             |  | $                               | 114,536 |   |      | $ | 110,245 |      |  | $ | 95,780 |  
|                                               |  |                                 |         |   |      |   |         |      |  |   |        |  
|Yield on earning assets without tax adjustment |  |                                 | 6.94    | % |      |   | 6.13    | %    |  |   | 5.24   | %
|Yield on earning assets - tax equivalent       |  |                                 | 7.05    | % |      |   | 6.19    | %    |  |   | 5.28   | %
|                                               |  |                                 |        
|Net interest margin without tax adjustment     |  |                                 | 3.49    | % |      |   | 3.75    | %    |  |   | 3.60   | %
|Net interest margin - tax equivalent           |  |                                 | 3.60    | % |      |   | 3.80    | %    |  |   | 3.65   | %
|                                               |  |                                 |        
|Net interest spread - without tax adjustment   |  |                                 | 2.72    | % |      |   | 3.18    | %    |  |   | 3.18   | %
|Net interest spread - tax equivalent           |  |                                 | 2.83    | % |      |   | 3.23    | %    |  |   | 3.23   | %



25



---

##### Table of Contents

The following table presents, for the periods indicated, certain information relating to our consolidated
average balances and reflects 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 a tax rate of 35%.



|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|------------------------------------------ |  | ----------------------- | --------- | - | -------- | - | ------------- | ---- | ---- | -------------- |  | - | --------- | - | ------------- | - | ------- | -------------- | ---- | - | -------- | - | -------------- | - |  | - | ------- |  | ---- | -
|                                           |  | Year Ended December 31, |          
|                                           |  | 2006                    |           |   | 2005     |   |               | 2004 |     
|                                           |  | AVERAGEBALANCE          |           |   | INTEREST |   | YIELD/RATE(%) |      |      | AVERAGEBALANCE |  |   | INTEREST  |   | YIELD/RATE(%) |   |         | AVERAGEBALANCE |      |   | INTEREST |   | YIELD/ RATE(%) |  
|                                           |  | (dollars in thousands)  |          
|INTEREST-EARNING ASSETS:                   |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Investment securities (1):                 |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Taxable                                    |  | $                       | 574,823   |   |          | $ | 24,779        |      | 4.31 | %              |  | $ | 530,513   |   |               | $ | 21,173  |                | 3.99 | % |          | $ | 517,110        |   |  | $ | 20,486  |  | 3.96 | %
|Tax-exempt (tax equivalent) (2)            |  |                         | 133,115   |   |          |   | 8,545         |      | 6.42 |                |  |   | 60,619    |   |               |   | 4,082   |                | 6.73 |   |          |   | 43,538         |   |  |   | 3,083   |  | 7.08 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Total investment securities                |  |                         | 707,938   |   |          |   | 33,324        |      | 4.71 |                |  |   | 591,132   |   |               |   | 25,255  |                | 4.27 |   |          |   | 560,648        |   |  |   | 23,569  |  | 4.20 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Cash Equivalents                           |  |                         | 45,284    |   |          |   | 2,292         |      | 4.99 |                |  |   | 36,910    |   |               |   | 1,277   |                | 3.41 |   |          |   | 17,264         |   |  |   | 271     |  | 1.55 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Loans (3):                                 |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Commercial and commercial real estate      |  |                         | 2,214,508 |   |          |   | 171,977       |      | 7.66 |                |  |   | 2,006,511 |   |               |   | 135,314 |                | 6.65 |   |          |   | 1,723,210      |   |  |   | 96,724  |  | 5.52 |  
|Residential real estate mortgages          |  |                         | 63,904    |   |          |   | 3,581         |      | 5.60 |                |  |   | 61,487    |   |               |   | 3,258   |                | 5.30 |   |          |   | 70,963         |   |  |   | 3,806   |  | 5.36 |  
|Home equity and consumer                   |  |                         | 152,178   |   |          |   | 11,631        |      | 7.64 |                |  |   | 203,683   |   |               |   | 12,466  |                | 6.12 |   |          |   | 251,550        |   |  |   | 12,402  |  | 4.93 |  
|Fees on loans                              |  |                         |           |   |          |   | 1,539         |      |      |                |  |   |           |   |               |   | 1,877   |                |      |   |          |   |                |   |  |   | 1,838   |  |      |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Net loans (tax equivalent) (2)             |  |                         | 2,430,590 |   |          |   | 188,728       |      | 7.76 |                |  |   | 2,271,681 |   |               |   | 152,915 |                | 6.73 |   |          |   | 2,045,723      |   |  |   | 114,770 |  | 5.61 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Total interest earning assets              |  |                         | 3,183,812 |   |          |   | 224,344       |      | 7.05 |                |  |   | 2,899,723 |   |               |   | 179,447 |                | 6.19 |   |          |   | 2,623,635      |   |  |   | 138,610 |  | 5.28 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|NON-EARNING ASSETS:                        |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Allowance for loan losses                  |  |                         | (37,419   | ) |          |   |               |      |      |                |  |   | (38,100   | ) |               |   |         |                |      |   |          |   | (36,756        | ) |  |   |         |  |      |  
|Cash and due from banks                    |  |                         | 59,440    |   |          |   |               |      |      |                |  |   | 67,048    |   |               |   |         |                |      |   |          |   | 59,878         |   |  |   |         |  |      |  
|Accrued interest and other assets          |  |                         | 85,482    |   |          |   |               |      |      |                |  |   | 86,218    |   |               |   |         |                |      |   |          |   | 90,266         |   |  |   |         |  |      |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|TOTAL ASSETS                               |  | $                       | 3,291,315 |   |          |   |               |      |      |                |  | $ | 3,014,889 |   |               |   |         |                |      |   |          | $ | 2,737,023      |   |  |   |         |  |      |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|INTEREST-BEARING LIABILITIES:              |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Interest-bearing deposits:                 |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Interest-bearing demand deposits           |  | $                       | 772,127   |   |          | $ | 26,956        |      | 3.49 |                |  | $ | 627,489   |   |               | $ | 11,115  |                | 1.77 |   |          | $ | 564,920        |   |  | $ | 4,370   |  | 0.77 |  
|Savings deposits                           |  |                         | 66,500    |   |          |   | 188           |      | 0.28 |                |  |   | 78,853    |   |               |   | 230     |                | 0.29 |   |          |   | 89,678         |   |  |   | 279     |  | 0.31 |  
|Time deposits                              |  |                         | 1,330,524 |   |          |   | 60,122        |      | 4.52 |                |  |   | 1,216,846 |   |               |   | 40,665  |                | 3.34 |   |          |   | 1,044,023      |   |  |   | 26,593  |  | 2.55 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Total interest-bearing deposits            |  |                         | 2,169,151 |   |          |   | 87,266        |      | 4.02 |                |  |   | 1,923,188 |   |               |   | 52,010  |                | 2.70 |   |          |   | 1,698,621      |   |  |   | 31,242  |  | 1.84 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Other borrowings                           |  |                         | 263,874   |   |          |   | 10,622        |      | 3.97 |                |  |   | 248,676   |   |               |   | 6,147   |                | 2.44 |   |          |   | 219,438        |   |  |   | 2,228   |  | 1.02 |  
|Notes payable and FHLB advances            |  |                         | 80,548    |   |          |   | 4,105         |      | 5.03 |                |  |   | 82,192    |   |               |   | 3,905   |                | 4.69 |   |          |   | 95,582         |   |  |   | 4,336   |  | 4.46 |  
|Junior subordinated debentures             |  |                         | 87,067    |   |          |   | 7,815         |      | 8.98 |                |  |   | 87,638    |   |               |   | 7,140   |                | 8.15 |   |          |   | 68,709         |   |  |   | 5,024   |  | 7.31 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Total interest-bearing liabilities         |  |                         | 2,600,640 |   |          |   | 109,808       |      | 4.22 |                |  |   | 2,341,694 |   |               |   | 69,202  |                | 2.96 |   |          |   | 2,082,350      |   |  |   | 42,830  |  | 2.05 |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|NONINTEREST-BEARING LIABILITIES:           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Noninterest-bearing deposits               |  |                         | 401,258   |   |          |   |               |      |      |                |  |   | 438,784   |   |               |   |         |                |      |   |          |   | 447,345        |   |  |   |         |  |      |  
|Accrued interest and other liabilities     |  |                         | 53,251    |   |          |   |               |      |      |                |  |   | 51,941    |   |               |   |         |                |      |   |          |   | 43,286         |   |  |   |         |  |      |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Total noninterest-bearing liabilities      |  |                         | 454,509   |   |          |   |               |      |      |                |  |   | 490,725   |   |               |   |         |                |      |   |          |   | 490,631        |   |  |   |         |  |      |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|STOCKHOLDERS EQUITY                       |  |                         | 236,166   |   |          |   |               |      |      |                |  |   | 182,470   |   |               |   |         |                |      |   |          |   | 164,042        |   |  |   |         |  |      |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |  | $                       | 3,291,315 |   |          |   |               |      |      |                |  | $ | 3,014,889 |   |               |   |         |                |      |   |          | $ | 2,737,023      |   |  |   |         |  |      |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Net interest income (tax equivalent)       |  |                         |           |   |          | $ | 114,536       |      |      |                |  |   |           |   |               | $ | 110,245 |                |      |   |          |   |                |   |  | $ | 95,780  |  |      |  
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Net interest spread (4)                    |  |                         |           |   |          |   |               |      | 2.83 | %              |  |   |           |   |               |   |         |                | 3.23 | % |          |   |                |   |  |   |         |  | 3.23 | %
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  
|Net interest margin (5)                    |  |                         |           |   |          |   |               |      | 3.60 | %              |  |   |           |   |               |   |         |                | 3.80 | % |          |   |                |   |  |   |         |  | 3.65 | %
|                                           |  |                         |           |   |          |   |               |      |      |                |  |   |           |   |               |   |         |                |      |   |          |   |                |   |  |   |         |  |      |  

---

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

|(2) | Calculations are computed on a taxable-equivalent basis using a 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.
|--- | ------------------------------------------------------------------------------------------------------------------------



26



---

##### Table of Contents

The following table presents, for the periods indicated, a summary of the changes in interest earned and
interest paid resulting from changes in volume and rates for the major components of interest-earning assets and interest-bearing liabilities on a tax-equivalent basis assuming a tax rate of 35%. The impact of changes in the mix of interest-earning
assets and interest-bearing liabilities is reflected in net interest income.



|                                   |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  
|---------------------------------- |  | --------------------------------- | ------ | - | --------------------------------- | - | ------ | --- |  | - | ------ | - |  | ---- | ------ | - | --- | - | ------ | - |  | - | ------ | -
|                                   |  | Year Ended December 31,           |       
|                                   |  | 2006 over 2005INCREASE/(DECREASE) |        |   | 2005 over 2004INCREASE/(DECREASE) |  
|                                   |  | VOLUME                            |        |   | RATE                              |   |        | NET |  |   | VOLUME |   |  | RATE |        |   | NET |  
|                                   |  | (in thousands)                    |       
|INTEREST EARNED ON:                |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  
|Investment securities:             |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  
|Taxable                            |  | $                                 | 1,840  |   |                                   | $ | 1,766  |     |  | $ | 3,606  |   |  | $    | 532    |   |     | $ | 155    |   |  | $ | 687    |  
|Tax-exempt                         |  |                                   | 4,659  |   |                                   |   | (196   | )   |  |   | 4,463  |   |  |      | 1,158  |   |     |   | (159   | ) |  |   | 999    |  
|Cash equivalents                   |  |                                   | 334    |   |                                   |   | 681    |     |  |   | 1,015  |   |  |      | 490    |   |     |   | 516    |   |  |   | 1,006  |  
|Loans                              |  |                                   | 11,234 |   |                                   |   | 24,579 |     |  |   | 35,813 |   |  |      | 13,587 |   |     |   | 24,558 |   |  |   | 38,145 |  
|                                   |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  
|Total interest-earning assets      |  |                                   |        |   |                                   |   |        |     |  |   | 44,897 |   |  |      |        |   |     |   |        |   |  |   | 40,837 |  
|                                   |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  
|INTEREST PAID ON:                  |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  
|Interest-bearing demand deposits   |  |                                   | 3,037  |   |                                   |   | 12,804 |     |  |   | 15,841 |   |  |      | 530    |   |     |   | 6,215  |   |  |   | 6,745  |  
|Savings deposits                   |  |                                   | (34    | ) |                                   |   | (8     | )   |  |   | (42    | ) |  |      | (32    | ) |     |   | (17    | ) |  |   | (49    | )
|Time deposits                      |  |                                   | 4,069  |   |                                   |   | 15,388 |     |  |   | 19,457 |   |  |      | 4,901  |   |     |   | 9,171  |   |  |   | 14,072 |  
|Other borrowings                   |  |                                   | 397    |   |                                   |   | 4,078  |     |  |   | 4,475  |   |  |      | 342    |   |     |   | 3,577  |   |  |   | 3,919  |  
|Notes payable and FHLB advances    |  |                                   | (78    | ) |                                   |   | 278    |     |  |   | 200    |   |  |      | (636   | ) |     |   | 205    |   |  |   | (431   | )
|Junior subordinated debentures     |  |                                   | (47    | ) |                                   |   | 722    |     |  |   | 675    |   |  |      | 1,493  |   |     |   | 623    |   |  |   | 2,116  |  
|                                   |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  
|Total interest-bearing liabilities |  |                                   |        |   |                                   |   |        |     |  |   | 40,606 |   |  |      |        |   |     |   |        |   |  |   | 26,372 |  
|                                   |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  
|Net interest income                |  | $                                 | 10,194 |   |                                   | $ | (5,903 | )   |  | $ | 4,291  |   |  | $    | 9,703  |   |     | $ | 4,762  |   |  | $ | 14,465 |  
|                                   |  |                                   |        |   |                                   |   |        |     |  |   |        |   |  |      |        |   |     |   |        |   |  |   |        |  



Provision for
Loan Losses



We determine a provision for loan losses
that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date. For additional information concerning this determination, see the sections of this discussion and analysis
captioned Application of Critical Accounting PoliciesAllowance for Loan Losses, Nonperforming Assets and Impaired Loans and Allowance for Loan Losses.



Our provision for loan losses was $6.0 million during 2006, an increase of
$477,000, or 8.0%, compared to a provision for loan losses of $5.5 million during 2005. Net charge-offs totaled $6.0 million, or 0.25% of total loans, in 2006 compared to $5.5 million, or 0.24% of total loans, in 2005. The increase in net
charge-offs in 2006 was a factor in the increase in the provision in 2006 as compared to 2005. See the sections of this discussion and analysis captioned Nonperforming Assets and Impaired Loans and Allowance for Loan Losses
for further discussion on the credit quality of our loan portfolio.



Our provision for loan losses was $5.5 million during 2005, a decrease of $4.6 million, or 45.2%, less than the provision of $10.1 million during 2004. The lower provision in 2005 as compared to 2004 was due to the improvement in the
overall performance of our loan portfolio, as evidenced by reduced net charge-offs and nonaccrual loans, coupled with the slower growth of commercial loans. Net charge-offs totaled $5.5 million, or 0.24% of total loans, in 2005 compared to $7.0
million, or 0.34% of total loans, in 2004. Total commercial loans grew $223.5 million in 2005, compared to $323.6 million in 2004.



27



---

##### Table of Contents

Noninterest Income



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



|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                           |  | Year Ended December 31, |       
|                                           |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|                                           |  | (in thousands)          |       
|Service charges                            |  | $                       | 7,738  |   |      | $ | 9,022  |      |  | $ | 10,854 |  
|Trust services                             |  |                         | 2,269  |   |      |   | 3,069  |      |  |   | 4,079  |  
|Investment management fees                 |  |                         | 1,886  |   |      |   | 1,476  |      |  |   | 1,252  |  
|Loan syndication fees                      |  |                         | 1,317  |   |      |   | 2,673  |      |  |   | 1,350  |  
|Letter of credit fees                      |  |                         | 597    |   |      |   | 666    |      |  |   | 565    |  
|ATM fees                                   |  |                         | 364    |   |      |   | 373    |      |  |   | 459    |  
|Losses from partnership interests          |  |                         | (74    | ) |      |   | (917   | )    |  |   | (227   | )
|Other noninterest income                   |  |                         | 1,674  |   |      |   | 1,007  |      |  |   | 850    |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|                                           |  |                         | 15,771 |   |      |   | 17,369 |      |  |   | 19,182 |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Gain on sale of land trusts                |  |                         |       |   |      |   | 2,000  |      |  |   |       |  
|Gain on sale of branch                     |  |                         |       |   |      |   | 1,572  |      |  |   |       |  
|Gain on sale of investment securities, net |  |                         |       |   |      |   | 127    |      |  |   | 144    |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|                                           |  |                         |        |   |      |   | 3,699  |      |  |   | 144    |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Other derivative income (expense)          |  |                         | 494    |   |      |   | (3,203 | )    |  |   | 2,193  |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Total noninterest income                   |  | $                       | 16,265 |   |      | $ | 17,865 |      |  | $ | 21,519 |  
|                                           |  |                         |        |   |      |   |        |      |  |   |        |  



Our noninterest income
was $16.3 million during 2006, a decrease of $1.6 million, or 9.0%, as compared to noninterest income of $17.9 million during 2005. A decrease in deposit service charges, trust service fees, and loan syndication fees in 2006, as well as the impact
of the non-recurring gains on the sale of a branch and our land trust operations in 2005, caused the decline in noninterest income in 2006. These decreases were partly offset by a $3.7 million increase in other derivative income. Noninterest income
decreased by $3.7 million, or 17.0%, during 2005 to $17.9 million compared to $21.5 million during 2004. A $5.4 million decrease in other derivative income, partly offset by non-recurring gains in 2005, caused the decrease in noninterest income
between the two periods.



Our service charges are principally
derived from deposit accounts. Service charges totaled $7.7 million, $9.0 million, and $10.9 million during 2006, 2005, and 2004, respectively. Service charge income is impacted by a number of factors, including the volume of deposit accounts and
service transactions, the price established for each deposit service, the earnings credit rate and the collected balances customers maintain in their commercial checking accounts. The decrease in service charge revenue over the last two years was
primarily caused by a lower volume of deposit services rendered and an increase in the earnings credit rate given to customers on their collected account balances to offset gross activity charges.



Trust fees declined $800,000, or 26.1%, to $2.3 million in 2006 as compared
to 2005 and declined $1.0 million, or 24.8%, in 2005 as compared to 2004. The decline in trust fees was a result of our discontinuation of certain trust services during 2005, including the sale of our land trust operations during the first quarter
of 2005 and the discontinuation of tax-deferred exchange trust services during the fourth quarter of 2005. Trust fees in 2006 were primarily from our offering of corporate trust services. Corporate trust revenues totaled $2.2 million, $2.0 million,
and $1.8 million in 2006, 2005 and 2004, respectively. Tax-deferred exchange fees totaled $787,000 in 2005 and $1.0 million in 2004. Land trust fees totaled $245,000 in 2005 and $1.1 million in 2004. In connection with the sale of our land trust
operations in 2005, we recognized a gain of $2.0 million.



Investment management fee income increased $410,000, or 27.8%, to $1.9 million during 2006 as compared to 2005, and increased $224,000, or 17.9%, to $1.5 million during 2005, as compared to 2004. In January 2007,



28



---

##### Table of Contents

we entered into an agreement with Mesirow Financial, a Chicago-based asset management firm, pursuant to which Mesirow Financial will provide certain of our
customers with sub-advisory investment management services. Concurrent with our entering into this arrangement, several of our former investment management employees terminated their employment and joined another financial services company in
Chicago. We expect that our investment management fees in 2007 will be lower as a result of these events.



In January 2005, we recorded a $1.6 million gain in connection with the sale of our Broadview, Illinois branch. In addition to selling the land and
building, we sold approximately $19.7 million of deposit balances and $5.3 million of loans associated with the branch.



Loan syndication fees totaled $1.3 million, $2.7 million, and $1.4 million during 2006, 2005, and 2004, respectively. These fees were earned through the
syndication of certain commercial real estate development loans for our customers. While we have earned syndication fees in each of the last three years, that opportunity is dependent on the level of activity in the real estate development market as
well as our decisions with respect to balance sheet and credit capacity.



ATM fees have declined since 2004 as the number of automatic teller machines we have deployed in our market has decreased.



We have investments in limited partnerships that specialize in providing low-income housing in the Chicago metropolitan area. We account for our limited
partnership investments under the equity method of accounting and recognize our share of partnership losses in noninterest income and the related low-income housing tax credits as a reduction of income tax expense. At December 31, 2006, we had
investments in a total of 14 partnerships with a total carrying value of $1.3 million.



Other derivative income in 2006 totaled $494,000 and related primarily to certain interest rate exchange agreements, or swaps, we had used to convert fixed rate brokered CDs to a variable rate. In May 2006, we
terminated all of our interest rate swaps related to brokered CDs. Through the termination date, we had recognized $458,000 of other derivative income from these brokered CD swaps, which reflected the changes in the fair value of both the interest
rate swaps and the related hedged brokered CDs, as well as the ineffective portion of the hedging relationship. In May 2006, we also removed the hedge designation on our $100.0 million notional amount 5.50% prime floor. Changes in the fair value of
this interest rate floor, subsequent to the date on which we removed the hedge designation, totaled $36,000 and are also reflected in other derivative income.



In 2005 and 2004, we recognized $3.2 million of net derivative expense and $2.2 million of derivative income, respectively. Other derivative income in
2005 and 2004 included net cash settlements as well as changes in the fair value of the interest rate swaps that did not qualify for hedge accounting. Net cash settlements received were $684,000 in 2005, as compared to $2.2 million in 2004. The
increase in market interest rates that began in mid-2004 caused the decrease in the net cash settlements received as the rates paid on the variable leg of the swaps increased. During 2005, we had a loss in fair value from these swaps of $3.9 million
compared to a gain in 2004 of $27,000. The increase in the forward yield curve during 2005 caused the decrease in the fair value of the CD swaps. For additional information see Application of Critical Accounting PoliciesDerivative
Financial Instruments and Note 18 to our consolidated financial statements in this Annual Report on Form 10-K.



Other noninterest income, which principally includes safe deposit rental fees and gains or losses from deferred compensation plan investments and
unconsolidated subsidiaries, totaled $1.7 million, $1.0 million, and $850,000 for the years ended December 31, 2006, 2005, and 2004, respectively. The increase in other noninterest income during 2006 was primarily due to a $396,000 increase in
the market values of assets in our employees deferred compensation plan and $138,000 of recoveries of losses on indemnification agreements on residential loans sold in a prior period. Included in other noninterest income in 2005 and 2004, were
losses of $46,000 and $83,000, respectively, related to these indemnification agreements.



29



---

##### Table of Contents

Noninterest Expense



The following table presents for the periods indicated the composition of our noninterest expense:



|                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                  |  | Year Ended December 31, |       
|                                                  |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|                                                  |  | (dollars in thousands)  |       
|Salaries and employee benefits:                   |  |                         |        |   |      |   |        |      |  |   |        |  
|Salaries, employment taxes, and medical insurance |  | $                       | 32,738 |   |      | $ | 30,825 |      |  | $ | 31,813 |  
|Incentives, commissions, and retirement benefits  |  |                         | 7,914  |   |      |   | 9,430  |      |  |   | 7,138  |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Total salaries and employee benefits              |  |                         | 40,652 |   |      |   | 40,255 |      |  |   | 38,951 |  
|Occupancy of premises                             |  |                         | 7,842  |   |      |   | 7,035  |      |  |   | 7,465  |  
|Furniture and equipment                           |  |                         | 3,627  |   |      |   | 3,928  |      |  |   | 3,892  |  
|Lease termination charge                          |  |                         |       |   |      |   |       |      |  |   | 984    |  
|Computer processing                               |  |                         | 1,758  |   |      |   | 1,805  |      |  |   | 1,874  |  
|Corporate insurance                               |  |                         | 1,211  |   |      |   | 1,373  |      |  |   | 2,334  |  
|Holding company legal fees, net                   |  |                         | 705    |   |      |   | 717    |      |  |   | 624    |  
|Bank legal fees, net                              |  |                         | 1,461  |   |      |   | 1,174  |      |  |   | 1,184  |  
|Advertising and public relations                  |  |                         | 1,525  |   |      |   | 574    |      |  |   | 1,489  |  
|Consulting                                        |  |                         | 1,018  |   |      |   | 768    |      |  |   | 527    |  
|Other real estate and repossessed asset expense   |  |                         | 542    |   |      |   | 225    |      |  |   | 472    |  
|Other noninterest expense                         |  |                         | 12,918 |   |      |   | 11,801 |      |  |   | 11,877 |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Total noninterest expense                         |  | $                       | 73,259 |   |      | $ | 69,655 |      |  | $ | 71,673 |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Efficiency Ratio (1)                              |  |                         | 57.48  | % |      |   | 55.13  | %    |  |   | 61.84  | %
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |  

---

|(1) | The efficiency ratio is determined by dividing noninterest expense by an amount equal to net interest income plus noninterest income, less investment securities gains.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our noninterest expense was $73.3 million in
2006 compared to $69.7 million in 2005, an increase of $3.6 million, or 5.2%. An increase in advertising and public relations, occupancy of premises, and higher auditing, consulting, recruiting, and other professional service fees combined to
produce the increase in noninterest expense. Our noninterest expense in 2005 was $69.7 million compared to $71.7 million in 2004, a decrease of $2.0 million, or 2.8%. Lower advertising, corporate insurance, and a charge in 2004 of $984,000 for the
termination of a lease of our former administrative offices in Wheeling, Illinois, contributed to the decrease in expenses in 2005.



Salaries and employee benefits represent the largest category of our noninterest expense. Total salaries and benefits during 2006 were $40.7 compared to
$40.3 million during 2005 and $39.0 million during 2004. During 2006, total salaries and benefits increased $397,000, or 1.0% as compared to 2005, as an increase in salaries, taxes, and insurance was partly offset by a decline in incentive
compensation. Total salaries and benefits in 2005 increased $1.3 million, or 3.3%, as compared to 2004, as an increase in incentive compensation was partly offset by lower base salaries.



Salaries, employment taxes and medical insurance increased $1.9 million, or 6.2%, to $32.7 million in 2006, as compared to
$30.8 million in 2005. The increase in base salaries during 2006 was primarily caused by our increased investment in our relationship and sales managers. The reduction in base salaries from the decrease in the number of trust employees, was largely
offset by higher medical insurance expense. Salaries, employment taxes and medical insurance decreased $987,000, or 3.1%, to $30.8 million in 2005, as compared to $31.8 million in 2004, primarily as a result of lower severance expense and fewer
employees in 2005. Severance expense was $326,000 in 2006, $530,000 in 2005 and $1.1 million in 2004. The number of full-time equivalent employees was 427 at the end of 2005 compared to 431 at the end of 2004.



30



---

##### Table of Contents

Total incentives, commissions, and retirement benefits decreased $1.5 million, or 16.1%, to $7.9 million
in 2006 compared to $9.4 million in 2005. We reduced our accruals for cash-based incentives for 2006 because certain performance targets were not achieved. This decrease was partly offset by a $1.0 million increase in cost of equity-based
compensation, primarily due to the adoption of new accounting requirements in 2006 that require the recognition of expense related to stock options granted to employees and directors. Compensation costs in 2006 included $907,000 of costs related to
stock options.



Beginning in 2006, salaries and employee
benefits expense was impacted by the adoption of Statement of Financial Accounting Standard No. 123, Share-Based Payment (SFAS 123R), which revised and reissued guidance on the accounting for stock-based compensation.
SFAS 123R eliminated the intrinsic value method that we previously used to account for the granting of employee stock options. We adopted SFAS 123R effective January 1, 2006, using the modified prospective method, recording compensation expense
for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remained outstanding at the date of adoption. Stock-based compensation expense, adjusted for estimated forfeitures, is recognized
against earnings for the portion of outstanding unvested awards, based on the grant date fair value of those awards as calculated using a Black-Scholes pricing model. See the section of this discussion and analysis captioned New Accounting
Pronouncements for additional details.



Total incentives,
commissions, and retirement benefits in 2005 increased $2.3 million, or 24.3%, to $9.4 million in 2005 as compared to $7.1 million in 2004, primarily because certain performance targets were achieved.



Our occupancy of premises expense was $7.8 million during 2006 as compared to
$7.0 million during 2005 and $7.5 million during 2004. Occupancy of premises expense increased $807,000, or 11.5%, during 2006 as compared to 2005, primarily due to higher building related expense including depreciation, real estate taxes, and
maintenance. The decrease of $430,000, or 5.8%, during 2005 as compared to 2004 was due to reduced premises maintenance and janitorial services. In January 2007, we signed a lease to move our office in downtown Chicago from one leased facility to
another leased facility when the current lease expires in December 2007. The impact of this relocation on our occupancy expenses is not expected to be material.



Furniture and equipment expense was $3.6 million during 2006, compared to $3.9 million during each of 2005 and 2004. Lower depreciation and maintenance
produced the decrease in expense between 2006 and 2005.



In
2004, we recorded a charge of $984,000 for a lease termination liability relating to the abandonment of our administrative offices on the second and third floors of our Wheeling facility. The property owner agreed to terminate the lease in exchange
for a cash payment and the transfer of a small parcel of land we owned next to the site.



Our computer processing expense is comprised of payments to third party processors, primarily for our key data processing applications including loans, deposits, general ledger, payroll, internet banking and ATM
operations. Our computer processing expense was $1.8 million during 2006 and 2005, compared to $1.9 million during 2004.



Corporate insurance totaled $1.2 million, $1.4 million, and $2.3 million during the years ended December 31, 2006, 2005, and 2004, respectively. A
reduction in the amount of our directors and officers insurance coverage and a more favorable insurance market, among other factors, caused the decrease in expense since 2004.



Holding company legal fees were $705,000 in 2006 as compared to $717,000 in 2005 and $624,000 in 2004. Holding company legal
fees consist primarily of costs for general corporate matters, including securities law compliance and other costs associated with being a publicly-traded company.



31



---

##### Table of Contents

Bank legal fees were $1.5 million in 2006 compared to $1.2 million in both 2005 and 2004. Bank legal fees
relate to collection activities, loan documentation, contract and compliance matters and are reported net of reimbursements received from customers. The increase in legal expense in 2006 was a result of lower reimbursements, primarily from those
customers handled by our collection department. Gross legal fees declined modestly from 2004 to 2006.



Our advertising expenses were $1.5 million in 2006, compared to $574,000 in 2005 and $1.5 million in 2004. Advertising expense in 2006 reflected the
introduction of our Specialist brand marketing campaign. Our advertising expense was lower in 2005 as compared to 2004 as we discontinued television advertising and reduced print advertising.



Consulting expense was $1.0 million, $768,000, and $527,000 for the years
ended December 31, 2006, 2005, and 2004, respectively. The increase in expense during 2006 as compared to 2005 primarily resulted from higher human resource department related services. The higher expense during 2005 as compared to 2004 was
related to branding and cash management product consulting.



Other real estate and repossessed asset expense was $542,000 in 2006, compared to expense of $225,000 and $472,000 for 2005 and 2004, respectively. This net expense is influenced to a large degree by the number and complexity of properties
being maintained pending their sale.



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 $12.9 million in 2006 compared
to $11.8 million and $11.9 million in 2005 and 2004, respectively. The increase in other noninterest expense in 2006 was primarily due to an increase in accounting and auditing services, other professional services, and recruiting and training
costs. In addition, other noninterest expense in 2005 included a recovery of $700,000 to adjust our reserves for interest receivable related to our portfolio of indirect manufactured homes. There were no such recoveries or charges in 2006 or 2004.



Our efficiency ratio was 57.48% for 2006, compared to 55.13%
for 2005 and 61.84% for 2004. The increase in the ratio in 2006 was caused by the increase in operational expenses during the year.



Income Taxes



Income tax expense was $2.0 million in 2006, resulting in an effective tax rate of 4.2%. Income tax expense in 2005 was $19.5 million, resulting in an
effective tax rate of 38.1%. In 2006, income tax expense of $18.0 million was reduced by the recognition of a $15.5 million of tax benefits relating to deductions taken on prior year tax returns that had not been recognized for financial reporting
purposes. Tax liabilities established for these tax uncertainties were no longer required in 2006 primarily as a result of the expiration of the statute of limitations with respect to the Companys 2002 federal income tax return and based upon
the results of examinations by taxing authorities with respect to other tax years. In addition, tax expense in 2006 was reduced by refunds of prior years state income taxes totaling $443,000.



Income tax expense was $19.5 million in 2005 compared to $11.3 million in
2004. The higher level of pre-tax income for 2005 caused the increase in income tax expense as compared to 2004. The effective income tax rate was 38.1% for 2005 as compared to 33.0% for 2004. Income tax expense and the effective income tax rate for
2004 were impacted by the net recognition of $1.1 million of income tax benefits relating to expenses deducted on prior years tax returns for which the statute of limitations expired in 2004.



Impact of Inflation and Changing Prices



The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles, which require the measurement of our financial position and



32



---

##### Table of Contents

operating results in terms of historical amounts without considering the changes in the relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the
effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or, to the same extent, as the price of goods and services.



Financial Condition



Our total assets increased $99.0 million, or 3.0%, during 2006 to $3.38 billion at December 31, 2006 compared to $3.28 billion at year-end 2005. An
increase in loans of $115.7 million, or 4.9%, during 2006 primarily produced the increase. Total deposits increased $96.3 million, or 3.8%, to $2.64 billion at December 31, 2006 as compared to total deposits of $2.54 billion at
December 31, 2005. Total stockholders equity increased $51.9 million during 2006 to $271.2 million at December 31, 2006 compared to $219.3 million at December 31, 2005. Net income retained for operations, additional capital
provided by our stock based compensation plans, and a decrease in the unrealized loss on available for sale investment securities combined to produce the increase in total stockholders equity.



Average interest-earning assets increased to $3.18 billion during 2006, an
increase of $284.1 million, or 9.8%, compared to average interest-earning assets of $2.90 billion in 2005. Higher average total loans of $158.9 million and average investment securities of $116.8 million produced the increase in average
interest-earning assets. The increase in average interest-earning assets was primarily funded with an increase in average deposit balances. During 2006, average interest-bearing deposits increased $246.0 million, or 12.8%, to $2.17 billion as
compared to $1.92 billion during 2005. Average other borrowings increased $15.2 million during 2006 to $263.9 million at December 31, 2006 compared to $248.7 million at December 31, 2005.



Interest-bearing Cash Equivalents



Interest-bearing cash equivalents consist of interest-bearing deposits with
banks or other financial institutions, federal funds sold and securities purchased under agreements to resell with original maturities less than 30 days. All federal funds are sold overnight with daily settlement required. We use short-term
investments in circumstances where a large depositor indicates the increase in deposit balance is likely to be short-term. Interest bearing cash equivalents during 2006 primarily consisted of federal funds sold and interest bearing deposits with the
Federal Home Loan Bank (FHLB). Included in interest bearing cash equivalents at December 31, 2005, were $100.0 million of securities purchased on December 8, 2005 under agreements to resell on January 3, 2006, to
accommodate a large, short-term deposit.



Investment
Securities



Our investment portfolio is designed to
provide a source of income with minimal risk of loss, a source of liquidity and interest rate risk management opportunities. In managing our investment portfolio within the composition of the entire balance sheet, we balance our earnings, credit,
interest rate risk, and liquidity considerations, with a goal of maximizing longer-term overall profitability.



33



---

##### Table of Contents

The following tables present the composition and maturities of our investment portfolio by major category
as of the dates indicated:



|                                    |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|----------------------------------- |  | ------------------ | ------- | ------------------- | - | ------------- |  | ------------------- | --- | ------------- | - | ------------------- |  | - | ------- |  | - | -------
|                                    |  | AVAILABLE-FOR-SALE |         | HELD-TO-MATURITY    |   | TOTAL        
|                                    |  | Amortizedcost      |         | Estimatedfair value |   | Amortizedcost |  | Estimatedfair value |     | Amortizedcost |   | Estimatedfair value
|                                    |  | (in thousands)    
|December 31, 2006:                  |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|U.S. government agency securities   |  | $                  | 157,848 |                     | $ | 155,591       |  | $                   |    |               | $ |                    |  | $ | 157,848 |  | $ | 155,591
|Collateralized mortgage obligations |  |                    | 165,297 |                     |   | 161,439       |  |                     |    |               |   |                    |  |   | 165,297 |  |   | 161,439
|Mortgage-backed securities          |  |                    | 207,275 |                     |   | 203,798       |  |                     |    |               |   |                    |  |   | 207,275 |  |   | 203,798
|State and municipal obligations     |  |                    | 147,566 |                     |   | 147,982       |  |                     |    |               |   |                    |  |   | 147,566 |  |   | 147,982
|Other debt securities               |  |                    |        |                     |   |              |  |                     | 275 |               |   | 275                 |  |   | 275     |  |   | 275    
|                                    |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|Total                               |  | $                  | 677,986 |                     | $ | 668,810       |  | $                   | 275 |               | $ | 275                 |  | $ | 678,261 |  | $ | 669,085
|                                    |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|                                    |  |                    |         |                     |   |              
|December 31, 2005:                  |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|U.S. government agency securities   |  | $                  | 203,753 |                     | $ | 200,357       |  | $                   |    |               | $ |                    |  | $ | 203,753 |  | $ | 200,357
|Collateralized mortgage obligations |  |                    | 187,368 |                     |   | 183,100       |  |                     |    |               |   |                    |  |   | 187,368 |  |   | 183,100
|Mortgage-backed securities          |  |                    | 166,592 |                     |   | 161,898       |  |                     |    |               |   |                    |  |   | 166,592 |  |   | 161,898
|State and municipal obligations     |  |                    | 111,380 |                     |   | 111,123       |  |                     |    |               |   |                    |  |   | 111,380 |  |   | 111,123
|Other debt securities               |  |                    |        |                     |   |              |  |                     | 275 |               |   | 275                 |  |   | 275     |  |   | 275    
|                                    |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|Total                               |  | $                  | 669,093 |                     | $ | 656,478       |  | $                   | 275 |               | $ | 275                 |  | $ | 669,368 |  | $ | 656,753
|                                    |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|                                    |  |                    |         |                     |   |              
|December 31, 2004:                  |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|U.S. government agency securities   |  | $                  | 194,370 |                     | $ | 193,693       |  | $                   |    |               | $ |                    |  | $ | 194,370 |  | $ | 193,693
|Collateralized mortgage obligations |  |                    | 117,020 |                     |   | 115,693       |  |                     |    |               |   |                    |  |   | 117,020 |  |   | 115,693
|Mortgage-backed securities          |  |                    | 181,515 |                     |   | 180,351       |  |                     |    |               |   |                    |  |   | 181,515 |  |   | 180,351
|State and municipal obligations     |  |                    | 41,668  |                     |   | 43,607        |  |                     |    |               |   |                    |  |   | 41,668  |  |   | 43,607 
|Other debt securities               |  |                    |        |                     |   |              |  |                     | 275 |               |   | 275                 |  |   | 275     |  |   | 275    
|                                    |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        
|Total                               |  | $                  | 534,573 |                     | $ | 533,344       |  | $                   | 275 |               | $ | 275                 |  | $ | 534,848 |  | $ | 533,619
|                                    |  |                    |         |                     |   |               |  |                     |     |               |   |                     |  |   |         |  |   |        

---

Investment securities do not include investments in
Federal Home Loan Bank (FHLB) and Federal Reserve Bank stock of $11.8 million, $12.9 million, and $12.5 million, at December 31, 2006, 2005, and 2004, respectively. These investments are stated at cost, which approximates fair
value.



We consider our commercial loan portfolio to be our
primary earning asset and use our investment portfolio primarily for liquidity and interest rate risk management. Our investment portfolio increased by $12.3 million, or 1.9%, to $669.1 million at December 31, 2006 compared to $656.8 million at
year-end 2005. We increased our investment portfolio during the first quarter of 2006 for liquidity and interest rate risk management purposes. In 2006, we purchased $74.8 million of mortgage-related securities and $40.3 million of tax-exempt
municipal securities. The mortgage-related securities were purchased at discounts to par and had an average life of approximately 7 years. The tax-exempt municipal securities had average lives to the par call date of 10.5 years. The weighted average
life of the investment portfolio was approximately five years at both December 31, 2006 and 2005. In connection with our liquidity risk management, we regularly assess the size of our investment portfolio to meet our liquidity needs. See the
sections of this discussion and analysis captioned Liquidity and Quantitative and Qualitative Disclosure About Market Risks for further discussion on liquidity and interest rate risk management.



The net unrealized loss on the available for sale portfolio was $9.2 million
at the end of 2006 compared to an unrealized loss of $12.6 million at the end of 2005. The unrealized loss is due to changes in market interest rates and not credit deterioration. We manage our potential exposure to impairment within our investment
securities portfolio by limiting the purchase of securities at a premium over par value and by subjecting all



34



---

##### Table of Contents

securities to interest rate shock testing prior to their acquisition. No security is purchased if the result of the interest rate shock testing indicates a
negative yield could result under any of the rate shocks. In addition, we adjust premium amortization monthly based on current prepayment estimates and 12 month rolling actual prepayment rates for all mortgage related securities.



At December 31, 2006, we had 126 investment securities in an unrealized
loss position. Of these securities, 55 securities have been in a loss position for twelve months or more. We believe that none of these unrealized losses represented other-than-temporary impairments of our investment portfolio. We have both the
intent and ability to hold all of these securities for the time necessary to recover the amortized cost.



Our investment portfolio increased by $123.1 million, or 23.1%, to $656.8 million at December 31, 2005 compared to $533.6 million at year-end 2004.
During 2005, we purchased approximately $73 million in securities to replace maturities, sales and other cash flows from our existing securities portfolio. In addition, beginning in September 2005, we purchased $133 million in securities as part of
an interest rate risk management strategy to reduce potential exposure to declining interest rates.



35



---

##### Table of Contents

Investment Portfolio  Maturity and Yields



The following table summarizes the contractual maturity of investment
securities and their weighted average yields:



|                                        |  |                         |         |       |                               |   |        |                               |         |  |                |        |  |       |         |  |        |   |       |   |         |       |      |       |  |   |         |  |      |  
|--------------------------------------- |  | ----------------------- | ------- | ----- | ----------------------------- | - | ------ | ----------------------------- | ------- |  | -------------- | ------ |  | ----- | ------- |  | ------ | - | ----- | - | ------- | ----- | ---- | ----- |  | - | ------- |  | ---- | -
|                                        |  | AS OF DECEMBER 31, 2006 |        
|                                        |  | WITHIN ONEYEAR          |         |       | AFTER ONE BUTWITHIN FIVEYEARS |   |        | AFTER FIVEBUT WITHINTEN YEARS |         |  | AFTER TENYEARS |        |  | TOTAL |        
|                                        |  | AMOUNT                  |         | YIELD |                               |   | AMOUNT |                               | YIELD   |  |                | AMOUNT |  | YIELD |         |  | AMOUNT |   | YIELD |   |         | TOTAL |      | YIELD | 
|                                        |  | (dollars in thousands)  |        
|Available-for-sale securities (1):      |  |                         |         |       |                               |   |        |                               |         |  |                |        |  |       |         |  |        |   |       |   |         |       |      |       |  |   |         |  |      |  
|U.S. government agency securities       |  | $                       | 71,518  |       | 3.33                          | % |        | $                             | 78,586  |  | 4.22           | %      |  | $     | 5,487   |  | 4.75   | % |       | $ |        |       |     | %     |  | $ | 155,591 |  | 3.84 | %
|Collateralized mortgage obligations (2) |  |                         | 20,120  |       | 3.64                          |   |        |                               | 56,995  |  | 4.29           |        |  |       | 84,324  |  | 5.05   |   |       |   |        |       |     |       |  |   | 161,439 |  | 4.61 |  
|Mortgage-backed securities (2)          |  |                         | 35,059  |       | 4.63                          |   |        |                               | 92,586  |  | 4.66           |        |  |       | 53,497  |  | 4.90   |   |       |   | 22,656  |       | 5.03 |       |  |   | 203,798 |  | 4.76 |  
|States and political subdivisions (3)   |  |                         | 1,937   |       | 5.14                          |   |        |                               | 7,340   |  | 6.45           |        |  |       | 16,504  |  | 7.57   |   |       |   | 122,201 |       | 6.25 |       |  |   | 147,982 |  | 6.39 |  
|                                        |  |                         |         |       |                               |   |        |                               |         |  |                |        |  |       |         |  |        |   |       |   |         |       |      |       |  |   |         |  |      |  
|Total available-for-sale                |  |                         | 128,634 |       | 3.76                          |   |        |                               | 235,507 |  | 4.48           |        |  |       | 159,812 |  | 5.25   |   |       |   | 144,857 |       | 6.06 |       |  |   | 668,810 |  | 4.87 |  
|Held-to-maturity securities (4):        |  |                         |         |       |                               |   |        |                               |         |  |                |        |  |       |         |  |        |   |       |   |         |       |      |       |  |   |         |  |      |  
|Other debt securities                   |  |                         | 250     |       | 7.50                          |   |        |                               | 25      |  | 6.50           |        |  |       |        |  |       |   |       |   |        |       |     |       |  |   | 275     |  | 7.41 |  
|                                        |  |                         |         |       |                               |   |        |                               |         |  |                |        |  |       |         |  |        |   |       |   |         |       |      |       |  |   |         |  |      |  
|Total held-to-maturity                  |  |                         | 250     |       | 7.50                          |   |        |                               | 25      |  | 6.50           |        |  |       |        |  |       |   |       |   |        |       |     |       |  |   | 275     |  | 7.41 |  
|                                        |  |                         |         |       |                               |   |        |                               |         |  |                |        |  |       |         |  |        |   |       |   |         |       |      |       |  |   |         |  |      |  
|Total securities                        |  | $                       | 128,884 |       | 3.77                          | % |        | $                             | 235,532 |  | 4.48           | %      |  | $     | 159,812 |  | 5.25   | % |       | $ | 144,857 |       | 6.06 | %     |  | $ | 669,085 |  | 4.87 | %
|                                        |  |                         |         |       |                               |   |        |                               |         |  |                |        |  |       |         |  |        |   |       |   |         |       |      |       |  |   |         |  |      |  

---

|(1) | Based on estimated fair value.
|--- | ------------------------------

|(2) | Maturities of mortgage-backed securities and collateralized mortgage obligations (CMOs) are based on anticipated lives of the underlying mortgages, not contractual
maturities. CMO maturities are based on cash flow (or payment) windows derived from broker market consensus.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Rates on obligations of states and political subdivisions have been adjusted to tax equivalent yields using a 35% income tax rate.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(4) | Based on amortized cost.
|--- | ------------------------



Investments in U.S. Treasury securities and U.S. government agency securities are generally considered to have low credit risk. Our mortgage-backed
securities holdings consist principally of direct pass through securities issued by the Fannie Mae and Freddie Mac. These securities are also considered to have low credit risk, but do possess market value risk due to the prepayment risk
associated with mortgage-backed securities. Our CMOs consist primarily of planned amortization class securities that are backed by fixed-rate, single-family mortgage loans. Although CMOs are guaranteed as to principal and interest by certain
agencies, primarily Fannie Mae and Freddie Mac, they possess market risk due to the prepayment risk associated with the underlying collateral.



We generally invest in state and municipal obligations that are rated investment grade by nationally recognized rating organizations. However, certain
municipal issues, which are restricted to our local market area, are not rated and undergo the Banks standard underwriting procedures for loan transactions. We also have investments in Federal Reserve Bank stock and FHLB stock which are
required to be maintained for various purposes. At December 31, 2006, we held no securities of any single issuer, other than U.S. government agency securities, that exceeded 10% of stockholders equity. Although we hold securities issued
by municipalities within the State of Illinois that, in the aggregate, exceed 10% of stockholders equity, none of the holdings from any individual municipal issue exceed this threshold.



Investment securities with an approximate book value of $366 million and $395
million at December 31, 2006 and 2005, respectively, were pledged to collateralize certain deposits, securities sold under agreements to repurchase, FHLB advances, and for other purposes as required or permitted by law.



36



---

##### Table of Contents

Loan Portfolio



Our primary source of income is interest on loans. The following table presents the composition of our loan portfolio by
type of loan as of the dates indicated:



|                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------- |  | ------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                      |  | As of December 31, |          
|                                      |  | 2006               |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|                                      |  | (in thousands)     |          
|Commercial and industrial             |  | $                  | 770,863   |   |      | $ | 665,023   |      |  | $ | 656,099   |   |  | $    | 589,987   |   |  | $ | 586,885   |  
|Commercial real estate secured        |  |                    | 791,962   |   |      |   | 793,965   |      |  |   | 732,251   |   |  |      | 642,364   |   |  |   | 484,015   |  
|Real estate  construction            |  |                    | 744,317   |   |      |   | 684,737   |      |  |   | 531,868   |   |  |      | 364,294   |   |  |   | 317,739   |  
|Residential real estate  mortgages   |  |                    | 62,453    |   |      |   | 63,789    |      |  |   | 64,569    |   |  |      | 86,710    |   |  |   | 117,652   |  
|Home equity loans and lines of credit |  |                    | 116,516   |   |      |   | 161,058   |      |  |   | 207,164   |   |  |      | 253,006   |   |  |   | 336,727   |  
|Consumer                              |  |                    | 13,237    |   |      |   | 14,972    |      |  |   | 18,386    |   |  |      | 24,636    |   |  |   | 34,572    |  
|Other loans                           |  |                    | 1,396     |   |      |   | 1,497     |      |  |   | 1,460     |   |  |      | 1,330     |   |  |   | 2,412     |  
|                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Gross loans                           |  |                    | 2,500,744 |   |      |   | 2,385,041 |      |  |   | 2,211,797 |   |  |      | 1,962,327 |   |  |   | 1,880,002 |  
|Less: Unearned discount               |  |                    | (59       | ) |      |   | (110      | )    |  |   | (191      | ) |  |      | (319      | ) |  |   | (528      | )
|                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total loans                           |  |                    | 2,500,685 |   |      |   | 2,384,931 |      |  |   | 2,211,606 |   |  |      | 1,962,008 |   |  |   | 1,879,474 |  
|Less: Allowance for loan losses       |  |                    | (37,516   | ) |      |   | (37,481   | )    |  |   | (37,484   | ) |  |      | (34,356   | ) |  |   | (34,073   | )
|                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loans, net                            |  | $                  | 2,463,169 |   |      | $ | 2,347,450 |      |  | $ | 2,174,122 |   |  | $    | 1,927,652 |   |  | $ | 1,845,401 |  
|                                      |  |                    |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  



At December 31,
2006, our gross loan portfolio increased to $2.5 billion compared to gross loans at December 31, 2005 and 2004 of $2.4 billion and $2.2 billion, respectively. Our loan portfolio is comprised primarily of commercial loans, which constituted
approximately 92% of total loans at December 31, 2006. Our commercial loan portfolio, which includes commercial and industrial, commercial real estate secured, and real estateconstruction, totaled $2.31 billion at year-end, an increase of
$163.4 million, or 7.6%, over commercial loans at December 31, 2005. Our total commercial loans were $2.14 billion at December 31, 2005, which was $223.5 million, or 11.6%, higher than total commercial loans of $1.92 billion at
December 31, 2004. As anticipated, our portfolio of consumer-oriented loan products, which include residential real estate mortgages, home equity loans and lines of credit, and consumer loans continues to decline. Consumer-oriented loan
products totaled $193.6 million at December 31, 2006 compared to $241.3 million and $291.6 million at December 31, 2005 and 2004, respectively. Consumer loans have continued to decline as we discontinued origination of indirect auto and
manufactured homes, de-emphasized first mortgage products, and ceased acquiring home equity loans and lines from mortgage brokers.



Commercial and industrial (C&I) loans consist of loans to businesses or for business purposes that are either unsecured or secured by
collateral other than the business real estate. These loans totaled $770.9 million, $665.0 million, and $656.1 million, at December 31, 2006, 2005, and 2004, respectively, and have represented between 28% and 31% of our total loan portfolio
over the last three years. C&I loans increased $105.8 million, or 15.9%, in 2006 compared to an increase of $8.9 million, or 1.4%, during 2005.



Loans secured by commercial real estate consist of commercial owner-occupied properties as well as investment properties. These loans totaled $792.0
million, $794.0 million, and $732.3 million, at December 31, 2006, 2005, and 2004, respectively, and have represented between 32% and 33% of our total loan portfolio over the last three years. Commercial real estate secured loans decreased $2.0
million during 2006 compared to an increase of $61.7 million, or 8.4%, during 2005. At December 31, 2006 and 2005, the composition of our commercial real estate secured portfolio was approximately as follows:



37



---

##### Table of Contents

|                                     |  |                                                   |   |  |                         |   |  |                                                |   |  |                         |  
|------------------------------------ |  | ------------------------------------------------- | - |  | ----------------------- | - |  | ---------------------------------------------- | - |  | ----------------------- | -
|                                     |  | December 31, 2006                                 |   |  | December 31, 2005       |  
|                                     |  | Percentageof Total Commercial Real Estate Secured |   |  | Percentageof GrossLoans |   |  | Percentageof TotalCommercialReal EstateSecured |   |  | Percentageof GrossLoans |  
|Commercial properties:               |  |                                                   |   |  |                         |   |  |                                                |   |  |                         |  
|Non-owner occupied                   |  | 61                                                | % |  | 19                      | % |  | 57                                             | % |  | 18                      | %
|Owner occupied                       |  | 23                                                | % |  | 7                       | % |  | 25                                             | % |  | 9                       | %
|                                     |  |                                                   |   |  |                         |   |  |                                                |   |  |                         |  
|Subtotal                             |  | 84                                                | % |  | 26                      | % |  | 82                                             | % |  | 27                      | %
|Residential income property          |  | 16                                                | % |  | 5                       | % |  | 18                                             | % |  | 6                       | %
|                                     |  |                                                   |   |  |                         |   |  |                                                |   |  |                         |  
|Total commercial real estate secured |  | 100                                               | % |  | 31                      | % |  | 100                                            | % |  | 33                      | %
|                                     |  |                                                   |   |  |                         |   |  |                                                |   |  |                         |  



Real
estate-construction loans consist primarily of loans to professional real estate developers for the construction of single-family homes, town-homes, condominium conversions and commercial property. These loans totaled $744.3 million, $684.7 million,
and $531.9 million, at December 31, 2006, 2005 and 2004, respectively. These loans have increased over the last three years to represent 30% of our total loan portfolio at December 31, 2006, compared to 24% at December 31, 2004. Real
estate-construction loans increased $59.6 million, or 8.7%, in 2006 compared to an increase of $152.9 million, or 29%, in 2005. At December 31, 2006 and 2005, the composition of our real estate-construction loan portfolio was approximately as
follows:



|                                 |  |                                     |   |  |                          |   |  |                                     |   |  |                          |  
|-------------------------------- |  | ----------------------------------- | - |  | ------------------------ | - |  | ----------------------------------- | - |  | ------------------------ | -
|                                 |  | December 31, 2006                   |   |  | December 31, 2005        |  
|                                 |  | Percentage ofTotalConstructionLoans |   |  | Percentage ofGross Loans |   |  | Percentage ofTotalConstructionLoans |   |  | Percentage ofGross Loans |  
|Residential properties           |  | 69                                  | % |  | 21                       | % |  | 71                                  | % |  | 21                       | %
|Commercial property              |  | 15                                  | % |  | 4                        | % |  | 11                                  | % |  | 3                        | %
|Land and land development        |  | 16                                  | % |  | 5                        | % |  | 18                                  | % |  | 5                        | %
|                                 |  |                                     |   |  |                          |   |  |                                     |   |  |                          |  
|Total real estate  construction |  | 100                                 | % |  | 30                       | % |  | 100                                 | % |  | 29                       | %
|                                 |  |                                     |   |  |                          |   |  |                                     |   |  |                          |  



During 2006, the
strongest loan growth in the commercial portfolio was in C&I loans which continues to be a key element in our lending strategy. A slowing real estate market is expected to continue to impact the growth in our commercial real estate and
construction portfolios.



Our portfolio of residential real
estate-mortgages continues to modestly decline as a result of our decision to de-emphasize this product in 2001. At December 31, 2006, this portfolio totaled $62.5 million, compared to $63.8 million and $64.6 million at December 31, 2005
and 2004, respectively. Correspondingly, this portfolio has represented approximately 3% of our total loan portfolio over the past three years. While we do not actively seek to originate new home mortgage loans in the general Chicagoland market, we
do offer these products to our current customers, particularly to our business-owner customers.



Our portfolio of home equity loans and lines of credit also continues to decline as a result of our decision to discontinue the origination of third-party
sourced home equity products in 2002. At December 31, 2006, this portfolio totaled $116.5 million, compared to $161.1 million and $207.2 million at December 31, 2005 and 2004 respectively. Correspondingly, this portfolio as a percentage of
total loans decreased to 5% at year-end 2006 from 9% at December 31, 2004. The percentage of our home equity loans and lines that exceed 80% of the appraised value of the underlying real estate, after giving effect to any outstanding first
mortgage loans, was 15% at December 31, 2006 as compared to 24% at year-end 2004. The Banks general underwriting guidelines do not allow lines in excess of 100% of appraised value. The percentage of our outstanding home equity loans and
lines that were originally sourced through mortgage brokers was 20% at year-end 2006, down from 33% at December 31, 2004.



38



---

##### Table of Contents

Consumer loans were $13.2 million, $15.0 million, and $18.4 million, at December 31, 2006, 2005, and
2004, respectively, and represented less than 1% of total loans at December 31, 2006. Of total consumer loans at December 31, 2006, 76% were indirect manufactured home loans, 4% were direct and indirect auto and boat loans, and the
remaining 20% were other personal secured and unsecured loans. During 2003, we discontinued the origination of indirect auto and manufactured homes. As a result, we expect our indirect consumer loan portfolio to continue to decline as these loans
repay.



The following table shows our maturity distribution of
gross loans as of the dates indicated:



|                                      |  |                            |           |                            |   |                          |  |           |         |                          |   |        |  |   |        |  |   |          
|------------------------------------- |  | -------------------------- | --------- | -------------------------- | - | ------------------------ |  | --------- | ------- | ------------------------ | - | ------ |  | - | ------ |  | - | ---------
|                                      |  | As of December 31, 2006(1)
|                                      |  | ONE YEAROR LESS            |           | OVER 1 YEAR THROUGH5 YEARS |   | OVER 5 YEARS             |  |          
|                                      |  |                            |           | FIXED RATE                 |   | FLOATINGORADJUSTABLERATE |  | FIXEDRATE |         | FLOATINGORADJUSTABLERATE |   | TOTAL 
|                                      |  | (in thousands)            
|Commercial and commercial real estate |  | $                          | 666,254   |                            | $ | 641,342                  |  | $         | 233,159 |                          | $ | 19,369 |  | $ | 2,701  |  | $ | 1,562,825
|Real estate  construction            |  |                            | 489,145   |                            |   | 18,901                   |  |           | 226,000 |                          |   | 10,271 |  |   |       |  |   | 744,317  
|Residential real estate  mortgages   |  |                            | 19,396    |                            |   | 9,738                    |  |           | 31,112  |                          |   | 1,167  |  |   | 1,040  |  |   | 62,453   
|Home equity loans and lines of credit |  |                            | 10,519    |                            |   | 3,476                    |  |           | 18,739  |                          |   |       |  |   | 83,782 |  |   | 116,516  
|Consumer                              |  |                            | 3,054     |                            |   | 5,003                    |  |           |        |                          |   | 4,697  |  |   | 483    |  |   | 13,237   
|Other loans                           |  |                            | 1,396     |                            |   |                         |  |           |        |                          |   |       |  |   |       |  |   | 1,396    
|                                      |  |                            |           |                            |   |                          |  |           |         |                          |   |        |  |   |        |  |   |          
|Total gross loans                     |  | $                          | 1,189,764 |                            | $ | 678,460                  |  | $         | 509,010 |                          | $ | 35,504 |  | $ | 88,006 |  | $ | 2,500,744
|                                      |  |                            |           |                            |   |                          |  |           |         |                          |   |        |  |   |        |  |   |          

---

|(1) | Maturities are based upon contractual dates. Demand loans are included in the one year or less category and totaled $8.0 million as of December 31, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



Nonperforming Assets and Impaired Loans



Our lending officers and their managers are
responsible for the ongoing review of present and projected future performance of the loans within their assigned portfolio and for risk rating such loans in accordance with the Banks risk rating system. In addition, an objective loan review
process independently risk rates loans to monitor and confirm the reasonableness of the lending officers loan risk rating conclusion. Delinquency reports are reviewed monthly by the lending officers, their managers and credit administration.
The responsible lending officer reports to a loan committee the current status of loans past due or current but graded below a designated level. The committee evaluates whether to place the loan on nonaccrual, the need for a specific allowance for
loan loss, or, if appropriate, a partial or full charge-off.



Nonperforming loans include nonaccrual loans and interest-accruing loans contractually past due 90 days or more. All loans past due 90 days or more are evaluated to determine if the accrual of interest should be discontinued. Loans are
placed on a nonaccrual basis for recognition of interest income when sufficient doubt exists as to the full collection of principal and interest. Generally, loans are to be placed on nonaccrual when principal and interest is contractually past due
90 days, unless the loan committee determines that the loan is adequately secured and in the process of collection.



39



---

##### Table of Contents

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



|                                                                         |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                         |  | As of December 31,     |       
|                                                                         |  | 2006                   |        |   | 2005 |   |        | 2004 |  |   | 2003   |   |  | 2002 |       
|                                                                         |  | (dollars in thousands) |       
|Loans contractually past due 90 days or more but still accruing interest |  | $                      | 10,046 |   |      | $ | 2,615  |      |  | $ | 1,807  |   |  | $    | 4,728  |   |  | $ | 6,151  |  
|Nonaccrual loans                                                         |  |                        | 23,111 |   |      |   | 10,834 |      |  |   | 12,286 |   |  |      | 18,056 |   |  |   | 12,107 |  
|                                                                         |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming loans                                                |  |                        | 33,157 |   |      |   | 13,449 |      |  |   | 14,093 |   |  |      | 22,784 |   |  |   | 18,258 |  
|Other real estate                                                        |  |                        | 412    |   |      |   | 1,139  |      |  |   | 46     |   |  |      | 141    |   |  |   | 602    |  
|Other repossessed assets                                                 |  |                        |       |   |      |   |       |      |  |   | 12     |   |  |      | 23     |   |  |   | 23     |  
|                                                                         |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                               |  | $                      | 33,569 |   |      | $ | 14,588 |      |  | $ | 14,151 |   |  | $    | 22,948 |   |  | $ | 18,883 |  
|                                                                         |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Restructured loans not included in nonperforming assets                  |  | $                      |       |   |      | $ |       |      |  | $ | 1,777  |   |  | $    | 130    |   |  | $ | 313    |  
|Nonperforming loans to total loans                                       |  |                        | 1.33   | % |      |   | 0.56   | %    |  |   | 0.64   | % |  |      | 1.16   | % |  |   | 0.97   | %
|Nonperforming assets to total loans plus repossessed property            |  |                        | 1.34   | % |      |   | 0.61   | %    |  |   | 0.64   | % |  |      | 1.17   | % |  |   | 1.00   | %
|Nonperforming assets to total assets                                     |  |                        | 0.99   | % |      |   | 0.44   | %    |  |   | 0.49   | % |  |      | 0.88   | % |  |   | 0.74   | %



Our nonperforming
loans increased to their highest year-end level in five years at December 31, 2006. The increase in nonperforming loans occurred primarily among loans for residential land development. We believe the decline in residential home sales in the
Chicagoland market that began in 2006 has reduced demand for developed residential lots and vacant land and, as a result, has reduced cash inflows for many residential developers. Where there is reduced demand for new homes, residential developers
may be required to hold land for longer periods of time which can lead to greater interest cost and lower or deferred cash flows. These factors may result in higher credit risk for the lender. We viewed the increase in our nonperforming loans as an
indicator of increased credit risk in our loan portfolio in our evaluation of the adequacy of the allowance for loan losses.



Nonperforming loans at December 31, 2006 included $19.7 million of loans to two borrowers, both of whom were residential real estate developers.
Loans totaling $10.78 million to one of these borrowers were placed on nonaccrual status at the end of the second quarter in 2006. Loans to a second borrower totaling $8.97 million include one loan placed on nonaccrual status at year end and the
other reported as 90 days or more past due but still accruing interest.



The inability of a borrower to comply with the terms of a loan agreement often requires the loan to be recognized as contractually past due, and therefore, reported as nonperforming. However, not all nonperforming loans are considered
impaired loans. A loan may be contractually past due with respect to its note maturity date but current on interest or otherwise performing such that we believe that it is probable that interest and principal will be paid in full. A loan is
considered impaired if, based upon current information and events, we believe it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. We
regard all nonaccrual loans as impaired, as well as those accruing loans that we believe to have higher risk of noncompliance with the contractual repayment schedule for both interest and principal.



Once we determine that a loan has been impaired, we then determine what we
believe is the likely amount of the impairment. While impaired loans exhibit weaknesses that may inhibit repayment in compliance with the original note terms, our impairment analysis may not always result in an allowance for loan loss for every
impaired loan. Generally, the amount in the allowance for loan losses for impaired loans is based on the present value of expected future cash flows discounted at each loans effective interest rate. However, collateral-dependent loans may be
measured for impairment based on the fair value of the collateral, net of cost to sell.



40



---

##### Table of Contents

Information about our impaired loans at or for the years ended December 31, 2006, 2005, and 2004 is
as follows:



|                                                                    |  |                |        |      |   |        |  |   |       
|------------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                    |  | 2006           |        | 2005 |   | 2004  
|                                                                    |  | (in thousands)
|Recorded balance of impaired loans, at end of year:                 |  |                |        |      |   |        |  |   |       
|With related allowance for loan loss                                |  | $              | 18,813 |      | $ | 26,605 |  | $ | 12,271
|With no related allowance for loan loss                             |  |                | 5,323  |      |   | 9,159  |  |   | 6,056 
|                                                                    |  |                |        |      |   |        |  |   |       
|Total                                                               |  | $              | 24,136 |      | $ | 35,764 |  | $ | 18,327
|                                                                    |  |                |        |      |   |        |  |   |       
|Allowance for loan losses related to impaired loans, at end of year |  | $              | 2,528  |      | $ | 1,925  |  | $ | 1,067 
|Average balance of impaired loans for the year                      |  |                | 33,928 |      |   | 27,678 |  |   | 20,797
|Interest income recognized on impaired loans for the year           |  |                | 850    |      |   | 1,918  |  |   | 1,004 



Certain categories of
loans that are more homogenous, such as residential mortgage and consumer loans, are evaluated collectively for impairment. Therefore, we do not assign individual credit risk ratings to these loans and they are excluded from impaired loans.



The dollar amount of impaired loans can vary from period to
period depending upon the size and number of loans deemed impaired. Total impaired loans were $24.1 million, $35.8 million, and $18.3 million at December 31, 2006, 2005, and 2004, respectively. The allowance for loan losses related to impaired
loans was $2.5 million at December 31, 2006, compared to $1.9 million at December 31, 2005 and $1.1 million at December 31, 2005.



In addition to nonperforming and impaired loans, we also monitor performing loans where appropriate. At December 31, 2006, a greater portion of the
performing loans that we were actively monitoring were to residential development borrowers than in prior years. Diminished demand in the residential housing market may reveal specific project or borrower weaknesses that otherwise might have been
mitigated by a stronger or more vibrant market.



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.
Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula described below, specific allowances for identified problem loans and portfolio segments, and the unallocated allowance.



The formula portion of the allowance is calculated by applying
loss factors to categories of loans outstanding in the portfolio. The loans are categorized by loan type as commercial, which includes C&I, commercial real estate, and real estate construction loans, residential real estate mortgage and consumer
loans. Those categories are further segregated by risk classification and in some cases by delinquency status. Each commercial, commercial real estate and real estate construction loan has a risk grade based on formal defined criteria. For consumer
loans, we further categorize the loans into consumer loan product types; for example home equity loans over 80% loan to value, home equity loans equal to or less than 80%, and loans secured by manufactured homes. Segregation of the loans into more
discrete pools facilitates greater precision in matching historic and expected loan losses with the source of the loss. We adjust these pools from time to time, based on the changing composition of the loan portfolio, segmenting loans with similar
attributes and risk characteristics. We calculate actual historic loss rates for prior years for each separate loan segment identified. Each of the prior years historical loss rates is then weighted based on our evaluation of the duration of
the economic cycle to arrive at a current expected loss rate. The current expected loss rates are adjusted, if deemed appropriate, for



41



---

##### Table of Contents

other relevant factors affecting the segments, including changes in lending practices, trends in past due loans and industry, geographical, collateral and
size concentrations. Finally, the resulting loss factors are multiplied against the current period loans outstanding to derive an estimated loss.



Specific allowances are established in cases where management has identified significant conditions or circumstances related to a loan that indicate a
loss will probably be incurred, but the degree of certainty and loss quantification has not reached the charge-off level. The amount in the allowance for loan losses for impaired loans is determined based on the present value of expected future cash
flows discounted at the loans effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of the collateral, net of cost to sell. If the measure of the impaired loan is less than the
recorded investment in the loan, a specific allowance is established.



The unallocated portion of the allowance contains amounts that are based on managements evaluation of conditions that are not directly measured in the determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The factors assessed are more qualitative in nature. Conditions
affecting the entire lending portfolio evaluated in connection with the unallocated portion of the allowance include: general economic and business conditions, duration of the current business cycle, the impact of competition on our underwriting
terms, current general market collateral valuations and findings of our independent loan review process. Executive management reviews these conditions quarterly in discussion with our senior lenders and credit officers. To the extent that any of
these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, managements estimate of the effect of such condition may be reflected as part of the formula allowance applicable to
such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment, managements evaluation of the probable loss related to such conditions is reflected in the
unallocated portion of the allowance.



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.



42



---

##### Table of Contents

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



|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                        |  | Year Ended December 31, |          
|                                        |  | 2006                    |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|                                        |  | (dollars in thousands)  |          
|Average total loans                     |  | $                       | 2,430,590 |   |      | $ | 2,271,681 |      |  | $ | 2,045,723 |   |  | $    | 1,898,604 |   |  | $ | 1,800,544 |  
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total loans at end of year              |  | $                       | 2,500,685 |   |      | $ | 2,384,931 |      |  | $ | 2,211,606 |   |  | $    | 1,962,008 |   |  | $ | 1,879,474 |  
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance for loan losses:              |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance at beginning of year          |  | $                       | 37,481    |   |      | $ | 37,484    |      |  | $ | 34,356    |   |  | $    | 34,073    |   |  | $ | 31,118    |  
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Charge-offs:                            |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial and commercial real estate   |  |                         | (5,341    | ) |      |   | (5,240    | )    |  |   | (6,783    | ) |  |      | (8,099    | ) |  |   | (6,603    | )
|Real estate  construction              |  |                         | (1,059    | ) |      |   | (103      | )    |  |   | (85       | ) |  |      |          |   |  |   | (350      | )
|Residential real estate  mortgages     |  |                         | (7        | ) |      |   | (260      | )    |  |   | (202      | ) |  |      | (101      | ) |  |   | (152      | )
|Consumer and other (1)                  |  |                         | (824      | ) |      |   | (1,485    | )    |  |   | (2,050    | ) |  |      | (1,748    | ) |  |   | (1,428    | )
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Subtotal                                |  |                         | (7,231    | ) |      |   | (7,088    | )    |  |   | (9,120    | ) |  |      | (9,948    | ) |  |   | (8,533    | )
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Recoveries:                             |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial and commercial real estate   |  |                         | 904       |   |      |   | 761       |      |  |   | 1,550     |   |  |      | 560       |   |  |   | 1,403     |  
|Real estate  construction              |  |                         | 1         |   |      |   | 89        |      |  |   | 2         |   |  |      |          |   |  |   |          |  
|Residential real estate  mortgages     |  |                         | 2         |   |      |   |          |      |  |   | 47        |   |  |      | 46        |   |  |   | 43        |  
|Consumer and other (1)                  |  |                         | 359       |   |      |   | 712       |      |  |   | 566       |   |  |      | 392       |   |  |   | 142       |  
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Subtotal                                |  |                         | 1,266     |   |      |   | 1,562     |      |  |   | 2,165     |   |  |      | 998       |   |  |   | 1,588     |  
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net charge-offs                         |  |                         | (5,965    | ) |      |   | (5,526    | )    |  |   | (6,955    | ) |  |      | (8,950    | ) |  |   | (6,945    | )
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Provision for loan losses               |  |                         | 6,000     |   |      |   | 5,523     |      |  |   | 10,083    |   |  |      | 9,233     |   |  |   | 9,900     |  
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance at end of year                |  | $                       | 37,516    |   |      | $ | 37,481    |      |  | $ | 37,484    |   |  | $    | 34,356    |   |  | $ | 34,073    |  
|                                        |  |                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net charge-offs to average total loans  |  |                         | 0.25      | % |      |   | 0.24      | %    |  |   | 0.34      | % |  |      | 0.47      | % |  |   | 0.39      | %
|Allowance to total loans at end of year |  |                         | 1.50      | % |      |   | 1.57      | %    |  |   | 1.69      | % |  |      | 1.75      | % |  |   | 1.81      | %
|Allowance to non-performing loans       |  |                         | 113.15    | % |      |   | 278.69    | %    |  |   | 265.98    | % |  |      | 150.79    | % |  |   | 186.62    | %

---

|(1) | Consumer loan charge-offs include charge-offs relating to credit card loans, indirect and direct auto loans, home equity loans and lines of credit, overdrafts and all other types of
consumer loans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Loans are charged off when the
loss is deemed to have occurred and is reasonably quantifiable. Net charge-offs were $6.0 million, or 0.25% of average loans, during 2006. In comparison, net charge-offs totaled $5.5 million, or 0.24% of average loans, during 2005 and $7.0 million,
or 0.34% of average loans, during 2004. The allowance as a percentage of total loans has declined from 1.69% at December 31, 2004 to 1.50% at December 31, 2006. The reduced net charge-off experience over the past two years favorably
impacted our estimates of probable losses inherent in our portfolio at December 31, 2006.



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. 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, as we identify changes in estimates, the allowance for loan losses is adjusted through the recording of a provision
for loan losses.



The table below presents an allocation of
the allowance for loan losses among the various loan categories and sets forth the percentage of loans in each category to gross loans. The allocation of the allowance for loan



43



---

##### Table of Contents

losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods
will necessarily occur in these amounts or in the indicated proportions.



ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES



|                                      |  |                        |        |                              |       |   |        |      |                              |  |       |        |  |                              |        |  |        |   |                              |   |        |        |       |                              |  |   |        |  |       |  
|------------------------------------- |  | ---------------------- | ------ | ---------------------------- | ----- | - | ------ | ---- | ---------------------------- |  | ----- | ------ |  | ---------------------------- | ------ |  | ------ | - | ---------------------------- | - | ------ | ------ | ----- | ---------------------------- |  | - | ------ |  | ----- | -
|                                      |  | As of December 31,     |       
|                                      |  | 2006                   |        |                              | 2005  |   |        | 2004 |                              |  | 2003  |        |  | 2002                         |       
|                                      |  | AMOUNT                 |        | LOAN CATEGORY TO GROSS LOANS |       |   | AMOUNT |      | LOAN CATEGORY TO GROSS LOANS |  |       | AMOUNT |  | LOAN CATEGORY TO GROSS LOANS |        |  | AMOUNT |   | LOAN CATEGORY TO GROSS LOANS |   |        | AMOUNT |       | LOAN CATEGORY TO GROSS LOANS | 
|                                      |  | (dollars in thousands) |       
|Allocated:                            |  |                        |        |                              |       |   |        |      |                              |  |       |        |  |                              |        |  |        |   |                              |   |        |        |       |                              |  |   |        |  |       |  
|Commercial and commercial real estate |  | $                      | 20,752 |                              | 62.5  | % |        | $    | 20,705                       |  | 61.2  | %      |  | $                            | 20,128 |  | 62.8   | % |                              | $ | 21,438 |        | 62.8  | %                            |  | $ | 18,751 |  | 56.9  | %
|Real estate  construction            |  |                        | 9,884  |                              | 29.8  |   |        |      | 9,718                        |  | 28.7  |        |  |                              | 7,711  |  | 24.0   |   |                              |   | 6,337  |        | 18.6  |                              |  |   | 5,564  |  | 16.9  |  
|Residential real estate  mortgages   |  |                        | 413    |                              | 2.5   |   |        |      | 469                          |  | 2.7   |        |  |                              | 406    |  | 2.9    |   |                              |   | 526    |        | 4.4   |                              |  |   | 376    |  | 6.3   |  
|Consumer and other                    |  |                        | 1,875  |                              | 5.2   |   |        |      | 2,292                        |  | 7.4   |        |  |                              | 3,501  |  | 10.3   |   |                              |   | 3,389  |        | 14.2  |                              |  |   | 4,614  |  | 19.9  |  
|Unallocated                           |  |                        | 4,592  |                              |      |   |        |      | 4,297                        |  |      |        |  |                              | 5,738  |  |       |   |                              |   | 2,666  |        |      |                              |  |   | 4,768  |  |      |  
|                                      |  |                        |        |                              |       |   |        |      |                              |  |       |        |  |                              |        |  |        |   |                              |   |        |        |       |                              |  |   |        |  |       |  
|Total allowance for loan losses       |  | $                      | 37,516 |                              | 100.0 | % |        | $    | 37,481                       |  | 100.0 | %      |  | $                            | 37,484 |  | 100.0  | % |                              | $ | 34,356 |        | 100.0 | %                            |  | $ | 34,073 |  | 100.0 | %
|                                      |  |                        |        |                              |       |   |        |      |                              |  |       |        |  |                              |        |  |        |   |                              |   |        |        |       |                              |  |   |        |  |       |  



Nonearning
Assets



The Company had $23.2 million of goodwill at
both December 31, 2006 and 2005, respectively, created from the 1997 acquisition of the Bank. No additions, disposals, or impairment to goodwill were recorded during 2006. In 2005, goodwill was reduced by $117,000 in connection with the sale of
the land trust operations. In recording goodwill in 1997, the Company elected the composite useful life approach and aggregated existing intangible assets into goodwill. Intangible assets consisting of relationships with land trust customers were
therefore included in the original recognition of goodwill. In connection with the sale of the land trust operations in 2005, the amount of the goodwill relating to land trusts was offset against the proceeds from the sale. Goodwill is tested
annually for impairment and as of July 1, 2006, the Company determined that no impairment charge was necessary at that time.



Premises, leasehold improvements, and equipment, net of accumulated depreciation and amortization, was $14.8 million at December 31, 2006, compared
to $15.1 million at December 31, 2005. The slight decrease in the net book value in 2006 was caused by depreciation and amortization, partly offset by remodeling at our Skokie banking center and the opening of our Rosemont banking center.



In January 2007, we announced that we entered into a new 15
year operating lease for approximately 36,000 square feet in downtown Chicago area. We will move our employees that are currently located at our West Washington location in downtown Chicago to the new space when the West Washington lease expires in
December 2007. However, we plan to continue to maintain the banking center on the first floor of the existing West Washington location. We expect to incur expenditures for the leasehold improvements, furniture, and equipment associated with the
build out of the new space.



On January 31, 2007, we
closed our Itasca branch. The operating lease on this 2,470 square foot facility was set to expire in August 2007. We have directed the customers of the Itasca banking center to our other banking centers. We will not incur any material costs
associated with the closing of this banking center.



44



---

##### Table of Contents

Deposits



Our deposits consist of noninterest and interest-bearing demand deposits, savings deposits, CDs, certain public funds and
customer repurchase agreements. Our customer repurchase agreements are reported in other borrowings. We also use brokered CDs and money market accounts and other out-of-local-market CDs to support our asset base.



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



|                                            |  |                         |           |                     |       |   |      |      |   |                 |   |                     |  |       |      |  |      |                 |  |                     |           |  |       |   |  |      |  
|------------------------------------------- |  | ----------------------- | --------- | ------------------- | ----- | - | ---- | ---- | - | --------------- | - | ------------------- |  | ----- | ---- |  | ---- | --------------- |  | ------------------- | --------- |  | ----- | - |  | ---- | -
|                                            |  | Year Ended December 31, |          
|                                            |  | 2006                    |           |                     | 2005  |   |      | 2004 |  
|                                            |  | AVERAGE BALANCE         |           | PERCENT OF DEPOSITS |       |   | RATE |      |   | AVERAGE BALANCE |   | PERCENT OF DEPOSITS |  |       | RATE |  |      | AVERAGE BALANCE |  | PERCENT OF DEPOSITS |           |  | RATE  |  
|                                            |  | (dollars in thousands)  |          
|Noninterest-bearing demand deposits         |  | $                       | 401,258   |                     | 15.6  | % |      |     | % |                 | $ | 438,784             |  | 18.6  | %    |  |     | %               |  | $                   | 447,345   |  | 20.8  | % |  |     | %
|NOW accounts                                |  |                         | 94,279    |                     | 3.7   |   |      | 0.56 |   |                 |   | 117,657             |  | 5.0   |      |  | 0.45 |                 |  |                     | 134,180   |  | 6.3   |   |  | 0.48 |  
|Money market accounts                       |  |                         | 677,848   |                     | 26.4  |   |      | 3.90 |   |                 |   | 509,832             |  | 21.6  |      |  | 2.08 |                 |  |                     | 430,740   |  | 20.0  |   |  | 0.86 |  
|Savings deposits                            |  |                         | 66,500    |                     | 2.6   |   |      | 0.28 |   |                 |   | 78,853              |  | 3.3   |      |  | 0.29 |                 |  |                     | 89,678    |  | 4.2   |   |  | 0.31 |  
|Time deposits:                              |  |                         |           |                     |       |   |      |      |   |                 |   |                     |  |       |      |  |      |                 |  |                     |           |  |       |   |  |      |  
|Certificates of deposit                     |  |                         | 540,901   |                     | 21.0  |   |      | 4.13 |   |                 |   | 541,547             |  | 22.9  |      |  | 3.14 |                 |  |                     | 510,632   |  | 23.8  |   |  | 2.39 |  
|Out-of-local-market certificates of deposit |  |                         | 123,804   |                     | 4.8   |   |      | 4.83 |   |                 |   | 139,001             |  | 5.9   |      |  | 3.36 |                 |  |                     | 96,663    |  | 4.5   |   |  | 2.59 |  
|Brokered certificates of deposit            |  |                         | 592,199   |                     | 23.0  |   |      | 4.79 |   |                 |   | 463,476             |  | 19.6  |      |  | 3.61 |                 |  |                     | 369,735   |  | 17.3  |   |  | 2.92 |  
|Public funds                                |  |                         | 73,620    |                     | 2.9   |   |      | 4.59 |   |                 |   | 72,822              |  | 3.1   |      |  | 3.07 |                 |  |                     | 66,993    |  | 3.1   |   |  | 1.61 |  
|                                            |  |                         |           |                     |       |   |      |      |   |                 |   |                     |  |       |      |  |      |                 |  |                     |           |  |       |   |  |      |  
|Total time deposits                         |  |                         | 1,330,524 |                     | 51.7  |   |      | 4.52 |   |                 |   | 1,216,846           |  | 51.5  |      |  | 3.34 |                 |  |                     | 1,044,023 |  | 48.7  |   |  | 2.55 |  
|                                            |  |                         |           |                     |       |   |      |      |   |                 |   |                     |  |       |      |  |      |                 |  |                     |           |  |       |   |  |      |  
|Total deposits                              |  | $                       | 2,570,409 |                     | 100.0 | % |      |      |   |                 | $ | 2,361,972           |  | 100.0 | %    |  |      |                 |  | $                   | 2,145,966 |  | 100.0 | % |  |      |  
|                                            |  |                         |           |                     |       |   |      |      |   |                 |   |                     |  |       |      |  |      |                 |  |                     |           |  |       |   |  |      |  



During 2006, average
deposit balances increased $208.4 million, or 8.8%, to $2.57 billion in 2006 from $2.36 billion during 2005. An increase in money market balances and brokered CDs primarily produced the higher average deposit balances. Average money market accounts
increased $168.0 million, or 33.0%, during 2006 to $677.8 million compared to $509.8 million during 2005. Most of the increase in money market balances occurred in our high-rate market-priced money market products. Average brokered CDs increased
$128.7 million during 2006, to $592.2 million, compared to an average of $463.5 million in 2005.



During 2005, year-to-date average deposit balances increased $216.0 million, or 10.1%, to $2.36 billion from $2.15 billion during 2004. Almost two-thirds
of the increase in deposits was obtained through issuance of brokered and out-of-local-market CDs. Average brokered CDs increased $93.7 million during 2005, to $463.5 million in 2005 compared to an average of $369.7 million in 2004. In addition,
average out-of-local-market CDs increased $42.3 million during 2005 to $139.0 million. From in-market sources, the largest increases in average balances were in money market accounts and customer CDs. Average money market accounts were $509.8
million during 2005, an increase of $79.1 million, or 18.4%, from $430.7 million during 2004. Average customer CDs increased $30.7 million, or 6.1%, during 2005 to $541.5 million as compared to $510.6 million during 2004.



45



---

##### Table of Contents

The following table sets forth the period end balances of total deposits at December 31, 2006, 2005
and 2004, respectively, as well as categorizes our deposits as in-market and out-of-market deposits.



|                                            |  |                 |           |      |   |           |  |   |          
|------------------------------------------- |  | --------------- | --------- | ---- | - | --------- |  | - | ---------
|                                            |  | At December 31,
|                                            |  | 2006            |           | 2005 |   | 2004     
|                                            |  | (in thousands) 
|In-market deposits:                         |  |                 |           |      |   |           |  |   |          
|Non-interest bearing deposits               |  | $               | 447,862   |      | $ | 464,289   |  | $ | 519,158  
|NOW accounts                                |  |                 | 82,484    |      |   | 104,269   |  |   | 124,015  
|Savings accounts                            |  |                 | 59,523    |      |   | 73,173    |  |   | 85,371   
|Money market accounts                       |  |                 | 742,859   |      |   | 645,523   |  |   | 421,529  
|Customer certificates of deposit            |  |                 | 516,624   |      |   | 549,793   |  |   | 525,173  
|Public time deposits                        |  |                 | 68,580    |      |   | 69,679    |  |   | 69,635   
|                                            |  |                 |           |      |   |           |  |   |          
|Total in-market deposits                    |  |                 | 1,917,932 |      |   | 1,906,726 |  |   | 1,744,881
|                                            |  |                 |          
|Out-of-market deposits:                     |  |                 |           |      |   |           |  |   |          
|Brokered money market accounts              |  |                 | 65,090    |      |   |          |  |   |         
|Out-of-local-market certificates of deposit |  |                 | 105,119   |      |   | 131,116   |  |   | 124,005  
|Brokered certificates of deposit            |  |                 | 551,786   |      |   | 505,802   |  |   | 415,811  
|                                            |  |                 |           |      |   |           |  |   |          
|Total out-of-market deposits                |  |                 | 721,995   |      |   | 636,918   |  |   | 539,816  
|                                            |  |                 |           |      |   |           |  |   |          
|Total deposits                              |  | $               | 2,639,927 |      | $ | 2,543,644 |  | $ | 2,284,697
|                                            |  |                 |           |      |   |           |  |   |          



During 2006, total
period-end deposit balances increased $96.3 million, or 3.8%, to $2.64 billion at December 31, 2006 compared to $2.54 billion at December 31, 2005. While total in-market deposits remained relatively unchanged at $1.9 billion at both
December 31, 2006 and 2005, total out-of-market deposits increased $85.1 million, or 13.4%, in 2006 to $722.0 million at December 31, 2006 from $637.0 million at December 31, 2005.



In-market funding increased $11.2 million in 2006 to $1.92 billion at
year-end 2006. While in-market money market deposits increased $97.3 million, or 15.1%, during 2006, period-end non-interest bearing deposits, NOW accounts, savings accounts, and customer CDs all declined. A significant portion of the increase in
money market accounts resulted from an increase in higher-rate market-priced money market balances. Our in-market money market deposits include deposits from what we describe as deposit rich customers. These customers include title
companies, downstream correspondent banks and a tax-deferred exchange company, among others. Within this customer group, there were three customers with combined deposit balances of $426.8 million at December 31, 2006.



On January 27, 2005, we completed the sale of our Broadview banking
center. In addition to selling the physical land and building, we sold approximately $19.7 million of deposits. The deposits sold consisted of $2.5 million of noninterest-bearing demand deposits, $4.1 million of interest-bearing demand deposits and
$13.1 million of CDs. The sale of these deposits did not have a material impact on our funding.



We utilize out-of-market CDs to fund the portion of our earning asset growth that is not funded with in-market deposits and other borrowings. While
these time deposits generally carry higher interest rates, prudent use of these alternatives is part of our strategy for the management of our overall cost of funding. When we evaluate the rate paid on a particular in-market deposit product, we
quantify the cost of the increase and weigh it against the alternative of maintaining the rate and exposing ourselves to potential balance runoff, which then must be funded through alternative sources. This in-market deposit pricing strategy has
been critical for us in the management of our cost of total funding. We offer CDs to out-of-local-market customers by providing rates to a private third-party electronic system that provides certificate of deposit rates from institutions across the
country to its subscribers. These CDs are generally issued at amounts of $100,000 or less as the purchasers seek to



46



---

##### Table of Contents

maintain full FDIC deposit insurance protection. The balance of CDs obtained through this marketing medium was $105.1 million at December 31, 2006, as
compared to $131.1 million and $124.0 million at December 31, 2005, and 2004, respectively. We also issue brokered CDs. The balance of our brokered CDs was $551.8 million, $505.8 million, and $415.8 million at December 31, 2006, 2005, and
2004, respectively. Under FDIC regulations, only well-capitalized institutions may fund brokered CDs without prior regulatory approval, and the Bank is currently categorized as well-capitalized. Adverse operating results at
the Bank or changes in industry conditions or overall market liquidity could lead to our inability to replace brokered deposits at maturity, which could result in higher costs to, or reduced asset levels at, the Bank. In addition, brokered money
market deposits were augmented by a new funding source in 2006. Total brokered money market balances were $65.1 million at December 31, 2006.



Brokered CDs are carried net of the related broker placement fees and the remaining unamortized fair value adjustments that resulted from the termination
of interest rate exchange agreements that were associated with brokered CDs previously accounted for as fair value hedges. The broker placement fees and unamortized fair value adjustment are amortized to the maturity date of the related brokered
CDs. The amortization is included in deposit interest expense. At December 31, 2006, the scheduled maturities of brokered CDs are as follows:



|                                  |  |                |         |  
|--------------------------------- |  | -------------- | ------- | -
|Year                              |  | Total          |        
|                                  |  | (in thousands) |        
|2007                              |  | $              | 282,871 |  
|2008                              |  |                | 49,339  |  
|2009                              |  |                | 9,757   |  
|2010                              |  |                | 38,946  |  
|2011                              |  |                | 88,283  |  
|Thereafter                        |  |                | 87,866  |  
|                                  |  |                |         |  
|Subtotal                          |  |                | 557,062 |  
|Unamortized broker placement fees |  |                | (2,146  | )
|Unamortized fair value adjustment |  |                | (3,130  | )
|                                  |  |                |         |  
|Total                             |  | $              | 551,786 |  
|                                  |  |                |         |  



Time deposits,
including public funds, in denominations of $100,000 or more totaled $329.2 million at December 31, 2006. The following table sets forth the amount and maturities of time deposits of $100,000 or more at December 31, 2006:



|                               |  |                   |        
|------------------------------ |  | ----------------- | -------
|                               |  | December 31, 2006
|                               |  | (in thousands)   
|3 months or less               |  | $                 | 134,668
|Between 3 months and 6 months  |  |                   | 60,840 
|Between 6 months and 12 months |  |                   | 91,542 
|Over 12 months                 |  |                   | 42,138 
|                               |  |                   |        
|Total                          |  | $                 | 329,188
|                               |  |                   |        



During 2005, total
period-end deposit balances increased $258.9 million, or 11.3%, to $2.54 billion at December 31, 2005 compared to $2.28 billion at December 31, 2004. Total in-market deposits increased $161.8 million, or 9.3%, in 2005 to $1.9 billion at
December 31, 2005. Total out-of-market deposits increased $97.1 million, or 18.0%, in 2005 to $636.9 million at December 31, 2005. Brokered CDs increased $90.0 million during 2005 to $505.8 million and out-of-local market CDs increased
$7.1 million during 2005 to $131.1 million at year-end 2005. In-market funding increases occurred in money market deposits, which increased by $224.0 million to $645.5 million at year-end 2005, and customer CDs that increased by $24.6 million to
$549.8 million at December 31, 2005. Deposits in noninterest bearing demand deposits, NOW and savings accounts declined.



47



---

##### Table of Contents

Other Borrowings



At December 31, 2006, our other borrowings totaled $262.3 million as compared to $298.4 million at December 31,
2005. Average other borrowings for 2006 and 2005 were $263.9 million and $248.7 million, respectively. Our other borrowings include federal funds purchased, securities sold under agreements to repurchase and U.S. Treasury tax and loan note option
accounts. The federal funds purchased are primarily noncollateralized funds obtained from financial institutions where the Bank acts as one of the selling institutions primary correspondent banks. The overnight securities sold under agreement
to repurchase are collateralized financing transactions and are primarily executed with local Bank customers. At December 31, 2006, we had a $100.0 million term repurchase agreement that we executed with a broker/dealer to fund a portion of our
investment security purchases during 2005. The term repurchase agreement, which matures in September 2007, carries a variable interest rate tied to 3-month LIBOR with a maximum rate of 5.12%. At December 31, 2006, subject to available
collateral, the Bank had available pre-approved overnight federal funds borrowings and repurchase agreement lines of $200 million and $750 million, respectively.



The following table shows categories of other borrowings having average balances during the period greater than 30% of
stockholders equity at the end of each period. During each reported period, securities sold under repurchase agreements were the only category meeting this criteria.



|                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                             |  | Year Ended December 31, |        
|                                             |  | 2006                    |         |   | 2005 |   |         | 2004 | 
|                                             |  | (dollars in thousands)  |        
|Securities sold under repurchase agreements: |  |                         |         |   |      |   |         |      |  |   |         |  
|Balance at year end                          |  | $                       | 226,415 |   |      | $ | 250,746 |      |  | $ | 185,737 |  
|Weighted average interest rate at year end   |  |                         | 4.05    | % |      |   | 3.24    | %    |  |   | 1.19    | %
|Maximum amount outstanding (1)               |  | $                       | 276,134 |   |      | $ | 276,827 |      |  | $ | 223,404 |  
|Average amount outstanding during the year   |  | $                       | 227,237 |   |      | $ | 203,595 |      |  | $ | 176,944 |  
|Daily average interest rate during the year  |  |                         | 3.91    | % |      |   | 2.34    | %    |  |   | 0.97    | %

---

|(1) | Based on amount outstanding at month end during each year.
|--- | ----------------------------------------------------------



Notes Payable and FHLB Advances



Notes payable. At December 31, 2006, the Company had a $20.0 million revolving credit facility that had not been drawn upon. The facility
matures on November 27, 2007 and is secured by the Companys pledge of its capital stock of the Bank. The underlying loan agreement requires that the Bank remain well capitalized and the holding company remain adequately capitalized as
defined by regulatory guidelines. As of December 31, 2006, we were in compliance with these covenants.



Previously, we had $10.0 million of unsecured subordinated debt and a $500,000 outstanding term loan. The subordinated debt and term loan were repaid in
their entirety in September 2005 from proceeds from our August 2005 public offering of 1,000,000 shares of our common stock.



FHLB advances. Our borrowings from the FHLB at December 31, 2006 totaled $80.0 million, compared to $75.0 million at December 31, 2005.
The weighted average interest rate was 5.32% and 4.56% at December 31, 2006 and 2005, respectively. The advances have remaining terms ranging from 3 to 5 years. However, a $25.0 million advance, that is scheduled to mature in 2011, is currently
callable at par at the FHLBs option. The FHLB advances are collateralized by investment securities and a blanket lien on qualified first-mortgage residential and home equity loans. For additional details of the FHLB advances, see the section
captioned Notes to Consolidated Financial StatementsNotes Payable and FHLB Advances from our audited financial statements contained elsewhere in this annual report.



48



---

##### Table of Contents

Junior Subordinated Debentures



At December 31, 2006, we had $86.6 million of junior subordinated
debentures that were comprised of $45.4 million issued to TAYC Capital Trust I and $41.2 million issued to TAYC Capital Trust II. Each of the trusts is a wholly-owned statutory trust. We report a liability for the total balance of the junior
subordinated debentures issued to the trusts. We report the equity investments in the trusts of $2.6 million in other assets on the Consolidated Balance Sheet at December 31, 2006. Interest expense on the junior subordinated debentures is
reported in interest expense.



TAYC Capital Trust I is a wholly
owned subsidiary we formed for the purpose of issuing $45.0 million of trust preferred securities in October 2002. 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 our 9.75% junior subordinated debentures. The sole assets of the TAYC Capital Trust I are our junior subordinated debentures. Interest on both the trust preferred securities and
junior subordinated debentures are payable quarterly at a rate of 9.75% per year. We incurred issuance costs of $3.1 million that is being amortized over the 30 year term of the junior subordinated debentures. At December 31, 2006,
unamortized issuance costs relating to these debentures totaled $2.7 million.



In 2006, we purchased $1.0 million of the trust preferred securities issued by TAYC Capital Trust I that were offered for sale. We then exchanged the trust preferred securities we had purchased along with a
proportional amount of common securities issued by TAYC Capital Trust I, for $1.03 million of our junior subordinated debentures issued to TAYC Capital Trust I. These trust preferred securities can be called, at our option, beginning in October
2007. We plan to review alternatives available to us at that time, in light of the then current interest rate environment and our capital needs, to refinance or repay these 9.75% trust preferred securities.



In June 2004, we
formed TAYC Capital Trust II, a wholly owned subsidiary, for the purpose of issuing $40.0 million of floating rate trust preferred securities. Proceeds from the sale of these trust preferred securities, along with $1.2 million received from the
purchase of its common equity securities, were invested by TAYC Capital Trust II in $41.2 million of our floating rate junior subordinated debentures. The sole assets of the TAYC Capital Trust II are our junior subordinated debentures. 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 17thof September, December, March and June. The interest rate on both was 8.04% and 7.18% at December 31, 2006 and 2005, respectively. We incurred issuance costs of $470,000 that is being amortized
over the 30 year term of the junior subordinated debentures. At December 31, 2006, unamortized issuance costs relating to these debentures totaled $431,000.



Our obligations with respect to each of the trust preferred securities and the related debentures, in the aggregate,
constitute a full, irrevocable and unconditional guarantee on a subordinated basis by us of the obligations of each of the trusts under the respective trust preferred securities. See the section of this annual report captioned Notes to
Consolidated Financial StatementsJunior Subordinated Debentures for additional details.



Capital Resources



We
monitor compliance with bank regulatory capital requirements, focusing primarily on the risk-based capital guidelines. Under the risk-based capital method of capital measurement, the ratio computed is dependent on the amount and composition of
assets recorded on the balance sheet and the amount and composition of off-balance sheet items, in addition to the level of capital. Generally, Tier I capital includes common stockholders equity, trust preferred securities (up to certain
limits), and, in prior periods, our noncumulative perpetual preferred stock. Goodwill is deducted from Tier I capital. Total capital represents Tier I capital plus the allowance for loan loss, subject to certain limits, our subordinated note payable
and the portion of the trust preferred securities not includable in Tier I capital.



49



---

##### Table of Contents

At December 31, 2006, 2005, and 2004, the holding company was considered well
capitalized under capital guidelines set by the Federal Reserve for bank holding companies. In 2006, the holding companys regulatory capital ratios increased as the impact of earnings retention was partly offset by an increase in
risk-weighted and average assets. The holding companys regulatory capital ratios increased in 2005 as a result of the common stock offering completed in August 2005 and from earnings retention.



At December 31, 2006, 2005, and 2004, the Bank was considered well
capitalized under regulatory capital guidelines. All of the Banks capital ratios increased during both 2006 and 2005, as growth in equity outpaced the higher risk-weighted and average assets. The Banks dividend payout as a
percentage of Bank net income was 25% and 15% for the year ended December 31, 2006 and 2005, respectively. We intend to maintain the Banks capital levels at amounts above the regulatory well capitalized guidelines.



The holding company 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 December 31, 2006:                 |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Total Capital (to Risk Weighted Assets)  |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  | $                      | 372,451 |       | 13.35                         | % |        | >$223,140                                                        |       | >8.00 | % |        | >$278,925 |       | >10.00 | %
|Cole Taylor Bank                         |  |                        | 334,293 |       | 12.01                         |   |        | >222,706                                                         |       | >8.00 |   |        | >278,382  |       | >10.00 |  
|Tier I Capital (to Risk Weighted Assets) |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  |                        | 337,553 |       | 12.10                         |   |        | >111,570                                                         |       | >4.00 |   |        | >167,355  |       | >6.00  |  
|Cole Taylor Bank                         |  |                        | 299,462 |       | 10.76                         |   |        | >111,353                                                         |       | >4.00 |   |        | >167,029  |       | >6.00  |  
|Leverage (to average assets)             |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  |                        | 337,553 |       | 10.17                         |   |        | >132,825                                                         |       | >4.00 |   |        | >166,031  |       | >5.00  |  
|Cole Taylor Bank                         |  |                        | 299,462 |       | 9.04                          |   |        | >132,488                                                         |       | >4.00 |   |        | >165,610  |       | >5.00  |  
|                                         |  |                        |         |       |                               |  
|As of December 31, 2005:                 |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Total Capital (to Risk Weighted Assets)  |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  | $                      | 324,050 |       | 12.02                         | % |        | >$215,693                                                        |       | >8.00 | % |        | >$269,617 |       | >10.00 | %
|Cole Taylor Bank                         |  |                        | 300,510 |       | 11.16                         |   |        | >215,325                                                         |       | >8.00 |   |        | >269,156  |       | >10.00 |  
|Tier I Capital (to Risk Weighted Assets) |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  |                        | 281,480 |       | 10.44                         |   |        | >$107,847                                                        |       | >4.00 |   |        | >$161,770 |       | >6.00  |  
|Cole Taylor Bank                         |  |                        | 266,818 |       | 9.91                          |   |        | >107,662                                                         |       | >4.00 |   |        | >161,494  |       | >6.00  |  
|Leverage (to average assets)             |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  |                        | 281,480 |       | 8.90                          |   |        | >$126,475                                                        |       | >4.00 |   |        | >$158,094 |       | >5.00  |  
|Cole Taylor Bank                         |  |                        | 266,818 |       | 8.46                          |   |        | >126,182                                                         |       | >4.00 |   |        | >157,727  |       | >5.00  |  
|                                         |  |                        |         |       |                               |  
|As of December 31, 2004:                 |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Total Capital (to Risk Weighted Assets)  |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  | $                      | 255,616 |       | 10.27                         | % |        | >$199,125                                                        |       | >8.00 | % |        | >$248,906 |       | >10.00 | %
|Cole Taylor Bank                         |  |                        | 262,350 |       | 10.55                         |   |        | >198,954                                                         |       | >8.00 |   |        | >248,692  |       | >10.00 |  
|Tier I Capital (to Risk Weighted Assets) |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  |                        | 181,437 |       | 7.29                          |   |        | >$99,563                                                         |       | >4.00 |   |        | >$149,344 |       | >6.00  |  
|Cole Taylor Bank                         |  |                        | 231,185 |       | 9.30                          |   |        | >99,477                                                          |       | >4.00 |   |        | >149,215  |       | >6.00  |  
|Leverage (to average assets)             |  |                        |         |       |                               |   |        |                                                                  |       |       |   |        |           |       |        |  
|Taylor Capital Group, Inc.               |  |                        | 181,437 |       | 6.49                          |   |        | >$111,757                                                        |       | >4.00 |   |        | >$139,696 |       | >5.00  |  
|Cole Taylor Bank                         |  |                        | 231,185 |       | 8.29                          |   |        | >111,611                                                         |       | >4.00 |   |        | >139,514  |       | >5.00  |  



50



---

##### Table of Contents

During 2006, we declared common stock dividends of $0.28 per share. In comparison, we declared common
stock dividends of $0.24 per share in each of 2005 and 2004. During the fourth quarter of 2006, we increased our quarterly dividend rate to $0.10 per common share from the quarterly dividend rate of $0.06 per common share that we had maintained
since we were formed in 1997. The amount of dividends paid on common shares in 2006, 2005, and 2004 was $2.7 million, $2.4 million, and $2.3 million, respectively. In addition, the increase in common shares outstanding because of our August 2005
public offering, as well as the exercise of stock options, caused the increase in the amount of dividends paid each year.



During 2004, we also declared preferred stock dividends of $1.225 per share, totaling $1.9 million. We redeemed our Series A preferred stock on
July 16, 2004, and therefore no longer pay preferred dividends.



As of December 31, 2006, we had purchased 323,007 shares of our common stock, at a cost of $7.1 million, which are held as treasury shares. All of these shares were repurchased prior to our 2002 initial public offering of common stock.
Previously, under the terms of our employee stock ownership plan, stock option agreements, and the restricted stock program, we were obligated to purchase shares of our stock from terminated employees related to put rights. Following the
completion of our common stock offering, we are no longer obligated to purchase shares of our stock under any of these plans.



Liquidity



In addition to the normal influx of liquidity from in-market deposit growth, in concert with repayments and maturities of loans and investments, the Bank
utilizes brokered money market accounts and CDs, out-of-local-market CDs, FHLB borrowings, broker/dealer repurchase agreements and federal funds purchased to meet its liquidity needs. We manage the risks associated with this reliance on wholesale
funding sources by extending and laddering the maturity of these liabilities and pledging collateral. We manage the risk associated with volatility in our customers deposit balances by maintaining adequate alternate sources of funding and
excess collateral available for immediate use. For example, the Bank is able to borrow from the Federal Reserve Bank using securities or commercial loans as collateral through the Borrower-in-Custody Program. Under this program, at December 31,
2006, the Bank maintained $406 million of commercial loans as collateral with a lendable value of $315 million. The Bank also maintains pre-approved overnight federal funds borrowing lines at various correspondent banks, which provide additional
short-term borrowing capacity of $200 million at December 31, 2006. Pre-approved repurchase agreement availability with major brokers and banks totaled $750 million at December 31, 2006, subject to acceptable unpledged marketable
securities.



At December 31, 2006, our total assets were
$3.38 billion, an increase of $99.0 million, or 3.0%, as compared to total assets of $3.28 billion at December 31, 2005. The increase in total assets was mainly funded with a $96.3 million increase in deposits. The increase in deposits was
mostly a result of higher money market account balances of $162.4 million and brokered CD balances of $46.0 million. Cash inflow from operations exceeded cash outflows by $35.0 million in 2006. We believe that our current sources of funds are
adequate to meet all of our financial commitments and asset growth targets for 2007.



At December 31, 2005, our total assets increased to $3.3 billion, a $391.6 million, or 13.6%, from December 31, 2004. The increase in total assets was primarily funded with a $279.5 million increase in
deposits and a $68.9 million increase in other borrowings. The increase in deposits was primarily due to a $224.0 million increase in money market account balances and a $90.0 million increase in brokered CD balances. Cash inflow from operations
exceeded cash outflows by $36.1 million in 2005. We also received $39.0 million of proceeds, net of issuance costs, from the public offering of 1.15 million of our common shares in 2005.



During 2004, our total assets increased by $285.4 million, or 11.0%. The
increase in total assets was primarily funded with the $273.0 million increase in deposits. The increase in deposits was primarily due to a $177.7 million increase in brokered and out-of-local-market CDs and a $74.0 million increase in
noninterest-bearing demand deposits. Cash inflow from operations exceeded cash outflows by $37.1 million in 2004.



51



---

##### Table of Contents

Interest received net of interest paid was the principal source of our operating cash inflows in each of
the above periods. Management of investing and financing activities and market conditions determine the level and the stability of our net interest cash flows.



Our net cash outflows from investing activities for the years ended December 31, 2006, 2005, and 2004, were $129.1 million, $331.4 million, and
$305.8 million, respectively. During 2006, the net cash outflow was primarily invested in loans of $117.4 million. In 2005 and 2004, the net cash outflow was primarily invested in loans and net additions to the investment portfolio.



Our net cash inflows from financing activities for years ended
December 31, 2006, 2005, and 2004 were $68.0 million, $377.1 million, and $259.4 million, respectively. The majority of the cash inflows each year were from net increases in deposits. Net deposit inflows were $99.4 million, $279.5 million, and
$273.0 million in 2006, 2005 and 2004, respectively. During 2006, we also utilized funds to reduce other borrowings by $36.1 million. During 2005, we utilized term securities sold under agreements to repurchase to fund a portion of our investing
activities. In addition, a portion of the net proceeds of $39.0 million from our common stock offering was used to retire our subordinated and term debt totaling $10.5 million. In 2004, we used proceeds from the issuance of $41.2 million of junior
subordinated debentures to TAYC Capital Trust II to redeem all of the outstanding Series A preferred stock at its stated amount of $38.25 million.



Holding Company Liquidity. Historically, our primary source of funds has been dividends received from the Bank. During 2006, 2005, and 2004, the
Bank declared $10.0 million, $6.0 million, and $8.0 million, respectively of dividends to the holding company. The Bank is subject to dividend restrictions set forth by regulatory authorities, whereby the Bank may not, without prior approval of
regulatory authorities, declare dividends in excess of the sum of the current years earnings plus the retained earnings from the prior two years. The dividends, as of December 31, 2006, that the Bank could declare and pay to us, without
the approval of regulatory authorities, amounts to approximately $84.6 million.



We also receive funds from the exercise of employee stock options. We received $2.7 million during 2006 from the exercise of employee stock options, compared to $2.6 million during each of 2005 and 2004.



In 2005, we received net proceeds, after issuance costs, of $39.0 million
from the issuance of 1.15 million shares of our common stock. We used $10.5 million of the proceeds to repay our notes payable. The remaining proceeds were maintained at the holding company level for general corporate purposes and to support
future growth.



Our liquidity uses at the holding company level
consist primarily of dividends to stockholders, debt service requirements on the debentures issued to TAYC Capital Trust I and TAYC Capital Trust II, and expenses for general corporate purposes. During the fourth quarter of 2006, we increased our
quarterly dividend rate to $0.10 per common share from the quarterly dividend rate of $0.06 per common share that we had maintained since 1997. We believe that the holding company currently has sufficient cash to meet its expected obligations in
2007. In addition, we have a $20.0 million revolving credit facility, which was not drawn upon at December 31, 2006.



In 2004, we received net proceeds, after issuance costs, of $40.8 million from the issuance of junior subordinated debentures to TAYC Capital Trust II. We
used most of these proceeds to redeem all of our outstanding Series A preferred stock. The redemption price was the stated value of $38.25 million, plus $153,000 of accrued and unpaid dividends since the last dividend distribution date. The
remainder of the proceeds were used for general corporate purposes.



Off-Balance Sheet Arrangements



Off-balance sheet arrangements include commitments to extend credit and financial guarantees. Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers. We



52



---

##### Table of Contents

had commitments to extend credit of $914.7 million and $925.5 million at December 31, 2006 and 2005, respectively. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many customers do not
utilize the total approved commitment amounts. Historically, approximately 60% of available consumer and commercial loan commitment amounts are drawn. Therefore, the total commitment amounts do not usually represent future cash requirements.



We had $110.2 million and $110.6 million of financial and
performance standby letters of credit at December 31, 2006 and 2005, respectively. Financial standby letters of credit are conditional commitments issued by us to guarantee the payment of a specified financial obligation of a customer to a
third party. Performance standby letters of credit are conditional commitments issued by us to make a payment to a specified third party in the event a customer fails to perform under a non-financial contractual obligation. The terms of these
financial guarantees range from less than one to five years. The credit risk involved in issuing these letters of credit is essentially the same as that involved in extending loan facilities to customers. We expect most of these letters of credit to
expire undrawn and we expect no significant loss from our obligation under financial guarantees.



The following table shows as of December 31, 2006 the loan commitments and financial guarantees by maturity date.



|                                      |  |                   |         |                   |   |                   |  |                 |        |       |   |        |  |   |        
|------------------------------------- |  | ----------------- | ------- | ----------------- | - | ----------------- |  | --------------- | ------ | ----- | - | ------ |  | - | -------
|                                      |  | December 31, 2006
|                                      |  | Within OneYear    |         | One to ThreeYears |   | Four to FiveYears |  | After FiveYears |        | Total
|                                      |  | (in thousands)   
|Commitments to extend credit:         |  |                   |         |                   |   |                   |  |                 |        |       |   |        |  |   |        
|Commercial                            |  | $                 | 467,663 |                   | $ | 292,825           |  | $               | 47,766 |       | $ | 15,611 |  | $ | 823,865
|Consumer                              |  |                   | 3,076   |                   |   | 12,912            |  |                 | 11,188 |       |   | 63,621 |  |   | 90,797 
|Financial guarantees:                 |  |                   |         |                   |   |                   |  |                 |        |       |   |        |  |   |        
|Financial standby letters of credit   |  |                   | 52,687  |                   |   | 1,944             |  |                 | 2,254  |       |   |       |  |   | 56,885 
|Performance standby letters of credit |  |                   | 48,968  |                   |   | 209               |  |                 | 3,977  |       |   | 150    |  |   | 53,304 



The following table
shows, as of December 31, 2006, our obligations and commitments to make future payments under contracts, debt and lease agreements and maturing time deposits. FHLB advances are categorized by their call date as opposed to maturity date.



|                                |  |                   |         |                   |   |                   |  |                 |         |       |   |         |  |   |          
|------------------------------- |  | ----------------- | ------- | ----------------- | - | ----------------- |  | --------------- | ------- | ----- | - | ------- |  | - | ---------
|                                |  | December 31, 2006
|                                |  | Within OneYear    |         | One to ThreeYears |   | Four to FiveYears |  | After FiveYears |         | Total
|                                |  | (in thousands)   
|Notes payable and FHLB advances |  | $                 | 25,000  |                   | $ | 55,000            |  | $               |        |       | $ |        |  | $ | 80,000   
|Junior subordinated debentures  |  |                   |        |                   |   |                  |  |                 |        |       |   | 86,607  |  |   | 86,607   
|Time deposits                   |  |                   | 874,198 |                   |   | 139,369           |  |                 | 140,866 |       |   | 87,676  |  |   | 1,242,109
|Operating leases                |  |                   | 3,227   |                   |   | 6,365             |  |                 | 6,759   |       |   | 19,301  |  |   | 35,652   
|                                |  |                   |         |                   |   |                   |  |                 |         |       |   |         |  |   |          
|Total                           |  | $                 | 902,425 |                   | $ | 200,734           |  | $               | 147,625 |       | $ | 193,584 |  | $ | 1,444,368
|                                |  |                   |         |                   |   |                   |  |                 |         |       |   |         |  |   |          



Derivative
Financial Instruments



We use derivative financial
instruments to assist in our interest rate risk management. We have used interest rate exchange agreements, or swaps, and interest rate floors and collars to manage the interest rate risk associated with our commercial loan portfolio and our
portfolio of fixed rate brokered CDs.



At both
December 31, 2006 and 2005, we had two interest rate floors, each with a $100.0 million notional amount. These agreements, which are scheduled to mature in 2010, are based upon the prime lending rate and



53



---

##### Table of Contents

have interest rate floors of 5.50% and 6.25%. We use these interest rate floors to help manage interest rate risk associated with certain commercial loans
that are tied to the prime lending rate by protecting interest income in the event that the prime lending rate declines below the floor level. The Company did not receive any payments in 2006 or 2005 from these floors. During 2005, both of the
floors were designed as cash flow hedges. As a result, the change in the fair value of the derivative is reported as a separate component of other comprehensive income, net of tax.



During 2006, we removed the hedge designation on the 5.50% floor. Therefore, $36,000 of change in the fair value of
derivative subsequent to its de-designation was reported directly in noninterest income in our Consolidated Statements of Income. In addition, since we removed the hedge designation, the prior balance in accumulated other comprehensive income, which
was comprised of the change in fair value since inception less amortization of the original floor cost, net of tax, is being amortized to loan interest income over the remaining four year term of the floor. During 2006, $7,000 of the balance in
accumulated other comprehensive income was reclassified as a reduction in loan interest income and $76,000 of the remaining balance is expected to be reclassified in 2007.



The 6.25% floor remains classified as a cash flow hedge. The premium on this floor is amortized to loan interest income in
proportion to the expected value of the floor, calculated at inception, in each of the future periods. During 2006, loan interest income was reduced by $44,000 for amortization of the floor premium, and $193,000 of amortization is expected for 2007.



During 2006, we entered into two interest rate collar
agreements, each with a notional amount of $150.0 million, to hedge the variability in cash flow on certain prime-based commercial loans. One of the collars has a floor interest rate of 7.75% and a ceiling interest rate of 8.505% and is scheduled to
mature in May 2009. The second collar agreement has a floor interest rate of 7.75% and a ceiling interest rate of 8.585% and is scheduled to mature in May 2010. No payments were made or received in 2006 under either of these two collar agreements.
The collars were entered into at no cost. The fair values of the collars are recorded as an asset or liability with the effective portion of the corresponding gain or loss recorded in other comprehensive income in stockholders equity, net of
tax.



During 2006, we terminated an interest rate swap, with a
notional amount of $50.0 million, which was classified as a cash flow hedge of certain prime-indexed commercial loans. The interest rate swap was scheduled to mature in 2007. The $1.4 million cost to terminate the swap was deferred and is being
amortized against loan interest income over what would have been the remaining life of the swap. During 2006, $722,000 of this deferred loss was amortized as a reduction in loan interest income and the remaining $722,000 of the deferred loss will be
amortized in 2007.



In May 2006, we terminated all of our
interest rate swaps that had been used as fair value hedges against brokered CDs (CD swaps). The notional amount of these terminated swaps was $330.0 million. At December 31, 2005, we had $320.0 million notional amount of these CD
swaps outstanding. The termination of the swaps resulted in a $100,000 charge that was recorded in other derivative expense included in noninterest income. The cumulative fair value adjustment to the hedged brokered CDs at the time of termination,
which was $3.7 million, will be amortized into deposit interest expense over the remaining life of the related brokered CDs using an effective yield method. During 2006, $587,000 of this fair value adjustment was amortized as additional deposit
interest expense, and $804,000 of this adjustment is expected to be amortized in 2007.



During 2003, we entered into swaps with a total notional amount of $200 million, to hedge the variability of cash flows of certain prime-indexed commercial loans and accounted for these transactions as cash flow
hedges. However, in October 2003, these swaps were terminated and the resulting gain on termination of $885,000 net of taxes, was deferred and recorded in other comprehensive income in stockholders equity. This deferred gain is being
reclassified as an adjustment to interest income over the remaining term of the original swaps. For the years ended December 31, 2006 and 2005, $172,000 of this deferred gain was reclassified into interest income



54



---

##### Table of Contents

during each year. In addition, $197,000 of this deferred gain is expected to be reclassified into interest income during 2007.



For additional information concerning the accounting treatment for our
derivative instruments, please see Application of Critical Accounting Policies  Derivative Financial Instruments and Notes 1 and 18 to our consolidated financial statements in this Annual Report on Form 10-K.



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 and interest
rate floors and collars, 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 our existing assets and liabilities, including derivative financial instruments. These models are built with the sole objective of measuring the volatility of the embedded interest
rate risk as of the balance sheet date and, as such, do not provide for growth or any changes in balance sheet composition. Projected net interest income is computed by the model assuming market rates remaining unchanged and compares those results
to other interest rate scenarios with changes in the magnitude, timing, and relationship between various interest rates. The impact of embedded options in the balance sheet such as callable agencies and mortgage-backed securities, real estate
mortgage loans, and callable borrowings are also 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.



Net interest income for year one in a 200 basis points rising rate scenario was calculated to be $1.6 million, or 1.52%, higher than the net interest
income in the rates unchanged scenario at December 31, 2006. At December 31, 2005, the projected variance in the rising rate scenario was $395,000, or 0.36% higher than the rates unchanged scenario. Net interest income at risk for year one
in a 200 basis points falling rate scenario was calculated at $2.4 million, or 2.23%, lower than the net interest income in the rates unchanged scenario at December 31, 2006. At December 31, 2005, the projected variance for year one in a
200 basis points falling rate scenario was $3.0 million, or 2.75% lower than the rates unchanged scenario. These exposures were within our policy guidelines of 10%.



Our simulation modeling of the December 31, 2006 balance sheet, using the market interest rates in effect at period-end
(the rates unchanged scenario), indicated our net interest margin would decline in future periods as



55



---

##### Table of Contents

many of our interest-bearing liabilities would reprice to current rates as they mature or reprice under this scenario. Additional critical factors affecting
our net interest margin that are not specifically measured as part of interest rate risk are the impact of competition on loan and deposit pricing as well as changes in our balance sheet such as the mix of our funding.



Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including, among other factors, no change in the balance sheet size or composition, 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 market 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 in year one under various parallel ramp interest rate scenarios at December 31, 2006 and 2005:



|                                 |  |                                      |        |   |                      |       |    |              |   |        |                  |  |       |   
|-------------------------------- |  | ------------------------------------ | ------ | - | -------------------- | ----- | -- | ------------ | - | ------ | ---------------- |  | ----- | --
|                                 |  | Change in Future Net Interest Income |       
|                                 |  | At December 31, 2006                 |        |   | At December 31, 2005 |      
|Change in interest rates         |  | DollarChange                         |        |   | PercentageChange     |       |    | DollarChange |   |        | PercentageChange | 
|                                 |  | (dollars in thousands)               |       
|+200 basis points over one year  |  | $                                    | 1,645  |   |                      | 1.52  | %  |              | $ | 395    |                  |  | 0.36  | % 
|- 200 basis points over one year |  |                                      | (2,411 | ) |                      | (2.23 | )% |              |   | (3,026 | )                |  | (2.75 | )%



We also model changes
in the shape (steepness) of the yield curve, other parallel shifts in the yield, such as a 400 basis point increase in interest rates, and balance sheet growth scenarios. We also monitor the repricing terms of our assets and liabilities through gap
matrix reports for the rates in unchanged, rising and falling interest rate scenarios. The reports illustrate, at designated time frames, the dollar amount of assets and liabilities maturing or repricing under the different interest rate scenarios.



56



---

##### Table of Contents

The following table sets forth the amounts of our interest-earning assets and interest-bearing
liabilities outstanding at December 31, 2006, on a consolidated basis, that we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The projected repricing of assets and liabilities
anticipates prepayments and scheduled rate adjustments, as well as contractual maturities under an interest rate unchanged scenario within the selected time intervals. While we believe such assumptions are reasonable, there can be no assurance that
assumed repricing rates would approximate our actual future experience.



|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|----------------------------------------------------------------------------- |  | ----------------------------------- | --------- | - | ----------- | - | -------- | ------------ |  | - | --------- | - |  | --------- | ------- | - | ------------ | - | ------- | ----- |  | - | ------- | - |  | - | ---------
|                                                                              |  | Volumes Subject to Repricing Within
|                                                                              |  | 0-30 Days                           |           |   | 31-180 Days |   |          | 181-365 Days |  |   | 1-3 Years |   |  | 4-5 Years |         |   | Over 5 Years |   |         | Total
|                                                                              |  | (dollars in thousands)             
|Interest-earning assets:                                                      |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Short-term investments and federal funds sold                                 |  | $                                   | 73,354    |   |             | $ |         |              |  | $ |          |   |  | $         |        |   |              | $ |        |       |  | $ |        |   |  | $ | 73,354   
|Investment securities and FHLB/Federal Reserve Bank stock                     |  |                                     | 32,823    |   |             |   | 47,403   |              |  |   | 48,205    |   |  |           | 135,104 |   |              |   | 106,323 |       |  |   | 311,032 |   |  |   | 680,890  
|Loans                                                                         |  |                                     | 1,558,843 |   |             |   | 72,926   |              |  |   | 106,941   |   |  |           | 388,876 |   |              |   | 318,859 |       |  |   | 54,240  |   |  |   | 2,500,685
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Total interest-earning assets                                                 |  |                                     | 1,665,020 |   |             |   | 120,329  |              |  |   | 155,146   |   |  |           | 523,980 |   |              |   | 425,182 |       |  |   | 365,272 |   |  |   | 3,254,929
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Interest-bearing liabilities:                                                 |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Interest-bearing checking, savings and money market accounts                  |  |                                     | 730,122   |   |             |   | 136,524  |              |  |   | 1,496     |   |  |           |        |   |              |   |        |       |  |   | 81,814  |   |  |   | 949,956  
|Certificates of deposit                                                       |  |                                     | 139,284   |   |             |   | 392,894  |              |  |   | 338,686   |   |  |           | 141,118 |   |              |   | 142,132 |       |  |   | 87,995  |   |  |   | 1,242,109
|Other borrowings                                                              |  |                                     | 162,319   |   |             |   | 100,000  |              |  |   |          |   |  |           |        |   |              |   |        |       |  |   |        |   |  |   | 262,319  
|Notes payable/FHLB advances                                                   |  |                                     | 30,000    |   |             |   | 25,000   |              |  |   |          |   |  |           | 25,000  |   |              |   |        |       |  |   |        |   |  |   | 80,000   
|Junior subordinated debentures                                                |  |                                     |          |   |             |   | 41,238   |              |  |   |          |   |  |           |        |   |              |   |        |       |  |   | 45,369  |   |  |   | 86,607   
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Total interest-bearing liabilities                                            |  |                                     | 1,061,725 |   |             |   | 695,656  |              |  |   | 340,182   |   |  |           | 166,118 |   |              |   | 142,132 |       |  |   | 215,178 |   |  |   | 2,620,991
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Period gap                                                                    |  | $                                   | 603,295   |   |             | $ | (575,327 | )            |  | $ | (185,036  | ) |  | $         | 357,862 |   |              | $ | 283,050 |       |  | $ | 150,094 |   |  | $ | 633,938  
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Cumulative gap                                                                |  | $                                   | 603,295   |   |             | $ | 27,968   |              |  | $ | (157,068  | ) |  | $         | 200,794 |   |              | $ | 483,844 |       |  | $ | 633,938 |   |  |   |          
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Period gap to total assets                                                    |  |                                     | 17.85     | % |             |   | -17.02   | %            |  |   | -5.47     | % |  |           | 10.59   | % |              |   | 8.38    | %     |  |   | 4.44    | % |  |   |          
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Cumulative gap to total assets                                                |  |                                     | 17.85     | % |             |   | 0.83     | %            |  |   | -4.64     | % |  |           | 5.95    | % |              |   | 14.33   | %     |  |   | 18.77   | % |  |   |          
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          
|Cumulative interest-earning assets to cumulative interest-bearing liabilities |  |                                     | 156.82    | % |             |   | 101.59   | %            |  |   | 92.51     | % |  |           | 108.87  | % |              |   | 120.11  | %     |  |   | 124.19  | % |  |   |          
|                                                                              |  |                                     |           |   |             |   |          |              |  |   |           |   |  |           |         |   |              |   |         |       |  |   |         |   |  |   |          



Certain shortcomings
are inherent in the method of analysis presented in the gap table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates.
Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset. More importantly, changes in interest rates, prepayments and early
withdrawal levels may deviate significantly from those assumed in the calculations in the table. As a result of these shortcomings, we focus more on earnings at risk simulation modeling than on gap analysis. Even though the gap analysis reflects a
ratio of cumulative gap to total assets within acceptable limits, the earnings at risk simulation modeling is considered by management to be more informative in forecasting future income at risk.



Finally, we also monitor core funding utilization in each interest rate
scenario as well as market value of equity. These measures are used to evaluate long-term interest rate risk beyond the two year planning horizon.



Litigation



We are from time to time a party to litigation arising in the normal course of business. Management knows of no such 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.



57



---

##### Table of Contents

New Accounting Pronouncements



On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123, Share-Based
Payment (SFAS 123R). This Statement revises the previously issued SFAS 123 and supersedes APB Opinion 25. SFAS 123R eliminated the intrinsic value method that we had previously used to account for the granting of employee stock
options. SFAS 123R was adopted using the modified prospective method, recording compensation expense for all stock option awards granted after the date of adoption and for the unvested portion of previously granted stock option awards that remained
outstanding at the date of adoption. See the section captioned Employee Benefit Plans included in Note 1Summary of Significant Accounting and Reporting Policies and Note 14Stock-Based Compensation to our consolidated
financial statements in this Annual Report on Form 10-K for further information.



In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and
140 (SFAS 155). SFAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation, and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 also amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity
from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys
first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 is not expected have a material effect on our consolidated financial statements.



In March 2006, FASB issued SFAS No. 156 Accounting for Servicing of Financial Assets an amendment of FASB
Statement No. 140 (SFAS 156), which amends the guidance in SFAS 140. SFAS 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service a
financial asset under a servicing contract in certain situations, and to initially record such servicing assets or servicing liabilities at fair value, if practicable. SFAS 156 also allows an entity to measure its servicing assets and servicing
liabilities subsequently using either the amortization method, which existed under SFAS 140, or the fair value measurement method. SFAS 156 will be effective for the fiscal year beginning January 1, 2007. The adoption of SFAS 156 did not
have a material effect on our consolidated financial statements.



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosure related to the use of fair value measures in financial statements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, and does not expand the use of fair
value measures in financial statements, but standardizes its definition and guidance in generally accepted accounting principles. The Statement emphasizes that fair value is a market-based measurement, and not an entity-specific measurement, based
on an exchange transaction between market participants in which an entity sells an asset or transfers a liability. SFAS 157 also establishes a fair value hierarchy from observable market data as the highest level to fair value based on an
entitys own fair value assumptions as the lowest level. The Statement is to be effective for financial statements issued for fiscal years beginning after November 15, 2007, however, earlier application is encouraged. We are currently
evaluating the impact, if any, that adoption may have on our consolidated financial statements.



In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan
amendment of FASB Statements No. 87, 88, 106, and 132(R), (SFAS 158). SFAS 158 requires an entity to recognize in its statement of financial position the overfunded or underfunded status of a defined benefit
postretirement plan and to recognize changes in the funded status in the year which the change occurs through other comprehensive income, net of tax. SFAS 158 also requires an



58



---

##### Table of Contents

employer to measure the funded status of a plan as of the date of its year-end statement of financial position. An entity will also be required to disclose
additional information in the notes to financial statements about certain effects on net periodic benefit cost in the upcoming fiscal year that arise from delayed recognition of the actuarial gains and losses and the prior service costs and
credits. The requirement to recognize the funded status of a defined benefit postretirement plan and the related disclosure requirements is effective for fiscal years ending after December 15, 2006. The requirement to change the
measurement date to the year-end reporting date is for fiscal years ending after December 15, 2008. The adoption of SFAS 158 is not expected to have a material impact on our consolidated financial statements.



In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the consolidated financial statements
in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes the recognition threshold and measurement for the recognition in the financial statements of a tax position taken or expected to be taken
in a tax return. FIN 48 clarifies that an enterprise should recognize the financial statement effects of a tax position when that position will more-likely-than-not be sustained by a tax authority upon examination. FIN 48 also provides
additional guidance on derecognition, interest and penalties, and disclosure of uncertain tax positions. This Interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material effect
on our consolidated financial statements.



In September 2006,
the FASB ratified Emerging Issues Task Force 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 addresses
accounting for split-dollar life insurance arrangements after the employer purchases a life insurance policy on the covered employee, and will be effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 is
not expected to have a material impact on our consolidated financial statements.



In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB No. 108) on quantifying financial statement misstatements. SAB No. 108 was issued to
provide guidance on how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires an entity to quantify misstatements using both a balance
sheet and an income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of the relevant quantitative and qualitative factors. SAB No. 108 is effective for our annual financial
statements beginning January 1, 2007. The adoption of SAB No. 108 did not have an impact on our consolidated financial statements.



Quarterly Financial Information



The following table sets forth unaudited financial data regarding our operations for each of the four quarters of 2006 and 2005. 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.



59



---

##### Table of Contents

|                                                  |  |                    |                                       |                    |         |   |        |         |  |   |         |   |         |   |        |         |   |        |         |  |         |        |   |  |   |        |  |   |        |  
|------------------------------------------------- |  | ------------------ | ------------------------------------- | ------------------ | ------- | - | ------ | ------- |  | - | ------- | - | ------- | - | ------ | ------- | - | ------ | ------- |  | ------- | ------ | - |  | - | ------ |  | - | ------ | -
|                                                  |  | 2006 Quarter Ended |                                       | 2005 Quarter Ended |        
|                                                  |  | Dec. 31            |                                       |                    | Sep. 30 |   |        | Jun. 30 |  |   | Mar. 31 |   | Dec. 31 |   |        | Sep. 30 |   |        | Jun. 30 |  | Mar. 31 |       
|                                                  |  |                    | (in thousands, except per share data) |                   
|Interest income                                   |  | $                  | 57,599                                |                    |         | $ | 57,393 |         |  | $ | 54,553  |   |         | $ | 51,455 |         | $ | 49,873 |         |  | $       | 45,682 |   |  | $ | 42,742 |  | $ | 39,512 |  
|Interest expense                                  |  |                    | 29,970                                |                    |         |   | 29,305 |         |  |   | 27,097  |   |         |   | 23,436 |         |   | 21,177 |         |  |         | 18,202 |   |  |   | 16,158 |  |   | 13,665 |  
|                                                  |  |                    |                                       |                    |         |   |        |         |  |   |         |   |         |   |        |         |   |        |         |  |         |        |   |  |   |        |  |   |        |  
|Net interest income                               |  |                    | 27,629                                |                    |         |   | 28,088 |         |  |   | 27,456  |   |         |   | 28,019 |         |   | 28,696 |         |  |         | 27,480 |   |  |   | 26,584 |  |   | 25,847 |  
|Provision for loan losses                         |  |                    | 900                                   |                    |         |   | 2,100  |         |  |   | 2,100   |   |         |   | 900    |         |   | 2,772  |         |  |         |       |   |  |   | 917    |  |   | 1,834  |  
|Noninterest income                                |  |                    | 4,745                                 |                    |         |   | 3,666  |         |  |   | 3,452   |   |         |   | 3,908  |         |   | 4,386  |         |  |         | 4,473  |   |  |   | 3,954  |  |   | 8,128  |  
|Other derivative income (expense)                 |  |                    | (42                                   | )                  |         |   | 59     |         |  |   | (105    | ) |         |   | 582    |         |   | (1,561 | )       |  |         | (2,351 | ) |  |   | 2,062  |  |   | (1,353 | )
|Gain (loss) on sale of investment securities, net |  |                    |                                      |                    |         |   |       |         |  |   |        |   |         |   |       |         |   |       |         |  |         |       |   |  |   |       |  |   | 127    |  
|Noninterest expense                               |  |                    | 18,707                                |                    |         |   | 18,167 |         |  |   | 18,599  |   |         |   | 17,786 |         |   | 17,594 |         |  |         | 17,797 |   |  |   | 17,524 |  |   | 16,740 |  
|                                                  |  |                    |                                       |                    |         |   |        |         |  |   |         |   |         |   |        |         |   |        |         |  |         |        |   |  |   |        |  |   |        |  
|Income before income taxes                        |  |                    | 12,725                                |                    |         |   | 11,546 |         |  |   | 10,104  |   |         |   | 13,823 |         |   | 11,155 |         |  |         | 11,805 |   |  |   | 14,159 |  |   | 14,175 |  
|Income taxes                                      |  |                    | 618                                   |                    |         |   | (7,347 | )       |  |   | 3,799   |   |         |   | 4,965  |         |   | 4,137  |         |  |         | 4,408  |   |  |   | 5,342  |  |   | 5,636  |  
|                                                  |  |                    |                                       |                    |         |   |        |         |  |   |         |   |         |   |        |         |   |        |         |  |         |        |   |  |   |        |  |   |        |  
|Net income                                        |  | $                  | 12,107                                |                    |         | $ | 18,893 |         |  | $ | 6,305   |   |         | $ | 8,858  |         | $ | 7,018  |         |  | $       | 7,397  |   |  | $ | 8,817  |  | $ | 8,539  |  
|                                                  |  |                    |                                       |                    |         |   |        |         |  |   |         |   |         |   |        |         |   |        |         |  |         |        |   |  |   |        |  |   |        |  
|Earnings per share:                               |  |                    |                                       |                    |         |   |        |         |  |   |         |   |         |   |        |         |   |        |         |  |         |        |   |  |   |        |  |   |        |  
|Basic                                             |  | $                  | 1.10                                  |                    |         | $ | 1.72   |         |  | $ | 0.58    |   |         | $ | 0.81   |         | $ | 0.65   |         |  | $       | 0.73   |   |  | $ | 0.92   |  | $ | 0.88   |  
|Diluted                                           |  |                    | 1.09                                  |                    |         |   | 1.70   |         |  |   | 0.57    |   |         |   | 0.80   |         |   | 0.63   |         |  |         | 0.71   |   |  |   | 0.90   |  |   | 0.87   |  
|                                                  |  |                    |                                       |                    |         |   |        |         |  |   |         |   |         |   |        |         |   |        |         |  |         |        |   |  |   |        |  |   |        |  



CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS



Certain of the statements
under Management Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K constitute forward-looking statements. These forward looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act 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 2007 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 interest rates fluctuate as well as the effect
of our customers changing use of our deposit products; 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 probable losses in our loan portfolio; possible volatility in loan charge-offs and recoveries between periods; the possible decline in residential real estate sales volume and the likely potential for illiquidity in the real
estate market: the risks associated with management changes and employee turnover; 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; changes in general economic conditions, interest rates, deposit flows, loan demand, including loan syndication opportunities, competition, legislation or 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 the section of this Annual Report
on Form 10-K captioned 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.



Item 7A. Quantitative and Qualitative Disclosures about Market Risk



The information contained in the section captioned Managements Discussion and Analysis of Financial Condition and Results of
OperationsQuantitative and Qualitative Disclosure About Market Risks is incorporated herein by reference.



60



---

##### Table of Contents

Item 8. Financial Statements and Supplementary Data



INDEX TO FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                |  | Page
|Report of Independent Registered Public Accounting Firm                                                         |  | 62  
|Financial Statements:                                                                                           |  |     
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                    |  | 63  
|Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004                          |  | 64  
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2006, 2005 and 2004 |  | 65  
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                      |  | 66  
|Notes to Consolidated Financial Statements                                                                      |  | 68  





61



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Stockholders and Board of Directors of Taylor Capital Group, Inc.:



We have audited the accompanying consolidated balance sheets of Taylor Capital Group, Inc. and subsidiaries (the Company) as of
December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.



In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of Taylor Capital Group, Inc. as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2007 expressed an unqualified
opinion on managements assessment of, and the effective operation of, internal control over financial reporting.



LOGO



Chicago, Illinois

March 15, 2007



62



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                                                          |  | December 31, |          
|                                                                                                                                                                                                                                          |  | 2006         |           |   | 2005 |  
|ASSETS                                                                                                                                                                                                                                    |  |              |           |   |      |   |           |  
|Cash and cash equivalents:                                                                                                                                                                                                                |  |              |           |   |      |   |           |  
|Cash and due from banks                                                                                                                                                                                                                   |  | $            | 61,566    |   |      | $ | 57,171    |  
|Federal funds sold                                                                                                                                                                                                                        |  |              | 48,400    |   |      |   | 1,900     |  
|Short-term investments                                                                                                                                                                                                                    |  |              | 24,954    |   |      |   | 101,994   |  
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|Total cash and cash equivalents                                                                                                                                                                                                           |  |              | 134,920   |   |      |   | 161,065   |  
|Investment securities:                                                                                                                                                                                                                    |  |              |           |   |      |   |           |  
|Available-for-sale, at fair value                                                                                                                                                                                                         |  |              | 668,810   |   |      |   | 656,478   |  
|Held-to-maturity, at amortized cost (fair value of $275 at December 31, 2006 and 2005)                                                                                                                                                    |  |              | 275       |   |      |   | 275       |  
|Loans, net of allowance for loan losses of $37,516 and $37,481 at December 31, 2006 and 2005, respectively                                                                                                                                |  |              | 2,463,169 |   |      |   | 2,347,450 |  
|Premises, leasehold improvements and equipment, net                                                                                                                                                                                       |  |              | 14,799    |   |      |   | 15,105    |  
|Investment in Federal Home Loan Bank and Federal Reserve Bank stock, at cost                                                                                                                                                              |  |              | 11,805    |   |      |   | 12,946    |  
|Other real estate and repossessed assets, net                                                                                                                                                                                             |  |              | 412       |   |      |   | 1,139     |  
|Goodwill                                                                                                                                                                                                                                  |  |              | 23,237    |   |      |   | 23,237    |  
|Other assets                                                                                                                                                                                                                              |  |              | 62,240    |   |      |   | 62,977    |  
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|Total assets                                                                                                                                                                                                                              |  | $            | 3,379,667 |   |      | $ | 3,280,672 |  
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                      |  |              |           |   |      |   |           |  
|Deposits:                                                                                                                                                                                                                                 |  |              |           |   |      |   |           |  
|Noninterest-bearing                                                                                                                                                                                                                       |  | $            | 447,862   |   |      | $ | 464,289   |  
|Interest-bearing                                                                                                                                                                                                                          |  |              | 2,192,065 |   |      |   | 2,079,355 |  
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|Total deposits                                                                                                                                                                                                                            |  |              | 2,639,927 |   |      |   | 2,543,644 |  
|Other borrowings                                                                                                                                                                                                                          |  |              | 262,319   |   |      |   | 298,426   |  
|Accrued interest, taxes and other liabilities                                                                                                                                                                                             |  |              | 39,622    |   |      |   | 56,646    |  
|Notes payable and FHLB advances                                                                                                                                                                                                           |  |              | 80,000    |   |      |   | 75,000    |  
|Junior subordinated debentures                                                                                                                                                                                                            |  |              | 86,607    |   |      |   | 87,638    |  
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|Total liabilities                                                                                                                                                                                                                         |  |              | 3,108,475 |   |      |   | 3,061,354 |  
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|Stockholders equity:                                                                                                                                                                                                                     |  |              |           |   |      |   |           |  
|Preferred stock, $.01 par value, 5,000,000 shares authorized. No shares issued and outstanding                                                                                                                                            |  |              |          |   |      |   |          |  
|Common stock, $.01 par value; 18,000,000 shares authorized; 11,454,066 and 11,296,836 shares issued at December 31, 2006 and 2005,
respectively; 11,131,059 and 10,973,829 shares outstanding at December 31, 2006 and 2005, respectively |  |              | 115       |   |      |   | 113       |  
|Surplus                                                                                                                                                                                                                                   |  |              | 194,687   |   |      |   | 191,816   |  
|Unearned compensation  stock grants                                                                                                                                                                                                      |  |              |          |   |      |   | (2,322    | )
|Retained earnings                                                                                                                                                                                                                         |  |              | 89,045    |   |      |   | 45,988    |  
|Accumulated other comprehensive loss, net                                                                                                                                                                                                 |  |              | (5,598    | ) |      |   | (9,220    | )
|Treasury stock, at cost, 323,007 shares at December 31, 2006 and 2005                                                                                                                                                                     |  |              | (7,057    | ) |      |   | (7,057    | )
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|Total stockholders equity                                                                                                                                                                                                                |  |              | 271,192   |   |      |   | 219,318   |  
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                                                                |  | $            | 3,379,667 |   |      | $ | 3,280,672 |  
|                                                                                                                                                                                                                                          |  |              |           |   |      |   |           |  



See accompanying notes
to consolidated financial statements



63



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)



|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|--------------------------------------------------- |  | -------------------------------- | ------- | ---- | - | ------- | ---- |  | - | ------- | -
|                                                    |  | For the Years Ended December 31, |        
|                                                    |  | 2006                             |         | 2005 |   |         | 2004 | 
|Interest income:                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Interest and fees on loans                          |  | $                                | 188,375 |      | $ | 152,706 |      |  | $ | 114,598 |  
|Interest and dividends on investment securities:    |  |                                  |         |      |   |         |      |  |   |         |  
|Taxable                                             |  |                                  | 24,779  |      |   | 21,173  |      |  |   | 20,486  |  
|Tax-exempt                                          |  |                                  | 5,554   |      |   | 2,653   |      |  |   | 1,998   |  
|Interest on cash equivalents                        |  |                                  | 2,292   |      |   | 1,277   |      |  |   | 271     |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Total interest income                               |  |                                  | 221,000 |      |   | 177,809 |      |  |   | 137,353 |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Interest expense:                                   |  |                                  |         |      |   |         |      |  |   |         |  
|Deposits                                            |  |                                  | 87,266  |      |   | 52,010  |      |  |   | 31,242  |  
|Other borrowings                                    |  |                                  | 10,622  |      |   | 6,147   |      |  |   | 2,228   |  
|Notes payable and FHLB advances                     |  |                                  | 4,105   |      |   | 3,905   |      |  |   | 4,336   |  
|Junior subordinated debentures                      |  |                                  | 7,815   |      |   | 7,140   |      |  |   | 5,024   |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Total interest expense                              |  |                                  | 109,808 |      |   | 69,202  |      |  |   | 42,830  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Net interest income                                 |  |                                  | 111,192 |      |   | 108,607 |      |  |   | 94,523  |  
|Provision for loan losses                           |  |                                  | 6,000   |      |   | 5,523   |      |  |   | 10,083  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Net interest income after provision for loan losses |  |                                  | 105,192 |      |   | 103,084 |      |  |   | 84,440  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Noninterest income:                                 |  |                                  |         |      |   |         |      |  |   |         |  
|Service charges                                     |  |                                  | 7,738   |      |   | 9,022   |      |  |   | 10,854  |  
|Trust and investment management fees                |  |                                  | 4,155   |      |   | 4,545   |      |  |   | 5,331   |  
|Loan syndication fees                               |  |                                  | 1,317   |      |   | 2,673   |      |  |   | 1,350   |  
|Other derivative income (expense)                   |  |                                  | 494     |      |   | (3,203  | )    |  |   | 2,193   |  
|Other noninterest income                            |  |                                  | 2,561   |      |   | 1,129   |      |  |   | 1,647   |  
|Gain on sale of land trusts                         |  |                                  |        |      |   | 2,000   |      |  |   |        |  
|Gain on sale of branch                              |  |                                  |        |      |   | 1,572   |      |  |   |        |  
|Gain on sale of investment securities, net          |  |                                  |        |      |   | 127     |      |  |   | 144     |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Total noninterest income                            |  |                                  | 16,265  |      |   | 17,865  |      |  |   | 21,519  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Noninterest expense:                                |  |                                  |         |      |   |         |      |  |   |         |  
|Salaries and employee benefits                      |  |                                  | 40,652  |      |   | 40,255  |      |  |   | 38,951  |  
|Occupancy of premises                               |  |                                  | 7,842   |      |   | 7,035   |      |  |   | 7,465   |  
|Furniture and equipment                             |  |                                  | 3,627   |      |   | 3,928   |      |  |   | 3,892   |  
|Lease termination charges                           |  |                                  |        |      |   |        |      |  |   | 984     |  
|Computer processing                                 |  |                                  | 1,758   |      |   | 1,805   |      |  |   | 1,874   |  
|Corporate insurance                                 |  |                                  | 1,211   |      |   | 1,373   |      |  |   | 2,334   |  
|Legal fees, net                                     |  |                                  | 2,166   |      |   | 1,891   |      |  |   | 1,808   |  
|Advertising and public relations                    |  |                                  | 1,525   |      |   | 574     |      |  |   | 1,489   |  
|Other noninterest expense                           |  |                                  | 14,478  |      |   | 12,794  |      |  |   | 12,876  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Total noninterest expense                           |  |                                  | 73,259  |      |   | 69,655  |      |  |   | 71,673  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Income before income taxes                          |  |                                  | 48,198  |      |   | 51,294  |      |  |   | 34,286  |  
|Income taxes                                        |  |                                  | 2,035   |      |   | 19,523  |      |  |   | 11,313  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Net income                                          |  | $                                | 46,163  |      | $ | 31,771  |      |  | $ | 22,973  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Preferred dividend requirements                     |  |                                  |        |      |   |        |      |  |   | (1,875  | )
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Net income applicable to common stockholders        |  | $                                | 46,163  |      | $ | 31,771  |      |  | $ | 21,098  |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  
|Basic earnings per common share                     |  | $                                | 4.22    |      | $ | 3.16    |      |  | $ | 2.21    |  
|Diluted earnings per common share                   |  |                                  | 4.15    |      |   | 3.09    |      |  |   | 2.19    |  
|                                                    |  |                                  |         |      |   |         |      |  |   |         |  



See accompanying notes
to consolidated financial statements



64



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(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                                                                                                         |  |                                                     |        |   |              |   |        |  |   | 775                                |   |  |                             | (775   | ) |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   |        |  
|Forfeiture of stock grants                                                                                                       |  |                                                     |        |   |              |   |        |  |   | (68                                | ) |  |                             | 19     |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | (49     | )
|Amortization of stock grants                                                                                                     |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             | 511    |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 511     |  
|Exercise of stock options                                                                                                        |  |                                                     |        |   |              |   | 2       |  |   | 2,550                              |   |  |                             |       |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 2,552   |  
|Tax benefit on stock options exercised and stock awards                                                                          |  |                                                     |        |   |              |   |        |  |   | 507                                |   |  |                             |       |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 507     |  
|Comprehensive income:                                                                                                            |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                                                                                       |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   | 22,973 |                |  |   |       |   |  |   |       |   |  |   | 22,973  |  
|Change in unrealized losses on available-for-sale investment securities, net of reclassification adjustment, net of income
taxes |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | (4,477 | ) |  |   |       |   |  |   | (4,477  | )
|Change in unrealized loss from cash flow hedging instruments, net of income taxes                                                |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | (338   | ) |  |   |       |   |  |   | (338    | )
|Change in deferred gain from termination of cash flow hedging instruments, net of income taxes                                   |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | (172   | ) |  |   |       |   |  |   | (172    | )
|                                                                                                                                 |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                       |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   | 17,986  |  
|                                                                                                                                 |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Preferred Dividends  $1.225 per share                                                                                           |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   | (1,875 | )              |  |   |       |   |  |   |       |   |  |   | (1,875  | )
|Common Dividends  $0.24 per share                                                                                               |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   | (2,294 | )              |  |   |       |   |  |   |       |   |  |   | (2,294  | )
|                                                                                                                                 |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2004                                                                                                     |  | $                                                   |        |   |              | $ | 100     |  | $ | 147,682                            |   |  | $                           | (1,383 | ) |                                               | $ | 16,698 |                |  | $ | (467   | ) |  | $ | (7,057 | ) |  | $ | 155,573 |  
|Issuance of common stock, net of issuance costs                                                                                  |  |                                                     |        |   |              |   | 12      |  |   | 38,938                             |   |  |                             |       |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 38,950  |  
|Issuance of stock grants                                                                                                         |  |                                                     |        |   |              |   |        |  |   | 2,070                              |   |  |                             | (2,070 | ) |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   |        |  
|Forfeiture of stock grants                                                                                                       |  |                                                     |        |   |              |   |        |  |   | (593                               | ) |  |                             | 268    |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | (325    | )
|Amortization of stock grants                                                                                                     |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             | 863    |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 863     |  
|Exercise of stock options                                                                                                        |  |                                                     |        |   |              |   | 1       |  |   | 2,636                              |   |  |                             |       |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 2,637   |  
|Tax benefit on stock options exercised and stock awards                                                                          |  |                                                     |        |   |              |   |        |  |   | 1,083                              |   |  |                             |       |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 1,083   |  
|Comprehensive income:                                                                                                            |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                                                                                       |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   | 31,771 |                |  |   |       |   |  |   |       |   |  |   | 31,771  |  
|Change in unrealized losses on available-for-sale investment securities, net of reclassification adjustment, net of income
taxes |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | (7,401 | ) |  |   |       |   |  |   | (7,401  | )
|Change in unrealized loss from cash flow hedging instruments, net of income taxes                                                |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | (1,180 | ) |  |   |       |   |  |   | (1,180  | )
|Change in deferred gain from termination of cash flow hedging instruments, net of income taxes                                   |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | (172   | ) |  |   |       |   |  |   | (172    | )
|                                                                                                                                 |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                       |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   | 23,018  |  
|Common Dividends  $0.24 per share                                                                                               |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   | (2,481 | )              |  |   |       |   |  |   |       |   |  |   | (2,481  | )
|                                                                                                                                 |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2005                                                                                                     |  | $                                                   |        |   |              | $ | 113     |  | $ | 191,816                            |   |  | $                           | (2,322 | ) |                                               | $ | 45,988 |                |  | $ | (9,220 | ) |  | $ | (7,057 | ) |  | $ | 219,318 |  
|Adoption of FAS 123R                                                                                                             |  |                                                     |        |   |              |   |        |  |   | (2,322                             | ) |  |                             | 2,322  |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   |        |  
|Amortization of stock based compensation awards                                                                                  |  |                                                     |        |   |              |   |        |  |   | 1,577                              |   |  |                             |       |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 1,577   |  
|Exercise of stock options                                                                                                        |  |                                                     |        |   |              |   | 2       |  |   | 2,673                              |   |  |                             |       |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 2,675   |  
|Tax benefit on stock options exercised and stock awards                                                                          |  |                                                     |        |   |              |   |        |  |   | 943                                |   |  |                             |       |   |                                               |   |       |                |  |   |       |   |  |   |       |   |  |   | 943     |  
|Comprehensive income:                                                                                                            |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                                                                                       |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   | 46,163 |                |  |   |       |   |  |   |       |   |  |   | 46,163  |  
|Change in unrealized losses on available-for-sale investment securities, net of income taxes                                     |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | 2,612  |   |  |   |       |   |  |   | 2,612   |  
|Change in unrealized loss from cash flow hedging instruments, net of income taxes                                                |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | 2,005  |   |  |   |       |   |  |   | 2,005   |  
|Change in deferred gains and losses from termination of cash flow hedging instruments, net of income taxes                       |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   |       |                |  |   | (995   | ) |  |   |       |   |  |   | (995    | )
|                                                                                                                                 |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                       |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   | 49,785  |  
|Common Dividends  $0.28 per share                                                                                               |  |                                                     |        |   |              |   |        |  |   |                                   |   |  |                             |       |   |                                               |   | (3,106 | )              |  |   |       |   |  |   |       |   |  |   | (3,106  | )
|                                                                                                                                 |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2006                                                                                                     |  | $                                                   |        |   |              | $ | 115     |  | $ | 194,687                            |   |  | $                           |       |   |                                               | $ | 89,045 |                |  | $ | (5,598 | ) |  | $ | (7,057 | ) |  | $ | 271,192 |  
|                                                                                                                                 |  |                                                     |         |   |              |   |         |  |   |                                    |   |  |                             |        |   |                                               |   |        |                |  |   |        |   |  |   |        |   |  |   |         |  



See accompanying notes
to consolidated financial statements



65



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                  |  |                                  |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | For the Years Ended December 31, |         
|                                                                                  |  | 2006                             |          |   | 2005 |   |          | 2004 | 
|Cash flows from operating activities:                                             |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                                | 46,163   |   |      | $ | 31,771   |      |  | $ | 22,973   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                  |          |   |      |   |          |      |  |   |          |  
|Other derivative (income) expense                                                 |  |                                  | (494     | ) |      |   | 3,887    |      |  |   | (27      | )
|Lease termination charges                                                         |  |                                  |         |   |      |   |         |      |  |   | 984      |  
|Investment securities gains, net                                                  |  |                                  |         |   |      |   | (127     | )    |  |   | (144     | )
|Amortization of premiums and discounts, net                                       |  |                                  | 687      |   |      |   | 1,766    |      |  |   | 2,360    |  
|Deferred loan fee amortization                                                    |  |                                  | (4,874   | ) |      |   | (4,728   | )    |  |   | (3,331   | )
|Provision for loan losses                                                         |  |                                  | 6,000    |   |      |   | 5,523    |      |  |   | 10,083   |  
|Depreciation and amortization                                                     |  |                                  | 3,487    |   |      |   | 3,367    |      |  |   | 3,388    |  
|Amortization of intangible assets                                                 |  |                                  |         |   |      |   | 3        |      |  |   | 13       |  
|Deferred income taxes                                                             |  |                                  | 2,690    |   |      |   | (814     | )    |  |   | (1,033   | )
|Loss on sales of other real estate                                                |  |                                  | 8        |   |      |   | 177      |      |  |   | 225      |  
|Provision for losses on other real estate                                         |  |                                  | 216      |   |      |   |         |      |  |   | 71       |  
|Gain on sale of branch                                                            |  |                                  |         |   |      |   | (1,572   | )    |  |   |         |  
|Gain on sale of land trusts                                                       |  |                                  |         |   |      |   | (2,000   | )    |  |   |         |  
|Tax benefit on stock options exercised and stock awards                           |  |                                  | 943      |   |      |   | 1,083    |      |  |   | 507      |  
|Excess tax benefit on stock options exercised and stock awards                    |  |                                  | (654     | ) |      |   |         |      |  |   |         |  
|Cash paid to terminate derivative instruments                                     |  |                                  | (12,239  | ) |      |   |         |      |  |   |         |  
|Other, net                                                                        |  |                                  | 856      |   |      |   | (416     | )    |  |   | 215      |  
|Changes in other assets and liabilities:                                          |  |                                  |          |   |      |   |          |      |  |   |          |  
|Accrued interest receivable                                                       |  |                                  | (56      | ) |      |   | (6,238   | )    |  |   | (2,324   | )
|Other assets                                                                      |  |                                  | (1,377   | ) |      |   | (1,324   | )    |  |   | 317      |  
|Accrued interest, taxes and other liabilities                                     |  |                                  | (6,373   | ) |      |   | 5,765    |      |  |   | 2,855    |  
|                                                                                  |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                                  | 34,983   |   |      |   | 36,123   |      |  |   | 37,132   |  
|                                                                                  |  |                                  |          |   |      |   |          |      |  |   |          |  
|                                                                                  |  |                                  |         
|Cash flows from investing activities:                                             |  |                                  |          |   |      |   |          |      |  |   |          |  
|Purchases of available-for-sale securities                                        |  |                                  | (115,072 | ) |      |   | (206,005 | )    |  |   | (251,894 | )
|Proceeds from principal payments and maturities of available-for-sale securities  |  |                                  | 105,492  |   |      |   | 67,120   |      |  |   | 94,435   |  
|Proceeds from principal payments and maturities of held-to-maturity securities    |  |                                  |         |   |      |   |         |      |  |   | 250      |  
|Proceeds from sales of available-for-sale securities                              |  |                                  |         |   |      |   | 2,725    |      |  |   | 103,475  |  
|Net increase in loans                                                             |  |                                  | (117,409 | ) |      |   | (181,015 | )    |  |   | (254,823 | )
|Investment in TAYC Capital Trust II                                               |  |                                  |         |   |      |   |         |      |  |   | (1,239   | )
|Additions to premises, leasehold improvements and equipment                       |  |                                  | (3,181   | ) |      |   | (5,702   | )    |  |   | (1,235   | )
|Proceeds from the sale of premises, leasehold improvements and equipment          |  |                                  |         |   |      |   |         |      |  |   | 3,802    |  
|Proceeds from sales of other real estate                                          |  |                                  | 1,067    |   |      |   | 317      |      |  |   | 1,411    |  
|Net cash paid on sale of branch                                                   |  |                                  |         |   |      |   | (10,853  | )    |  |   |         |  
|Proceeds from sale of land trusts                                                 |  |                                  |         |   |      |   | 2,050    |      |  |   |         |  
|                                                                                  |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                             |  |                                  | (129,103 | ) |      |   | (331,363 | )    |  |   | (305,818 | )
|                                                                                  |  |                                  |          |   |      |   |          |      |  |   |          |  



See accompanying notes
to consolidated financial statements



66



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)

(in thousands)



|                                                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                      |  | For the Years Ended December 31, |         
|                                                                                      |  | 2006                             |          |   | 2005 |   |         | 2004 | 
|Cash flows from financing activities:                                                 |  |                                  |          |   |      |   |         |      |  |   |         |  
|Net increase in deposits                                                              |  | $                                | 99,435   |   |      | $ | 279,491 |      |  | $ | 273,002 |  
|Net increase (decrease) in other borrowings                                           |  |                                  | (36,107  | ) |      |   | 68,879  |      |  |   | 10,439  |  
|Repayments of notes payable and FHLB advances                                         |  |                                  | (100,000 | ) |      |   | (10,500 | )    |  |   | (25,000 | )
|Proceeds from notes payable and FHLB advances                                         |  |                                  | 105,000  |   |      |   |        |      |  |   |        |  
|Proceeds from issuance of junior subordinated debentures                              |  |                                  |         |   |      |   |        |      |  |   | 41,238  |  
|Repayment of junior subordinated debentures                                           |  |                                  | (1,031   | ) |      |   |        |      |  |   |        |  
|Trust preferred issuance costs                                                        |  |                                  |         |   |      |   |        |      |  |   | (390    | )
|Redemption of preferred securities                                                    |  |                                  |         |   |      |   |        |      |  |   | (38,250 | )
|Proceeds from issuance of common securities, net                                      |  |                                  |         |   |      |   | 38,950  |      |  |   |        |  
|Proceeds from exercise of employee stock options                                      |  |                                  | 2,675    |   |      |   | 2,637   |      |  |   | 2,552   |  
|Excess tax benefit on stock options exercised and stock awards                        |  |                                  | 654      |   |      |   |        |      |  |   |        |  
|Dividends paid                                                                        |  |                                  | (2,651   | ) |      |   | (2,402  | )    |  |   | (4,159  | )
|                                                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                             |  |                                  | 67,975   |   |      |   | 377,055 |      |  |   | 259,432 |  
|                                                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                  |  |                                  | (26,145  | ) |      |   | 81,815  |      |  |   | (9,254  | )
|Cash and cash equivalents, beginning of year                                          |  |                                  | 161,065  |   |      |   | 79,250  |      |  |   | 88,504  |  
|                                                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of year                                                |  | $                                | 134,920  |   |      | $ | 161,065 |      |  | $ | 79,250  |  
|                                                                                      |  |                                  |          |   |      |   |         |      |  |   |         |  
|                                                                                      |  |                                  |         
|Supplemental disclosure of cash flow information:                                     |  |                                  |          |   |      |   |         |      |  |   |         |  
|Cash paid during the year for:                                                        |  |                                  |          |   |      |   |         |      |  |   |         |  
|Interest                                                                              |  | $                                | 105,078  |   |      | $ | 64,750  |      |  | $ | 41,233  |  
|Income taxes                                                                          |  |                                  | 12,093   |   |      |   | 18,279  |      |  |   | 11,809  |  
|                                                                                      |  |                                  |         
|Supplemental disclosures of noncash investing and financing activities:               |  |                                  |          |   |      |   |         |      |  |   |         |  
|Change in fair value of available-for-sale investment securities, net of income taxes |  | $                                | 2,612    |   |      | $ | (7,401  | )    |  | $ | (4,477  | )
|Loans transferred to other real estate                                                |  |                                  | 432      |   |      |   | 1,456   |      |  |   | 1,601   |  





See accompanying notes to consolidated financial statements





67



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.Summary of Significant Accounting and Reporting Policies:



The accounting and reporting policies of Taylor Capital Group, Inc. (the Company) 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 management 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from these estimates.



The following is a summary of the more
significant accounting and reporting policies:



Consolidation:



The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Cole Taylor Bank (the Bank). The Bank is a $3.4 billion asset commercial bank with banking offices located in the Chicago metropolitan area. The Bank provides a full range of
commercial banking services, primarily to small and midsize business, and consumer banking products and services. All significant intercompany balances and transactions between consolidated companies have been eliminated. The Company also owns all
of the common stock of TAYC Capital Trust I and TAYC Capital Trust II (each, a Trust and collectively, the Trusts), both of which are unconsolidated subsidiaries. Each of the Trusts is a Delaware statutory trust created to
issue trust preferred securities.



The Companys products
and services consist of commercial banking credit and deposit products delivered by a single operations area. The Company does not have separate and discrete operating segments.



Cash and Cash Equivalents:



Cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with banks or other financial institutions, federal
funds sold, and securities purchased under agreements to resell with original maturities less than 90 days. All federal funds are sold overnight with daily settlement required.



Investment Securities:



Securities that may be sold as part of the Companys asset/liability or liquidity management or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar factors, are classified as available-for-sale and carried at fair value. Unrealized holding gains and losses on such securities are reported, net of tax, in accumulated other
comprehensive income in stockholders equity. Securities that the Company has the ability and positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Premiums on investment securities are amortized
to the call date and discounts are accreted to the maturity date using the level-yield method. A decline in fair value of any available-for-sale or held-to-maturity security below cost that is deemed other-than-temporary results in a reduction in
carrying amount to fair value, a charge to earnings, and a new cost basis for the security. In determining if an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold an investment until market price
recovery, the reasons for impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the security. Realized gains and losses on the sales of all securities are reported in income
and computed using the specific identification method. Securities classified as trading are carried at fair value with unrealized gains or losses included in noninterest income. Dividends and interest income are recognized when earned.



68



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Loans:



Loans are stated at the principal amount outstanding, net of unearned discount. Unearned discount on consumer loans is recognized as income over the terms
of the loans using the sum-of-the-months-digits method, which approximates the interest method. Interest income on other loans is generally recognized using the level-yield method. Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount is amortized over the life of the loan as an adjustment of the related loans yields.



Allowance for Loan Losses:



An allowance for loan losses has been established to provide for those loans that may not be repaid in their entirety. The allowance is increased by
provisions for loan losses charged to expense and decreased by charge-offs, net of recoveries. Loans are charged off when the loss is highly probable and clearly identified. Although a loan is charged off, collection efforts may continue and future
recoveries may occur. Management maintains the allowance at a level considered adequate to absorb probable losses inherent in the portfolio as of the balance sheet date.



In evaluating the adequacy of the allowance for loan losses, consideration is given to numerous quantitative and qualitative
factors including historical charge-off experience, growth and changes in the composition of the loan portfolio, the volume of delinquent and criticized loans, information about specific borrower situations, including their financial position and
estimated collateral values, general economic and business conditions and collateral valuations, impact of competition on our underwriting terms and other factors and estimates which are subject to change over time. Estimating the risk of loss and
amount of loss on any loan is necessarily subjective and ultimate losses may vary from current estimates. These estimates are reviewed quarterly and, as changes in estimates are identified by management, the amounts are reflected in income through
the provision for loan losses in the appropriate period.



A
portion of the total allowance for loan losses is related to impaired loans. Certain homogenous loans, including residential mortgage and consumer loans, are collectively evaluated for impairment and, therefore, excluded from impaired loans. A loan
is considered impaired if, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired
loans include all nonaccrual loans as well as certain accruing loans judged to have higher risk of noncompliance with the present contractual repayment schedule for both interest and principal. Once a loan has been determined to be impaired, it is
measured to establish the amount of the impairment, if any, based on the present value of expected future cash flows discounted at the loans effective interest rate, except that collateral-dependent loans may be measured for impairment based
on the fair value of the collateral, less cost to sell. If the measure of the impaired loan is less than the recorded investment in the loan, a valuation allowance is recognized. 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.



Income Recognition on Nonaccrual Loans:



Loans are placed on a nonaccrual basis for recognition of interest income when sufficient doubt exists as to the full collection of principal and
interest. Generally, loans are placed on nonaccrual when principal and interest is contractually past due 90 days, unless the loan is adequately secured and in the process of collection. The nonrecognition of interest income on an accrual basis does
not constitute forgiveness of the interest. After a loan is placed on nonaccrual status, any current period interest previously accrued but not yet collected is reversed against current income. Interest is included in income subsequent to the date
the loan is placed on nonaccrual status only as interest is received and so long as management is satisfied that there is a high probability that



69



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



principal will be collected in full. The loan is returned to accrual status only when the borrower has demonstrated the ability to make future payments of
principal and interest as scheduled.



Premises, Leasehold Improvements and
Equipment:



Premises, leasehold improvements, and
equipment are reported at cost less accumulated depreciation and amortization. Depreciation and amortization is charged to operating expense using the straight-line method for financial reporting purposes over a three to twenty-five year period,
based upon the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvement.



Premises offered or contracted for sale are reported at the lower of cost or fair value, less cost to sell, and depreciation
on such assets is ceased. A charge to expense for the abandonment of a leased facility is recorded in the period that the Company ceases to occupy the space. The charge is determined based upon the remaining lease rentals, reduced by estimated
sublease rentals that could reasonably be obtained from the property. Leasehold improvements associated with abandoned facilities are charged to expense in the period in which the Company ceases to occupy the space.



Other Real Estate:



Other real estate primarily includes properties acquired through foreclosure or deed in lieu of foreclosure. At foreclosure,
the other real estate is recorded at the lower of the amount of the loan balance or the fair value of the real estate through a charge to the allowance for loan losses, if necessary. The fair value is reduced for estimated selling expenses to net
realizable value through a valuation allowance and the provision for losses is charged to noninterest expense. Subsequent write downs required by changes in estimated fair value or disposal expenses are recorded through the valuation allowance.
Carrying costs of these properties, net of related income, and gains or losses on the sale from their disposition are also included in current operations as other noninterest expense.



Goodwill and Intangible Assets:



Goodwill was created upon the Companys acquisition of the Bank in 1997 and represents the excess of purchase price over the fair value of net assets
acquired. The transaction was accounted for by the purchase method of accounting. Under purchase accounting, the price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable
income tax effects. Goodwill is not amortized, but tested annually for impairment, and if, at any time impairment exists, the Company will record an impairment loss.



Intangible assets with finite lives are amortized straight-line over their estimated useful lives and tested for impairment
only when events or circumstances indicate that the carrying value of the asset may not be recovered.



Income Taxes:



Deferred
tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the income tax provision. At times, the Company applies different tax treatment for selected transactions for tax return purposes than for financial reporting purposes. The accruals for income taxes
include reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired or when the Company determines that it is probable that the position taken on the tax return will be sustained by
the taxing authorities. Deferred tax assets



70



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



are reduced by a valuation allowance, when in the opinion of management, it is more likely than not that some portion or all of the deferred tax asset will
not be realized.



Employee Benefit Plans:



Stock-based Compensation: The Company has an incentive compensation
plan that allows the issuance of nonqualified stock options and restricted stock to employees and directors. On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options. SFAS 123R supersedes the
Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), which was applied to periods prior to 2006.



The Company adopted SFAS 123R using the modified prospective transition
method. Under the modified prospective transition method, the Companys Consolidated Financial Statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123R, however, prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123R. Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Companys Consolidated
Statements of Income for stock options granted to employees and directors because the exercise price of the Companys stock options equaled the fair market value of the underlying stock at the date of grant. However, compensation costs for
restricted stock was recognized, based upon the fair value of the stock on the grant date, over the vesting period.



The following table illustrates the effect on net income and earnings per share as if SFAS 123R had been applied to all outstanding share-based payment
awards for the periods indicated. The amounts reported for 2005 and 2004 are as if the provisions of SFAS 123R had been applied and the amounts reported for 2006 are as reported on the Consolidated Statement of Income:



|                                                                                                                                          |  |                                                |        |   |                |   |        |                |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------- | ------ | - | -------------- | - | ------ | -------------- |  | - | ------ | -
|                                                                                                                                          |  | For the Years EndedDecember 31,                |       
|                                                                                                                                          |  | AsReported 2006                                |        |   | Pro Forma 2005 |   |        | Pro Forma 2004 | 
|                                                                                                                                          |  | (dollars in thousand, except pershare amounts) |       
|Net income as reported                                                                                                                    |  | $                                              | 46,163 |   |                | $ | 31,771 |                |  | $ | 22,973 |  
|Add: Stock-based compensation, net of tax, included in the determination of net income, as reported                                       |  |                                                | 958    |   |                |   | 326    |                |  |   | 278    |  
|Deduct: Stock-based compensation, net of tax, that would have been reported if the fair value based method had been applied to all
awards |  |                                                | (958   | ) |                |   | (848   | )              |  |   | (757   | )
|                                                                                                                                          |  |                                                |        |   |                |   |        |                |  |   |        |  
|Net income                                                                                                                                |  |                                                | 46,163 |   |                |   | 31,249 |                |  |   | 22,494 |  
|Less preferred dividend requirements                                                                                                      |  |                                                |       |   |                |   |       |                |  |   | (1,875 | )
|                                                                                                                                          |  |                                                |        |   |                |   |        |                |  |   |        |  
|Net income available to common stockholders                                                                                               |  | $                                              | 46,163 |   |                | $ | 31,249 |                |  | $ | 20,619 |  
|                                                                                                                                          |  |                                                |        |   |                |   |        |                |  |   |        |  
|Basic earnings per common share                                                                                                           |  |                                                |        |   |                |   |        |                |  |   |        |  
|As reported                                                                                                                               |  | $                                              | 4.22   |   |                | $ | 3.16   |                |  | $ | 2.21   |  
|Pro forma                                                                                                                                 |  |                                                | 4.22   |   |                |   | 3.11   |                |  |   | 2.16   |  
|Diluted earnings per common share                                                                                                         |  |                                                |        |   |                |   |        |                |  |   |        |  
|As reported                                                                                                                               |  | $                                              | 4.15   |   |                | $ | 3.09   |                |  | $ | 2.19   |  
|Pro forma                                                                                                                                 |  |                                                | 4.15   |   |                |   | 3.04   |                |  |   | 2.14   |  



71



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Nonqualified Deferred Compensation Plan: The Company maintains a nonqualified deferred
compensation program for certain key employees which allow participants to defer a portion of their base, commission, or incentive compensation. The amount of compensation deferred by the participant, along with any Company discretionary
contributions to the plan, are held in a rabbi trust for the participants. The Companys discretionary contributions are recorded as additional compensation expense when contributed. While the Company maintains ownership of the assets, the
participants are allowed to direct the investment of the assets in several equity and fixed income mutual funds. These assets are recorded at their approximate fair market value in other assets on the Consolidated Balance Sheets. A liability is
established, in accrued interest, taxes and other liabilities in the Consolidated Balance Sheets, for the fair value of the obligation to the participants. Any increase or decrease in the fair market value of plan assets is recorded in other
noninterest income on the Consolidated Statements of Income. Any increase or decrease in the fair value of the deferred compensation obligation to participants is recorded as additional compensation expense or a reduction of compensation expense on
the Consolidated Statements of Income.



Derivative Instruments and Hedging
Activities:



We use derivative financial instruments
(derivatives), including interest rate exchange agreements and interest rate floor or collar agreements to assist in our interest rate risk management. The Companys asset and liability management and investment policies do not allow the use of
derivatives for trading purposes. In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), all derivatives are measured and reported at
fair value on our Consolidated Balance Sheet as either an asset or a liability. For derivatives that are designated and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk, are recognized in current earnings during the period of the change in the fair values. For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative
is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For all hedging relationships, derivative gains and losses that are not
effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings during the period of the change. Similarly, the changes in the fair value of derivatives that do not qualify for
hedge accounting under SFAS 133 are also reported currently in earnings, in noninterest income.



The net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being
hedged. The net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income.



At the inception of the hedge and quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of
the derivatives have been highly effective in offsetting the changes in the fair values or cash flows of the hedged item and whether they are expected to be highly effective in the future. The Company discontinues hedge accounting prospectively when
it is determined that the derivative is not, or will no longer be, effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires, is sold, or terminated, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate.



When hedge accounting is discontinued, the future gains and losses arising from any change in fair value are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for
changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transaction is still expected to
occur, gains or losses that were accumulated in other comprehensive income are



72



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



amortized or accreted into earnings over the same periods which the hedged transactions would have affected earnings.



The estimates of fair values of our derivatives are calculated using
independent valuation models to estimate mid-market valuations. The fair values produced by these proprietary valuation models are in part theoretical and therefore can vary between derivative dealers and are not necessarily reflective of the actual
price at which the contract could be traded. Small changes in assumptions can result in significant changes in valuation. The risks inherent in the determination of the fair value of a derivative may result in income statement volatility.



Financial Instruments:



In the ordinary course of business, the Company enters into off-balance
sheet financial instruments consisting of commitments to extend credit, unused lines of credit, letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.



Comprehensive Income:



Comprehensive income includes net income, unrealized holding gains and
losses on available-for-sale securities, and gains and losses associated with cash flow hedging instruments. The statement of comprehensive income is included within the Consolidated Statements of Changes in Stockholders Equity. Also, see Note
22Other Comprehensive Income for further details.



New
Accounting Standards:



On January 1, 2006, the
Company adopted SFAS 123, Share-Based Payment (SFAS 123R). SFAS 123R revises the previously issued SFAS 123 and supersedes APB Opinion 25. SFAS 123R eliminated the intrinsic value method that the Company had previously used
to account for the granting of employee stock options. SFAS 123R was adopted using the modified prospective method, recording compensation expense for all stock option awards granted after the date of adoption and for the unvested portion of
previously granted stock option awards that remained outstanding at the date of adoption. See the section captioned Employee Benefit Plans included in this note to the consolidated financial statement and Note 14Stock-Based
Compensation for further information.



In February 2006,
FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, and clarifies that concentrations of credit risk in the form
of subordination are not embedded derivatives. SFAS 155 also amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 is not expected to
have a material effect on the Companys consolidated financial statements.



In March 2006, FASB issued SFAS No. 156 Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140 (SFAS 156), which amends the guidance in SFAS 140.
SFAS 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service



73



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



a financial asset under a servicing contract in certain situations, and to initially record such servicing assets or servicing liabilities at fair value, if
practicable. SFAS 156 also allows an entity to measure its servicing assets and servicing liabilities subsequently using either the amortization method, which existed under SFAS 140, or the fair value measurement method. SFAS 156 will be effective
for the Company in the fiscal year beginning January 1, 2007. The adoption of SFAS 156 did not have a material effect on the Companys consolidated financial statements.



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This
Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, and does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in generally accepted accounting principles. The
Statement emphasizes that fair value is a market-based measurement, and not an entity-specific measurement, based on an exchange transaction between market participants in which an entity sells an asset or transfers a liability. SFAS 157 also
establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entitys own fair value assumptions as the lowest level. The Statement is to be effective for financial statements issued for fiscal
years beginning after November 15, 2007, however, earlier application is encouraged. The Company is currently evaluating the impact, if any, that adoption may have on its consolidated financial statements.



In September 2006, the FASB issued SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). This Statement requires an entity to recognize in its statement of
financial position the overfunded or underfunded status of a defined benefit postretirement plan and to recognize changes in the funded status in the year which the change occurs through other comprehensive income, net of tax. This Statement also
requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. An entity will also be required to disclose additional information in the notes to financial statements about certain effects
on net periodic benefit cost in the upcoming fiscal year that arise from delayed recognition of the actuarial gains and losses and the prior service costs and credits. The requirement to recognize the funded status of a defined benefit
postretirement plan and the related disclosure requirements is effective for fiscal years ending after December 15, 2006. The requirement to change the measurement date to the year-end reporting date is for fiscal years ending after
December 15, 2008. The adoption of SFAS 158 is not expected to have a material impact on the Companys consolidated financial statements.



In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the consolidated financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This
Interpretation prescribes the recognition threshold and measurement for the recognition in the financial statements of a tax position taken or expected to be taken in a tax return. FIN 48 clarifies that an enterprise should recognize the financial
statement effects of a tax position when that position will more-likely-than-not be sustained by a tax authority upon examination. FIN 48 also provides additional guidance on derecognition, interest and penalties, and disclosure of
uncertain tax positions. This Interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material effect on the consolidated financial statements of the Company.



In September 2006, the FASB ratified Emerging Issues Task Force 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 addresses accounting for split-dollar life insurance arrangements
after the employer purchases a life insurance policy on the covered employee, and will be effective for fiscal years beginning after



74



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



December 15, 2007. The adoption of EITF 06-4 is not expected have a material impact on the Companys consolidated financial statements.



In September 2006, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 108 (SAB No. 108) on quantifying financial statement misstatements. SAB No. 108 was issued to provide guidance on how the effects of prior year uncorrected misstatements should be
considered when quantifying misstatements in current year financial statements. SAB No. 108 requires an entity to quantify misstatements using both a balance sheet and an income statement approach and to evaluate whether either approach results
in quantifying an error that is material in light of the relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements beginning January 1, 2007. The adoption of SAB No. 108 did not have an
impact on the Companys consolidated financial statements.



Reclassifications:



Amounts in the prior
years consolidated financial statements are reclassified whenever necessary to conform to the current years presentation.



2.Cash and Due From Banks



The Bank is required to maintain a balance with the Federal Reserve Bank to cover reserve and clearing requirements. The average balance required to be
maintained for the years ended December 31, 2006 and 2005 was approximately $2.0 million and $2.1 million, respectively.



3. Investment Securities



The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of investment securities at December 31, 2006 and 2005
are as follows:



|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|----------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | -------
|                                    |  | December 31, 2006
|                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|                                    |  | (in thousands)   
|Available-for-sale:                 |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|U.S. government agency securities   |  | $                 | 157,848 |                      | $ |                      |  | $ | (2,257             | ) |  | $ | 155,591
|Collateralized mortgage obligations |  |                   | 165,297 |                      |   | 27                    |  |   | (3,885             | ) |  |   | 161,439
|Mortgage-backed securities          |  |                   | 207,275 |                      |   | 953                   |  |   | (4,430             | ) |  |   | 203,798
|State and municipal obligations     |  |                   | 147,566 |                      |   | 1,178                 |  |   | (762               | ) |  |   | 147,982
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Total available-for-sale            |  |                   | 677,986 |                      |   | 2,158                 |  |   | (11,334            | ) |  |   | 668,810
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Held-to-maturity:                   |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Other debt securities               |  |                   | 275     |                      |   |                      |  |   |                   |   |  |   | 275    
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Total held-to-maturity              |  |                   | 275     |                      |   |                      |  |   |                   |   |  |   | 275    
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Total                               |  | $                 | 678,261 |                      | $ | 2,158                 |  | $ | (11,334            | ) |  | $ | 669,085
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        



75



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|----------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | -------
|                                    |  | December 31, 2005
|                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|                                    |  | (in thousands)   
|Available-for-sale:                 |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|U.S. government agency securities   |  | $                 | 203,753 |                      | $ |                      |  | $ | (3,396             | ) |  | $ | 200,357
|Collateralized mortgage obligations |  |                   | 187,368 |                      |   | 92                    |  |   | (4,360             | ) |  |   | 183,100
|Mortgage-backed securities          |  |                   | 166,592 |                      |   | 136                   |  |   | (4,830             | ) |  |   | 161,898
|State and municipal obligations     |  |                   | 111,380 |                      |   | 1,357                 |  |   | (1,614             | ) |  |   | 111,123
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Total available-for-sale            |  |                   | 669,093 |                      |   | 1,585                 |  |   | (14,200            | ) |  |   | 656,478
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Held-to-maturity:                   |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Other debt securities               |  |                   | 275     |                      |   |                      |  |   |                   |   |  |   | 275    
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Total held-to-maturity              |  |                   | 275     |                      |   |                      |  |   |                   |   |  |   | 275    
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        
|Total                               |  | $                 | 669,368 |                      | $ | 1,585                 |  | $ | (14,200            | ) |  | $ | 656,753
|                                    |  |                   |         |                      |   |                       |  |   |                    |   |  |   |        



The following table
summarizes, for investment securities with unrealized losses as of December 31, 2006 and 2005, the amount of the unrealized loss and the related fair value of investment securities with unrealized losses. The unrealized losses have been further
segregated by investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. At December 31, 2006, the Company had
126 investment securities in an unrealized loss position. Of these securities, 55 securities have been in a loss position for 12 or more months. Management believes the declines in market value is attributed to changes in interest rates and not
credit quality, and because the Company has both the intent and ability to hold all of these securities for the time necessary until a recovery of fair value, which may be maturity, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2006 and 2005.



|                                                     |  |                                               |        |                  |                     |      |            |       |                  |         |  |            |         |                  |  |   |         |  |   |         |  
|---------------------------------------------------- |  | --------------------------------------------- | ------ | ---------------- | ------------------- | ---- | ---------- | ----- | ---------------- | ------- |  | ---------- | ------- | ---------------- |  | - | ------- |  | - | ------- | -
|                                                     |  | December 31, 2006                             |       
|                                                     |  | Length Of Continuous Unrealized Loss Position |       
|                                                     |  | Less than 12 months                           |        |                  | 12 months or longer |      |            | Total |                 
|                                                     |  | FairValue                                     |        | UnrealizedLosses |                     |      | Fair Value |       | UnrealizedLosses |         |  | Fair Value |         | UnrealizedLosses | 
|                                                     |  | (in thousands)                                |       
|Available-for-sale:                                  |  |                                               |        |                  |                     |      |            |       |                  |         |  |            |         |                  |  |   |         |  |   |         |  
|U.S. government agency securities                    |  | $                                             |       |                  | $                   |     |            |       | $                | 155,591 |  | $          | (2,257  | )                |  | $ | 155,591 |  | $ | (2,257  | )
|Collateralized mortgage obligations                  |  |                                               |       |                  |                     |     |            |       |                  | 157,008 |  |            | (3,885  | )                |  |   | 157,008 |  |   | (3,885  | )
|Mortgage-backed securities                           |  |                                               |       |                  |                     |     |            |       |                  | 129,834 |  |            | (4,430  | )                |  |   | 129,834 |  |   | (4,430  | )
|State and municipal obligations                      |  |                                               | 67,293 |                  |                     | (481 | )          |       |                  | 16,292  |  |            | (281    | )                |  |   | 83,585  |  |   | (762    | )
|                                                     |  |                                               |        |                  |                     |      |            |       |                  |         |  |            |         |                  |  |   |         |  |   |         |  
|Temporarily impaired securities  Available-for-sale |  |                                               | 67,293 |                  |                     | (481 | )          |       |                  | 458,725 |  |            | (10,853 | )                |  |   | 526,018 |  |   | (11,334 | )
|                                                     |  |                                               |        |                  |                     |      |            |       |                  |         |  |            |         |                  |  |   |         |  |   |         |  
|Held-to-maturity:                                    |  |                                               |        |                  |                     |      |            |       |                  |         |  |            |         |                  |  |   |         |  |   |         |  
|Other debt securities                                |  |                                               |       |                  |                     |     |            |       |                  |        |  |            |        |                  |  |   |        |  |   |        |  
|                                                     |  |                                               |        |                  |                     |      |            |       |                  |         |  |            |         |                  |  |   |         |  |   |         |  
|Temporarily impaired securities  Held-to-maturity   |  |                                               |       |                  |                     |     |            |       |                  |        |  |            |        |                  |  |   |        |  |   |        |  
|                                                     |  |                                               |        |                  |                     |      |            |       |                  |         |  |            |         |                  |  |   |         |  |   |         |  
|Total temporarily impaired securities                |  | $                                             | 67,293 |                  | $                   | (481 | )          |       | $                | 458,725 |  | $          | (10,853 | )                |  | $ | 526,018 |  | $ | (11,334 | )
|                                                     |  |                                               |        |                  |                     |      |            |       |                  |         |  |            |         |                  |  |   |         |  |   |         |  



76



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                     |  |                                               |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  
|---------------------------------------------------- |  | --------------------------------------------- | ------- | ---------------- | ------------------- | ------ | ---------- | ----- | ---------------- | ------- |  | ---------- | ------ | ---------------- |  | - | ------- |  | - | ------- | -
|                                                     |  | December 31, 2005                             |        
|                                                     |  | Length Of Continuous Unrealized Loss Position |        
|                                                     |  | Less than 12 months                           |         |                  | 12 months or longer |        |            | Total |                 
|                                                     |  | Fair Value                                    |         | UnrealizedLosses |                     |        | Fair Value |       | UnrealizedLosses |         |  | Fair Value |        | UnrealizedLosses | 
|                                                     |  | (in thousands)                                |        
|Available-for-sale:                                  |  |                                               |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  
|U.S. government agency securities                    |  | $                                             | 25,386  |                  | $                   | (185   | )          |       | $                | 174,971 |  | $          | (3,211 | )                |  | $ | 200,357 |  | $ | (3,396  | )
|Collateralized mortgage obligations                  |  |                                               | 96,399  |                  |                     | (1,991 | )          |       |                  | 81,521  |  |            | (2,369 | )                |  |   | 177,920 |  |   | (4,360  | )
|Mortgage-backed securities                           |  |                                               | 59,442  |                  |                     | (1,068 | )          |       |                  | 96,698  |  |            | (3,762 | )                |  |   | 156,140 |  |   | (4,830  | )
|State and municipal obligations                      |  |                                               | 62,141  |                  |                     | (1,614 | )          |       |                  |        |  |            |       |                  |  |   | 62,141  |  |   | (1,614  | )
|                                                     |  |                                               |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  
|Temporarily impaired securities  Available-for-sale |  |                                               | 243,368 |                  |                     | (4,858 | )          |       |                  | 353,190 |  |            | (9,342 | )                |  |   | 596,558 |  |   | (14,200 | )
|                                                     |  |                                               |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  
|Held-to-maturity:                                    |  |                                               |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  
|Other debt securities                                |  |                                               |        |                  |                     |       |            |       |                  |        |  |            |       |                  |  |   |        |  |   |        |  
|                                                     |  |                                               |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  
|Temporarily impaired securities  Held-to-maturity   |  |                                               |        |                  |                     |       |            |       |                  |        |  |            |       |                  |  |   |        |  |   |        |  
|                                                     |  |                                               |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  
|Total temporarily impaired securities                |  | $                                             | 243,368 |                  | $                   | (4,858 | )          |       | $                | 353,190 |  | $          | (9,342 | )                |  | $ | 596,558 |  | $ | (14,200 | )
|                                                     |  |                                               |         |                  |                     |        |            |       |                  |         |  |            |        |                  |  |   |         |  |   |         |  



The following table
shows the contractual maturities of debt securities, categorized by amortized cost and estimated fair value, at December 31, 2006.



|                                       |  |                |         |                      |   |        
|-------------------------------------- |  | -------------- | ------- | -------------------- | - | -------
|                                       |  | AmortizedCost  |         | Estimated Fair Value
|                                       |  | (in thousands)
|Available-for-sale:                    |  |                |         |                      |   |        
|Due in one year or less                |  | $              | 74,027  |                      | $ | 73,455 
|Due after one year through five years  |  |                | 87,472  |                      |   | 85,926 
|Due after five years through ten years |  |                | 21,581  |                      |   | 21,991 
|Due after ten years                    |  |                | 122,334 |                      |   | 122,201
|Collateralized mortgage obligations    |  |                | 165,297 |                      |   | 161,439
|Mortgage-backed securities             |  |                | 207,275 |                      |   | 203,798
|                                       |  |                |         |                      |   |        
|Totals                                 |  | $              | 677,986 |                      | $ | 668,810
|                                       |  |                |         |                      |   |        
|Held-to-maturity:                      |  |                |         |                      |   |        
|Due in one year or less                |  | $              | 250     |                      | $ | 250    
|Due after one year through five years  |  |                | 25      |                      |   | 25     
|Due after five years through ten years |  |                |        |                      |   |       
|Due after ten years                    |  |                |        |                      |   |       
|                                       |  |                |         |                      |   |        
|Totals                                 |  | $              | 275     |                      | $ | 275    
|                                       |  |                |         |                      |   |        



No gross gains were
realized on the sale of available-for-sale investment securities in 2006, while gross gains of $127,000 and $397,000 were realized on the sale of investment securities classified as available-for-sale during 2005 and 2004. No gross losses were
realized on the sale of available-for-sale investment securities in



77



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



2006 and 2005, while gross losses of $253,000 were realized on the sale of available-for-sale investment securities in 2004.



Investment securities with an approximate book value of $366 million and $395
million at December 31, 2006 and 2005, respectively, were pledged to collateralize certain deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances, and for other purposes as required or
permitted by law.



Investment securities do not include the
Banks investment in FHLB and Federal Reserve Bank stock of $11.8 million and $12.9 million at December 31, 2006 and 2005, respectively. These investments are required for membership and are carried at cost. The Bank also must maintain a
specified level of investment in FHLB stock based upon the amount of outstanding FHLB borrowings.



4.Loans



Loans classified by type at December 31, 2006 and 2005 are as follows:



|                                      |  |                |           |   |      |   |           |  
|------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                      |  | 2006           |           |   | 2005 |  
|                                      |  | (in thousands) |          
|Commercial and industrial             |  | $              | 770,863   |   |      | $ | 665,023   |  
|Commercial real estate secured        |  |                | 791,962   |   |      |   | 793,965   |  
|Real estate-construction              |  |                | 744,317   |   |      |   | 684,737   |  
|Residential real estate mortgages     |  |                | 62,453    |   |      |   | 63,789    |  
|Home equity loans and lines of credit |  |                | 116,516   |   |      |   | 161,058   |  
|Consumer                              |  |                | 13,237    |   |      |   | 14,972    |  
|Other loans                           |  |                | 1,396     |   |      |   | 1,497     |  
|                                      |  |                |           |   |      |   |           |  
|Gross loans                           |  |                | 2,500,744 |   |      |   | 2,385,041 |  
|Less: Unearned discount               |  |                | (59       | ) |      |   | (110      | )
|                                      |  |                |           |   |      |   |           |  
|Total loans                           |  |                | 2,500,685 |   |      |   | 2,384,931 |  
|Less: Allowance for loan losses       |  |                | (37,516   | ) |      |   | (37,481   | )
|                                      |  |                |           |   |      |   |           |  
|Loans, net                            |  | $              | 2,463,169 |   |      | $ | 2,347,450 |  
|                                      |  |                |           |   |      |   |           |  



Nonperforming loans
include nonaccrual loans and interest-accruing loans contractually past due 90 days or more. Loans are placed on a nonaccrual basis for recognition of interest income when sufficient doubt exists as to the full collection of principal and interest.
Generally, loans are to be placed on nonaccrual when principal and interest is contractually past due 90 days, unless the loan is adequately secured and in the process of collection.



78



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table sets forth the amounts of nonperforming loans at December 31, 2006, 2005,
and 2004 and the related interest on nonaccrual loans for the years then ended:



|                                                                                                             |  |                |        |      |   |        |  |   |       
|------------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                                                             |  | 2006           |        | 2005 |   | 2004  
|                                                                                                             |  | (in thousands)
|Recorded balance of loans contractually past due 90 days or more but still accruing interest, at end of year |  | $              | 10,046 |      | $ | 2,615  |  | $ | 1,807 
|Recorded balance of nonaccrual loans, at end of year                                                         |  |                | 23,111 |      |   | 10,834 |  |   | 12,286
|                                                                                                             |  |                |        |      |   |        |  |   |       
|Total nonperforming loans                                                                                    |  | $              | 33,157 |      | $ | 13,449 |  | $ | 14,093
|                                                                                                             |  |                |        |      |   |        |  |   |       
|Restructured loans not included in nonperforming loans                                                       |  | $              |       |      | $ |       |  | $ | 1,777 
|Interest on nonaccrual loans recognized in income                                                            |  |                | 723    |      |   | 346    |  |   | 160   
|Interest on nonaccrual loans which would have been recognized under the original terms of the loans          |  |                | 3,168  |      |   | 1,069  |  |   | 766   



Impaired loans include
all nonaccrual loans as well as certain accruing loans judged to have higher risk of noncompliance with the present contractual repayment schedule for both interest and principal. Once a loan has been determined to be impaired, it is measured to
establish the amount of the impairment based on the present value of expected future cash flows discounted at the loans effective interest rate, except that collateral-dependent loans may be measured for impairment based on the fair value of
the collateral, less cost to sell. If the measure of the impaired loan is less than the recorded investment in the loan, a valuation allowance is recognized. 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.



Information about the Companys impaired loans at or for the years ended December 31, 2006, 2005, and 2004 is as follows:



|                                                                    |  |                |        |      |   |        |  |   |       
|------------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                    |  | 2006           |        | 2005 |   | 2004  
|                                                                    |  | (in thousands)
|Recorded balance of impaired loans, at end of year:                 |  |                |        |      |   |        |  |   |       
|With related allowance for loan loss                                |  | $              | 18,813 |      | $ | 26,605 |  | $ | 12,271
|With no related allowance for loan loss                             |  |                | 5,323  |      |   | 9,159  |  |   | 6,056 
|                                                                    |  |                |        |      |   |        |  |   |       
|Total                                                               |  | $              | 24,136 |      | $ | 35,764 |  | $ | 18,327
|                                                                    |  |                |        |      |   |        |  |   |       
|Allowance for loan losses related to impaired loans, at end of year |  | $              | 2,528  |      | $ | 1,925  |  | $ | 1,067 
|Average balance of impaired loans for the year                      |  |                | 33,928 |      |   | 27,678 |  |   | 20,797
|Interest income recognized on impaired loans for the year           |  |                | 850    |      |   | 1,918  |  |   | 1,004 



The Company provides
several types of loans to its customers including residential, construction, commercial, and consumer loans. Lending activities are conducted with customers in a wide variety of industries as well as with individuals with a wide variety of credit
requirements. The Company does not have a concentration of loans in any specific industry. Credit risks tend to be geographically concentrated in that the majority of the Companys customer base lies within the Chicago metropolitan area.
Furthermore, as of December 31, 2006, 69% of the Companys loan portfolio involves loans that are to some degree secured by real estate properties located primarily within the Chicago metropolitan area.



79



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Activity in the allowance for loan losses for the years ended December 31, 2006, 2005, and 2004
consisted of the following:



|                                           |  |                |        |   |      |   |        |      |  |   |        |  
|------------------------------------------ |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                           |  | 2006           |        |   | 2005 |   |        | 2004 | 
|                                           |  | (in thousands) |       
|Balance at beginning of year               |  | $              | 37,481 |   |      | $ | 37,484 |      |  | $ | 34,356 |  
|Provision for loan losses                  |  |                | 6,000  |   |      |   | 5,523  |      |  |   | 10,083 |  
|Loans charged-off                          |  |                | (7,231 | ) |      |   | (7,088 | )    |  |   | (9,120 | )
|Recoveries on loans previously charged-off |  |                | 1,266  |   |      |   | 1,562  |      |  |   | 2,165  |  
|                                           |  |                |        |   |      |   |        |      |  |   |        |  
|Net charge-offs                            |  |                | (5,965 | ) |      |   | (5,526 | )    |  |   | (6,955 | )
|                                           |  |                |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                     |  | $              | 37,516 |   |      | $ | 37,481 |      |  | $ | 37,484 |  
|                                           |  |                |        |   |      |   |        |      |  |   |        |  



The Company has
extended loans to directors and executive officers of the Bank, the Company and their related interests. The aggregate loans outstanding to the directors and executive officers of the Bank, the Company and their related interests totaled $49.4
million and $37.7 million at December 31, 2006 and 2005, respectively. During 2006 and 2005, new loans totaled $37.6 million and $36.0 million, respectively and repayments totaled $25.9 million and $31.1 million, respectively. In the opinion of
management, these loans were made in the normal course of business and on substantially the same terms for comparable transactions with other borrowers and do not involve more than a normal risk of collectiblity.



5.Premises, Leasehold Improvements, and Equipment



Premises, leasehold improvements, and equipment at December 31, 2006
and 2005 are summarized as follows:



|                                               |  |                |         |   |      |   |         |  
|---------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                               |  | 2006           |         |   | 2005 |  
|                                               |  | (in thousands) |        
|Land and improvements                          |  | $              | 1,158   |   |      | $ | 1,140   |  
|Buildings and improvements                     |  |                | 5,759   |   |      |   | 4,734   |  
|Leasehold improvements                         |  |                | 6,286   |   |      |   | 5,764   |  
|Furniture, fixtures and equipment              |  |                | 20,273  |   |      |   | 19,053  |  
|                                               |  |                |         |   |      |   |         |  
|Total cost                                     |  |                | 33,476  |   |      |   | 30,691  |  
|Less accumulated depreciation and amortization |  |                | (18,677 | ) |      |   | (15,586 | )
|                                               |  |                |         |   |      |   |         |  
|Net book value                                 |  | $              | 14,799  |   |      | $ | 15,105  |  
|                                               |  |                |         |   |      |   |         |  



In January 2005, the
Company sold its Broadview branch location, including the related loan and deposit accounts for a gain of $1.6 million. The net book value of the premises and equipment sold was $2.0 million. In June 2004, the Company completed the sale of its
Burbank facility and agreed to lease back approximately one-half of the space for a banking center and administrative offices. Upon sale, the Company realized a gain of $245,000 that was deferred and is being amortized over the 10 year life of the
lease.



During 2004, the Company reached an agreement to
terminate the lease for its administrative offices on the second and third floors of its Wheeling facility that was originally scheduled to end in March 2010 for a cash payment and the transfer of a small parcel of land it owned near the site. In
connection with this agreement, the Company recorded an additional charge of $984,000 in 2004 for the lease termination liability, the write-off the small parcel of land, and to accrue other transaction costs.



80



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6.Other Real Estate and Repossessed Assets



Other real estate owned and repossessed assets totaled $412,000 and $1.1
million at December 31, 2006 and 2005, respectively. Activity in the allowance for other real estate and repossessed assets for the years ended December 31, 2006, 2005, and 2004, are as follows:



|                                          |  |                |      |   |      |   |     |      |  |   |     |  
|----------------------------------------- |  | -------------- | ---- | - | ---- | - | --- | ---- |  | - | --- | -
|                                          |  | 2006           |      |   | 2005 |   |     | 2004 | 
|                                          |  | (in thousands) |     
|Balance at beginning of year              |  | $              | 99   |   |      | $ | 4   |      |  | $ | 7   |  
|Provision for losses on other real estate |  |                | 216  |   |      |   | 148 |      |  |   | 71  |  
|Charge-offs                               |  |                | (185 | ) |      |   | (53 | )    |  |   | (74 | )
|                                          |  |                |      |   |      |   |     |      |  |   |     |  
|Balance at end of year                    |  | $              | 130  |   |      | $ | 99  |      |  | $ | 4   |  
|                                          |  |                |      |   |      |   |     |      |  |   |     |  



7.Goodwill and
Intangible Assets



At both December 31,
2006 and 2005, the Company has $23.2 million of goodwill which was created from the 1997 acquisition of the Bank. No additions or disposals to goodwill were recorded during 2006. In 2005, goodwill was reduced by $117,000 in connection with the sale
of the land trust operations. In recording goodwill in 1997, the Company elected the composite useful life approach and aggregated existing intangible assets into goodwill. Intangible assets consisting of relationships with land trust customers were
therefore, included in the original recognition of goodwill. In connection with the sale of the land trust operations in 2005, the amount of the goodwill relating to land trusts reduced the amount of the gain recognized. Goodwill is tested annually
for impairment and as of July 1, 2006, the date of the most recent test, the Company determined that no impairment charge was necessary at that time.



At December 31, 2006 and 2005, the Company had no intangible assets. During 2005, in connection with the sale of the land trust operations, the
remaining unamortized balance of intangible assets related to these operations of $51,000 was written off by reducing the amount of the gain recognized. Amortization expense for these intangible assets was $3,000 and $13,000 during the years ended
December 31, 2005, and 2004, respectively.



8.Interest-Bearing Deposits



Interest-bearing deposits at December 31, 2006 and 2005 are summarized as follows:



|                                              |  |                |           |      |   |          
|--------------------------------------------- |  | -------------- | --------- | ---- | - | ---------
|                                              |  | 2006           |           | 2005
|                                              |  | (in thousands)
|NOW accounts                                  |  | $              | 82,484    |      | $ | 104,269  
|Savings accounts                              |  |                | 59,523    |      |   | 73,173   
|Money market deposits                         |  |                | 807,949   |      |   | 645,523  
|Time deposits:                                |  |                |           |      |   |          
|Certificates of deposit of less than $100,000 |  |                | 187,436   |      |   | 206,951  
|Certificates of deposit of $100,000 or more   |  |                | 329,188   |      |   | 342,842  
|Out-of-local-market certificates of deposit   |  |                | 105,119   |      |   | 131,116  
|Brokered certificates of deposit              |  |                | 551,786   |      |   | 505,802  
|Public time deposits                          |  |                | 68,580    |      |   | 69,679   
|                                              |  |                |           |      |   |          
|Total time deposits                           |  |                | 1,242,109 |      |   | 1,256,390
|                                              |  |                |           |      |   |          
|Total                                         |  | $              | 2,192,065 |      | $ | 2,079,355
|                                              |  |                |           |      |   |          



81



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Interest expense on time deposits with balances of $100,000 or more was $11.5 million, $8.5 million,
and $5.5 million for the years ended December 31, 2006, 2005, and 2004, respectively.



At December 31, 2006, the scheduled maturities of total time deposits are as follows:



|           |  |                |          
|---------- |  | -------------- | ---------
|Year       |  | Amount        
|           |  | (in thousands)
|2007       |  | $              | 874,198  
|2008       |  |                | 120,537  
|2009       |  |                | 18,832   
|2010       |  |                | 45,319   
|2011       |  |                | 95,547   
|Thereafter |  |                | 87,676   
|           |  |                |          
|Total      |  | $              | 1,242,109
|           |  |                |          



9.Other
Borrowings



Other borrowings at
December 31, 2006 and 2005 are summarized as follows:



|                                                |  |                        |         |                     |      |   |                |   |                      |  |      |  
|----------------------------------------------- |  | ---------------------- | ------- | ------------------- | ---- | - | -------------- | - | -------------------- |  | ---- | -
|                                                |  | 2006                   |         |                     | 2005 |  
|                                                |  | AmountBorrowed         |         | WeightedAverageRate |      |   | AmountBorrowed |   | WeightedAverage Rate | 
|                                                |  | (dollars in thousands) |        
|Securities sold under agreements to repurchase: |  |                        |         |                     |      |   |                |   |                      |  |      |  
|Overnight                                       |  | $                      | 126,415 |                     | 3.21 | % |                | $ | 150,746              |  | 2.34 | %
|Term                                            |  |                        | 100,000 |                     | 5.12 |   |                |   | 100,000              |  | 4.60 |  
|Federal funds purchased                         |  |                        | 35,823  |                     | 4.93 |   |                |   | 47,567               |  | 3.75 |  
|U.S. Treasury tax and loan note option          |  |                        | 81      |                     | 4.99 |   |                |   | 113                  |  | 3.89 |  
|                                                |  |                        |         |                     |      |   |                |   |                      |  |      |  
|Total                                           |  | $                      | 262,319 |                     | 4.17 | % |                | $ | 298,426              |  | 3.32 | %
|                                                |  |                        |         |                     |      |   |                |   |                      |  |      |  



Under the terms of the
securities sold under agreements to repurchase, if the market value of the pledged securities declines below the repurchase liability, the Bank may be required to provide additional collateral to the buyer. For overnight repurchase agreements, the
Bank maintains control of the pledged securities, however, for the term repurchase agreement, the pledged securities are held by the counterparty. The term repurchase agreement, which matures in September 2007, carries a variable interest rate tied
to 3-month LIBOR with a maximum rate of 5.12%.



Information
concerning securities sold under agreements to repurchase for the years ended December 31, 2006, 2005, and 2004 is summarized as follows:



|                                            |  |                        |         |   |      |   |         |      |  |   |         |  
|------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                            |  | 2006                   |         |   | 2005 |   |         | 2004 | 
|                                            |  | (dollars in thousands) |        
|Daily average balance during the year       |  | $                      | 227,237 |   |      | $ | 203,595 |      |  | $ | 176,944 |  
|Daily average rate during the year          |  |                        | 3.91    | % |      |   | 2.34    | %    |  |   | 0.97    | %
|Maximum amount outstanding at any month end |  | $                      | 276,134 |   |      | $ | 276,827 |      |  | $ | 223,404 |  



Under the treasury tax
and loan note option, the Bank is authorized to accept U.S. Treasury Department deposits of excess funds along with the deposits of customer taxes. These liabilities bear interest at a rate of



82



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



0.25% below the average federal funds rate and are collateralized by a pledge of various investment securities. The Bank also participates in the U.S.
Treasury Departments Term Investment Option program whereby the Bank can obtain additional short-term funding from the U.S. Treasury at the prevailing short-term market rates and are collateralized by commercial loans.



At December 31, 2006, subject to available collateral, the Bank had
available pre-approved overnight federal funds borrowings and repurchase agreement lines of $200 million and $750 million, respectively.



10.Income Taxes



The components of the income tax expense (benefit) for the years ended December 31, 2006, 2005, and 2004 are as follows:



|                                |  |                |        |   |      |   |        |      |  |   |        |  
|------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                |  | 2006           |        |   | 2005 |   |        | 2004 | 
|                                |  | (in thousands) |       
|Current tax expense (benefit):  |  |                |        |   |      |   |        |      |  |   |        |  
|Federal                         |  | $              | (2,344 | ) |      | $ | 17,146 |      |  | $ | 10,598 |  
|State                           |  |                | 1,689  |   |      |   | 3,191  |      |  |   | 1,748  |  
|                                |  |                |        |   |      |   |        |      |  |   |        |  
|Total                           |  |                | (655   | ) |      |   | 20,337 |      |  |   | 12,346 |  
|                                |  |                |        |   |      |   |        |      |  |   |        |  
|Deferred tax expense (benefit): |  |                |        |   |      |   |        |      |  |   |        |  
|Federal                         |  |                | 2,054  |   |      |   | (625   | )    |  |   | (1,045 | )
|State                           |  |                | 636    |   |      |   | (189   | )    |  |   | 12     |  
|                                |  |                |        |   |      |   |        |      |  |   |        |  
|Total                           |  |                | 2,690  |   |      |   | (814   | )    |  |   | (1,033 | )
|                                |  |                |        |   |      |   |        |      |  |   |        |  
|Applicable income taxes         |  | $              | 2,035  |   |      | $ | 19,523 |      |  | $ | 11,313 |  
|                                |  |                |        |   |      |   |        |      |  |   |        |  





Income tax expense was different from the amounts computed by applying the federal statutory rate of 35% for the years ended December 31, 2006, 2005,
and 2004 to income before income taxes because of the following:



|                                                                 |  |                |         |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                 |  | 2006           |         |   | 2005 |   |        | 2004 | 
|                                                                 |  | (in thousands) |        
|Federal income tax expense at statutory rate                     |  | $              | 16,869  |   |      | $ | 17,953 |      |  | $ | 12,000 |  
|Increase (decrease) in taxes resulting from:                     |  |                |         |   |      |   |        |      |  |   |        |  
|Addition (reversal) of allocated tax reserves                    |  |                | (14,643 | ) |      |   | 535    |      |  |   | (1,056 | )
|Tax-exempt interest income, net of disallowed interest deduction |  |                | (1,834  | ) |      |   | (955   | )    |  |   | (725   | )
|State taxes, net                                                 |  |                | 1,511   |   |      |   | 1,951  |      |  |   | 1,144  |  
|Other, net                                                       |  |                | 132     |   |      |   | 39     |      |  |   | (50    | )
|                                                                 |  |                |         |   |      |   |        |      |  |   |        |  
|Total                                                            |  | $              | 2,035   |   |      | $ | 19,523 |      |  | $ | 11,313 |  
|                                                                 |  |                |         |   |      |   |        |      |  |   |        |  



During 2006, income
tax expense was reduced by the recognition of a $15.5 million of tax benefit relating to deductions taken on prior year tax returns that had not been recognized for financial reporting purposes. Tax liabilities established for these tax
uncertainties were no longer required primarily as a result of the expiration of the of the statute of limitations of the Companys 2002 federal income tax return and the results of examinations in 2006 by taxing authorities with respect to
other tax years. The tax uncertainty principally related to the Companys 2002 litigation settlement charge of $61.9 million. While the Company did not recognize any income



83



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



tax benefit of this charge for financial reporting purposes, it did deduct a portion of the settlement ($28.7 million) on its 2002 income tax return, because
it believed that a portion of the settlement that related to specific settled claims was more likely than not deductible as an ordinary and necessary business expense. This degree of certainty was not sufficient to recognize an income tax benefit
for financial reporting purposes. In addition, state tax expense in 2006 was reduced by refunds of prior years state income taxes totaling $443,000.



The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2006 and 2005 are presented below:



|                                                             |  |                |        |   |      |   |        |  
|------------------------------------------------------------ |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                             |  | 2006           |        |   | 2005 |  
|                                                             |  | (in thousands) |       
|Deferred Tax Assets:                                         |  |                |        |   |      |   |        |  
|Fixed assets, principally due to differences in depreciation |  | $              | 647    |   |      | $ | 155    |  
|Loans, principally due to allowance for loan losses          |  |                | 14,952 |   |      |   | 15,024 |  
|Deferred income, principally net loan origination fees       |  |                | 1,635  |   |      |   | 2,035  |  
|Brokered CD swaps                                            |  |                |       |   |      |   | 1,993  |  
|Employee benefits                                            |  |                | 3,959  |   |      |   | 2,651  |  
|Deferred rent                                                |  |                | 1,280  |   |      |   | 913    |  
|                                                             |  |                |        |   |      |   |        |  
|Gross deferred tax assets                                    |  |                | 22,473 |   |      |   | 22,771 |  
|                                                             |  |                |        |   |      |   |        |  
|Deferred Tax Liabilities:                                    |  |                |        |   |      |   |        |  
|Brokered CD swaps                                            |  |                | (2,290 | ) |      |   |       |  
|Discount accretion                                           |  |                | (64    | ) |      |   | (41    | )
|Other                                                        |  |                | (516   | ) |      |   | (437   | )
|                                                             |  |                |        |   |      |   |        |  
|Gross deferred tax liabilities                               |  |                | (2,870 | ) |      |   | (478   | )
|                                                             |  |                |        |   |      |   |        |  
|Subtotal                                                     |  |                | 19,603 |   |      |   | 22,293 |  
|                                                             |  |                |        |   |      |   |        |  
|Tax effect of other comprehensive income                     |  |                | 3,546  |   |      |   | 4,965  |  
|                                                             |  |                |        |   |      |   |        |  
|Net deferred tax assets                                      |  | $              | 23,149 |   |      | $ | 27,258 |  
|                                                             |  |                |        |   |      |   |        |  



Based upon historical
taxable income as well as projections of future taxable income, management believes that it is more likely than not that the deferred tax assets will be realized. Therefore, no valuation reserve has been recorded at December 31, 2006 or 2005.



84



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



11.Notes Payable and FHLB Advances



Notes payable: At December 31, 2006, the Company has a $20.0
million revolving credit facility that has not been drawn upon. The facility matures on November 27, 2007, and is secured by the Companys pledge of its capital stock of the Bank and includes certain restrictions in the event of default.
Interest on any drawn upon amounts would be, at the Companys election, at the prime rate less 1.00% or LIBOR less 1.15%. The underlying loan agreement requires that the Bank remain well capitalized and the holding company remain adequately
capitalized as defined by regulatory guidelines. As of December 31, 2006, the Company was in compliance with these covenants.



FHLB advances: FHLB advances at December 31, 2006 and 2005 consisted of the following:



|                                                                                                                                                                                      |  |                |        |      |   |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                                                                                                                                                                      |  | 2006           |        | 2005
|                                                                                                                                                                                      |  | (in thousands)
|Cole Taylor Bank:                                                                                                                                                                     |  |                |        |      |   |       
|FHLB advance  4.30%, due January 10, 2011, callable after January 8, 2002                                                                                                            |  | $              |       |      | $ | 25,000
|FHLB advance  4.55%, due January 10, 2011, callable after January 8, 2003                                                                                                            |  |                |       |      |   | 25,000
|FHLB advance  4.83%, due February 1, 2011, callable after January 8, 2004                                                                                                            |  |                | 25,000 |      |   | 25,000
|FHLB advance  interest determined quarterly at the 3-month LIBOR plus 0.23%, with maximum interest rate of 5.48%; interest rate at
December 31, 2006 was 5.48%; due April 7, 2008    |  |                | 30,000 |      |   |      
|FHLB advance  interest determined quarterly at the 3-month LIBOR plus 0.255%, with maximum interest rate of 5.755%; interest rate at
December 31, 2006 was 5.628%, due July 13, 2008 |  |                | 25,000 |      |   |      
|                                                                                                                                                                                      |  |                |        |      |   |       
|Total FHLB advances                                                                                                                                                                   |  |                | 80,000 |      |   | 75,000
|                                                                                                                                                                                      |  |                |        |      |   |       
|Total notes payable and FHLB advances                                                                                                                                                 |  | $              | 80,000 |      | $ | 75,000
|                                                                                                                                                                                      |  |                |        |      |   |       



At December 31,
2006, the FHLB advances were collateralized by $71.1 million of investment securities and a blanket lien on $235.8 million of qualified first-mortgage residential and home equity loans. At December 31, 2005, the FHLB advances were
collateralized by $65.8 million of investment securities and a blanket lien on $118.0 million of qualified first-mortgage residential and home equity loans. Based on the value of collateral pledged at December 31, 2006, the Bank had additional
borrowing capacity at the FHLB of $141.7 million. The weighted average interest rate at December 31, 2006 and 2005 was 5.32% and 4.56%, respectively.



Following are the scheduled maturities of notes payable and FHLB advances, categorized by the earlier of call or contractual maturity, at
December 31, 2006:



|                    |  |                |       
|------------------- |  | -------------- | ------
|Year                |  | Amount        
|                    |  | (in thousands)
|2007                |  | $              | 25,000
|2008                |  |                | 55,000
|2009                |  |                |      
|2010                |  |                |      
|2011                |  |                |      
|2012 and thereafter |  |                |      
|                    |  |                |       
|Total               |  | $              | 80,000
|                    |  |                |       



85



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



12.Junior Subordinated Debentures



The following table summarizes the amount of junior subordinated debentures
issued by the Company to TAYC Capital Trust I and TAYC Capital Trust II as of December 31, 2006 and 2005:



|                                                      |  |                     |               |                       |   |                   
|----------------------------------------------------- |  | ------------------- | ------------- | --------------------- | - | ------------------
|                                                      |  | TAYC CapitalTrust I |               | TAYC Capital Trust II
|Issuance Date                                         |  |                     | October 2002  |                       |   | June 2004         
|Maturity Date                                         |  |                     | Oct. 21, 2032 |                       |   | June 17, 2034     
|Annual Rate                                           |  |                     | 9.75%         |                       |   | 3-mo LIBOR + 2.68%
|Amount of Junior Subordinated Debentures:             |  |                     |               |                       |   |                   
|At December 31, 2005                                  |  | $                   | 46,400        |                       | $ | 41,238            
|At December 31, 2006                                  |  |                     | 45,369        |                       |   | 41,238            
|Amount of Trust Preferred Securities Issued by Trust: |  |                     |               |                       |   |                   
|At December 31, 2005                                  |  | $                   | 45,000        |                       | $ | 40,000            
|At December 31, 2006                                  |  |                     | 44,000        |                       |   | 40,000            



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 sole assets of the TAYC Capital Trust II
are the Companys junior subordinated debentures. 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 17thof September, December, March and June. The interest rate on both the trust preferred securities and the junior subordinated
debentures were 8.04% and 7.18% at December 31, 2006 and 2005, respectively. 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 certain 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. The sole assets of the TAYC Capital Trust I are the Companys junior subordinated debentures. 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 certain unfavorable changes in certain laws or regulations. In 2006, the Company purchased $1.0 million of the trust preferred
securities issued by TAYC Capital Trust I from an unrelated third party. The Company exchanged the trust preferred securities it had purchased and a proportional amount of common securities issued by TAYC Capital Trust I, for $1.03 million of the
Companys junior subordinated debentures issued to TAYC Capital Trust I.



86



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(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 thirty years, or through the maturity dates, to interest expense using the straight-line method. At December 31, 2006, unamortized issuance costs related to TAYC Capital Trust I and TAYC Capital Trust II were $2.7
million and $431,000, respectively.



The Companys
obligations with respect to each of the trust preferred securities and the related debentures, in the aggregate, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of each of the
Trusts under the respective trust preferred securities.



The
Company does not consolidate TAYC Capital Trust I and TAYC Capital Trust II. The equity investments in the Trusts of $2.6 million are reported in other assets on the Consolidated Balance Sheet at December 31, 2006 and 2005.



13.Employee Benefit Plans



The Companys employees participate in employee benefit plans
consisting of a 401(k) Plan and a Profit Sharing/Employee Stock Ownership Plan (ESOP), collectively called the Plans. Contributions to the Plans are made at the discretion of the Board of Directors, with the exception of
certain 401(k) matching of employee contributions. The 401(k) plan allows participants a choice of several equity and fixed income mutual funds. Company common stock is not an investment option for 401(k) participants. For the years ended
December 31, 2006, 2005 and 2004, contributions paid to the Plans were $2.3 million, $1.9 million, and $2.3 million, respectively. The ESOP owned 299,103 shares and 309,518 shares of the Companys common stock as of December 31, 2006
and 2005, respectively. These shares are held in trust for the participants by the ESOPs trustee. As of December 31, 2006, all shares of Company common stock owned by the ESOP were allocated to plan participants.



The Company also maintains a non-qualified deferred compensation plan for
certain key employees that allow participants to defer a portion of base and incentive compensation. The Company also may make contributions and discretionary matching contributions to the plan. The deferrals and Company contributions are held in a
rabbi trust for the participants. While the Company maintains ownership of the assets, the participants are able to direct the investment of the assets into several equity and fixed income mutual funds. Company common stock is not an investment
option for the participants. The Company records the assets at their fair value in other assets in the Consolidated Balance Sheets. The liability to participants is recorded in other liabilities in the Consolidated Balance Sheets. Total assets and
the corresponding liability in the nonqualified deferred compensation plan totaled $5.6 million and $4.4 million at December 31, 2006 and 2005, respectively.



14.Stock-Based Compensation



The Company has an Incentive Compensation Plan (the Plan) that allows for the granting of stock-based
compensation awards. Under the Plan, directors, officers and employees selected by the Board of Directors will be eligible to receive awards, including incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, and
performance awards. The Company has only issued nonqualified stock options and restricted stock awards under the Plan. During the term of the Plan, on the first day of each calendar year the number of shares reserved for issuance under the Plan will
be increased by a number of shares equal to the excess of 3.0% of the aggregate number of shares outstanding as of December 31 of the immediately preceding calendar



87



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



year, over the number of shares remaining available for awards at that time. As of December 31, 2006, 1,793,952 shares of common stock were authorized
for use in the Plan and 237,742 shares were available for future grants. In accordance with the provision in the Plan that increases the number of common shares reserved on the first day of each calendar year, as of January 1, 2007, 333,932
shares of Company common stock were available for future grants. The Company uses newly-issued shares of common stock for grants of restricted stock or upon the exercise of stock options.



The following table presents, for the periods indicated, stock-based compensation expense recognized on the Consolidated
Income Statements under SFAS 123R:



|                                   |  |                                  |       |   |      |   |      |      |  |   |      |  
|---------------------------------- |  | -------------------------------- | ----- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                   |  | For the Years Ended December 31, |      
|                                   |  | 2006                             |       |   | 2005 |   |      | 2004 | 
|                                   |  | (in thousands)                   |      
|Recorded Compensation Expense for: |  |                                  |       |   |      |   |      |      |  |   |      |  
|Restricted Stock                   |  | $                                | 671   |   |      | $ | 537  |      |  | $ | 461  |  
|Stock Options                      |  |                                  | 906   |   |      |   |     |      |  |   |     |  
|                                   |  |                                  |       |   |      |   |      |      |  |   |      |  
|                                   |  | $                                | 1,577 |   |      | $ | 537  |      |  | $ | 461  |  
|                                   |  |                                  |       |   |      |   |      |      |  |   |      |  
|Income Tax Benefit for:            |  |                                  |       |   |      |   |      |      |  |   |      |  
|Restricted Stock                   |  | $                                | (264  | ) |      | $ | (211 | )    |  | $ | (183 | )
|Stock Options                      |  |                                  | (355  | ) |      |   |     |      |  |   |     |  
|                                   |  |                                  |       |   |      |   |      |      |  |   |      |  
|                                   |  | $                                | (619  | ) |      | $ | (211 | )    |  | $ | (183 | )
|                                   |  |                                  |       |   |      |   |      |      |  |   |      |  
|Recorded Net Expense for:          |  |                                  |       |   |      |   |      |      |  |   |      |  
|Restricted Stock                   |  | $                                | 407   |   |      | $ | 326  |      |  | $ | 278  |  
|Stock Options                      |  |                                  | 551   |   |      |   |     |      |  |   |     |  
|                                   |  |                                  |       |   |      |   |      |      |  |   |      |  
|                                   |  | $                                | 958   |   |      | $ | 326  |      |  | $ | 278  |  
|                                   |  |                                  |       |   |      |   |      |      |  |   |      |  



The following table
provides the amount of compensation expense related to stock options that the Company would have incurred had the Company not applied the intrinsic value method of accounting for stock options under APB 25 during 2005 and 2004:



|                               |  |                                 |      |   |      |   |      |  
|------------------------------ |  | ------------------------------- | ---- | - | ---- | - | ---- | -
|                               |  | For the Years EndedDecember 31, |     
|                               |  | 2005                            |      |   | 2004 |  
|                               |  | (in thousands)                  |     
|Pro Forma Stock Option Expense |  | $                               | 860  |   |      | $ | 793  |  
|Pro Forma Income Tax Benefit   |  |                                 | (338 | ) |      |   | (314 | )
|                               |  |                                 |      |   |      |   |      |  
|Net Pro Forma Expense          |  | $                               | 522  |   |      | $ | 479  |  
|                               |  |                                 |      |   |      |   |      |  



Stock Options:



SFAS 123R requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys Consolidated Statements of
Income. The Company recognized compensation costs for these awards over the requisite service period for the entire award on a straight-line basis. Stock-based compensation expense recognized in the Companys Consolidated Statements of Income
for the year ended December 31, 2006 included compensation expense for share-based



88



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



payment awards granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the pro forma
provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. As stock-based compensation
expense recognized in the Consolidated Statements of Income during 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Companys pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred.



Stock options are granted with an exercise price equal to the
fair market value of the common stock on the date of grant. The stock options that were granted prior to 2006 vest over a five year period (vesting at 20% per year) and expire 10 years following the grant date. The stock options that were
granted in 2006 vest over a four year period (vesting at 25% per year) and expire eight years following grant date. In either case, upon death, disability, retirement or change of control of the Company (as defined in the Plan) vesting may be
accelerated to 100%.



The following is a summary of stock
option activity for the year ended December 31, 2006:



|                                 |  |          |   |  |                               |       |                                                  |     |                               |   |      
|-------------------------------- |  | -------- | - |  | ----------------------------- | ----- | ------------------------------------------------ | --- | ----------------------------- | - | -----
|                                 |  | Shares   |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm inYears |     | AggregateIntrinsicValue($000)
|Outstanding at January 1, 2006   |  | 765,088  |   |  | $                             | 23.30 |                                                  |     |                               |   |      
|Granted                          |  | 114,122  |   |  |                               | 37.51 |                                                  |     |                               |   |      
|Exercised                        |  | (126,267 | ) |  |                               | 21.19 |                                                  |     |                               |   |      
|Forfeited                        |  | (52,020  | ) |  |                               | 31.97 |                                                  |     |                               |   |      
|Expired                          |  | (1,375   | ) |  |                               | 26.59 |                                                  |     |                               |   |      
|                                 |  |          |   |  |                               |       |                                                  |     |                               |   |      
|Outstanding at December 31, 2006 |  | 699,548  |   |  | $                             | 25.34 |                                                  | 6.2 |                               | $ | 7,967
|                                 |  |          |   |  |                               |       |                                                  |     |                               |   |      
|Exercisable at December 31, 2006 |  | 342,221  |   |  | $                             | 21.52 |                                                  | 5.1 |                               | $ | 5,166
|                                 |  |          |   |  |                               |       |                                                  |     |                               |   |      



In connection with
stock options exercised during 2006, the Company received $2.7 million of cash from the settlement of the options on the exercised awards. In addition, the Company recorded a tax benefit from these exercises during the year ended December 31,
2006, of $843,000. Plan participants realized an intrinsic value of $2.2 million from the exercise of these stock options during 2006. In comparison, Plan participants realized an intrinsic value of $2.3 million and $1.0 million from the exercise of
stock options during 2005 and 2004, respectively. As of December 31, 2006, the total compensation cost related to nonvested stock options that have not yet been recognized totaled $2.2 million and the weighted average period which these costs
are expected to be recognized over is approximately 2.8 years.



Restricted
Stock:



Under the Plan, the Company can grant restricted
stock awards that vest upon completion of future service requirements or specified performance criteria. The fair value of these awards is equal to the market price at the date of grant. The Company recognizes stock-based compensation expense for
these awards over the vesting period based upon the number of awards ultimately expected to vest. Restricted stock awards based upon completion of future service requirements vest 50% at the end of year three, 75% at the end of year four and



89



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



100% at the end of year five or upon death, disability, retirement or change of control (as defined in the Plan) of the Company. If a participant terminates
employment prior to the end of the continuous service period, the unearned portion of the stock award is forfeited. The Company may also issue awards that vest upon satisfaction of specified performance criteria. For these types of awards, the final
measure of compensation cost is based upon the number of shares that ultimately vest considering the performance criteria.



In conjunction with the adoption of SFAS 123R, the Company changed its method of attributing the value of restricted stock to compensation expense for
awards in 2006. Prior to 2006, the Company recognized compensation cost for restricted stock over the service period of each separately vesting portion of the award, in effect treating each vesting portion as a separate award. For grants in 2006,
compensation costs are recognized on a straight line basis over the vesting period for the entire award.



The following table provides information regarding nonvested restricted stock:



|                               |  |         |   |  |                                      |      
|------------------------------ |  | ------- | - |  | ------------------------------------ | -----
|Nonvested Restricted Stock     |  | Shares  |   |  | Weighted-AverageGrant-Date FairValue
|Nonvested at January 1, 2006   |  | 113,908 |   |  | $                                    | 29.42
|Granted                        |  | 52,800  |   |  |                                      | 36.48
|Vested                         |  | (18,974 | ) |  |                                      | 22.24
|Forfeited                      |  | (23,425 | ) |  |                                      | 33.34
|                               |  |         |   |  |                                      |      
|Nonvested at December 31, 2006 |  | 124,309 |   |  | $                                    | 32.77
|                               |  |         |   |  |                                      |      



During 2006, the
Company recorded a $100,000 tax benefit from the vesting of restricted stock awards. The fair value of restricted stock awards that vested during 2006 was $670,000, compared to $959,000 and $193,000 during the years ended December 31, 2005 and
2004, respectively. As of December 31, 2006, the total compensation cost related to nonvested restricted stock that has not yet been recognized totaled $2.8 million, and the weighted average period during which these costs are expected to be
recognized over is approximately 3.8 years.



Valuation Information:



The Company uses the modified Black-Scholes
option-pricing model (Black-Scholes model) for determining the fair value of stock options issued to employees and directors. The determination of the fair value of share-based payment awards using the Black-Scholes model is impacted by
the Companys stock price on the date of grant as well as several assumptions used as inputs into the model. The significant assumptions include the risk-free interest rate at grant date, expected stock price volatility, expected dividend
payout, and expected option life.



The risk-free interest rate
assumption is based upon observed interest rates for the expected term of the Companys stock options. For grants in 2006, the expected volatility input into the model takes into account the historical volatility of the Company common stock
over the period that it has been publicly traded and the historical volatility over the expected term of the option of the common stock of a publicly-traded peer group. The expected volatility for grants prior to 2006 was based upon estimates of
volatility of Company common stock considering that prior to October 2002 the common stock was not publicly traded. The expected dividend yield assumption is based upon the Companys historical dividend payout. For options granted in 2006, the
Company used the methodology specified in SAB 107 in determining the expected life of the awards. This



90



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



methodology takes into account the vesting periods and the contractual term of the award. For grants prior to 2006, the expected life was estimated
considering that exercise behaviors were impacted by the limited history of public trading of the Companys common stock.



The following are the significant assumptions used to determine the fair value of stock option awards, using the Black-Scholes model, for each of the
periods indicated:



|                                      |  |                                 |       |   |      |   |       |      |  |   |       |  
|------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                      |  | For the Years EndedDecember 31, |      
|                                      |  | 2006                            |       |   | 2005 |   |       | 2004 | 
|Grant date fair value per share       |  | $                               | 11.76 |   |      | $ | 9.12  |      |  | $ | 6.03  |  
|Significant assumptions:              |  |                                 |       |   |      |   |       |      |  |   |       |  
|Risk-free interest rate at grant date |  |                                 | 4.40  | % |      |   | 4.23  | %    |  |   | 3.40  | %
|Expected stock price volatility       |  |                                 | 27.50 | % |      |   | 19.47 | %    |  |   | 16.02 | %
|Expected dividend payout              |  |                                 | 0.64  | % |      |   | 0.77  | %    |  |   | 0.92  | %
|Expected option life, in years        |  |                                 | 5.25  |   |      |   | 7.00  |      |  |   | 7.00  |  



15.Stockholders
Equity



At both December 31, 2006 and
2005, the authorized capital stock of the Company is 23 million shares, of which 18 million shares are common stock, par value $0.01 per share, and 5 million are preferred shares, par value $0.01 per share. In September 2005, the
authorized capital stock of the Company was reduced. Prior to the reduction, the authorized capital stock of the Company consisted of 30 million shares, of which 25 million shares were common stock, par value $0.01 per share, and
5 million were preferred shares, par value $0.01 per share.



Common
stock:



The holders of outstanding shares of common stock
are entitled to receive dividends out of assets legally available at such times and in such amounts as the Companys Board of Directors may determine. The shares of common stock are neither redeemable nor convertible, and the holders thereof
have no preemptive or subscription rights to purchase any securities of the Company. Upon liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to receive, pro rata, the assets of the Company which are
legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding. Each outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of stockholders.



Preferred stock:



The Companys amended and restated certificate of incorporation
authorizes the Board of Directors to issue preferred stock in classes or series and to establish the designations, preferences, qualifications, limitations or restrictions of any class or series with respect to the rate and nature of dividends, the
price and terms and conditions on which shares may be redeemed, the terms and conditions for conversion or exchange into any other class or series of the stock, voting rights and other terms.



Pursuant to this authority, the Board of Directors had designated 1,530,000
shares as 9.0% Noncumulative Perpetual Preferred Stock, Series A, $25.00 stated value per share. These shares of preferred stock became redeemable at the Companys option on and after January 15, 2002, and on July 16, 2004, the
Company used proceeds from the issuance of $41.2 million of junior subordinated debentures to TAYC Capital Trust II to redeem all the outstanding shares of the Series A 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



91



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



last dividend distribution date. Upon redemption, the shares of preferred stock were canceled and are no longer considered outstanding.



16.Regulatory Disclosures:



The Company and the Bank are subject to various capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the
Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the entitys
assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks and Companys capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.



Quantitative
measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined). Based on these quantitative measures, as of December 31, 2006 and 2005, the Company and the Bank were categorized as well-capitalized.



As of December 31, 2006 and 2005, the Federal Deposit Insurance
Corporation categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized well-capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. At December 31, 2006, there were no conditions or events since that notification that management believes have changed the institutions category.



92



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Companys and the Banks actual capital amounts and ratios as of December 31, 2006
and 2005 are presented in the following table:



|                                          |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|----------------------------------------- |  | ---------------------- |  | ----- | ----------------------------- |  | --------- | ------------------------------------------------------------- | ----- | - |  | --------- |  | ------ | -
|                                          |  | Actual                 |  |       | For Capital Adequacy Purposes |  |           | To Be Well CapitalizedUnder PromptCorrective ActionProvisions |      
|                                          |  | Amount                 |  | Ratio |                               |  | Amount    |                                                               | Ratio |   |  | Amount    |  | Ratio  |  
|                                          |  | (dollars in thousands) | 
|As of December 31, 2006:                  |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|Total Capital (to Risk Weighted Assets):  |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|Taylor Capital Group, Inc.  Consolidated |  | $372,451               |  | 13.35 | %                             |  | >$223,140 |                                                               | >8.00 | % |  | >$278,925 |  | >10.00 | %
|Cole Taylor Bank                          |  | 334,293                |  | 12.01 |                               |  | >222,706  |                                                               | >8.00 |   |  | >278,382  |  | >10.00 |  
|Tier I Capital (to Risk Weighted Assets): |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|Taylor Capital Group, Inc.  Consolidated |  | $337,553               |  | 12.10 | %                             |  | >$111,570 |                                                               | >4.00 | % |  | >$167,355 |  | >6.00  | %
|Cole Taylor Bank                          |  | 299,462                |  | 10.76 |                               |  | >111,353  |                                                               | >4.00 |   |  | >167,029  |  | >6.00  |  
|Leverage (to Average Assets):             |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|Taylor Capital Group, Inc.  Consolidated |  | $337,553               |  | 10.17 | %                             |  | >$132,825 |                                                               | >4.00 | % |  | >$166,031 |  | >5.00  | %
|Cole Taylor Bank                          |  | 299,462                |  | 9.04  |                               |  | >132,488  |                                                               | >4.00 |   |  | >165,610  |  | >5.00  |  
|As of December 31, 2005:                  |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|Total Capital (to Risk Weighted Assets):  |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|Taylor Capital Group, Inc.  Consolidated |  | $324,050               |  | 12.02 | %                             |  | >$215,693 |                                                               | >8.00 | % |  | >$269,617 |  | >10.00 | %
|Cole Taylor Bank                          |  | 300,510                |  | 11.16 |                               |  | >215,325  |                                                               | >8.00 |   |  | >269,156  |  | >10.00 |  
|Tier I Capital (to Risk Weighted Assets): |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|Taylor Capital Group, Inc.  Consolidated |  | $281,480               |  | 10.44 | %                             |  | >$107,847 |                                                               | >4.00 | % |  | >$161,770 |  | >6.00  | %
|Cole Taylor Bank                          |  | 266,818                |  | 9.91  |                               |  | >107,662  |                                                               | >4.00 |   |  | >161,494  |  | >6.00  |  
|Leverage (to Average Assets):             |  |                        |  |       |                               |  |           |                                                               |       |   |  |           |  |        |  
|Taylor Capital Group, Inc.  Consolidated |  | $281,480               |  | 8.90  | %                             |  | >$126,475 |                                                               | >4.00 | % |  | >$158,094 |  | >5.00  | %
|Cole Taylor Bank                          |  | 266,818                |  | 8.46  |                               |  | >126,182  |                                                               | >4.00 |   |  | >157,727  |  | >5.00  |  



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 December 31, 2006, that the Bank could declare and pay to the Company, without the approval of regulatory authorities, amounted to approximately
$84.6 million. However, payment of such dividends is also subject to the Bank remaining in compliance with all applicable capital ratios.



17.Commitments and Financial Instruments with Off-Balance Sheet Risks



Commitments:



The Company is obligated in accordance with the terms of various long-term noncancelable operating leases for certain premises (land and building) and
office space and equipment, including the Companys principal offices. The terms of the leases generally require periodic adjustment of the minimum lease payments based on



93



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



an increase in the consumer price index. In addition, the Company is obligated to pay the real estate taxes assessed on the properties and certain
maintenance costs. Certain of the leases contain renewal options for periods of up to five years. Total rental expense for the Company in connection with these leases for the years ended December 31, 2006, 2005, and 2004 was approximately $4.7
million, $4.5 million, and $4.6 million, respectively.



In
January 2007, the Company entered into a new operating lease and will move its administrative offices currently located on West Washington to the new space when the existing lease at West Washington expires in December 2007. Estimated future minimum
rental commitments under all operating leases as of December 31, 2006 are as follows, adjusted for the new operating lease for the West Washington space:



|           |  |                |       
|---------- |  | -------------- | ------
|Year       |  | Amount        
|           |  | (in thousands)
|2007       |  | $              | 3,227 
|2008       |  |                | 2,984 
|2009       |  |                | 3,381 
|2010       |  |                | 3,343 
|2011       |  |                | 3,416 
|Thereafter |  |                | 19,301
|           |  |                |       
|Total      |  | $              | 35,652
|           |  |                |       



Financial Instruments with
Off-Balance Sheet Risks:



At times, the Company is party
to various financial instruments with off-balance sheet risk. The Company uses these financial instruments in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit
and financial guarantees, such as financial and performance standby letters of credit. When viewed in terms of the maximum exposure, those instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount
recognized in the Consolidated Balance Sheet. Credit risk is the possibility that a counterparty to a financial instrument will be unable to perform its contractual obligations. Interest rate risk is the possibility that, due to changes in economic
conditions, the Companys net interest income will be adversely affected.



The Company mitigates its exposure to credit risk through its internal controls over the extension of credit. These controls include the process of credit approval and review, the establishment of credit limits, and,
when deemed necessary, securing collateral. Collateral held varies but may include deposits held in financial institutions; U.S. Treasury securities; other marketable securities; income-producing commercial or multi-family rental properties, vacant
land or land under development; accounts receivable; inventories; and property, plant and equipment. The Company manages its exposure to interest rate risk generally by setting variable rates of interest on extensions of credit and administered
rates on interest bearing non-maturity deposits and, on a limited basis, by using derivative financial instruments to offset existing interest rate risk of its assets and liabilities.



The following is a summary of the contractual or notional amount of each significant class of financial instrument with
off-balance sheet credit risk outstanding. The Companys maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and financial guarantees is represented by
the contractual notional amount of these instruments.



94



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2006 and 2005, the contractual amounts were as follows:



|                                                                      |  |                |         |      |   |        
|--------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                                      |  | 2006           |         | 2005
|                                                                      |  | (in thousands)
|Financial instruments wherein contract amounts represent credit risk: |  |                |         |      |   |        
|Commitments to extend credit                                          |  | $              | 914,662 |      | $ | 925,458
|Financial guarantees:                                                 |  |                |         |      |   |        
|Financial standby letters of credit                                   |  |                | 56,885  |      |   | 55,130 
|Performance standby letters of credit                                 |  |                | 53,304  |      |   | 55,487 



Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many
customers do not utilize the total approved commitments amounts. Historically, only approximately 60% of available commitment amounts are drawn. Therefore, the total commitment amounts do not usually represent future cash requirements.



The Company issues financial guarantees in the form of financial and
performance standby letters of credit to meet the needs of customers. Financial standby letters of credit are conditional commitments issued by the Company to guarantee the payment of a specified financial obligation of a customer to a third party.
Performance standby letters of credit are conditional commitments issued by the Company to make a payment to a specified third party in the event a customer fails to perform under a nonfinancial contractual obligation. The terms of these financial
guarantees primarily range from less than one year to three years. A liability is recognized if it is probable that it has been incurred by the Company under a standby letter of credit. The credit risk involved in issuing these letters of credit is
essentially the same as that involved in extending loan facilities to customers. Management expects most of the Companys letters of credit to expire undrawn. Management expects no significant loss from its obligation under these financial
guarantees.



18.Derivative Financial Instruments



The Company uses derivative financial instruments,
including interest rate exchange contracts (swaps) and interest rate floor and collar agreements, to assist in interest rate risk management. An interest rate swap is an agreement in which two parties agree to exchange, at specified
intervals, interest payment streams calculated on an agreed-upon notional principal amount with at least one stream based on a specified floating-rate index. Under an interest rate floor agreement, in the event a specified floating-rate index
decreases below a pre-determined interest rate floor level, the Company will receive an amount, from the counterparty, equal to the difference between the floor level and the current floating-rate index computed based upon the notional amount. In an
interest rate collar agreement, a pre-determined floor and ceiling interest rate levels are set with the counterparty. If the specified floating-rate index decreases below the interest rate floor level, the Company will receive an amount equal to
the difference between the floor level and the current floating-rate index, computed based upon the notional amount. If the specified floating-rate index increases above the interest rate ceiling level, the Company will pay an amount equal to the
difference between the current floating-rate index and the ceiling level, computed based upon the notional amount. For all types of these agreements, the notional amount does not represent the direct credit exposure. The Company is exposed to
credit-related losses in the event of non-performance by the counterparty on the interest rate exchange or floor or collar payment, but does not anticipate that any counterparty will fail to meet its payment obligation.



The Company has used these types of derivative agreements in the interest
rate risk management of its portfolio of prime-based loans and its portfolio of brokered certificates of deposit. The following table describes



95



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the derivative instruments outstanding at both December 31, 2006 and 2005 related to the Companys portfolio of prime-based loans (dollars in
thousands):



|             |  |                 |         |              |   |              |  |                  |  |              |  |              |       |  |   |        |  
|------------ |  | --------------- | ------- | ------------ | - | ------------ |  | ---------------- |  | ------------ |  | ------------ | ----- |  | - | ------ | -
|             |  | Notional Amount |         |              |   |              |  | Fair Value       | 
|Product      |  | Dec. 31,2006    |         | Dec. 31,2005 |   | Strike Rates |  | Maturity         |  | Dec. 31,2006 |  | Dec. 31,2005 |      
|Prime Swap   |  | $               |        |              | $ | 50,000       |  | 6.04%            |  | 9/2/2007     |  | $            |      |  | $ | (1,343 | )
|Prime Floor  |  |                 | 100,000 |              |   | 100,000      |  | 5.50%            |  | 6/30/2010    |  |              | 75    |  |   | 211    |  
|Prime Floor  |  |                 | 100,000 |              |   | 100,000      |  | 6.25%            |  | 7/12/2010    |  |              | 193   |  |   | 507    |  
|Prime Collar |  |                 | 150,000 |              |   |             |  | 7.75% and 8.505% |  | 5/5/2009     |  |              | 587   |  |   |       |  
|Prime Collar |  |                 | 150,000 |              |   |             |  | 7.75% and 8.585% |  | 5/5/2010     |  |              | 1,094 |  |   |       |  
|             |  |                 |         |              |   |              |  |                  |  |              |  |              |       |  |   |        |  
|Total        |  | $               | 500,000 |              | $ | 250,000      |  |                  |  |              |  |              |       |  |   |        |  
|             |  |                 |         |              |   |              |  |                  |  |              |  |              |       |  |   |        |  



At December 31,
2005, the Company had a three-year interest rate swap, with a notional amount of $50.0 million, to hedge the variability in cash flows on certain prime-based commercial loans. Under the terms of the interest rate swap, the Company received a fixed
interest rate of 6.04% and paid a floating rate based upon the prime-lending rate until the agreements scheduled. This contract was accounted for as a cash flow hedge and was 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. Net cash settlements for this interest rate swap were reported as a reduction of loan interest income of $254,000 and $24,000 in 2006 and 2005, respectively.
The Company terminated this agreement in May 2006. The fair value of the interest rate swap at termination was $1.4 million. The loss realized upon termination was deferred and is amortized as a reduction of loan interest income over what would have
been the remaining life of the derivative, which was scheduled to mature in September 2007. During 2006, $722,000 of this deferred loss was amortized as a reduction in loan interest income and the remaining $722,000 of the deferred loss will be
amortized in 2007.



During 2005, the Company entered into two
interest rate floor agreements, each with a notional amount of $100.0 million. Each of the floor agreements was originally designated as a cash flow hedge against interest receipts from prime-based loans. In May 2006, the Company de-designated the
floor agreement with the floor interest rate of 5.50%. The fair value of the floor on the date of de-designation was $39,000. Upon de-designation, the balance in accumulated other comprehensive income, which was comprised of the change in fair value
since inception less amortization of the original floor cost, net of tax, will be amortized to loan interest income over the remaining four year term of the floor. During 2006, $7,000 of the balance in accumulated other comprehensive income was
reclassed as a reduction in loan interest income and $76,000 is expected to be reclassified in 2007. Changes in the fair value of the floor subsequent to its de-designation are reported in noninterest income. During 2006 the increase in the fair
value of this de-designated floor of $36,000 was reflected in noninterest income. The Company did not receive any payments in 2005 or 2006 under this floor agreement.



During 2006, the Company entered into two interest rate collar agreements, each with a notional amount of $150.0 million, to
hedge the variability in cash flow on certain prime-based commercial loans. One of the collars has a floor interest rate of 7.75% and a ceiling interest rate of 8.505% and is scheduled to mature in May 2009. The second collar agreement has a floor
interest rate of 7.75% and a ceiling interest rate of 8.585% and is scheduled to mature in May 2010.



The Company has designated the floor agreement with a floor interest rate of 6.25%, and the two prime collars entered into during 2006 as cash flow hedges
against interest receipts from prime-based loans. The fair values of these derivatives are recorded as an asset or liability with the effective portion of the corresponding



96



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



gain or loss recorded in other comprehensive income in stockholders equity, net of tax. All of the cash flow hedges have been highly effective. The
Company has not received payments or made payments under the designated floor or collars in 2005 or 2006. The premium on the floor is amortized to loan interest income in proportion to the expected value of the floor, calculated at inception, in
each of the future periods. During 2006, loan interest income was reduced by $44,000 for amortization of the floor premium, and $193,000 of amortization is expected for 2007. The collars were entered into at no cost to the Company.



During 2003, the Company terminated, with the original counterparties,
interest rate exchange contracts with a total notional amount of $200 million that were used to hedge the variability of cash flows of $200 million of prime rate-based commercial loans. The Company had accounted for these transactions as cash flow
hedges, and the resulting gain on termination, which totaled $1.4 million, was deferred and recorded in accumulated other comprehensive income in stockholders equity. The amount of the deferred gain included in accumulated other comprehensive
income at December 31, 2006 and 2005, was $326,000 and $498,000, respectively, net of tax. This deferred gain will be reclassified as an adjustment to interest income over the remaining term of the original interest rate exchange contracts. For
the years ended December 31, 2006 and 2005, $172,000 of this deferred gain was reclassified into interest income during each year. In addition, $197,000 of this deferred gain is expected to be reclassified into interest income during 2007.



The Company has also used interest rate swaps (CD
swaps) to hedge the interest rate risk inherent in certain of its brokered certificates of deposits (brokered CDs). The CD swaps were used to convert the fixed rate paid on the brokered CDs to a variable rate based upon 3-month
LIBOR.



The following table sets forth the activity in the
notional amounts and fair value of the CD swaps during 2006 and 2005:



|                         |  |                |          |   |                   |   |        |             |  |      |         |  |      |              |  |    
|------------------------ |  | -------------- | -------- | - | ----------------- | - | ------ | ----------- |  | ---- | ------- |  | ---- | ------------ |  | ---
|                         |  | CD Swaps       |          |   | Weighted Averages
|                         |  | NotionalAmount |          |   | FairValue         |   |        | ReceiveRate |  |      | PayRate |  |      | Life inYears
|                         |  | (in thousands) |          |   |                   |   |        |             |  |      |        
|Balance at Dec. 31, 2004 |  | $              | 130,000  |   |                   | $ | (2,001 | )           |  | 3.15 | %       |  | 2.21 | %            |  | 5.7
|Additions                |  |                | 190,000  |   |                   |   |        |             |  |      |         |  |      |              |  |    
|Terminations\calls       |  |                |         |   |                   |   |        |             |  |      |         |  |      |              |  |    
|                         |  |                |          |   |                   |   |        |             |  |      |         |  |      |              |  |    
|Balance at Dec. 31, 2005 |  |                | 320,000  |   |                   |   | (7,140 | )           |  | 4.09 | %       |  | 4.30 | %            |  | 4.8
|Additions                |  |                | 20,000   |   |                   |   |        |             |  |      |         |  |      |              |  |    
|Maturities               |  |                | (10,000  | ) |                   |   |        |             |  |      |         |  |      |              |  |    
|Terminations             |  |                | (330,000 | ) |                   |   |        |             |  |      |         |  |      |              |  |    
|                         |  |                |          |   |                   |   |        |             |  |      |         |  |      |              |  |    
|Balance at Dec. 31, 2006 |  | $              |         |   |                   |   |        |             |  |      |         |  |      |              |  |    
|                         |  |                |          |   |                   |   |        |             |  |      |         |  |      |              |  |    



In May 2006, the
Company terminated all of the $330.0 million notional amount of CD swaps that had been used as fair value hedges against brokered CDs. The termination of the swaps resulted in a $100,000 charge that was recorded in other derivative expense included
in noninterest income. Upon termination, the associated cumulative fair value adjustment to the hedged brokered CDs of $3.7 million is being amortized into deposit interest expense over the remaining life of the CDs using an effective yield method.
During 2006, $587,000 of this fair value adjustment was amortized as additional deposit interest expense, and $804,000 of this adjustment is expected to be amortized in 2007.



Prior to November 18, 2005, these transactions did not qualify for fair value hedge accounting under SFAS 133. On
November 18, 2005, the Company designated a portion of these CD swaps as fair value hedges. As fair



97



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



value hedges, the net cash settlements from the designated swaps were reported as part of net interest income. In addition, the Company recognized in current
earnings the change in fair value of both the interest rate swap and related hedged brokered CDs, with the ineffective portion of the hedge relationship reported in noninterest income. The fair value of the CD swaps was reported on the Consolidated
Balance Sheets in accrued interest, taxes and other liabilities and the change in fair value of the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered CDs.



Prior to November 18, 2005 and for the portion of CD swaps that are not
designated as fair value hedges, the Company reported the net cash settlements and the change in the fair value of these CD swaps as separate components of noninterest income. The fair value of the CD swaps was reported on the Consolidated Balance
Sheets in accrued interest, taxes and other liabilities.



19.Fair
Value of Financial Instruments



SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the estimated fair value of financial instruments. A significant portion of the Companys assets and liabilities are considered financial
instruments as defined in SFAS No. 107. Many of the Companys financial instruments, however, lack an available, or readily determinable, trading market as characterized by a willing buyer and willing seller engaging in an exchange
transaction. The Company used significant estimations and present value calculations for the purposes of estimating fair values. Accordingly, fair values are based on various factors relative to current economic conditions, risk characteristics, and
other factors. The assumptions and estimates used in the fair value determination process are subjective in nature and involve uncertainties and significant judgment and, therefore, fair values cannot be determined with precision. Changes in
assumptions could significantly affect these estimated values.



The methods and assumptions used to determine fair values for each significant class of financial instruments are presented below:



Cash and Cash Equivalents:



The carrying amount of cash, due from banks, interest-bearing deposits with banks or other financial institutions, federal funds sold, and securities
purchased under agreement to resell with original maturities less than 90 days approximate fair value since their maturities are short-term.



Investment Securities:



Fair values for investment securities are determined from quoted market prices. If a quoted market price is not available, fair value is estimated using
quoted market prices for similar instruments.



Loans:



Fair values of loans have been estimated by the present value of future cash
flows, using current rates at which similar loans would be made to borrowers with the same remaining maturities.



Investment in FHLB and Federal Reserve Bank stock:



The fair value of these investments in FHLB and Federal Reserve Bank Stock equals its book value as these stocks can only be sold back to the FHLB,
Federal Reserve Bank, or other member banks at their par value per share.



98



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Accrued Interest Receivable:



The carrying amount of accrued interest receivable approximates fair value since its maturity is short-term.



Derivative Financial Instruments:



The carrying amount and fair value of existing derivative financial
instruments are based upon independent valuation models. On the Companys Consolidated Balance Sheets, instruments that have a positive fair value are included in other assets and those instruments that have a negative fair value are included
in accrued interest, taxes, and other liabilities.



Other Assets:



Financial instruments in other assets consist of assets
in the Companys nonqualified deferred compensation plan. The carrying value of these assets approximates their fair value and are based upon quoted market prices.



Deposit Liabilities:



Deposit liabilities with stated maturities have been valued at the present value of future cash flows using rates which approximate current market rates
for similar instruments; unless this calculation results in a present value which is less than the book value of the reflected deposit, in which case the book value would be utilized as an estimate of fair value. Fair values of deposits without
stated maturities equal the respective amounts due on demand.



Other
Borrowings:



The carrying amount of overnight securities
sold under agreements to repurchase, federal funds purchased, and the U.S. Treasury tax and loan note option, approximates fair value, as the maturities of these borrowings are short-term. Securities sold under agreements to repurchase with original
maturies over one year have been valued at the present values of future cash flows using rates which approximate current market rates for instruments of like maturities.



Notes Payable and FHLB Advances:



Notes payable and FHLB advances have been valued at the present values of future cash flows using rates which approximate current market rates for
instruments of like maturities.



Accrued Interest Payable:



The carrying amount of accrued interest payable approximates fair value
since its maturity is short-term.



Junior subordinated debentures:



The fair value of the fixed rate junior subordinated
debentures issued to TAYC Capital Trust I is computed based upon the publicly quoted market prices of the underlying trust preferred securities issued by the Trust. The fair value of the floating rate junior subordinated debentures issued to TAYC
Capital Trust II is assumed to approximate its carrying value as the underlying interest rate adjusts quarterly based upon short-term market interest rates.



99



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Off-Balance Sheet Financial Instruments:



The fair value of commercial loan commitments to extend credit are not material as they are predominantly floating rate,
subject to material adverse change clauses, cancelable and not readily marketable. The carrying value and the fair value of standby letters of credit represents the unamortized portion of the fee paid by the customer.



The estimated fair values of the Companys financial instruments are as
follows:



|                                                  |  |                   |           |                   |   |               |  |            |           |  |   |          
|------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | ------------- |  | ---------- | --------- |  | - | ---------
|                                                  |  | December 31, 2006 |           | December 31, 2005
|                                                  |  | CarryingValue     |           | Fair Value        |   | CarryingValue |  | Fair Value
|                                                  |  | (in thousands)   
|Financial Assets:                                 |  |                   |           |                   |   |               |  |            |           |  |   |          
|Cash and cash equivalents                         |  | $                 | 134,920   |                   | $ | 134,920       |  | $          | 161,065   |  | $ | 161,065  
|Investments                                       |  |                   | 669,085   |                   |   | 669,085       |  |            | 656,753   |  |   | 656,753  
|Loans, net of allowance                           |  |                   | 2,463,169 |                   |   | 2,452,554     |  |            | 2,347,450 |  |   | 2,341,199
|Investment in FHLB and Federal Reserve Bank stock |  |                   | 11,805    |                   |   | 11,805        |  |            | 12,946    |  |   | 12,946   
|Accrued interest receivable                       |  |                   | 19,174    |                   |   | 19,174        |  |            | 19,118    |  |   | 19,118   
|Derivative financial instruments                  |  |                   | 1,949     |                   |   | 1,949         |  |            | 718       |  |   | 718      
|Other assets                                      |  |                   | 5,626     |                   |   | 5,626         |  |            | 4,379     |  |   | 4,379    
|                                                  |  |                   |           |                   |   |               |  |            |           |  |   |          
|Total financial assets                            |  | $                 | 3,305,728 |                   | $ | 3,295,113     |  | $          | 3,202,429 |  | $ | 3,196,178
|                                                  |  |                   |           |                   |   |               |  |            |           |  |   |          
|Financial Liabilities:                            |  |                   |           |                   |   |               |  |            |           |  |   |          
|Deposits without stated maturities                |  | $                 | 1,397,818 |                   | $ | 1,397,818     |  | $          | 1,287,254 |  | $ | 1,287,254
|Deposits with stated maturities                   |  |                   | 1,242,109 |                   |   | 1,242,109     |  |            | 1,256,390 |  |   | 1,256,390
|Other borrowings                                  |  |                   | 262,319   |                   |   | 263,158       |  |            | 298,426   |  |   | 299,180  
|Notes payable and FHLB advances                   |  |                   | 80,000    |                   |   | 79,924        |  |            | 75,000    |  |   | 73,867   
|Accrued interest payable                          |  |                   | 14,405    |                   |   | 14,405        |  |            | 9,794     |  |   | 9,794    
|Derivative financial instruments                  |  |                   |          |                   |   |              |  |            | 8,483     |  |   | 8,483    
|Junior subordinated debentures                    |  |                   | 86,607    |                   |   | 87,533        |  |            | 87,638    |  |   | 92,000   
|                                                  |  |                   |           |                   |   |               |  |            |           |  |   |          
|Total financial liabilities                       |  | $                 | 3,083,258 |                   | $ | 3,084,947     |  | $          | 3,022,985 |  | $ | 3,026,968
|                                                  |  |                   |           |                   |   |               |  |            |           |  |   |          
|Off-Balance-Sheet Financial Instruments:          |  |                   |           |                   |   |               |  |            |           |  |   |          
|Commitments to extend credit                      |  | $                 |          |                   | $ |              |  | $          |          |  | $ |         
|Standby letters of credit                         |  |                   | 209       |                   |   | 209           |  |            | 311       |  |   | 311      
|                                                  |  |                   |           |                   |   |               |  |            |           |  |   |          
|Total off-balance-sheet financial instruments     |  | $                 | 209       |                   | $ | 209           |  | $          | 311       |  | $ | 311      
|                                                  |  |                   |           |                   |   |               |  |            |           |  |   |          



The remaining balance
sheet assets and liabilities of the Company are not considered financial instruments and have not been valued differently than is required under historical cost accounting. Since assets and liabilities that are not financial instruments are excluded
above, the difference between total financial assets and financial liabilities does not, nor is it intended to, represent the market value of the Company. Furthermore, the estimated fair value information may not be comparable between financial
institutions due to the wide range of valuation techniques permitted, and assumptions necessitated, in the absence of an available trading market.



20.Litigation:



The Company is, 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 the Company that are likely to have a material adverse impact on its business, financial condition, liquidity or operating results.



100



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



21.Parent Company Only



Summarized unconsolidated financial information of Taylor Capital Group, Inc. is as follows:



BALANCE SHEETS

(in thousands)



|                                                  |  |              |         |      |   |        
|------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                  |  | December 31,
|                                                  |  | 2006         |         | 2005
|ASSETS                                            |  |              |         |      |   |        
|Noninterest-bearing deposits with subsidiary Bank |  | $            | 34,934  |      | $ | 34,521 
|Investment in bank subsidiary                     |  |              | 317,102 |      |   | 280,861
|Investment in non-bank subsidiaries               |  |              | 2,616   |      |   | 2,646  
|Other assets                                      |  |              | 5,360   |      |   | 4,547  
|                                                  |  |              |         |      |   |        
|Total assets                                      |  | $            | 360,012 |      | $ | 322,575
|                                                  |  |              |         |      |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY              |  |              |         |      |   |        
|Accrued interest, taxes and other liabilities     |  | $            | 2,213   |      | $ | 15,619 
|Notes payable                                     |  |              |        |      |   |       
|Junior subordinated debentures                    |  |              | 86,607  |      |   | 87,638 
|Stockholders equity                              |  |              | 271,192 |      |   | 219,318
|                                                  |  |              |         |      |   |        
|Total liabilities and stockholders equity        |  | $            | 360,012 |      | $ | 322,575
|                                                  |  |              |         |      |   |        



STATEMENTS OF INCOME

(in thousands)



|                                                                             |  |                                 |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                             |  | For the Years EndedDecember 31, |       
|                                                                             |  | 2006                            |        |   | 2005 |   |        | 2004 | 
|Income:                                                                      |  |                                 |        |   |      |   |        |      |  |   |        |  
|Dividends from subsidiary Bank                                               |  | $                               | 10,000 |   |      | $ | 6,000  |      |  | $ | 8,000  |  
|Dividends from non-bank subsidiary                                           |  |                                 | 232    |   |      |   | 211    |      |  |   | 164    |  
|                                                                             |  |                                 |        |   |      |   |        |      |  |   |        |  
|Total income                                                                 |  |                                 | 10,232 |   |      |   | 6,211  |      |  |   | 8,164  |  
|                                                                             |  |                                 |        |   |      |   |        |      |  |   |        |  
|Expenses:                                                                    |  |                                 |        |   |      |   |        |      |  |   |        |  
|Interest                                                                     |  |                                 | 7,815  |   |      |   | 7,577  |      |  |   | 5,507  |  
|Salaries and employee benefits                                               |  |                                 | 2,203  |   |      |   | 2,374  |      |  |   | 1,655  |  
|Legal fees, net                                                              |  |                                 | 705    |   |      |   | 717    |      |  |   | 624    |  
|Other                                                                        |  |                                 | 2,130  |   |      |   | 2,459  |      |  |   | 2,931  |  
|                                                                             |  |                                 |        |   |      |   |        |      |  |   |        |  
|Total expenses                                                               |  |                                 | 12,853 |   |      |   | 13,127 |      |  |   | 10,717 |  
|                                                                             |  |                                 |        |   |      |   |        |      |  |   |        |  
|Loss before income taxes, equity in undistributed net income of subsidiaries |  |                                 | (2,621 | ) |      |   | (6,916 | )    |  |   | (2,553 | )
|Income tax benefit                                                           |  |                                 | 18,538 |   |      |   | 4,598  |      |  |   | 5,209  |  
|Equity in undistributed net income of subsidiaries                           |  |                                 | 30,246 |   |      |   | 34,089 |      |  |   | 20,317 |  
|                                                                             |  |                                 |        |   |      |   |        |      |  |   |        |  
|Net income                                                                   |  | $                               | 46,163 |   |      | $ | 31,771 |      |  | $ | 22,973 |  
|                                                                             |  |                                 |        |   |      |   |        |      |  |   |        |  



101



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                         |  | For the Years Ended December 31, |        
|                                                                                         |  | 2006                             |         |   | 2005 |   |         | 2004 | 
|Cash flows from operating activities:                                                    |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net income                                                                               |  | $                                | 46,163  |   |      | $ | 31,771  |      |  | $ | 22,973  |  
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |                                  |         |   |      |   |         |      |  |   |         |  
|Amortization of stock-based compensation                                                 |  |                                  | 806     |   |      |   | 184     |      |  |   | 21      |  
|Equity in undistributed net income of subsidiaries                                       |  |                                  | (30,246 | ) |      |   | (34,089 | )    |  |   | (20,317 | )
|Other, net                                                                               |  |                                  | (659    | ) |      |   | 38      |      |  |   | 81      |  
|Changes in assets and liabilities:                                                       |  |                                  |         |   |      |   |         |      |  |   |         |  
|Other assets                                                                             |  |                                  | (805    | ) |      |   | 783     |      |  |   | 554     |  
|Other liabilities                                                                        |  |                                  | (13,862 | ) |      |   | 278     |      |  |   | (715    | )
|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by operating activities                                      |  |                                  | 1,397   |   |      |   | (1,035  | )    |  |   | 2,597   |  
|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                    |  |                                  |         |   |      |   |         |      |  |   |         |  
|Investment in TAYC Capital Trust II                                                      |  |                                  |        |   |      |   |        |      |  |   | (1,239  | )
|Redemption of shares of TAYC Capital Trust I                                             |  |                                  | 31      |   |      |   |        |      |  |   |        |  
|Other, net                                                                               |  |                                  | (8      | ) |      |   | (10     | )    |  |   | 17      |  
|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                    |  |                                  | 23      |   |      |   | (10     | )    |  |   | (1,222  | )
|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                    |  |                                  |         |   |      |   |         |      |  |   |         |  
|Repayments of notes payable                                                              |  |                                  |        |   |      |   | (10,500 | )    |  |   |        |  
|Proceeds from issuance of junior subordinated debentures                                 |  |                                  |        |   |      |   |        |      |  |   | 41,238  |  
|Repurchase of junior subordinated debentures                                             |  |                                  | (1,031  | ) |      |   |        |      |  |   |        |  
|Dividends paid                                                                           |  |                                  | (2,651  | ) |      |   | (2,402  | )    |  |   | (4,159  | )
|Proceeds from the issuance of common stock, net                                          |  |                                  |        |   |      |   | 38,950  |      |  |   |        |  
|Redemption of Series A preferred stock                                                   |  |                                  |        |   |      |   |        |      |  |   | (38,250 | )
|Proceeds from the exercise of employee stock options                                     |  |                                  | 2,675   |   |      |   | 2,637   |      |  |   | 2,552   |  
|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                      |  |                                  | (1,007  | ) |      |   | 28,685  |      |  |   | 1,381   |  
|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  
|Net increase in cash and cash equivalents                                                |  |                                  | 413     |   |      |   | 27,640  |      |  |   | 2,756   |  
|Cash and cash equivalents, beginning of year                                             |  |                                  | 34,521  |   |      |   | 6,881   |      |  |   | 4,125   |  
|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of year                                                   |  | $                                | 34,934  |   |      | $ | 34,521  |      |  | $ | 6,881   |  
|                                                                                         |  |                                  |         |   |      |   |         |      |  |   |         |  



102



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



22.Other Comprehensive Income



The following table presents other comprehensive income for the years ended
December 31, 2006, 2005, and 2004:



|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  
|------------------------------------------------------------------------------------------------ |  | --------------- | ------- | - | --------- | - | ------ | --------- |  | - | ------ | -
|                                                                                                 |  | BeforeTaxAmount |         |   | TaxEffect |   |        | Net ofTax | 
|                                                                                                 |  | (in thousands)  |        
|Year ended December 31, 2004:                                                                    |  |                 |         |   |           |   |        |           |  |   |        |  
|Unrealized losses from securities:                                                               |  |                 |         |   |           |   |        |           |  |   |        |  
|Change in unrealized losses on available-for-sale securities                                     |  | $               | (6,744  | ) |           | $ | 2,360  |           |  | $ | (4,384 | )
|Less: reclassification adjustment for gains included in net income                               |  |                 | (144    | ) |           |   | 51     |           |  |   | (93    | )
|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  
|Change in unrealized losses on available-for-sale securities, net of reclassification adjustment |  |                 | (6,888  | ) |           |   | 2,411  |           |  |   | (4,477 | )
|Change in net unrealized loss from cash flow hedging instruments                                 |  |                 | (520    | ) |           |   | 182    |           |  |   | (338   | )
|Change in deferred gain and losses from termination of cash flow hedging instruments             |  |                 | (265    | ) |           |   | 93     |           |  |   | (172   | )
|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  
|Other comprehensive loss                                                                         |  | $               | (7,673  | ) |           | $ | 2,686  |           |  | $ | (4,987 | )
|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  
|Year ended December 31, 2005:                                                                    |  |                 |         |   |           |   |        |           |  |   |        |  
|Unrealized losses from securities:                                                               |  |                 |         |   |           |   |        |           |  |   |        |  
|Change in unrealized losses on available-for-sale securities                                     |  | $               | (11,259 | ) |           | $ | 3,941  |           |  | $ | (7,318 | )
|Less: reclassification adjustment for gains included in net income                               |  |                 | (127    | ) |           |   | 44     |           |  |   | (83    | )
|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  
|Change in unrealized losses on available-for-sale securities, net of reclassification adjustment |  |                 | (11,386 | ) |           |   | 3,985  |           |  |   | (7,401 | )
|Change in net unrealized gain (loss) from cash flow hedging instruments                          |  |                 | (1,815  | ) |           |   | 635    |           |  |   | (1,180 | )
|Change in deferred gain and losses from termination of cash flow hedging instruments             |  |                 | (265    | ) |           |   | 93     |           |  |   | (172   | )
|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  
|Other comprehensive loss                                                                         |  | $               | (13,466 | ) |           | $ | 4,713  |           |  | $ | (8,753 | )
|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  
|Year ended December 31, 2006:                                                                    |  |                 |         |   |           |   |        |           |  |   |        |  
|Change in unrealized losses on available-for-sale securities                                     |  | $               | 3,439   |   |           | $ | (827   | )         |  | $ | 2,612  |  
|Change in net unrealized gain (loss) from cash flow hedging instruments                          |  |                 | 3,132   |   |           |   | (1,127 | )         |  |   | 2,005  |  
|Change in deferred gain and losses from termination of cash flow hedging instruments             |  |                 | (1,530  | ) |           |   | 535    |           |  |   | (995   | )
|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  
|Other comprehensive income                                                                       |  | $               | 5,041   |   |           | $ | (1,419 | )         |  | $ | 3,622  |  
|                                                                                                 |  |                 |         |   |           |   |        |           |  |   |        |  



103



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



23.Earnings Per Share



The following table sets forth the computation of basic and diluted earnings per common share. For the years ended
December 31, 2006 and 2004, stock options outstanding to purchase 207,921 and 210,150 common shares, respectively, were not included in the computation of diluted earnings per share because the effect would have been antidilutive. All stock
options outstanding were included in the computation of diluted earnings per share for the year ended December 31, 2005.



|                                                   |  |                                                           |            |      |   |            |  |   |           |  
|-------------------------------------------------- |  | --------------------------------------------------------- | ---------- | ---- | - | ---------- |  | - | --------- | -
|                                                   |  | For the Years Ended December 31,                          |           
|                                                   |  | 2006                                                      |            | 2005 |   | 2004       | 
|                                                   |  | (dollars in thousands, except shareand per share amounts) |           
|Net income                                         |  | $                                                         | 46,163     |      | $ | 31,771     |  | $ | 22,973    |  
|Preferred dividend requirements                    |  |                                                           |           |      |   |           |  |   | (1,875    | )
|                                                   |  |                                                           |            |      |   |            |  |   |           |  
|Net income available to common stockholders        |  | $                                                         | 46,163     |      | $ | 31,771     |  | $ | 21,098    |  
|                                                   |  |                                                           |            |      |   |            |  |   |           |  
|Weighted average common shares outstanding         |  |                                                           | 10,940,162 |      |   | 10,045,358 |  |   | 9,539,242 |  
|Dilutive effect of stock options                   |  |                                                           | 178,656    |      |   | 241,289    |  |   | 105,273   |  
|                                                   |  |                                                           |            |      |   |            |  |   |           |  
|Diluted weighted average common shares outstanding |  |                                                           | 11,118,818 |      |   | 10,286,647 |  |   | 9,644,515 |  
|                                                   |  |                                                           |            |      |   |            |  |   |           |  
|Basic earnings per common share                    |  | $                                                         | 4.22       |      | $ | 3.16       |  | $ | 2.21      |  
|Diluted earnings per common share                  |  | $                                                         | 4.15       |      | $ | 3.09       |  | $ | 2.19      |  





104



---

##### Table of Contents

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure



None



Item 9A. Controls and Procedures



Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures



Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, we conducted an evaluation of our disclosure controls and procedures, as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective
as of December 31, 2006.



Managements Report on Internal Control
Over Financial Reporting



Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control 
Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the criteria established in Internal Control  Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2006.



Our managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by
KPMG LLP, an independent registered public accounting firm. KPMGs attestation report, which expresses unqualified opinions on managements assessment and on the effectiveness of our internal control over financial reporting, follows.



Changes in Internal Control Over Financial Reporting



There were no changes in our internal control over financial reporting that
occurred during the quarter-ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



105



---

##### Table of Contents

Report Of Independent Registered Public Accounting Firm



To the Stockholders and Board of Directors of Taylor Capital Group, Inc.:



We have audited managements assessment, included in
the accompanying Managements Report on Internal Controls over Financial Reporting that Taylor Capital Group, Inc. and its subsidiaries (Taylor Capital) maintained effective internal control over financial reporting as of December 31,
2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Taylor Capital management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of Taylor
Capitals internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that Taylor Capital maintained effective internal control over financial reporting as of December 31,
2006, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Taylor Capital
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by Committee of Sponsoring Organizations of
the Treadway Commission (COSO).



We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Taylor Capital Group, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of income, changes in stockholders



106



---

##### Table of Contents

equity, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 15, 2007 expressed an
unqualified opinion on those consolidated financial statements.



LOGO



Chicago, Illinois

March 15, 2007



Item 9B. Other Information



None.



107



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.



PART III



Item 10. Directors, Executive Officers and Corporate Governance



Information required by this item is incorporated herein by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders to be held
on June 7, 2007.



Item 11. Executive Compensation



Information by this item is incorporated herein by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 7, 2007.



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



Information by this item is incorporated herein by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
June 7, 2007.



Item 13. Certain Relationships and Related Transactions, and Director Independence



Information by this item is incorporated herein by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
June 7, 2007.



Item 14. Principal Accountant Fees and Services



Information with by this item is incorporated herein by reference to our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 7, 2007.



108



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.



PART IV



Item 15. Exhibits, Financial Statement Schedules



| |  | (a)(1) Financial Statements
| |  | ---------------------------



| |  | See Part II  Item 8. Financial Statements and Supplementary Data
| |  | -----------------------------------------------------------------



| |  | (a)(2) Financial Statement Schedules
| |  | ------------------------------------



| |  | Schedules have been omitted because the information required to be shown in the schedules is not applicable or is included elsewhere in our financial statements or accompanying
notes.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (a)(3) Exhibits:
| |  | ----------------



EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                                 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                                                                                         
|               | 
|3.1            |  | Second Amended and Restated Certificate of Incorporation of Taylor Capital Group, Inc. (incorporated by reference from Exhibit 3.1 of the Companys Current Report on Form 8-K filed
September 20, 2005).                                                       
|               | 
|3.2            |  | Form of Second Amended and Restated Bylaws of Taylor Capital Group, Inc. (incorporated by reference from Exhibit 3.4 of the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005).                                                       
|               | 
|3.3            |  | Certificate of Elimination of 9% Noncumulative Perpetual Preferred Stock, Series A, of Registrant (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-3 filed
July 25, 2005 (Registration No. 333-126864)).                       
|               | 
|4.1            |  | Form of 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)).                                    
|               | 
|4.2            |  | 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)).              
|               | 
|4.3            |  | Form of 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)).                                                              
|               | 
|4.4            |  | 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)).                                                                
|               | 
|4.5            |  | 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)).                                                
|               | 
|4.6            |  | 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)).                                                                    
|               | 
|4.7            |  | 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)).



109



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                      
|               | 
|4.8            |  | 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)).                                                                                                                                                  
|               | 
|4.9            |  | 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).                                                                                                                                                                                             
|               | 
|4.10           |  | 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).
|               | 
|4.11           |  | 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).                                                                                                                                                     
|               | 
|4.12           |  | 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).                                                                                                                                                
|               | 
|4.13           |  | 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).                                                                                                                                                        
|               | 
|4.14           |  | 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).                                                                                                                                                         
|               | 
|4.15           |  | 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).                                                                                                                                                                  
|               | 
|4.16           |  | Form of Registration Rights Agreement (incorporated by reference to Exhibit 4.16 of the Registration Statement on Form S-3 filed August 5, 2005 (Registration No.
333-126864)).                                                                                                                                                                                              
|               | 
|9.1            |  | Voting Trust Agreement, dated November 30, 1998, by and between the Depositors and Trustees as set forth therein. (incorporated by reference from Exhibit 9.1 of the Amended Registration
Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).                                                                                                        
|               | 
|9.2            |  | Amendment Number One of Voting Trust Agreement, dated December 1, 1999, by and between the Depositors and Trustees as set forth therein. (incorporated by reference from Exhibit 9.2 of the
Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).                                                                                 
|               | 
|9.3            |  | Amendment Number Two of Voting Trust Agreement, dated June 1, 2002, by and between the Depositors and Trustees as set forth therein. (incorporated by reference from Exhibit 9.3 of the Amended
Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).                                                                                     
|               | 
|10.1           |  | Taylor Capital Group, Inc. Deferred Compensation Plan effective April 1, 2001. (incorporated by reference from Exhibit 10.16 of the Amended Registration Statement on Form S-1 filed
October 10, 2002 (Registration No. 333-89158)).*                                                                                                                                        
|               | 
|10.2           |  | Trust Under Taylor Capital Group, Inc. Deferred Compensation Plan, dated April 1, 2001. (incorporated by reference from Exhibit 10.17 of the Amended Registration Statement on Form S-1 filed
October 10, 2002 (Registration No. 333-89158)).*                                                                                                                               



110



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                                                                                                                                                        
|               | 
|10.3           |  | Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan effective October 1, 1998 (incorporated by reference from Exhibit 10.20 of the Amended Registration Statement on
Form S-1 filed October 10, 2002 (Registration No. 333-89158))*.                                                                   
|               | 
|10.4           |  | First Amendment to Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan effective January 1, 2000 (incorporated by reference from Exhibit 10.21 of the Amended
Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).*                                                
|               | 
|10.5           |  | Second Amendment to Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan effective October 1, 2000 (incorporated by reference from Exhibit 10.22 of the Amended
Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).*                                               
|               | 
|10.6           |  | Third Amendment to Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan effective January 1, 2001 (incorporated by reference from Exhibit 10.23 of the Amended
Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).*                                                
|               | 
|10.7           |  | Amendment and Restatement of the Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Trust, effective October 1, 1998 (incorporated by reference from Exhibit 10.24 of the
Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).*                                
|               | 
|10.8           |  | Taylor Capital Group, Inc. 1997 Incentive Compensation Plan (incorporated by reference from Exhibit 10.25 of the Amended Registration Statement on Form S-1 filed October 10, 2002
(Registration No. 333-89158)).*                                                                                                             
|               | 
|10.9           |  | Taylor Capital Group, Inc. 1997 Long-Term Incentive Plan (incorporated by reference from Exhibit 10.30 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration
No. 333-89158)).*                                                                                                                
|               | 
|10.10          |  | Form of Executive Level Change in Control Severance Agreement (incorporated by reference from Exhibit 10.42 of the Amended Registration Statement on Form S-1 filed October 10, 2002
(Registration No. 333-89158)).*                                                                                                           
|               | 
|10.11          |  | Taylor Capital Group, Inc. 2002 Incentive Bonus Plan (incorporated by reference from Exhibit 10.52 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No.
333-89158)).*                                                                                                                    
|               | 
|10.12          |  | Taylor Capital Group, Inc. 2002 Incentive Compensation Plan (incorporated by reference from Exhibit 10.53 of the Amended Registration Statement on Form S-1 filed October 10, 2002
(Registration No. 333-89158)).*                                                                                                             
|               | 
|10.13          |  | Share Restriction Agreement, dated November 30, 1998, by and among the Principal Stockholders (as defined therein) and Taylor Capital Group, Inc. (incorporated by reference from Exhibit 10.54
of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).                        
|               | 
|10.14          |  | Amendment Number One of Share Restriction Agreement, dated November 30, 1998, by and among the Principal Stockholders (as defined therein) and Taylor Capital Group, Inc. (incorporated by
reference from Exhibit 10.55 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).
|               | 
|10.15          |  | Fourth Amendment to Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan effective October 1, 1998 (incorporated by reference from Exhibit 10.61 of the Companys
Annual Report on Form 10-K for the year ending December 31, 2002).*                                                                   



111



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                                                                                                                                        
|               | 
|10.16          |  | Fifth Amendment to Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan effective October 1, 1998 (incorporated by reference from Exhibit 10.62 of the Companys
Annual Report on Form 10-K for the year ending December 31, 2002).*                                                    
|               | 
|10.17          |  | Amendment No. 1 of Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated by reference from Exhibit 10.63 of the Companys Annual Report on Form 10-K for the year ending
December 31, 2002).*                                                                                                    
|               | 
|10.18          |  | Amendment No. 2 of Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated by reference from Exhibit 10.64 of the Companys Annual Report on Form 10-K for the year ending
December 31, 2002).*                                                                                                    
|               | 
|10.19          |  | Amendment No. 3 of Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated by reference from Exhibit 10.65 of the Companys Annual Report on Form 10-K for the year ending
December 31, 2002).*                                                                                                    
|               | 
|10.20          |  | Pointe OHare Office Lease, between Orix OHare II Inc. and Cole Taylor Bank, dated March 5, 2003 (incorporated by reference from Exhibit 10.66 of the Companys Annual Report
on Form 10-K for the year ending December 31, 2002).                                                                            
|               | 
|10.21          |  | Loan and Subordinated Debenture Purchase Agreement, dated November 27, 2002, between LaSalle Bank National Association and Taylor Capital Group, Inc. (incorporated by reference from Exhibit
99.1 of the Companys Current Report on Form 8-K dated as of November 26, 2002).                                 
|               | 
|10.22          |  | Taylor Capital Group, Inc. Incentive Bonus Plan  Long Term Incentive Plan (incorporated by reference from Exhibit 10.68 of the Companys Quarterly Report on Form 10-Q for the
quarter ending March 31, 2003).*                                                                                               
|               | 
|10.23          |  | Form of Amended and Restated Executive Level Change in Control Severance Agreement (incorporated by reference from Exhibit 10.69 of the Companys Quarterly Report on Form 10-Q for the
quarter ending March 31, 2003).*                                                                                       
|               | 
|10.24          |  | Amendment No. 4 to Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated by reference from Exhibit 10.70 of the Companys Quarterly Report on Form 10-Q for the quarter
ending March 31, 2003).*                                                                                                 
|               | 
|10.25          |  | Sixth Amendment of Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan effective as of October 1, 1998 (incorporated by reference from Exhibit 10.71 of the
Companys Quarterly Report on Form 10-Q for the quarter ending March 31, 2003).*                                           
|               | 
|10.26          |  | Seventh Amendment of Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan, effective as of October 1, 1998 (incorporated by reference from Exhibit 10.73 of the
Companys Annual Report on Form 10-K for the year ending December 31, 2003).*                                           
|               | 
|10.27          |  | First Amendment to Loan and Subordinated Debenture Purchase Agreement Between LaSalle Bank National Association and Taylor Capital Group, Inc., dated as of November 27, 2003
(incorporated by reference from Exhibit 10.74 of the Companys Annual Report on Form 10-K for the year ending December 31, 2003).
|               | 
|10.28          |  | Eighth Amendment of Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan, effective as of October 1, 1998 (incorporated by reference from Exhibit 10.75 of the
Companys Quarterly Report on Form 10-Q for the quarter ending March 31, 2004).*                                         
|               | 
|10.29          |  | Ninth Amendment of Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan, effective as of October 1, 1998 (incorporated by reference from Exhibit 10.76 of the
Companys Quarterly Report on Form 10-Q for the quarter ending March 31, 2004).*                                          



112



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                                                                                                                                                         
|               | 
|10.30          |  | Second Amendment to Loan and Subordinated Debenture Purchase Agreement between LaSalle Bank National Association and Taylor Capital Group, Inc. (incorporated by reference from Exhibit 10.78
of the Companys Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).                                             
|               | 
|10.31          |  | Employment Letter from Taylor Capital Group, Inc. to Daniel C. Stevens dated December 1, 2004 (incorporated by reference from Exhibit 10.1 of the Companys Current Report on Form 8-K
dated as of December 1, 2004).*                                                                                                          
|               | 
|10.32          |  | Third Amendment to Loan and Subordinated Debenture Purchase Agreement Between LaSalle Bank National Association and Taylor Capital Group, Inc. dated December 9, 2004, effective as of November
27, 2004 (incorporated by reference from Exhibit 10.1 of the Companys Current Report on Form 8-K dated as of December 9, 2004).
|               | 
|10.33          |  | Master Agreement by and between Cole Taylor Bank and DMCB, LLC dated September 8, 2004 (incorporated by reference from Exhibit 10.1 of the Companys Current Report on Form 8-K dated as
of December 16, 2004).                                                                                                                 
|               | 
|10.34          |  | Letter Agreement by and between Cole Taylor Bank and Arbor Acquisitions, Inc., as nominee of DMCB, LLC, dated November 12, 2004 (incorporated by reference from Exhibit 10.2 of the
Companys Current Report on Form 8-K dated as of December 16, 2004).                                                                        
|               | 
|10.35          |  | Letter Agreement by and between Cole Taylor Bank and Arbor Acquisitions, Inc., as nominee of DMCB, LLC, dated November 15, 2004 (incorporated by reference from Exhibit 10.3 of the
Companys Current Report on Form 8-K dated as of December 16, 2004).                                                                        
|               | 
|10.36          |  | Sublease by and between Cole Taylor Bank and Arbor Acquisitions, Inc. dated November 19, 2004 (incorporated by reference from Exhibit 10.4 of the Companys Current Report on Form 8-K
dated as of December 16, 2004).                                                                                                          
|               | 
|10.37          |  | Form of Non-Employee Director Restricted Stock Award (incorporated by reference from Exhibit 10.38 of the Companys Annual Report on Form 10-K for the year ended December 31, 2004 filed
on March 10, 2005).*                                                                                                                  
|               | 
|10.38          |  | Form of Officer and Employee Restricted Stock Award (incorporated by reference from Exhibit 10.39 of the Companys Annual Report on Form 10-K for the year ended December 31, 2004 filed
on March 10, 2005).*                                                                                                                   
|               | 
|10.39          |  | Form of Non-Employee Director Non-Qualified Stock Option Agreement (incorporated by reference from Exhibit 10.40 of the Companys Annual Report on Form 10-K for the year ended December
31, 2004 filed on March 10, 2005).*                                                                                                    
|               | 
|10.40          |  | Form of Officer and Employee Non-Qualified Stock Option Agreement (incorporated by reference from Exhibit 10.41 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2004 filed on March 10, 2005).*                                                                                                     
|               | 
|10.41          |  | Tenth Amendment of Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan, effective as of October 1, 1998 (incorporated by reference from Exhibit 10.42 of the
Companys Quarterly Report on Form 10-Q for the quarter ending March 31, 2005 filed on May 6, 2005).*                                      
|               | 
|10.42          |  | Eleventh Amendment of Taylor Capital Group, Inc. Profit Sharing and Employee Stock Ownership Plan, effective as of October 1, 1998 (incorporated by reference from Exhibit 10.43 of the
Companys Quarterly Report on Form 10-Q for the quarter ending March 31, 2005 filed on May 6, 2005).*                                   



113



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibits                                                                                                                                                                                                                                                                                                          
|               | 
|10.43          |  | Salary Continuation Following Death Benefit Letter to Jeffrey W. Taylor dated June 15, 2005 (incorporated by reference from Exhibit 10.44 of the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005 filed on August 3, 2005).*                                                                                    
|               | 
|10.44          |  | Salary Continuation Following Death Benefit Letter to Bruce W. Taylor dated June 15, 2005 (incorporated by reference from Exhibit 10.45 of the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005 filed on August 3, 2005).*                                                                                      
|               | 
|10.45          |  | Fourth Amendment to Loan and Subordinated Debenture Purchase Agreement Between LaSalle Bank National Association and Taylor Capital Group, Inc. dated January 12, 2006, effective as of
November 27, 2005 (incorporated by reference from Exhibit 10.1 of the Companys Current Report on Form 8-K dated as of January 12, 2006).
|               | 
|10.46          |  | Fifth Amendment to Loan and Subordinated Debenture Purchase Agreement Between LaSalle Bank National Association and Taylor Capital Group, Inc. dated December 28, 2006, effective as of
November 27, 2006.                                                                                                                       
|               | 
|10.47          |  | Separation and Settlement Agreement and General Release by and between Daniel C. Stevens, Taylor Capital Group, Inc., and Cole Taylor Bank, dated October 5, 2006 (incorporated by reference
from Exhibit 99.1 of the Companys Current Report on Form 8-K filed October 5, 2006).*                                              
|               | 
|10.48          |  | Office Lease by and between GQ 225 Washington, LLP, a Delaware limited liability partnership as Landlord and Cole Taylor Bank, an Illinois banking corporation as Tenant (incorporated by
reference from Exhibit 10.1 of the Companys Current Report on Form 8-K filed January 25, 2007).                                       
|               | 
|12.1           |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                               
|               | 
|21.1           |  | List of Subsidiaries of Taylor Capital Group, Inc.                                                                                                                                                                                                                                                                               
|               | 
|23.1           |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                             
|               | 
|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 Accounting Officer Pursuant to Rule 13a-14(a) under the Security Exchange Act of 1934.                                                                                                                                                                                                                    
|               | 
|32.1           |  | Certification of the Chief Executive Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                              

---

|* | Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Form 10-K.
|- | -------------------------------------------------------------------------------------------------------------



| | (b) | Exhibits
| | --- | --------



See Item 15(a)(3) above



| | (c) | Financial Statement Schedules
| | --- | -----------------------------



See Item 15(a)(2) above



114



---

##### Table of Contents

TAYLOR CAPITAL GROUP, INC.



SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, there unto duly authorized on the 15th day of March 2007.



TAYLOR CAPITAL GROUP, INC./s/    BRUCE W. TAYLORBruce W. TaylorChairman, Chief Executive Officer, and President(Principal Executive Officer)/s/    ROBIN VANCASTLERobin VanCastleChief Accounting Officer(Principal Financial Officer)(Principal Accounting Officer)




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and the dates indicated.



|                                                |  |                                                              |  |               
|----------------------------------------------- |  | ------------------------------------------------------------ |  | --------------
|Signature                                       |  | Title                                                        |  | Date          
|                                                |  |                                                             
|/S/    BRUCE W.
TAYLORBruce W.
Taylor           |  | Chief Executive Officer, President and Chairman of the Board |  | March 15, 2007
|                                                |  |                                                             
|/s/    RONALD L.
BLIWASRonald L.
Bliwas         |  | Director                                                     |  | March 15, 2007
|                                                |  |                                                             
|/s/    RONALD EMANUELRonald Emanuel             |  | Director                                                     |  | March 15, 2007
|                                                |  |                                                             
|/s/    EDWARD
MCGOWANEdward
McGowan             |  | Director                                                     |  | March 15, 2007
|                                                |  |                                                             
|/s/    LOUISE
OSULLIVANLouise
OSullivan       |  | Director                                                     |  | March 15, 2007
|                                                |  |                                                             
|/s/    MELVIN E. PEARLMelvin E. Pearl           |  | Director                                                     |  | March 15, 2007
|                                                |  |                                                             
|/s/    SHEPHERD G. PRYOR
IVShepherd G. Pryor IV |  | Director                                                     |  | March 15, 2007
|                                                |  |                                                             
|/s/    JEFFREY W.
TAYLORJeffrey W.
Taylor       |  | Director                                                     |  | March 15, 2007
|                                                |  |                                                             
|/s/    RICHARD W.
TINBERRichard W.
Tinberg      |  | Director                                                     |  | March 15, 2007
|                                                |  |                                                             
|/s/    MARK L. YEAGERMark L. Yeager             |  | Director                                                     |  | March 15, 2007



115