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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30, 2003



Commission File No. 0-50034



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TAYLOR CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)



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|Delaware                                                       |  | 36-4108550                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



350 East Dundee
Road, Suite 300

Wheeling, Illinois 60090

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



(847) 537-0020

(Registrants telephone number, including area code)



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



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



Indicate the number of outstanding shares of each of the issuers classes of common
stock, as of the latest practicable date: At August 1, 2003, there were 9,453,226 shares of Common Stock, $0.01 par value, outstanding.



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.



INDEX



|                              |  | Page                                                                                                                  
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------
|PART I. FINANCIAL INFORMATION |  |                                                                                                                       
|                              |  |                                                                                                                       
|Item 1.                       |  | Financial Statements                                                                                                  
|                              |  |                                                                                                                       
|                              |  | Consolidated Balance Sheets (unaudited)June 30, 2003 and December 31, 2002                                           
|                              |  |                                                                                                                       
|                              |  | Consolidated Statements of Income (unaudited)For the three and six months ended June 30, 2003 and 2002               
|                              |  |                                                                                                                       
|                              |  | Consolidated Statements of Changes in Stockholders Equity (unaudited)For the six months ended June 30, 2003 and 2002
|                              |  |                                                                                                                       
|                              |  | Statements of Cash Flows (unaudited)For the six months ended June 30, 2003 and 2002                                  
|                              |  |                                                                                                                       
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                                                
|                              |  |                                                                                                                       
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 
|                              |  |                                                                                                                       
|Item 3.                       |  | Quantitative and Qualitative Disclosure About Market Risks                                                            
|                              |  |                                                                                                                       
|Item 4.                       |  | Controls and Procedures                                                                                               
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                       
|                              |  |                                                                                                                       
|Item 1.                       |  | Legal Proceedings                                                                                                     
|                              |  |                                                                                                                       
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                             
|                              |  |                                                                                                                       
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                       
|                              |  |                                                                                                                       
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                   
|                              |  |                                                                                                                       
|Item 5.                       |  | Other Information                                                                                                     
|                              |  |                                                                                                                       
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                      
|                              |  |                                                                                                                       
|                              |  | Signatures                                                                                                            



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                                        |  | June 30, 2003 |           |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ----------------- | -
|ASSETS                                                                                                                                                                                                                                                  |  |               |           |   |                   |  
|Cash and cash equivalents:                                                                                                                                                                                                                              |  |               |           |   |                   |  
|Cash and due from banks                                                                                                                                                                                                                                 |  | $             | 86,723    |   |                   | $
|Short-term investments                                                                                                                                                                                                                                  |  |               | 5,355     |   |                   |  
|Federal funds sold                                                                                                                                                                                                                                      |  |               | 78,500    |   |                   |  
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  
|Total cash and cash equivalents                                                                                                                                                                                                                         |  |               | 170,578   |   |                   |  
|Investment securities:                                                                                                                                                                                                                                  |  |               |           |   |                   |  
|Available-for-sale, at fair value                                                                                                                                                                                                                       |  |               | 496,341   |   |                   |  
|Held-to-maturity, at amortized cost (fair value of $878 and $884 at June 30, 2003 and December 31, 2002,
respectively)                                                                                                                                  |  |               | 825       |   |                   |  
|Loans, net of allowance for loan losses of $36,157 and $34,073 at June 30, 2003 and December 31, 2002,
respectively                                                                                                                                     |  |               | 1,869,705 |   |                   |  
|Premises, leasehold improvements and equipment, net                                                                                                                                                                                                     |  |               | 20,010    |   |                   |  
|Investment in Federal Home Loan Bank and Federal Reserve Bank stock, at cost                                                                                                                                                                            |  |               | 11,813    |   |                   |  
|Other real estate and repossessed assets, net                                                                                                                                                                                                           |  |               | 1,582     |   |                   |  
|Goodwill, net of amortization of $11,696 at June 30, 2003 and December 31, 2002                                                                                                                                                                         |  |               | 23,354    |   |                   |  
|Other intangible assets, net of amortization of $893 and $700 at June 30, 2003 and December 31, 2002, respectively                                                                                                                                      |  |               | 245       |   |                   |  
|Other assets                                                                                                                                                                                                                                            |  |               | 45,113    |   |                   |  
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  
|Total assets                                                                                                                                                                                                                                            |  | $             | 2,639,566 |   |                   | $
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                    |  |               |           |   |                   |  
|Deposits:                                                                                                                                                                                                                                               |  |               |           |   |                   |  
|Noninterest-bearing                                                                                                                                                                                                                                     |  | $             | 412,957   |   |                   | $
|Interest-bearing                                                                                                                                                                                                                                        |  |               | 1,633,619 |   |                   |  
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  
|Total deposits                                                                                                                                                                                                                                          |  |               | 2,046,576 |   |                   |  
|Short-term borrowings                                                                                                                                                                                                                                   |  |               | 226,634   |   |                   |  
|Accrued interest, taxes and other liabilities                                                                                                                                                                                                           |  |               | 35,339    |   |                   |  
|Notes payable and FHLB advances                                                                                                                                                                                                                         |  |               | 110,500   |   |                   |  
|Guaranteed preferred beneficial interest in the Companys junior subordinated debentures                                                                                                                                                                |  |               | 45,000    |   |                   |  
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  
|Total liabilities                                                                                                                                                                                                                                       |  |               | 2,464,049 |   |                   |  
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  
|Stockholders equity:                                                                                                                                                                                                                                   |  |               |           |   |                   |  
|Preferred stock, $.01 par value, 5,000,000 shares authorized, Series A 9% noncumulative perpetual, 1,530,000 shares issued and
outstanding, $25 stated and redemption value                                                                             |  |               | 38,250    |   |                   |  
|Common stock, $.01 par value; 25,000,000 shares authorized; 9,773,013 and 9,733,667 shares issued at June 30, 2003 and December
31, 2002, respectively; 9,450,006 and 9,410,660 shares outstanding at June 30, 2003 and December 31, 2002, respectively |  |               | 98        |   |                   |  
|Surplus                                                                                                                                                                                                                                                 |  |               | 142,833   |   |                   |  
|Unearned compensationstock grants                                                                                                                                                                                                                      |  |               | (1,054    | ) |                   |  
|Retained deficit                                                                                                                                                                                                                                        |  |               | (7,331    | ) |                   |  
|Accumulated other comprehensive income                                                                                                                                                                                                                  |  |               | 9,778     |   |                   |  
|Treasury stock, at cost, 323,007 shares at June 30, 2003 and December 31, 2002                                                                                                                                                                          |  |               | (7,057    | ) |                   |  
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  
|Total stockholders equity                                                                                                                                                                                                                              |  |               | 175,517   |   |                   |  
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  
|Total liabilities and stockholders equity                                                                                                                                                                                                              |  | $             | 2,639,566 |   |                   | $
|                                                                                                                                                                                                                                                        |  |               |           |   |                   |  



See accompanying notes
to consolidated financial statements



1



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)



|                                                                                         |  | For the Three MonthsEnded June 30, |        |   | For the Six MonthsEnded June 30, |  
|---------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | -
|                                                                                         |  | 2003                               |        |   | 2002                             |  
|Interest income:                                                                         |  |                                    |        |   |                                  |  
|Interest and fees on loans                                                               |  | $                                  | 28,596 |   |                                  | $
|Interest and dividends on investment securities:                                         |  |                                    |        |   |                                  |  
|Taxable                                                                                  |  |                                    | 5,574  |   |                                  |  
|Tax-exempt                                                                               |  |                                    | 586    |   |                                  |  
|Interest on cash equivalents                                                             |  |                                    | 117    |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Total interest income                                                                    |  |                                    | 34,873 |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Interest expense:                                                                        |  |                                    |        |   |                                  |  
|Deposits                                                                                 |  |                                    | 7,472  |   |                                  |  
|Short-term borrowings                                                                    |  |                                    | 673    |   |                                  |  
|Notes payable and FHLB advances                                                          |  |                                    | 1,123  |   |                                  |  
|Guaranteed preferred beneficial interest in the Companys junior subordinated debentures |  |                                    | 1,299  |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Total interest expense                                                                   |  |                                    | 10,567 |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Net interest income                                                                      |  |                                    | 24,306 |   |                                  |  
|Provision for loan losses                                                                |  |                                    | 1,533  |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Net interest income after provision for loan losses                                      |  |                                    | 22,773 |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Noninterest income:                                                                      |  |                                    |        |   |                                  |  
|Service charges                                                                          |  |                                    | 3,135  |   |                                  |  
|Trust and investment management fees                                                     |  |                                    | 1,120  |   |                                  |  
|Gain on sale of investment securities, net                                               |  |                                    |       |   |                                  |  
|Other noninterest income                                                                 |  |                                    | 722    |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Total noninterest income                                                                 |  |                                    | 4,977  |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Noninterest expense:                                                                     |  |                                    |        |   |                                  |  
|Salaries and employee benefits                                                           |  |                                    | 10,598 |   |                                  |  
|Occupancy of premises                                                                    |  |                                    | 1,773  |   |                                  |  
|Furniture and equipment                                                                  |  |                                    | 765    |   |                                  |  
|Legal fees, net                                                                          |  |                                    | 739    |   |                                  |  
|Advertising and public relations                                                         |  |                                    | 752    |   |                                  |  
|Corporate insurance                                                                      |  |                                    | 728    |   |                                  |  
|Computer processing                                                                      |  |                                    | 515    |   |                                  |  
|Other intangible assets amortization                                                     |  |                                    | 97     |   |                                  |  
|Litigation settlement charge                                                             |  |                                    |       |   |                                  |  
|Other noninterest expense                                                                |  |                                    | 3,256  |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Total noninterest expense                                                                |  |                                    | 19,223 |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Income (loss) before income taxes                                                        |  |                                    | 8,527  |   |                                  |  
|Income taxes                                                                             |  |                                    | 2,988  |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Net income (loss)                                                                        |  | $                                  | 5,539  |   |                                  | $
|                                                                                         |  |                                    |        |   |                                  |  
|Preferred dividend requirements                                                          |  |                                    | (861   | ) |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  
|Net income (loss) applicable to common stockholders                                      |  | $                                  | 4,678  |   |                                  | $
|                                                                                         |  |                                    |        |   |                                  |  
|Basic earnings (loss) per common share                                                   |  | $                                  | 0.50   |   |                                  | $
|Diluted earnings (loss) per common share                                                 |  |                                    | 0.49   |   |                                  |  
|                                                                                         |  |                                    |        |   |                                  |  



See accompanying notes
to consolidated financial statements



2



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)

(in thousands, except per share data)



|                                                                                                                               |  | Series A 9%NoncumulativePerpetualPreferredStock |        | CommonStock |   | Surplus |  |   | UnearnedCompensation Stock Grants |   |  | RetainedEarnings(Deficit) |        |   | AccumulatedOtherComprehensiveIncome |   |         | TreasuryStock |  |   | Total  |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------- | ------ | ----------- | - | ------- |  | - | ---------------------------------- | - |  | ------------------------- | ------ | - | ----------------------------------- | - | ------- | ------------- |  | - | ------ | -
|Balance at December 31, 2002                                                                                                   |  | $                                               | 38,250 |             | $ | 97      |  | $ | 142,008                            |   |  | $                         | (1,088 | ) |                                     | $ | (15,140 | )             |  | $ | 11,667 |  
|Issuance of stock grants                                                                                                       |  |                                                 |       |             |   |        |  |   | 271                                |   |  |                           | (271   | ) |                                     |   |        |               |  |   |       |  
|Forfeiture of stock grants                                                                                                     |  |                                                 |       |             |   |        |  |   | (129                               | ) |  |                           | 60     |   |                                     |   |        |               |  |   |       |  
|Amortization of stock grants                                                                                                   |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           | 245    |   |                                     |   |        |               |  |   |       |  
|Exercise of stock options                                                                                                      |  |                                                 |       |             |   | 1       |  |   | 621                                |   |  |                           |       |   |                                     |   |        |               |  |   |       |  
|Tax benefit on stock options exercised and stock awards                                                                        |  |                                                 |       |             |   |        |  |   | 62                                 |   |  |                           |       |   |                                     |   |        |               |  |   |       |  
|Comprehensive income:                                                                                                          |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Net income                                                                                                                     |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   | 10,664  |               |  |   |       |  
|Change in unrealized gain on available-for-sale investment securities, net of income taxes                                     |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   |        |               |  |   | (2,905 | )
|Net unrealized gain (loss) from cash flow hedging instruments                                                                  |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   |        |               |  |   | 1,016  |  
|                                                                                                                               |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Total comprehensive income                                                                                                     |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|                                                                                                                               |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Dividends:                                                                                                                     |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Preferred$1.125 per share                                                                                                     |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   | (1,721  | )             |  |   |       |  
|Common$0.12 per share                                                                                                         |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   | (1,134  | )             |  |   |       |  
|                                                                                                                               |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Balance at June 30, 2003                                                                                                       |  | $                                               | 38,250 |             | $ | 98      |  | $ | 142,833                            |   |  | $                         | (1,054 | ) |                                     | $ | (7,331  | )             |  | $ | 9,778  |  
|                                                                                                                               |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Balance at December 31, 2001                                                                                                   |  | $                                               | 38,250 |             | $ | 71      |  | $ | 102,253                            |   |  | $                         | (655   | ) |                                     | $ | 31,511  |               |  | $ | 4,826  |  
|Issuance of stock grants                                                                                                       |  |                                                 |       |             |   |        |  |   | 450                                |   |  |                           | (450   | ) |                                     |   |        |               |  |   |       |  
|Forfeiture of stock grants                                                                                                     |  |                                                 |       |             |   |        |  |   | (57                                | ) |  |                           | 13     |   |                                     |   |        |               |  |   |       |  
|Amortization of stock grants                                                                                                   |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           | 229    |   |                                     |   |        |               |  |   |       |  
|Exercise of stock options                                                                                                      |  |                                                 |       |             |   |        |  |   | 260                                |   |  |                           |       |   |                                     |   |        |               |  |   |       |  
|Tax benefit on stock options exercised and stock awards                                                                        |  |                                                 |       |             |   |        |  |   | 20                                 |   |  |                           |       |   |                                     |   |        |               |  |   |       |  
|Purchase of treasury stock                                                                                                     |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   |        |               |  |   |       |  
|Comprehensive income:                                                                                                          |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Net loss                                                                                                                       |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   | (54,219 | )             |  |   |       |  
|Change in unrealized gain on available-for-sale investment securities, net of reclassification adjustment, net of income
taxes |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   |        |               |  |   | 4,630  |  
|                                                                                                                               |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Total comprehensive loss                                                                                                       |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|                                                                                                                               |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Dividends:                                                                                                                     |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Preferred$1.125 per share                                                                                                     |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   | (1,721  | )             |  |   |       |  
|Common$0.12 per share                                                                                                         |  |                                                 |       |             |   |        |  |   |                                   |   |  |                           |       |   |                                     |   | (819    | )             |  |   |       |  
|                                                                                                                               |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  
|Balance at June 30, 2002                                                                                                       |  | $                                               | 38,250 |             | $ | 71      |  | $ | 102,926                            |   |  | $                         | (863   | ) |                                     | $ | (25,248 | )             |  | $ | 9,456  |  
|                                                                                                                               |  |                                                 |        |             |   |         |  |   |                                    |   |  |                           |        |   |                                     |   |         |               |  |   |        |  



See accompanying notes
to consolidated financial statements



3



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)



|                                                                                         |  | For the Six Months Ended June 30, |         
|---------------------------------------------------------------------------------------- |  | --------------------------------- | --------
|                                                                                         |  | 2003                              |         
|Cash flows from operating activities:                                                    |  |                                   |         
|Net income (loss)                                                                        |  | $                                 | 10,664  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                   |         
|Accrued litigation settlement charge                                                     |  |                                   |        
|Investment securities gains, net                                                         |  |                                   |        
|Amortization of premiums and discounts, net                                              |  |                                   | 381     
|Deferred loan fee amortization                                                           |  |                                   | (985    
|Provision for loan losses                                                                |  |                                   | 3,833   
|Loss on sales of loans originated for sale                                               |  |                                   |        
|Proceeds from sales of loans originated for sale                                         |  |                                   |        
|Depreciation and amortization                                                            |  |                                   | 1,853   
|Amortization of intangible assets                                                        |  |                                   | 193     
|Deferred income taxes                                                                    |  |                                   | (3,244  
|(Gain) loss on sales of other real estate                                                |  |                                   | (12     
|Gain on sale of credit card loans                                                        |  |                                   | (140    
|Other, net                                                                               |  |                                   | (104    
|Changes in other assets and liabilities:                                                 |  |                                   |         
|Accrued interest receivable                                                              |  |                                   | 19      
|Other assets                                                                             |  |                                   | 1,259   
|Accrued interest, taxes and other liabilities                                            |  |                                   | 3,222   
|                                                                                         |  |                                   |         
|Net cash provided by operating activities                                                |  |                                   | 16,939  
|                                                                                         |  |                                   |         
|Cash flows from investing activities:                                                    |  |                                   |         
|Purchases of available-for-sale securities                                               |  |                                   | (133,164
|Proceeds from principal payments and maturities of available-for-sale securities         |  |                                   | 132,754 
|Proceeds from sales of available-for-sale securities                                     |  |                                   |        
|Net increase in loans                                                                    |  |                                   | (28,289 
|Net additions to premises, leasehold improvements and equipment                          |  |                                   | (2,773  
|Proceeds from sales of other real estate                                                 |  |                                   | 332     
|                                                                                         |  |                                   |         
|Net cash used in investing activities                                                    |  |                                   | (31,140 
|                                                                                         |  |                                   |         
|Cash flows from financing activities:                                                    |  |                                   |         
|Net increase in deposits                                                                 |  |                                   | 82,827  
|Net increase (decrease) in short-term borrowings                                         |  |                                   | 11,274  
|Proceeds from notes payable and FHLB advances                                            |  |                                   | 15,000  
|Repayments of notes payable and FHLB advances                                            |  |                                   | (15,000 
|Proceeds from exercise of employee stock options                                         |  |                                   | 622     
|Purchase of treasury stock                                                               |  |                                   |        
|Dividends paid                                                                           |  |                                   | (2,853  
|                                                                                         |  |                                   |         
|Net cash provided by financing activities                                                |  |                                   | 91,870  
|                                                                                         |  |                                   |         
|Net increase in cash and cash equivalents                                                |  |                                   | 77,669  
|Cash and cash equivalents, beginning of period                                           |  |                                   | 92,909  
|                                                                                         |  |                                   |         
|Cash and cash equivalents, end of period                                                 |  | $                                 | 170,578 
|                                                                                         |  |                                   |         



Consolidated Statements
of Cash Flows continued on next page

See accompanying notes to consolidated financial statements



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

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

(in thousands)



|                                                                              |  | For the Six Months Ended June 30,
|----------------------------------------------------------------------------- |  | ---------------------------------
|                                                                              |  | 2003                             
|Supplemental disclosure of cash flow information:                             |  |                                  
|Cash paid during the period for:                                              |  |                                  
|Interest                                                                      |  | $                                
|Income taxes                                                                  |  |                                  
|                                                                              |  |                                  
|Supplemental disclosures of noncash investing and financing activities:       |  |                                  
|Other comprehensive income (loss), net of tax                                 |  | $                                
|Tax benefit associated with exercise of common stock options and stock grants |  |                                  



See accompanying notes
to consolidated financial statements





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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



1. Basis of Presentation:



These financial statements contain unaudited information as of June 30, 2003 and for the
three and six month periods ended June 30, 2003 and 2002. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting
principles generally accepted in the United States of America are not included herein. In Managements opinion, these unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair
presentation of the information when read in conjunction with the Companys audited financial statements and the related notes. The income statement data for the three and six month periods ended June 30, 2003 are not necessarily indicative of
the results that the Company may achieve for the full year.



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



2. Investment Securities:



The amortized cost and estimated fair values of investment securities at June 30, 2003 and December 31, 2002 were as follows:



|                                    |  | June 30, 2003 
|----------------------------------- |  | --------------
|                                    |  | Amortized Cost
|                                    |  | (in thousands)
|Available-for-sale:                 |  |               
|U.S. government agency securities   |  | $             
|Collateralized mortgage obligations |  |               
|Mortgage-backed securities          |  |               
|State and municipal obligations     |  |               
|                                    |  |               
|Total available-for-sale            |  |               
|                                    |  |               
|Held-to-maturity:                   |  |               
|Other debt securities               |  |               
|                                    |  |               
|Total held-to-maturity              |  |               
|                                    |  |               
|Total                               |  | $             
|                                    |  |               



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



|                                    |  | December 31, 2002
|----------------------------------- |  | -----------------
|                                    |  | Amortized Cost   
|                                    |  | (in thousands)   
|Available-for-sale:                 |  |                  
|U.S. government agency securities   |  | $                
|Collateralized mortgage obligations |  |                  
|Mortgage-backed securities          |  |                  
|State and municipal obligations     |  |                  
|                                    |  |                  
|Total available-for-sale            |  |                  
|                                    |  |                  
|Held-to-maturity:                   |  |                  
|Other debt securities               |  |                  
|                                    |  |                  
|Total held-to-maturity              |  |                  
|                                    |  |                  
|Total                               |  | $                
|                                    |  |                  



There were no gains or losses realized
on the sale of available-for-sale investment securities during the six months ended June 30, 2003. During the six month period ended June 30, 2002, gross gains totaling $8,000 were realized on the sale of available-for-sale investment securities,
while no losses were realized.



Investment securities do not include the
Banks investment in Federal Home Loan Bank (FHLB), and Federal Reserve Bank stock of $11.8 million and $11.0 million at June 30, 2003 and December 31, 2002, respectively. These investments are required for membership and are
carried at cost.



3. Loans:



Loans classified by type at June 30, 2003 and December 31, 2002 were as follows:



|                                      |  | June 30, 2003  |           |   | Dec. 31, 2002 |  
|------------------------------------- |  | -------------- | --------- | - | ------------- | -
|                                      |  | (in thousands) |          
|Commercial and industrial             |  | $              | 568,546   |   |               | $
|Commercial real estate                |  |                | 590,270   |   |               |  
|Real estate-construction              |  |                | 312,691   |   |               |  
|Residential real estate mortgages     |  |                | 108,883   |   |               |  
|Home equity loans and lines of credit |  |                | 296,949   |   |               |  
|Consumer                              |  |                | 27,896    |   |               |  
|Other loans                           |  |                | 1,056     |   |               |  
|                                      |  |                |           |   |               |  
|Gross loans                           |  |                | 1,906,291 |   |               |  
|Less: Unearned discount               |  |                | (429      | ) |               |  
|                                      |  |                |           |   |               |  
|Total loans                           |  |                | 1,905,862 |   |               |  
|Less: Allowance for loan losses       |  |                | (36,157   | ) |               |  
|                                      |  |                |           |   |               |  
|Loans, net                            |  | $              | 1,869,705 |   |               | $
|                                      |  |                |           |   |               |  



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



Nonaccrual and impaired loans at June 30, 2003 were $14.0 million and $21.1 million, respectively, as compared to
$12.1 million and $16.9 million at December 31, 2002, respectively.



4. Goodwill and Intangible Assets



As
of June 30, 2003, the Company had $23.4 million of goodwill, created from the 1997 acquisition of the Bank, which as of January 1, 2002 was no longer subject to amortization. The goodwill was tested for impairment as of July 1, 2003, and no
impairment charge was determined to be necessary. Goodwill will continue to be tested annually for impairment, and if at any time impairment exists, an impairment loss will be recorded. No additions, disposals, or impairment charges were recorded to
goodwill during the first six months of 2003.



At June 30, 2003, the Company
also had $245,000 of other intangible assets that relate to the purchase of lines of trust business. The gross carrying amount totaled $1.1 million as of June 30, 2003 with accumulated amortization of $893,000. Amortization expense for these
intangible assets was $193,000 during the first six months of 2003. The estimated amortization expense for these assets is expected to be $178,000 for the period of July 1, 2003 to December 31, 2003 and $13,000 annually for the years ended December
31, 2004, 2005, 2006, and 2007.



5.
Interest-Bearing Deposits:



Interest-bearing deposits at June 30, 2003
and December 31, 2002 were as follows:



|                                 |  | June 30, 2003  |           | Dec. 31, 2002
|-------------------------------- |  | -------------- | --------- | -------------
|                                 |  | (in thousands)
|NOW accounts                     |  | $              | 138,946   |              
|Savings accounts                 |  |                | 90,736    |              
|Money market deposits            |  |                | 421,759   |              
|Certificates of deposit          |  |                | 592,136   |              
|Public time deposits             |  |                | 68,793    |              
|Brokered certificates of deposit |  |                | 321,249   |              
|                                 |  |                |           |              
|Total                            |  | $              | 1,633,619 |              
|                                 |  |                |           |              



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



6. Notes Payable and FHLB Advances:



Notes payable and FHLB advances at June 30, 2003 and December 31, 2002 consisted of the
following:



|                                                                                                                                                                                                                               |  | June 30,2003   |         | Dec. 31, 2002
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------- | -------------
|                                                                                                                                                                                                                               |  | (in thousands)
|Taylor Capital Group, Inc.:                                                                                                                                                                                                    |  |                |         |              
|Subordinated Debtinterest, at the Companys election, at prime rate plus 2.50% or LIBOR plus 2.75%; interest rates at
June 30, 2003 and December 31, 2002 were 4.03% and 4.17%, respectively; matures on November 27, 2009    |  | $              | 10,000  |              
|                                                                                                                                                                                                                               |  |               
|Term Loaninterest, at the Companys election, at the prime rate or LIBOR plus 1.15%, with a minimum interest rate of
3.50%; interest rate was 3.50% at both June 30, 2003 and December 31, 2002; matures on November 27, 2009 |  |                | 500     |              
|                                                                                                                                                                                                                               |  |               
|Revolving Credit Facility$11.5 million maximum available; interest, at the Companys election, at the prime rate or
LIBOR plus 1.15%, with a minimum interest rate of 3.50%; matures November 27, 2003                        |  |                |        |              
|                                                                                                                                                                                                                               |  |                |         |              
|Total notes payable                                                                                                                                                                                                            |  |                | 10,500  |              
|                                                                                                                                                                                                                               |  |               
|Cole Taylor Bank:                                                                                                                                                                                                              |  |                |         |              
|FHLB advance4.30%, due January 8, 2011, callable after January 8, 2002                                                                                                                                                        |  |                | 25,000  |              
|FHLB advance4.55%, due January 8, 2011, callable after January 8, 2003                                                                                                                                                        |  |                | 25,000  |              
|FHLB advance4.83%, due February 1, 2011, callable after January 8, 2004                                                                                                                                                       |  |                | 25,000  |              
|FHLB advance3.94%, due November 23, 2004                                                                                                                                                                                      |  |                | 10,000  |              
|FHLB advance1.50%, due January 29, 2004                                                                                                                                                                                       |  |                | 15,000  |              
|FHLB advance2.66%, due January 29, 2003                                                                                                                                                                                       |  |                |        |              
|                                                                                                                                                                                                                               |  |                |         |              
|Total FHLB advances                                                                                                                                                                                                            |  |                | 100,000 |              
|                                                                                                                                                                                                                               |  |                |         |              
|Total notes payable and FHLB advances                                                                                                                                                                                          |  | $              | 110,500 |              
|                                                                                                                                                                                                                               |  |                |         |              



The notes payable require compliance
with certain defined financial covenants. As of June 30, 2003, the Company is in compliance with these covenants.



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



7. Comprehensive Income:



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



|                                                                   |  | Before Tax Amount      |        |   | Tax Effect |   |        | Net of Tax | 
|------------------------------------------------------------------ |  | ---------------------- | ------ | - | ---------- | - | ------ | ---------- | 
|                                                                   |  | (dollars in thousands) |       
|For the Six Months Ended June 30, 2003:                            |  |                        |        |   |            |   |        |            | 
|Unrealized gain from securities:                                   |  |                        |        |   |            |   |        |            | 
|Change in unrealized gains on available-for-sale securities        |  | $                      | (4,469 | ) |            | $ | 1,564  |            | 
|Net unrealized gain from cash flow hedging instruments             |  |                        | 1,563  |   |            |   | (547   | )          | 
|                                                                   |  |                        |        |   |            |   |        |            | 
|Other comprehensive loss, net of tax                               |  | $                      | (2,906 | ) |            | $ | 1,017  |            | 
|                                                                   |  |                        |        |   |            |   |        |            | 
|For the Six Months Ended June 30, 2002:                            |  |                        |        |   |            |   |        |            | 
|Unrealized gain from securities:                                   |  |                        |        |   |            |   |        |            | 
|Change in unrealized gains on available-for-sale securities        |  | $                      | 7,130  |   |            | $ | (2,495 | )          | 
|Less: reclassification adjustment for gains included in net income |  |                        | (8     | ) |            |   | 3      |            | 
|                                                                   |  |                        |        |   |            |   |        |            | 
|Other comprehensive income, net of tax                             |  | $                      | 7,122  |   |            | $ | (2,492 | )          | 
|                                                                   |  |                        |        |   |            |   |        |            | 



8.
Earnings per Share



The following table sets forth the computation of
basic and diluted earnings per common share. Stock options are the only common stock equivalents. Before the initial public offering in October 2002, the Companys common stock was not publicly traded. The estimated market value of the common
shares before the initial public offering was based upon semiannual independent third party appraisals prepared in connection with the employee benefit plans.



Stock options outstanding to purchase 126,210 and 513,480 common shares for the quarterly and year-to-date periods ended June 30, 2003 and 2002, respectively, were not
included in the computation of diluted earnings per share because the effect would have been antidilutive.



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



|                                                   |  | For the Three Months Ended June 30,                |           |   | For the Six Months Ended June 30, |  
|-------------------------------------------------- |  | -------------------------------------------------- | --------- | - | --------------------------------- | -
|                                                   |  | 2003                                               |           |   | 2002                              |  
|                                                   |  | (in thousands, except share and per share amounts) |          
|Net income (loss)                                  |  | $                                                  | 5,539     |   |                                   | $
|Less preferred dividend requirements               |  |                                                    | (861      | ) |                                   |  
|                                                   |  |                                                    |           |   |                                   |  
|Net income (loss) available to common stockholders |  | $                                                  | 4,678     |   |                                   | $
|                                                   |  |                                                    |           |   |                                   |  
|Weighted average common shares outstanding         |  |                                                    | 9,444,997 |   |                                   |  
|Dilutive effect of stock options                   |  |                                                    | 66,167    |   |                                   |  
|                                                   |  |                                                    |           |   |                                   |  
|Diluted weighted average common shares outstanding |  |                                                    | 9,511,164 |   |                                   |  
|                                                   |  |                                                    |           |   |                                   |  
|Basic earnings (loss) per common share             |  | $                                                  | 0.50      |   |                                   | $
|Diluted earnings (loss) per common share           |  |                                                    | 0.49      |   |                                   |  
|                                                   |  |                                                    |           |   |                                   |  



9.
Stock-based Compensation



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



|                                                                                                                                          |  | For the Three Months Ended June 30, |       |   | For the Six Months Ended June 30, |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ----- | - | --------------------------------- | -
|(in thousand, except per share amounts)                                                                                                   |  | 2003                                |       |   | 2002                              |  
|Net income (loss) as reported                                                                                                             |  | $                                   | 5,539 |   |                                   | $
|Add: Stock-based compensation, net of tax, included in the determination of net income, as reported                                       |  |                                     | 88    |   |                                   |  
|Deduct: Stock-based compensation, net of tax, that would have been reported if the fair value based method had been applied to all
awards |  |                                     | (193  | ) |                                   |  
|                                                                                                                                          |  |                                     |       |   |                                   |  
|Pro forma net income (loss)                                                                                                               |  | $                                   | 5,434 |   |                                   | $
|                                                                                                                                          |  |                                     |       |   |                                   |  
|Basic earnings (loss) per common share                                                                                                    |  |                                     |       |   |                                   |  
|As reported                                                                                                                               |  | $                                   | 0.50  |   |                                   | $
|Pro forma                                                                                                                                 |  |                                     | 0.48  |   |                                   |  
|Diluted earnings (loss) per common share                                                                                                  |  |                                     |       |   |                                   |  
|As reported                                                                                                                               |  | $                                   | 0.49  |   |                                   | $
|Pro forma                                                                                                                                 |  |                                     | 0.48  |   |                                   |  



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



10. Derivative Financial Instruments



The Company uses derivative financial instruments to assist in interest rate risk
management. At both June 30, 2003 and December 31, 2002, the only derivative financial instruments outstanding were interest rate exchange agreements.



The following table sets forth the activity in the notional amounts of derivative financial instruments during the first six months of 2003.



|(in thousands)        |  | Fair Value Hedge |        | Cash Flow Hedge |   | Total  
|--------------------- |  | ---------------- | ------ | --------------- | - | -------
|Balance at 12/31/02   |  | $                | 25,000 |                 | $ |       
|Additions             |  |                  | 25,000 |                 |   | 100,000
|Terminations          |  |                  |       |                 |   |       
|Maturities            |  |                  |       |                 |   |       
|                      |  |                  |        |                 |   |        
|Balance at 6/30/03    |  | $                | 50,000 |                 | $ | 100,000
|                      |  |                  |        |                 |   |        
|Fair value at 6/30/03 |  | $                | 460    |                 | $ | 1,563  
|                      |  |                  |        |                 |   |        



Below is summary information regarding
the derivative financial instruments outstanding at June 30, 2003.



|                 |  | Notional Amount (in thousands) |         | Weighted Averages |         | Hedged Item
|---------------- |  | ------------------------------ | ------- | ----------------- | ------- | -----------
|                 |  | Receive Rate                   |         |                   | PayRate |            
|Fair Value Hedge |  | $                              | 50,000  |                   | 3.06    | %          
|Cash Flow Hedge  |  |                                | 100,000 |                   | 5.64    | %          
|                 |  |                                |         |                   |         |            
|Total            |  | $                              | 150,000 |                   | 4.78    | %          
|                 |  |                                |         |                   |         |            



In the fair value hedges, the Company
receives a fixed rate and pays a variable rate based upon LIBOR to hedge changes in the fair value of $50.0 million of brokered certificates of deposit. In the cash flow hedges, the Company receives a fixed rate and pays a variable rate based upon
the prime lending rate to hedge the variability of interest cash flows on $100.0 million of variable rate commercial loans.





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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS



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



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



The following discussion and analysis presents our consolidated financial condition and results of operations as of and for the dates and
periods indicated. This discussion should be read in conjunction with our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Form 10-Q and our December 31, 2002 Annual Report on Form 10-K which contain audited
financial statements of Taylor Capital Group, Inc. as of December 31, 2002 and 2001 and for each of the years in the three-year period ended December 31, 2002.



OVERVIEW



We recorded net income for the second quarter of 2003 of $5.5 million, or $0.49 per diluted common share, compared to a net loss of $59.5 million for the second quarter of 2002, or a loss of $8.82 per common share.
The net loss for the second quarter of 2002 was caused by a $64.5 million charge to settle litigation concerning our 1997 acquisition of the Bank. Excluding the litigation settlement charge in 2002, net income in the second quarter of 2003 would
have increased by $502,000, or 10.0%, as compared to second quarter 2002 pro forma net income of $5.0 million.



For the first six months of 2003, net income was $10.7 million, or $0.94 per diluted common share, compared to a net loss of $54.2 million, or $8.18 per common share, during the same six-month period in 2002.
Excluding the $64.5 million litigation settlement charge in 2002, the year-to-date 2003 net income would have increased by $374,000, or 3.6%, as compared to 2002 pro forma net income of $10.3 million.



For both the quarterly and year-to-date periods, net income, exclusive of the litigation
settlement charge, was higher than the comparable period in 2002. Lower noninterest expense, which included a nonrecurring reimbursement of legal fees, and a lower provision for loan losses contributed to the higher level of net income in 2003. The
effect of these items was partially offset by lower net interest income and noninterest income. The decline in diluted earnings per share during both the quarterly and year-to-date comparisons was a result of an increase in the number of common
shares outstanding. In October 2002, we issued 2,587,500 additional shares in our initial public offering.



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Management uses certain non-GAAP financial measures and ratios to evaluate the Companys performance.
Specifically, management reviews net income and the related earnings per share amounts excluding the $64.5 million litigation settlement charge. We believe that excluding this non-recurring charge from both net income and earnings per share presents
a more suitable comparison of our period-to-period results because of the extraordinary nature of the litigation that led to the settlement charge and the likelihood that such events will not reoccur. The following table reconciles net income as
reported under generally accepted accounting principles, or GAAP, on the consolidated statements of income to the non-GAAP pro forma net income.



|                                  |  | For the quarter ended June 30, |       |      | For the six months ended June 30, |        
|--------------------------------- |  | ------------------------------ | ----- | ---- | --------------------------------- | -------
|                                  |  | 2003                           |       | 2002 |                                   |        
|                                  |  | (dollars in thousands)         |      
|Net income (loss)as stated       |  | $                              | 5,539 |      | $                                 | (59,472
|Add back:                         |  |                                |       |      |                                   |        
|Litigation settlement charge      |  |                                |      |      |                                   | 64,509 
|                                  |  |                                |       |      |                                   |        
|Pro forma net income              |  | $                              | 5,539 |      | $                                 | 5,037  
|                                  |  |                                |       |      |                                   |        
|Earnings (loss) per common share: |  |                                |       |      |                                   |        
|Basicas stated                   |  | $                              | 0.50  |      | $                                 | (8.82  
|Dilutedas stated                 |  |                                | 0.49  |      |                                   | (8.82  
|Basicpro forma                   |  | $                              | 0.50  |      | $                                 | 0.61   
|Dilutedpro forma                 |  |                                | 0.49  |      |                                   | 0.61   



Total assets were $2.64 billion at
June 30, 2003, an increase of $104.1 million, or 4.1%, over total assets at December 31, 2002. At June 30, 2003, total loans were $1.91 billion, an increase of $26.4 million, or 1.4%, as compared to December 31, 2002. Total deposits were $2.05
billion at June 30, 2003, an increase of $82.8 million, or 4.2%, from the $1.96 billion of deposits at year-end 2002. Stockholders equity was $175.5 million at June 30, 2003 compared to $168.7 million at December 31, 2002.



RESULTS OF OPERATIONS



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 earning assets and
interest-bearing liabilities and the level of rates earned or paid on those assets and liabilities.



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Three Months Ended June 30, 2003 as Compared to the Three Months Ended June 30, 2002. Net interest income was
$24.3 million during the second quarter of 2003 compared to $25.6 million during the same quarter in 2002, a decrease of $1.3 million or 5.0%. With an adjustment for tax-exempt income, our consolidated net interest income for the second quarter of
2003 was $24.7 million as compared to $26.0 million during the same quarter a year ago, a decrease of $1.4 million, or 5.2%. Despite an increase in average interest-earning assets, our net interest income has declined because of a decline in our net
interest margin.



The net interest margin, which is determined by dividing
taxable equivalent net interest income by average interest-earning assets, was 4.00% during the second quarter of 2003 compared to 4.53% during the same quarter in 2002. The continued low interest rate environment has had a negative impact on our
net interest margin and therefore, net interest income. The low interest rates have caused the yield on our interest-earning assets to decline as we reinvest cash flows from loan and securities repayments at lower interest rates. The yield on
interest-earning assets declined 76 basis points from 6.48% during the second quarter of 2002 to 5.72% during the second quarter of 2003. While the yield on our interest-earning assets has continued to decline, the cost of our interest-bearing
liabilities has not declined as much. We believe this has occurred because many of our interest-bearing liability rates may have already reached their lowest likely levels based on current market-rate pricing. The cost of interest-bearing
liabilities declined 31 basis points from 2.41% during the second quarter of 2002 to 2.10% during the second quarter of 2003. In addition, the $45.0 million of 9.75% junior subordinated debentures that we issued in October 2002 caused the tax
equivalent net interest margin to decline approximately 21 basis points.



The
larger decline in the earning asset yield as compared to the cost of interest-bearing liabilities, also caused the tax equivalent net interest spread, which is the difference between the weighted average yield on interest-earning assets and the rate
paid on interest-bearing liabilities, to decrease. The tax equivalent net interest spread was 3.62% in the second quarter of 2003 as compared to 4.07% during the same quarter in 2002.



Average interest-earning assets grew for the second quarter of 2003 as compared to the same quarter in 2002. Average interest-earning assets
were $2.47 billion during the second quarter of 2003 compared to $2.30 billion during the same quarter in 2002, an increase of $167.7 million, or 7.3%. A $141.7 million, or 8.0% increase in average loan balances produced most of the growth in
average interest-earning assets. Average loan balances were $1.91 billion during the second quarter of 2003 compared to $1.77 billion during the same quarter in 2002. Higher average commercial and commercial real estate loans produced most of the
loan growth, as these average loan balances grew $185.5 million, or 14.6%, to $1.46 billion in the second quarter of 2003 as compared to $1.27 billion in the same quarter in 2002. While average balances have increased, the yield on the loan
portfolio has continued to decline. The yield on loans declined 71 basis points between the two quarterly periods to 6.00% during the second quarter of 2003 as compared to 6.71% during the same quarter a year ago. Most of the asset growth was funded
with interest-bearing deposit balances, with time deposit balances accounting for most of the increase. Time deposit balances increased to $950.9 million during the second quarter of 2003



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



compared to $782.3 million during the second quarter in 2002, with higher average brokered certificates of deposit producing most of the increase.



Six Months Ended June 30, 2003 as Compared to the Six Months Ended June 30,
2002. Net interest income was $48.5 million during the first half of 2003 compared to $50.3 million during the same period in 2002, a decrease of $1.9 million or 3.7%. With an adjustment for tax-exempt income, our consolidated net interest
income for the first six months of 2003 was $49.2 million as compared to $51.3 million during the same period in 2002, a decrease of $2.0 million, or 4.0%. As with the quarterly comparison, net interest income declined because of compression in our
net interest margin, despite an increase in average interest-earning assets.



The tax equivalent net interest margin was 4.07% during the first half of 2003 compared to 4.50% during the same six month period in 2002. As with the quarterly comparison, the continued low interest rate environment has negatively impacted
our net interest margin. Our interest-earning asset yield declined 67 basis points to 5.81% during the first six months of 2003 from 6.48% during the same period in 2002. However, the cost of interest-bearing liabilities declined only 30 basis
points from 2.45% during the first six months of 2002 to 2.15% during the first six months of 2003. The $45.0 million of 9.75% junior subordinated debentures caused approximately 20 basis points of the decline in the net interest margin. The tax
equivalent net interest spread was 3.66% during the year-to-date 2003 period as compared to 4.03% during the same period in 2002.



Average interest-earning assets during the first six months of 2003 totaled $2.44 billion, an increase of $146.3 million, or 6.4%, as compared to average interest-earning
assets of $2.29 billion during the same six month period in 2002. The growth in the loan portfolio accounted for most of the increase in average interest earning assets. Average loan balances were $1.90 billion during the first half of 2003 compared
to $1.77 billion during the same period in 2002. As with the quarterly comparison, higher average commercial and commercial real estate loans produced most of the loan growth. These average loan balances grew by 12.5%, or $157.9 million to $1.42
billion in the first six months of 2003 as compared to the same period in 2002. The yield on loans declined 66 basis points between the two six month periods to 6.06% during 2003 as compared to 6.72% during the first half of 2002. The asset growth
was funded with interest-bearing deposit balances, with time deposit balances accounting for most of the increase. Average time deposit balances increased to $928.8 million during the first six months of 2003 compared to $751.1 million during the
same period in 2002. Higher average brokered certificates of deposit produced most of the increase.



On June 25, 2003, the Federal Reserve Bank lowered the federal funds target rate by 25 basis points. Shortly thereafter, we lowered our internal prime rate that is the index for a large portion of our loan portfolio.
The decline in our prime rate and the continuing low interest rate environment is expected to have a negative impact on our net interest margin and, therefore, our net interest income. We expect this low interest rate environment to place continued
downward pressure on our earning assets yields, with only modest relief in our cost of funding. See the section captioned Quantitative and Qualitative Disclosure about Market Risks for further discussion on the impact of interest rates.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



The following tables present, for the periods indicated, certain information relating to our consolidated average
balances and reflect our yield on average interest-earning assets and costs of average interest-bearing liabilities. 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 table 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 an effective tax rate of 35%. This assumed rate may differ from our actual effective income tax rate. In addition, the earning asset yield, net interest margin and the net interest rate spread are adjusted to a
fully taxable equivalent basis. We believe that these measures and ratios present a more meaningful measure of the performance of interest-earning assets because they provide a better basis for comparison of net interest income regardless of the mix
of taxable and tax-exempt instruments.



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



|                                               |  | For the Three Months Ended June 30, |        |   | For the Six Months Ended June 30, |  
|---------------------------------------------- |  | ----------------------------------- | ------ | - | --------------------------------- | -
|                                               |  | 2003                                |        |   | 2002                              |  
|                                               |  | (dollars in thousands)              |       
|Net interest income as stated                  |  | $                                   | 24,306 |   |                                   | $
|Tax equivalent adjustment-investments          |  |                                     | 321    |   |                                   |  
|Tax equivalent adjustment-loans                |  |                                     | 44     |   |                                   |  
|                                               |  |                                     |        |   |                                   |  
|Tax equivalent net interest income             |  | $                                   | 24,671 |   |                                   | $
|                                               |  |                                     |        |   |                                   |  
|Yield on earning assets without tax adjustment |  |                                     | 5.66   | % |                                   |  
|Yield on earning assetstax equivalent         |  |                                     | 5.72   | % |                                   |  
|                                               |  |                                     |        |  
|Net interest margin without tax adjustment     |  |                                     | 3.94   | % |                                   |  
|Net interest margintax equivalent             |  |                                     | 4.00   | % |                                   |  
|                                               |  |                                     |        |  
|Net interest spreadwithout tax adjustment     |  |                                     | 3.56   | % |                                   |  
|Net interest spreadtax equivalent             |  |                                     | 3.62   | % |                                   |  



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



|                                             |  | For Three Months Ended June 30, |          
|-------------------------------------------- |  | ------------------------------- | ---------
|                                             |  | 2003                            |          
|                                             |  | AVERAGE BALANCE                 |          
|                                             |  | (in thousands)                  |          
|INTEREST-EARNING ASSETS:                     |  |                                 |          
|Investment securities (1):                   |  |                                 |          
|Taxable                                      |  | $                               | 466,505  
|Tax-exempt (tax equivalent) (2)              |  |                                 | 49,957   
|                                             |  |                                 |          
|Total investment securities                  |  |                                 | 516,462  
|                                             |  |                                 |          
|Cash Equivalents                             |  |                                 | 39,770   
|                                             |  |                                 |          
|Loans (2) (3):                               |  |                                 |          
|Commercial and commercial real estate        |  |                                 | 1,456,626
|Residential real estate mortgages            |  |                                 | 113,223  
|Home equity and consumer                     |  |                                 | 343,691  
|Fees on loans                                |  |                                 |          
|                                             |  |                                 |          
|Net loans (tax equivalent) (2)               |  |                                 | 1,913,540
|                                             |  |                                 |          
|Total interest-earning assets (2)            |  |                                 | 2,469,772
|                                             |  |                                 |          
|Allowance for loan losses                    |  |                                 | (35,926  
|                                             |  |                                 |          
|NON-EARNING ASSETS:                          |  |                                 |          
|                                             |  |                                 |          
|Cash and due from banks                      |  |                                 | 59,728   
|Accrued interest and other assets            |  |                                 | 99,999   
|                                             |  |                                 |          
|TOTAL ASSETS                                 |  | $                               | 2,593,573
|                                             |  |                                 |          
|INTEREST-BEARING LIABILITIES:                |  |                                 |          
|Interest-bearing deposits:                   |  |                                 |          
|Interest-bearing demand deposits             |  | $                               | 560,450  
|Savings deposits                             |  |                                 | 91,598   
|Time deposits                                |  |                                 | 950,890  
|                                             |  |                                 |          
|Total interest-bearing deposits              |  |                                 | 1,602,938
|                                             |  |                                 |          
|Short-term borrowings                        |  |                                 | 247,709  
|Notes payable and FHLB advances              |  |                                 | 118,126  
|Trust preferred securities                   |  |                                 | 45,000   
|                                             |  |                                 |          
|Total interest-bearing liabilities           |  |                                 | 2,013,773
|                                             |  |                                 |          
|NONINTEREST-BEARING LIABILITIES:             |  |                                 |          
|Noninterest-bearing deposits                 |  |                                 | 368,073  
|Accrued interest and other liabilities       |  |                                 | 39,403   
|                                             |  |                                 |          
|Total noninterest-bearing liabilities        |  |                                 | 407,476  
|                                             |  |                                 |          
|STOCKHOLDERS EQUITY                         |  |                                 | 172,324  
|                                             |  |                                 |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY   |  | $                               | 2,593,573
|                                             |  |                                 |          
|Net interest income (tax equivalent) (2)     |  |                                 |          
|                                             |  |                                 |          
|Net interest spread (tax equivalent) (2) (4) |  |                                 |          
|                                             |  |                                 |          
|Net interest margin (tax equivalent) (2) (5) |  |                                 |          
|                                             |  |                                 |          

---

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

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

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

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

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

|(6) |  | Yield/Rates are annualized.
|--- |  | ---------------------------



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



|                                             |  | For Six Months Ended June 30, |          
|-------------------------------------------- |  | ----------------------------- | ---------
|                                             |  | 2003                          |          
|                                             |  | AVERAGE BALANCE               |          
|                                             |  | (in thousands)                |          
|INTEREST-EARNING ASSETS:                     |  |                               |          
|Investment securities (1):                   |  |                               |          
|Taxable                                      |  | $                             | 456,606  
|Tax-exempt (tax equivalent) (2)              |  |                               | 50,262   
|                                             |  |                               |          
|Total investment securities                  |  |                               | 506,868  
|                                             |  |                               |          
|Cash Equivalents                             |  |                               | 33,361   
|                                             |  |                               |          
|Loans (2) (3):                               |  |                               |          
|Commercial and commercial real estate        |  |                               | 1,424,904
|Residential real estate mortgages            |  |                               | 115,044  
|Home equity and consumer                     |  |                               | 355,805  
|Fees on loans                                |  |                               |          
|                                             |  |                               |          
|Net loans (tax equivalent) (2)               |  |                               | 1,895,753
|                                             |  |                               |          
|Total interest-earning assets (2)            |  |                               | 2,435,982
|                                             |  |                               |          
|Allowance for loan losses                    |  |                               | (35,439  
|NON-EARNING ASSETS:                          |  |                               |          
|Cash and due from banks                      |  |                               | 59,843   
|Accrued interest and other assets            |  |                               | 99,686   
|                                             |  |                               |          
|TOTAL ASSETS                                 |  | $                             | 2,560,072
|                                             |  |                               |          
|INTEREST-BEARING LIABILITIES:                |  |                               |          
|Interest-bearing deposits:                   |  |                               |          
|Interest-bearing demand deposits             |  | $                             | 565,791  
|Savings deposits                             |  |                               | 90,687   
|Time deposits                                |  |                               | 928,836  
|                                             |  |                               |          
|Total interest-bearing deposits              |  |                               | 1,585,314
|                                             |  |                               |          
|Short-term borrowings                        |  |                               | 234,266  
|Notes payable and FHLB advances              |  |                               | 116,296  
|Trust preferred securities                   |  |                               | 45,000   
|                                             |  |                               |          
|Total interest-bearing liabilities           |  |                               | 1,980,876
|                                             |  |                               |          
|NONINTEREST-BEARING LIABILITIES:             |  |                               |          
|Noninterest-bearing deposits                 |  |                               | 371,126  
|Accrued interest and other liabilities       |  |                               | 37,141   
|                                             |  |                               |          
|Total noninterest-bearing liabilities        |  |                               | 408,267  
|                                             |  |                               |          
|STOCKHOLDERS EQUITY                         |  |                               | 170,929  
|                                             |  |                               |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY   |  | $                             | 2,560,072
|                                             |  |                               |          
|Net interest income (tax equivalent) (2)     |  |                               |          
|                                             |  |                               |          
|Net interest spread (tax equivalent) (2) (4) |  |                               |          
|                                             |  |                               |          
|Net interest margin (tax equivalent) (2) (5) |  |                               |          
|                                             |  |                               |          

---

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

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

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

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

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

|(6) |  | Yield/Rates are annualized.
|--- |  | ---------------------------



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Noninterest Income



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



|                                           |  | For ThreeMonths  EndedJune 30, |       | For SixMonths EndedJune 30,
|------------------------------------------ |  | ------------------------------ | ----- | ---------------------------
|                                           |  | 2003                           |       |                            
|                                           |  | (in thousands)                
|Service charges                            |  | $                              | 3,135 |                            
|Trust and investment management fees       |  |                                | 1,120 |                            
|Mortgage-banking activities                |  |                                | (7    | )                          
|Gain on sale of investment securities, net |  |                                |      |                            
|Other noninterest income                   |  |                                | 729   |                            
|                                           |  |                                |       |                            
|Total noninterest income                   |  | $                              | 4,977 |                            
|                                           |  |                                |       |                            



Our noninterest income was $5.0
million during the second quarter of 2003, a $391,000, or 7.3%, decrease from the $5.4 million of noninterest income during the second quarter of 2002. For the first six months of 2003, our noninterest income was $9.5 million, a decrease of
$796,000, or 7.7%, from the $10.3 million of noninterest income during the same period in 2002. The decline in both the quarterly and year-to-date periods was primarily due to reduced trust and investment management fees and a decrease in revenue
from mortgage-banking activities. In addition, $590,000 of proceeds received in the second quarter of 2002 from key man life insurance policies also contributed to the decline in noninterest income in 2003. These decreases in noninterest income were
partly offset by higher service charges. Our noninterest income has been, and will continue to be, impacted by our exit from certain trust lines of business during 2002 and mortgage-banking activities during 2001.



Service charges, principally on deposit accounts, were $3.1 million during the second quarter
of 2003, a slight increase from the same quarter a year ago. For the six month period ended June 30, 2003, service charges were $6.3 million, an increase of $237,000, or 3.9%, from the same six month period a year ago. The increases were primarily a
result of a continued decline in the earnings credit rate. The earnings credit rate determines the amount of credit attributed to customers for their collected deposit balances. This credit is available to offset account activity service charges
incurred. Lower earnings credit rates, other things being equal, therefore mean more activity charges are paid through this service charge category. The average earnings credit rate during the first six months of 2003 was approximately 77 basis
points lower than the same period in 2002.



Trust fees and investment
management fees declined $159,000, or 12.4%, to $1.1 million during the second quarter of 2003, compared to $1.3 million during the same quarter in 2002. On a year-to-date basis, trust and investment management fees during 2003 of $2.2 million were
$627,000, or 22.3%, lower than during the same period a year ago. Trust revenues have declined as a result of our exit from fiduciary personal and employee benefit trust services in late 2002.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



We continue to provide corporate trust, land trust and tax deferred exchange trust services. We also generate fees
from our wealth management services, including financial planning, insurance, and asset management services.



Noninterest Expense



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



|                                                |  | For Three Months Ended June 30, |        | For Six Months Ended June 30,
|----------------------------------------------- |  | ------------------------------- | ------ | -----------------------------
|                                                |  | 2003                            |        | 2002                         
|                                                |  | (in thousands)                 
|Salaries and employee benefits                  |  | $                               | 10,598 |                              
|Occupancy of premises                           |  |                                 | 1,773  |                              
|Furniture and equipment                         |  |                                 | 765    |                              
|Holding company legal fees, net                 |  |                                 | 305    |                              
|Bank legal fees, net                            |  |                                 | 434    |                              
|Advertising and public relations                |  |                                 | 752    |                              
|Corporate insurance                             |  |                                 | 728    |                              
|Computer processing                             |  |                                 | 515    |                              
|Consulting                                      |  |                                 | 183    |                              
|Other real estate and repossessed asset expense |  |                                 | 32     |                              
|Other intangible amortization                   |  |                                 | 97     |                              
|Litigation settlement charge                    |  |                                 |       |                              
|Other noninterest expense                       |  |                                 | 3,041  |                              
|                                                |  |                                 |        |                              
|Total noninterest expense                       |  | $                               | 19,223 |                              
|                                                |  |                                 |        |                              



Noninterest expense was $19.2 million
during the second quarter of 2003 compared to $85.3 million during the second quarter of 2002. For the first six months of 2003, noninterest expense was $37.7 million, compared to $104.1 million during the same six-month period in 2002.



Salaries and employee benefits expense was $10.6 million during the second quarter of
2003, a decrease of $1.7 million, or 13.6%, from the second quarter in 2002. In the year-to-date periods, salaries and employee benefits expense declined $1.5 million, or 6.7% to $21.4 million during 2003 from $23.0 million during 2002. The decrease
in 2003 was primarily due to $1.6 million of severance included during the second quarter of 2002 related to the decision to exit some trust lines of business and other executive level changes at the Bank. Our average number of full-time equivalent
employees was 525 during the first six months of 2003 compared to 533 during the same period in 2002. While the average number of full-time equivalent employees did decline as a result of the decisions to exit fiduciary trust and mortgage-banking,
we have increased the number of banking professionals in our core business lines and increased staffing levels in some support areas.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Expense relating to occupancy of premises increased during both the second quarter of 2003 and the first six months
of 2003 when compared to the same periods in 2002. Occupancy of premises expense was $1.8 million during the second quarter of 2003 compared to $1.5 million in the same quarter in 2002, while year-to-date expense was $3.4 million during 2003
compared to $3.2 million in the same period in 2002. An increase in depreciation expense and repairs and maintenance contributed to the higher level of costs in 2003.



Our plan to consolidate our operational and support staff into a centrally-located corporate center is expected to impact our occupancy
expense in the future. During the first quarter of 2003, we signed an operating lease for 108,000 square feet of office space in Rosemont, Illinois, a suburb of Chicago. The lease begins in September 2003 and expires in August of 2014. In connection
with the consolidation, we are also evaluating options for disposing of or reducing space at our existing facilities. As a result, in 2003, we expect to report significant nonrecurring costs in connection with a possible lease termination and the
abandonment of the related leasehold improvements at our Wheeling facility. These costs are currently estimated to be approximately $4.0 million. Lease termination costs and associated leasehold improvements and furniture to be abandoned will be
charged to expense in the period in which we contractually agree to a payment to terminate our lease or when we cease to occupy the space, whichever occurs sooner. No such expense was recorded during the first six months of 2003. See the section
captioned Financial ConditionNon-earning Assets for additional details.



In addition, we have announced that our Jackson Street banking facility in Chicago will close during the fourth quarter of 2003. The lease on the facility was scheduled to expire during the first quarter of 2004.
Customers who use the Jackson facility will be directed to another of our banking facilities located nearby.



Furniture and equipment expense was $765,000 during the second quarter of 2003, a decrease of $123,000 compared to the expense of $888,000 during the same quarter in 2002. For the first six months of 2003, furniture
and equipment expense was $1.6 million compared to $1.9 million during the same period in 2002, a decrease of $293,000. Lower depreciation expense produced most of the decrease, as certain technology and computer equipment that was placed in service
for year 2000 readiness became fully depreciated during 2002.



Holding company
legal fees during 2003 consist primarily of costs for general corporate matters, including securities law compliance and other costs associated with being a publicly-traded company. During 2002 and prior, holding company legal fees included costs
related to the defense and settlement of litigation concerning our 1997 acquisition of the Bank. Holding company legal fees were $305,000 during the second quarter of 2003 compared to $580,000 during the same quarter in 2002. For the year-to-date
2003 period, we reported a net reimbursement of holding company legal fees of $1.3 million compared to an expense of $995,000 during the same period in 2002. Portions of our defense costs related to the litigation, which were recorded as expenses in
previous periods, were submitted to insurance carriers for reimbursement. During the first quarter of 2003, we received a $2.1 million reimbursement of such legal costs. No such reimbursements were received in 2002. We do not expect to receive any
further reimbursements of holding company legal fees related to the litigation.



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Bank legal fees relate to collection activities as well as general corporate and compliance matters. While Bank legal
fees declined during the second quarter of 2003 as compared to the second quarter of 2002, the fees during the first six months of 2003 were higher than during the same period in 2002. The higher legal fees in 2003 were primarily caused by legal
services provided in connection with our negotiations for the corporate center lease, increased collection activity and regulatory compliance relating to new regulations and new products and services for our core business banking customers.



Advertising and public relations expense increased in both the second quarter
and the first six months of 2003 when compared to the same periods in 2002. Advertising and public relations expense for the second quarter was $752,000 compared to $428,000 in second quarter of 2002. Year-to-date advertising and public relations
expense was $2.1 million during 2003 compared to $885,000 during the same period in 2002. Our advertising expense increased in 2003 as a result of a new campaign to increase the Banks visibility in the business community. This campaign
includes television commercials, which began airing in 2003, and print advertising. While the advertising campaign increased advertising and public relations expense significantly during the first half of 2003, we do not currently plan to continue
this level of expenditures on television and print advertising during the remainder of 2003. The cost of producing the television commercials was capitalized in 2002 and is being amortized beginning in 2003 over three years, the expected time
horizon over which the commercials will be aired. The amortization expense in the second quarter and the first six months of 2003 was approximately $65,000 and $129,000, respectively. At June 30, 2003, the balance of capitalized advertising costs
totaled $646,000.



Corporate insurance increased to $728,000 during the second
quarter of 2003 compared to $304,000 during the same period in 2002. Corporate insurance expense was $1.6 million during the first six months of 2003 compared to $548,000 during the same period a year ago. The increase was associated with
market-driven costs, including those of becoming a publicly-traded company.



In
addition to corporate insurance costs, we expect to incur additional noninterest expense in 2003, as compared to 2002, as a result of our becoming a publicly traded company. Specifically, we expect increases in audit fees, filing and printing costs,
proxy solicitation costs, and other expenses generally associated with publicly-traded companies.



Reported noninterest expense in the second quarter of 2002 reflects a $64.5 million charge related to our settlement of litigation concerning our 1997 acquisition of the Bank. The amount of the settlement was based,
in part, on the anticipated initial public offering price of our common stock, and a charge was recorded in the second quarter of 2002 when we were first able to conclude that the execution of the settlement agreements was probable. This settlement
was funded with a portion of the net proceeds from the concurrent offerings of common stock and trust preferred securities completed in October 2002. After completion of the initial public offering in October 2002, we paid $61.9 million in full
satisfaction of our settlement agreements, and an adjustment was recorded in the third quarter of 2002 to reduce the previously estimated amount of the litigation settlement charge to $61.9 million.



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Income Taxes



We recorded income tax expense of $3.0 million during the second quarter of 2003 and $5.8 million during the first six months of 2003, resulting in an effective income
tax rate of 35% during both periods. In comparison, despite the net loss in both the second quarter of 2002 and for the year-to-date 2002 period, we recorded income tax expense of $2.7 million and $5.8 million during the three and six month periods
ended June 30, 2002, respectively. No income tax benefit was recorded with respect to the litigation settlement charge.



While we did not recognize any income tax benefit for financial reporting purposes with respect to the litigation settlement charge during 2002 (and certain legal defense
costs incurred during 2002 and prior years), we plan to deduct a portion of the litigation settlement for 2002 tax return purposes. We have not yet filed our 2002 income tax return. At times, we recognize income tax expense differently for financial
reporting purposes than for tax return purposes. We will record the income tax benefit on our financial statements when we determine that it is probable that the position that we take on our tax return will ultimately be sustained by the taxing
authorities.



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



FINANCIAL CONDITION



Overview



Our total assets were $2.64 billion at June 30, 2003 compared to $2.54 billion at year-end 2002. An increase in cash and cash equivalents and higher total loans accounted for most of the growth in total assets. Total
loans increased $26.4 million, or 1.4% to $1.91 billion at June 30, 2003, compared to $1.88 billion at December 31, 2002. Total deposits increased to $2.05 billion at June 30, 2003 compared to $1.96 billion at December 31, 2002. Total
stockholders equity at June 30, 2003 was $175.5 million compared to $168.7 million at December 31, 2002.



For the first six months of 2003, average interest-earning assets increased $146.3 million, or 6.4%, to total $2.44 billion, as compared to $2.29 billion during the same period of 2002. Loan growth was the primary
contributor to the higher level of interest-earning assets.



Cash and
Cash Equivalents



Period-end cash and cash equivalents increased to
$170.6 million at June 30, 2003 compared to $92.9 million at December 31, 2002. Average cash and due from bank balances for the second quarters of 2003 and 2002 and the six-month periods ending June 30, 2003 and 2002 were essentially flat. Cash
equivalents, consisting of short-term, interest-bearing investments, increased during 2003 as a result of increased deposit balances, a portion of which were considered short-term.



Interest-Earning Assets



Total investment securities decreased slightly to $497.2 million at June 30, 2003 compared to $501.6 million at year-end 2002. During the first half of 2003, we purchased
approximately $133 million of investment securities, primarily mortgage-related securities, reinvesting the repayments we received from our investment portfolio.



Period-end total loan balances increased $26.4 million, or 1.4%, to $1.91 billion at June 30, 2003 compared to $1.88 billion at December 31,
2002. Commercial and industrial and commercial real estate loans increased $82.9 million, or 6.0%, during the first six months of 2003. Our loan portfolios of real estate mortgages and indirectly-originated consumer loans declined as we discontinued
the origination of these loans sourced through brokers. The portfolio of loans extended to consumers, whether as a mortgage, line of credit or other purpose, approximated 23% of the total loan portfolio at June 30, 2003 compared to 26% at December
31, 2002.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Loan Quality and Nonperforming Assets



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



|                                                                         |  | June 30,2003   |        |   | Dec. 31,2002 |  
|------------------------------------------------------------------------ |  | -------------- | ------ | - | ------------ | -
|                                                                         |  | (in thousands) |       
|Loans contractually past due 90 days or more but still accruing interest |  | $              | 3,498  |   |              | $
|Nonaccrual loans                                                         |  |                | 14,021 |   |              |  
|Troubled debt restructurings                                             |  |                | 1,216  |   |              |  
|                                                                         |  |                |        |   |              |  
|Total nonperforming loans                                                |  |                | 18,735 |   |              |  
|Other real estate owned                                                  |  |                | 1,550  |   |              |  
|Other repossessed assets                                                 |  |                | 32     |   |              |  
|                                                                         |  |                |        |   |              |  
|Total nonperforming assets                                               |  | $              | 20,317 |   |              | $
|                                                                         |  |                |        |   |              |  
|Nonperforming loans to total loans                                       |  |                | 0.98   | % |              |  
|Nonperforming assets to total loans plus repossessed property            |  |                | 1.07   | % |              |  
|Nonperforming assets to total assets                                     |  |                | 0.77   | % |              |  



The level of nonperforming loans
increased to $18.7 million at June 30, 2003, or 0.98% of total loans, from $18.3 million, or 0.97% of total loans, at December 31, 2002. Higher nonaccrual and restructured loans produced the slight increase. The level of nonperforming assets was
$20.3 million at June 30, 2003 compared to $18.9 million at December 31, 2002. The increases in nonperforming loans and other real estate owned combined to produce the increase in nonperforming assets.



In addition to the existing nonperforming assets, we continue to monitor closely our $18.1
million of loans to consumers secured by manufactured homes.



Allowance
for Loan Losses



We have established an allowance for loan losses to
provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Although management believes that the
allowance for loan losses is adequate to absorb probable losses on existing loans that may become uncollectable, there can be no assurance that our allowance will prove to be 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 judgment about
information available to them at the time of their examinations.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



|                                                  |  | For Three Months EndedJune 30, |           |   | For Six Months Ended June 30, |  
|------------------------------------------------- |  | ------------------------------ | --------- | - | ----------------------------- | -
|                                                  |  | 2003                           |           |   | 2002                          |  
|                                                  |  | (in thousands)                 |          
|Average total loans                               |  | $                              | 1,913,540 |   |                               | $
|                                                  |  |                                |           |   |                               |  
|Total loans at end of period                      |  | $                              | 1,905,862 |   |                               | $
|                                                  |  |                                |           |   |                               |  
|Allowance for loan losses:                        |  |                                |           |   |                               |  
|Allowance at beginning of period                  |  | $                              | 35,697    |   |                               | $
|Total charge-offs                                 |  |                                | (1,329    | ) |                               |  
|Total recoveries                                  |  |                                | 256       |   |                               |  
|                                                  |  |                                |           |   |                               |  
|Net charge-offs                                   |  |                                | (1,073    | ) |                               |  
|Provision for loan losses                         |  |                                | 1,533     |   |                               |  
|                                                  |  |                                |           |   |                               |  
|Allowance at end of period                        |  | $                              | 36,157    |   |                               | $
|                                                  |  |                                |           |   |                               |  
|Annualized net charge-offs to average total loans |  |                                | 0.22      | % |                               |  
|Allowance to total loans at end of period         |  |                                | 1.90      | % |                               |  
|Allowance to nonperforming loans                  |  |                                | 192.99    | % |                               |  



Net charge-offs for the second quarter
of 2003 were $1.1 million, or 0.22% of average loans, while on a year-to-date basis, net charge-offs in 2003 were $1.7 million, or 0.18% of average loans. In comparison, net charge-offs during the second quarter and the first six months of 2002 were
$2.1 million and $3.2 million, respectively, representing 0.46% and 0.36% of average loans, respectively. We believe the lower level of net charge-offs during the first six months of 2003, as compared to 2002 will not be maintained in the third
quarter of 2003 and may not be sustainable in future periods. Losses on individually larger commercial loans, which comprise 75% of our total loan portfolio, can be larger in amount and more uneven in timing than consumer loans. Accordingly, net
charge-offs in any one quarter are not an indicator of net charge-offs in subsequent quarters.



Our allowance for loan loss increased to $36.2 million at June 30, 2003, or 1.90% of end-of-period loan balances and 192.99% of non-performing loans. At December 31, 2002, the allowance for loan losses was $34.1
million, which represented 1.81% of end-of-period loan balances and 186.62% of non-performing loans. At June 30, 2002, the allowance for loan losses was $32.9 million, which represented 1.83% of end-of-period loan balances and 214.74% of
non-performing loans.



Provision for Loan Losses



We determine a provision for loan losses that we consider sufficient to maintain an
allowance covering probable losses inherent in our portfolio as of the balance sheet date. Our provisions for loan losses in 2003 have been less than the provisions in 2002 during both the second quarter



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



and year-to-date period. The provision was $1.5 million during the second quarter of 2003 compared to $2.5 million
during the same quarter in 2002, while during the first six months of 2003, the provision for loan losses was $3.8 million compared to $5.0 million during the same period in 2002. The lower level of both net charge-offs and total loan growth, as
well as other factors, resulted in the decrease in the provision for loan losses during the quarter and the six month periods.



Non-earning Assets



Premises, leasehold improvements and equipment, net of accumulated depreciation and amortization, totaled $20.0 million at June 30, 2003 compared to $19.1 million at
December 31, 2002. During the first quarter of 2003, we signed an operating lease for 108,000 square feet of operation and office space in Rosemont, Illinois, a suburb of Chicago. We expect to begin transitioning our corporate, operational, and
administrative departments to this location in September 2003. The increase in premises, leasehold improvements, and equipment is associated with the leasehold improvements at this new facility.



We are also evaluating options for disposing of or reducing space at our existing facilities
and opportunities to down-size certain banking facilities. In the fourth quarter of 2002, we contracted to sell our existing Ashland facility and we plan to build a smaller banking facility near the current Ashland site. In addition, we have
announced that our Jackson facility will close during the fourth quarter of 2003. The lease on the Jackson facility was scheduled to expire during the first quarter of 2004. Customers who use the Jackson facility will be directed to another of our
banking facilities located nearby. We are also investigating options for reducing space at our Wheeling facility. The options include a possible lease termination and the abandonment of the related leasehold improvements. As a result, in 2003, we
expect to report significant nonrecurring costs in connection with a possible lease termination. These costs are currently estimated to be approximately $4.0 million. Lease termination costs and associated leasehold improvements and furniture to be
abandoned will be charged to expense in the period in which we contractually agree to a payment to terminate our lease or when we cease to occupy the space, whichever occurs sooner. No such costs have been incurred through June 30, 2003.



Funding Liabilities



Total deposits were $2.05 billion at June 30, 2003, an increase of $82.8 million, or 4.2%,
as compared to $1.96 billion at year-end 2002. During the first six months of 2003, noninterest-bearing accounts increased $12.3 million while interest-bearing deposit accounts increased by $70.5 million. Most of the increase in interest-bearing
deposits occurred in time deposits as we increased our reliance on brokered and out-of-market certificates of deposits. Brokered CDs increased $71.6 million to $321.2 million at June 30, 2003 from $249.6 million at year-end 2002, while our
out-of-market certificates of deposit balances increased $8.4 million to $99.9 million at June 30, 2003. Certificates of deposit from our customers increased $33.6 million during the first six months of 2003 to $492.2 million at June 30, 2003. The
growth in local customer certificates of deposit was largely due to a special promotion that ran in the second quarter.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



These increases in time deposits were partly offset by a $42.0 million decline in money market account balances from
December 31, 2002 to June 30, 2003. The decline in these balances primarily related to a large-deposit commercial customer.



Average deposit balances for the first six months of 2003 increased $115.3 million, or 6.3%, as compared to the same six month period in 2002. We relied more on brokered
certificates of deposits as these average balances increased $141.0 million between the two periods to $293.3 million during 2003. In addition, our out-of-market certificates of deposit average balances increased by $39.0 million between the two
periods. A decrease in funding from a large commercial customer, primarily in a money market account, contributed to our increased utilization of wholesale funding. Average money market account balances decreased $81.6 million for the first six
months of 2003 to $415.4 million, as compared to the first six months of 2002.



To the extent that core customer deposits are insufficient to meet our funding needs, we typically seek additional funding from other sources, as we did in the first half of 2003. These alternate sources are generally more expensive than
our core customer deposits and the increased use of these sources of funds has negatively impacted, and may continue to negatively impact our net interest income. Furthermore, the cost and availability of these funds may be factors in our evaluation
of opportunities to grow our loan portfolio.



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



|                                    |  | For the Six Months Ended June 30, 2003 |           |                    | For the Six Months Ended June 30, 2002 |  
|----------------------------------- |  | -------------------------------------- | --------- | ------------------ | -------------------------------------- | -
|                                    |  | AverageBalance                         |           | Percent OfDeposits |                                        |  
|                                    |  | (dollars in thousands)                 |          
|Noninterest-bearing demand deposits |  | $                                      | 371,126   |                    | 18.97                                  | %
|Interest-bearing demand deposits    |  |                                        | 565,791   |                    | 28.92                                  |  
|Savings deposits                    |  |                                        | 90,687    |                    | 4.64                                   |  
|Time deposits:                      |  |                                        |           |                    |                                        |  
|Certificates of deposit             |  |                                        | 556,266   |                    | 28.43                                  |  
|Brokered certificates of deposit    |  |                                        | 293,288   |                    | 14.99                                  |  
|Public Funds                        |  |                                        | 79,282    |                    | 4.05                                   |  
|                                    |  |                                        |           |                    |                                        |  
|Total time deposits                 |  |                                        | 928,836   |                    | 47.47                                  |  
|                                    |  |                                        |           |                    |                                        |  
|Total deposits                      |  | $                                      | 1,956,440 |                    | 100.00                                 | %
|                                    |  |                                        |           |                    |                                        |  



Our short-term borrowings include
federal funds purchased, securities sold under agreements to repurchase and U.S. Treasury tax and loan note option accounts. Period-end, short-term borrowings increased $11.3 million to $226.6 million at June 30, 2003 as compared to $215.4 million
at December 31, 2002, with most of the increase occurring in securities sold under agreements to repurchase which increased by $13.4 million. While period-end, short-term



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



borrowings increased, average balances for the first six months 2003 decreased by $6.4 million to $234.3 million when
compared to the same period in 2002.



Our notes payable and FHLB advances
consist of our revolving and term debt and the Banks FHLB advances. Borrowings from the FHLB totaled $100.0 million at both June 30, 2003 and December 31, 2002. Also, at June 30, 2003 and December 31, 2002, we had borrowings outstanding under
our $10.0 million subordinated debt agreement and $500,000 term loan. We have an $11.5 million revolving credit facility that has not yet been drawn upon.



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 and our
noncumulative perpetual preferred stock less goodwill. The trust preferred securities also qualify as Tier I capital up to certain limits. Total capital represents Tier I capital plus the allowance for loan loss, subject to certain limits, our
subordinated loan, and the portion of any trust preferred securities not includable in Tier I capital.



At both June 30, 2003 and December 31, 2002, the holding company was considered well capitalized under capital guidelines for bank holding companies set by the Federal Reserve.



In addition, at both June 30, 2003 and December 31, 2002, the Bank was considered well
capitalized under regulatory capital guidelines.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



|                                         |  | ACTUAL                 |         |       | FOR CAPITAL ADEQUACY PURPOSES |   |        | TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS |         
|---------------------------------------- |  | ---------------------- | ------- | ----- | ----------------------------- | - | ------ | ---------------------------------------------------------------- | --------
|                                         |  | AMOUNT                 |         | RATIO |                               |   | AMOUNT |                                                                  | RATIO   
|                                         |  | (dollars in thousands) |        
|As of June 30, 2003:                     |  |                        |         |       |                               |   |        |                                                                  |         
|Total Capital (to Risk Weighted Assets)  |  |                        |         |       |                               |   |        |                                                                  |         
|Taylor Capital Group, Inc.               |  | $                      | 224,016 |       | 10.46                         | % |        | >$                                                               | 171,268 
|Cole Taylor Bank                         |  |                        | 225,461 |       | 10.56                         |   |        |                                                                  | >170,813
|Tier I Capital (to Risk Weighted Assets) |  |                        |         |       |                               |   |        |                                                                  |         
|Taylor Capital Group, Inc.               |  |                        | 187,139 |       | 8.74                          |   |        |                                                                  | >85,634 
|Cole Taylor Bank                         |  |                        | 198,654 |       | 9.30                          |   |        |                                                                  | >85,407 
|Leverage (to average assets)             |  |                        |         |       |                               |   |        |                                                                  |         
|Taylor Capital Group, Inc.               |  |                        | 187,139 |       | 7.28                          |   |        |                                                                  | >102,819
|Cole Taylor Bank                         |  |                        | 198,654 |       | 7.75                          |   |        |                                                                  | >102,560
|                                         |  |                        |         |       |                               |  
|As of December 31, 2002:                 |  |                        |         |       |                               |   |        |                                                                  |         
|Total Capital (to Risk Weighted Assets)  |  |                        |         |       |                               |   |        |                                                                  |         
|Taylor Capital Group, Inc.               |  | $                      | 213,555 |       | 10.63                         | % |        | >$                                                               | 161,089 
|Cole Taylor Bank                         |  |                        | 210,180 |       | 10.47                         |   |        |                                                                  | >160,547
|Tier I Capital (to Risk Weighted Assets) |  |                        |         |       |                               |   |        |                                                                  |         
|Taylor Capital Group, Inc.               |  |                        | 177,700 |       | 8.82                          |   |        |                                                                  | >80,545 
|Cole Taylor Bank                         |  |                        | 184,984 |       | 9.22                          |   |        |                                                                  | >80,273 
|Leverage (to average assets)             |  |                        |         |       |                               |   |        |                                                                  |         
|Taylor Capital Group, Inc.               |  |                        | 177,700 |       | 7.21                          |   |        |                                                                  | >98,625 
|Cole Taylor Bank                         |  |                        | 184,984 |       | 7.52                          |   |        |                                                                  | >98,406 



During the first six months of 2003,
we declared preferred stock dividends of $1.125 per share, totaling $1.7 million, and common stock dividends of $0.12 per share, totaling $1.1 million.



The covenants in our senior notes payable agreement restrict the amount of dividends that the Company can pay to shareholders and the amount of dividends that the Bank
can pay to the Company. Beginning with the 2003 calendar year, the Company is restricted from paying annual cash dividends to shareholders during a calendar year in excess of 25% of that years annual net income, while the Bank is restricted
from paying annual cash dividends in a calendar year to the Company in excess of 60% of that years annual net income. As of June 30, 2003, the Company is in compliance with these covenants.



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 June 30, 2003, that the Bank could declare and pay to the Company, without the approval of regulatory authorities, amounted to approximately $35.1 million. However, payment of such dividends is also subject to the Bank remaining in
compliance with all applicable capital ratios.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



LIQUIDITY



From December 31, 2002 to June 30, 2003, our cash and cash equivalent balances increased $77.7 million to $170.6 million. Significant sources of funds included $132.8
million of proceeds from principal repayments and maturities of investment securities, an $82.8 million increase in deposits and $16.9 million in cash provided from operating activities. Uses of funds included the purchase of $133.2 million of
investment securities and a net increase in loans of $28.3 million. While commercial loans increased $82.9 million, loans to consumers decreased $56.5 million.



During the first half of 2003, we purchased $133.2 million of available-for-sale investment securities to reinvest the large repayments received from the investment
portfolio. The increase in deposits was largely in time deposits, as funding from brokered certificates of deposits increased by $71.6 million, and customer certificates of deposits increased by $42.0 million. These increases were partially offset
by a decrease in other interest-bearing deposit balances, primarily money market account balances. We manage the liquidity risk associated with wholesale funding by using predominantly longer term products.



At the holding company level, we maintained the same level of borrowings at June 30, 2003 as
we had outstanding at December 31, 2002. We also have an $11.5 million revolving credit facility, which has not yet been drawn upon.



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



Off-Balance Sheet Arrangements



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



At June 30, 2003, we had $810.4 million of commitments to extend credit and $75.4 million of financial and performance standby letters of credit. In comparison, at
December 31, 2002, we had $841.2 million of commitments to extend credit and $58.0 million of financial and performance standby letters of credit. We expect most of these letters of credit to expire undrawn and we expect no significant loss from our
obligation under financial guarantees.



At June 30, 2003, our only derivative
financial instruments were interest-rate exchange contracts. An interest-rate exchange contract, or 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. Our objective in holding interest-rate swaps is interest rate risk management.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



During the second quarter of 2003 and the first six months of 2003, we entered into interest rate exchange contracts
with notional amounts totaling $50.0 million and $125.0 million, respectively. These swaps were designed to hedge the fair values of certain brokered certificates of deposits and the cash flows on variable rate commercial loans.



Under the terms of the swaps relating to the brokered certificates of deposit, we receive a
fixed interest rate over the term of the agreement and pay a variable interest rate based upon LIBOR. The swaps are callable by the counterparty and the brokered certificates are callable at our option. These swaps, which are accounted for as fair
value hedges, satisfied the criteria to use the short-cut method of accounting for changes in fair value. The short-cut method allows us to assume, over the life of the swap and brokered certificates of deposit, that there is no
ineffectiveness in the hedging relationship and that changes in the fair value of the derivative perfectly offset changes in the fair value of the hedged liability, resulting in no volatility in earnings.



Under the terms of the swaps relating to the cash flows from certain variable rate commercial
loans, we receive a fixed interest rate and pay a floating rate based upon the prime lending rate. This contract is accounted for as a cash flow hedge and is expected to be highly effective, over the life of the swap, in hedging the variability of
cash flows on prime-based loans due to movements in the prime lending rate. The fair value of the interest rate swap is recorded as an asset or liability with the corresponding gain or loss recorded in other comprehensive income in
stockholders equity, net of tax. We review the hedging relationship periodically for effectiveness. However, we expect any ineffective portion of the hedge to be immaterial.



We also have contractual obligations under operating leases for certain of our banking facilities. During the first quarter of 2003, we
signed an operating lease for 108,000 square feet of office and operational space in Rosemont, Illinois, a suburb of Chicago. We expect to begin to occupy the facility and incurring rent expense in September 2003 and the lease expires in August of
2014. Our obligation to make future payments under this operating lease is $534,000 during 2004, $657,000 during 2005, $676,000 during 2006, $697,000 during 2007, and $13.2 million during 2008 through 2014.



QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS



Interest rate risk is one of the most significant risks affecting us. 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. Our objectives are to manage, to the degree prudently possible, our exposure to
interest rate risk over both a one year planning cycle and a 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 derivative financial instruments.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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 and rates in effect at the model date. Our most recent modeling reflected the market and
portfolio interest rates in effect at June 30, 2003. Therefore, it reflected the 25 basis point decline in our prime rate on June 30, 2003. Net interest income is computed by the model assuming interest rates unchanged and compares those results to
other interest rate scenarios with changes in the magnitude, timing and relationship between various interest rates. We 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.



As predicted by our
December 31, 2002 and March 31, 2003 simulations, the net interest margin has declined. Our June 30, 2003 modeling indicates that even if market interest rates were to remain unchanged from June 30, 2003, our earning asset yields would decline more
than our liability rates, resulting in a reduced net interest margin.



Our
simulation modeling also indicates that net interest income would be under further downward pressure if rates continued to fall, reflecting an exposure to declining market rates. At June 30, 2003, net interest income at risk for year one in the
falling rate scenario was calculated at $2.7 million, or 2.74%, lower than the net interest income in the rates unchanged scenario. Conversely, net interest income for year one in the rising rate scenario was calculated to be $4.1 million, or 4.11%,
higher than the net interest income in the rates unchanged scenario at June 30, 2003. These exposures were within the Banks policy guidelines of 10%. The direction of our one-year exposure to rising and declining interest rates at June 30,
2003 was generally consistent with our exposure at December 31, 2002 and March 31, 2003. Growth in prime-based assets during the first six months of 2003, as well as accelerating cash flows, largely offset the impact of the in-the-money cash flow
hedges placed in 2003, resulting in an estimated positive impact to net interest income in the rising rate scenario in year one. However, the same cash flow hedges may limit our ability to benefit from rising rates in the time horizons beyond one
year.



Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including, among other factors, 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. Further, the computations do not contemplate any actions we may take in response to changes in interest rates. We cannot assure you that our actual net interest income would increase or decrease by the amounts computed by the simulations.



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



The following table indicates the estimated impact on net interest income in year one under various parallel ramp
interest rate scenarios at June 30, 2003 and December 31, 2002:



|                                |  | Change in Future Net Interest Income |       
|------------------------------- |  | ------------------------------------ | ------
|                                |  | At June 30,2003                      |       
|                                |  | (dollars in thousands)               |       
|Change in interest rates        |  | DollarChange                         |       
|+200 basis points over one year |  | $                                    | 4,064 
|-75 basis points over one year  |  |                                      | (2,713
|-100 basis points over one year |  |                                      |      



LITIGATION



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



NEW ACCOUNTING PRONOUNCEMENTS



In January 2003, the Financial Accounting Standards board, or FASB, issued Interpretation
No. 46, Consolidation of Variable Interest Entities which provides new accounting guidance on when to consolidate a variable interest entity. A variable interest entity exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to
make decisions about an entitys activities through voting rights or similar rights, the obligation to absorb the expected loss of an entity if they occur, and the right to receive the expected residual return of the entity if they occur. We do
not expect that the adoption of this Interpretation will have any significant impact on our consolidated financial statements.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. We do not expect that the adoption of this Statement will have any significant impact on our consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement would require that certain financial instruments with characteristics of both liabilities and equity be classified on the consolidated balance sheets as liabilities. The Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect that the adoption of this Statement will have any significant impact on our
consolidated financial statements.



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



QUARTERLY FINANCIAL INFORMATION



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



|                                  |  | 2003 Quarter Ended     |        | 2002 Quarter Ended |   | 2001 Quarter Ended
|--------------------------------- |  | ---------------------- | ------ | ------------------ | - | ------------------
|                                  |  | Jun. 30                |        | Mar. 31            |   | Dec. 31           
|                                  |  | (dollars in thousands)
|Interest income                   |  | $                      | 34,873 |                    | $ | 34,787            
|Interest expense                  |  |                        | 10,567 |                    |   | 10,608            
|                                  |  |                        |        |                    |   |                   
|Net interest income               |  |                        | 24,306 |                    |   | 24,179            
|Provision for loan losses         |  |                        | 1,533  |                    |   | 2,300             
|Noninterest income                |  |                        | 4,977  |                    |   | 4,535             
|Securities gains, net             |  |                        |       |                    |   |                  
|Litigation settlement charge      |  |                        |       |                    |   |                  
|Noninterest expense               |  |                        | 19,223 |                    |   | 18,450            
|                                  |  |                        |        |                    |   |                   
|Income (loss) before income taxes |  |                        | 8,527  |                    |   | 7,964             
|Income taxes                      |  |                        | 2,988  |                    |   | 2,839             
|                                  |  |                        |        |                    |   |                   
|Net income (loss)                 |  | $                      | 5,539  |                    | $ | 5,125             
|                                  |  |                        |        |                    |   |                   
|Earnings (loss) per common share: |  |                        |        |                    |   |                   
|Basic                             |  | $                      | 0.50   |                    | $ | 0.45              
|Diluted                           |  |                        | 0.49   |                    |   | 0.45              
|                                  |  |                        |        |                    |   |                   



CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS



This quarterly report includes forward-looking
statements that reflect our current expectations and projections about our future results, performance, prospects and opportunities. We have tried to identify these forward-looking statements by using words such as 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 2003 and beyond to differ materially from those expressed in, or implied by, these forward-looking
statements. These risks, uncertainties and other factors include, without limitation: the effect on our profitability if historically low interest rates continue or if interest rates fluctuate as well as the effect of any imbalances in the interest
rate sensitivities of our assets and liabilities; the possibility that our wholesale funding sources may prove insufficient to replace deposits at maturity and support our growth; the risk that our allowance for loan losses may prove insufficient to
absorb potential losses in our loan portfolio; possible volatility in loan charge-offs and recoveries from quarter to quarter; the effectiveness of our hedging transactions and their impact on our future results of operations; the possible
difficulties or unforeseen costs of relocating and consolidating our administrative and operational functions; the risks associated with implementing our business strategy and managing our growth effectively; the risks associated with our reliance
on third party professionals who provide



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



certain financial services to our customers; changes in general economic conditions, interest rates, deposit flows,
loan demand, 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 our December 31, 2002 Annual Report on Form 10-K under the caption Risk Factors.



You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly
update or revise any forward-looking statements or risk factors, whether as a result of new information, future events, changed circumstances or any other reason after the date of this quarterly report.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



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



Item 4. Controls and Procedures



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



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



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



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TAYLOR CAPITAL GROUP, INC.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



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



Item 2. Changes in Securities and Use of Proceeds



None.



Item 3. Defaults Upon Senior Securities



None



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



We held our annual meeting of stockholders on June 19, 2003. The following matters were voted on at the meeting:



1. The election of three directors by common stockholders set forth below:



|                   |  | For       |  | Withheld
|------------------ |  | --------- |  | --------
|Jeffery W. Taylor  |  | 8,623,165 |  | 86,451  
|Melvin E. Pearl    |  | 8,623,165 |  | 86,451  
|Richard W. Tinberg |  | 8,709,616 |  |        



2. The election of one director by the
holders of our Series A Preferred Stock set forth below:



|               |  | For     |  | Withheld
|-------------- |  | ------- |  | --------
|Adelyn Leander |  | 566,129 |  | 23,500  



The following are the names of the
directors who were not up for reelection at the annual meeting of stockholders whose terms continued after the meeting:



John Christopher Alstrin

Mark L. Yeager

Edward T. McGowan

Bruce W. Taylor

Cindy Taylor Bleil

Ronald D. Emanuel



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TAYLOR CAPITAL GROUP, INC.



Item 5. Other Information



None



Item 6. Exhibits and Reports on Form 8-K



|a) |  | We have filed the following exhibits with this quarterly report:
|-- |  | ----------------------------------------------------------------



|Exhibit Number |  | Exhibit                                                                                                                                                                                                                                           
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               | 
|3.1            |  | Amended and Restated Certificate of Incorporation of Taylor Capital Group, Inc. (incorporated by reference from Exhibit 3.1 of the Amended Registration Statement on Form S-1 filed
October 10, 2002 (Registration No. 333-89158)).               
|               | 
|3.2            |  | Amended and Restated By-laws of Taylor Capital Group, Inc. (incorporated by reference from Exhibit 3.2 of the Amended Registration Statement on Form S-1 filed October 10, 2002
(Registration No. 333-89158)).                                    
|               | 
|4.1            |  | Certificate representing the Series A 9% Noncumulative Perpetual Preferred Stock (incorporated by reference from Exhibit 4.2 of the Amended Registration Statement on Form S-1
filed October 10, 2002 (Registration No. 333-89158)).              
|               | 
|4.2            |  | Certificate representing Taylor Capital Group, Inc. Common Stock (incorporated by reference from Exhibit 4.3 of the Amended Registration Statement on Form S-1 filed October 10,
2002 (Registration No. 333-89158)).                              
|               | 
|4.3            |  | Indenture between Taylor Capital Group, Inc. and LaSalle Bank National Association, as trustee (incorporated by reference from Exhibit 4.4 of the Amended Registration Statement on
Form S-1 filed October 10, 2002 (Registration No. 333-89158)).
|               | 
|4.4            |  | Junior Subordinated Debenture due 2032 (incorporated by reference from Exhibit 4.5 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No.
333-89158)).                                                        
|               | 
|4.5            |  | Certificate of Trust of TAYC Capital Trust I (incorporated by reference from Exhibit 4.6 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No.
333-89158)).                                                  
|               | 
|4.6            |  | Amended and Restated Trust Agreement of TAYC Capital Trust I (incorporated by reference from Exhibit 4.8 of the Amended Registration Statement on Form S-1 filed October 10, 2002
(Registration No. 333-89158)).                                  
|               | 
|4.7            |  | Preferred Securities Guarantee Agreement (incorporated by reference from Exhibit 4.9 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No.
333-89158)).                                                      



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TAYLOR CAPITAL GROUP, INC.



|Exhibit Number |  | Exhibit                                                                                                                                                                                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               | 
|4.8            |  | Agreement as to Expenses and Liabilities by and between Taylor Capital Group, Inc. and TAYC Capital Trust I (incorporated by reference from Exhibit 4.10 of the Amended
Registration Statement on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).
|               | 
|4.9            |  | Certificate representing TAYC Capital Trust I Trust Preferred Security (incorporated by reference from Exhibit 4.11 of the Amended Registration Statement on Form S-1 filed October
10, 2002 (Registration No. 333-89158)).                                     
|               | 
|31.1           |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|               | 
|31.2           |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|               | 
|32.1           |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                              



|b) |  | Reports on Form 8-K.
|-- |  | --------------------



| | 1) |  | On April 2, 2003, a Report on Form 8-K was filed providing certain financial statement disclosures of Cole Taylor Bank, a wholly owned subsidiary of the Company, which was provided
to customers and depositors.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) |  | On April 23, 2003, a Report on Form 8-K was furnished in conjunction with the Companys quarterly earnings release for the quarter ended March 31, 2003.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------





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TAYLOR CAPITAL GROUP, INC.



SIGNATURES



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



|                     |  |  |  |  |  | TAYLOR CAPITAL GROUP, INC.
|-------------------- |  |  |  |  |  | --------------------------
|                     |  |  |  | 
|Date: August 7, 2003 |  |  |  |  |  |                           
|                     |  |  |  |  |  |                           
|                     |  |  |  |  |  |                           
|                     |  |  |  |  |  |                           
|                     |  |  | 
|                     |  |  |  |  |  | /s/ JEFFREY W. TAYLOR     
|                     |  |  |  |  |  |                           
|                     |  |  |  |  |  |                           
|                     |  |  |  |  |  |                           



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