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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE
ACT OF 1934



For the quarterly period ended September 30,
2004



Commission File No. 0-50034



TAYLOR CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)



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



9550 West Higgins
Road

Rosemont, IL 60018

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



(847) 653-7978

(Registrants telephone number, including area code)



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



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



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



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TAYLOR CAPITAL GROUP,
INC.



INDEX



|                              |  |                                                                                                                               |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                               |  | Page
|                              | 
|PART I. FINANCIAL INFORMATION |  |                                                                                                                              
|                              |  |                                                                                                                              
|Item 1.                       |  | Financial Statements                                                                                                          |  |     
|                              |  | Consolidated Balance Sheets (unaudited) -September 30, 2004 and December 31, 2003                                             |  | 1   
|                              |  | Consolidated Statements of Income (unaudited) -For the three and nine months ended September 30, 2004 and 2003                |  | 2   
|                              |  | Consolidated Statements of Changes in Stockholders Equity (unaudited) -For the nine months ended September 30, 2004 and 2003 |  | 3   
|                              |  | Consolidated Statements of Cash Flows (unaudited) -For the nine months ended September 30, 2004 and 2003                      |  | 4   
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                                                        |  | 6   
|                              |  |                                                                                                                              
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 16  
|                              |  |                                                                                                                              
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |  | 43  
|                              |  |                                                                                                                              
|Item 4.                       |  | Controls and Procedures                                                                                                       |  | 43  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                              
|                              |  |                                                                                                                              
|Item 1.                       |  | Legal Proceedings                                                                                                             |  | 44  
|                              |  |                                                                                                                              
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                   |  | 44  
|                              |  |                                                                                                                              
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                               |  | 44  
|                              |  |                                                                                                                              
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                           |  | 44  
|                              |  |                                                                                                                              
|Item 5.                       |  | Other Information                                                                                                             |  | 44  
|                              |  |                                                                                                                              
|Item 6.                       |  | Exhibits                                                                                                                      |  | 44  
|                              |  |                                                                                                                              
|                              |  | Signatures                                                                                                                    |  | 47  



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TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                                                                                                                  |  | September 30, 2004 |           |   | December 31, 2003 |  
|ASSETS                                                                                                                                                                                                                                                            |  |                    |           |   |                   |   |           |  
|Cash and cash equivalents:                                                                                                                                                                                                                                        |  |                    |           |   |                   |   |           |  
|Cash and due from banks                                                                                                                                                                                                                                           |  | $                  | 67,878    |   |                   | $ | 53,254    |  
|Short-term investments                                                                                                                                                                                                                                            |  |                    | 3,049     |   |                   |   | 3,550     |  
|Federal funds sold                                                                                                                                                                                                                                                |  |                    | 20,500    |   |                   |   | 31,700    |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|Total cash and cash equivalents                                                                                                                                                                                                                                   |  |                    | 91,427    |   |                   |   | 88,504    |  
|Investment securities:                                                                                                                                                                                                                                            |  |                    |           |   |                   |   |           |  
|Available-for-sale, at fair value                                                                                                                                                                                                                                 |  |                    | 553,659   |   |                   |   | 487,777   |  
|Held-to-maturity, at amortized cost (fair value of $275 and $564 at September 30, 2004 and December 31, 2003, respectively)                                                                                                                                       |  |                    | 275       |   |                   |   | 525       |  
|Loans, net of allowance for loan losses of $38,204 and $34,356 at September 30, 2004 and December 31, 2003, respectively                                                                                                                                          |  |                    | 2,083,637 |   |                   |   | 1,927,652 |  
|Premises, leasehold improvements and equipment, net                                                                                                                                                                                                               |  |                    | 17,210    |   |                   |   | 20,548    |  
|Investments in Federal Home Loan Bank and Federal Reserve Bank stock, at cost                                                                                                                                                                                     |  |                    | 12,404    |   |                   |   | 12,058    |  
|Other real estate and repossessed assets, net                                                                                                                                                                                                                     |  |                    | 1,563     |   |                   |   | 164       |  
|Goodwill                                                                                                                                                                                                                                                          |  |                    | 23,354    |   |                   |   | 23,354    |  
|                                                                                                                                                                                                                                                                  |  |                   
|Other assets                                                                                                                                                                                                                                                      |  |                    | 48,980    |   |                   |   | 43,074    |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|Total assets                                                                                                                                                                                                                                                      |  | $                  | 2,832,509 |   |                   | $ | 2,603,656 |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                              |  |                    |           |   |                   |   |           |  
|Deposits:                                                                                                                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|Noninterest-bearing                                                                                                                                                                                                                                               |  | $                  | 480,259   |   |                   | $ | 445,193   |  
|Interest-bearing                                                                                                                                                                                                                                                  |  |                    | 1,768,514 |   |                   |   | 1,567,891 |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|Total deposits                                                                                                                                                                                                                                                    |  |                    | 2,248,773 |   |                   |   | 2,013,084 |  
|Short-term borrowings                                                                                                                                                                                                                                             |  |                    | 206,912   |   |                   |   | 219,108   |  
|Accrued interest, taxes and other liabilities                                                                                                                                                                                                                     |  |                    | 44,606    |   |                   |   | 39,479    |  
|Notes payable and FHLB advances                                                                                                                                                                                                                                   |  |                    | 95,500    |   |                   |   | 110,500   |  
|Junior subordinated debentures                                                                                                                                                                                                                                    |  |                    | 87,638    |   |                   |   | 45,000    |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                                                                                                                 |  |                    | 2,683,429 |   |                   |   | 2,427,171 |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|Stockholders equity:                                                                                                                                                                                                                                             |  |                    |           |   |                   |   |           |  
|Preferred stock, $.01 par value, 5,000,000 shares authorized, Series A 9% noncumulative perpetual, 1,530,000 shares issued and outstanding at
December 31, 2003, $25 stated and redemption value                                                                  |  |                    |          |   |                   |   | 38,250    |  
|Common stock, $.01 par value; 25,000,000 shares authorized; 9,895,922 and 9,809,731 shares issued at September 30, 2004 and December 31, 2003,
respectively; 9,572,915 and 9,486,724 shares outstanding at September 30, 2004 and December 31, 2003, respectively |  |                    | 99        |   |                   |   | 98        |  
|Surplus                                                                                                                                                                                                                                                           |  |                    | 145,662   |   |                   |   | 143,918   |  
|Unearned compensation - stock grants                                                                                                                                                                                                                              |  |                    | (885      | ) |                   |   | (1,138    | )
|Retained earnings (deficit)                                                                                                                                                                                                                                       |  |                    | 9,579     |   |                   |   | (2,106    | )
|Accumulated other comprehensive income                                                                                                                                                                                                                            |  |                    | 1,682     |   |                   |   | 4,520     |  
|Treasury stock, at cost, 323,007 shares at September 30, 2004 and December 31, 2003                                                                                                                                                                               |  |                    | (7,057    | ) |                   |   | (7,057    | )
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|Total stockholders equity                                                                                                                                                                                                                                        |  |                    | 149,080   |   |                   |   | 176,485   |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                        |  | $                  | 2,832,509 |   |                   | $ | 2,603,656 |  
|                                                                                                                                                                                                                                                                  |  |                    |           |   |                   |   |           |  



See accompanying notes
to consolidated financial statements



1



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TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)



|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | --------------------------------------- | ------ | ---- | -------------------------------------- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                    |  | For the Three Months EndedSeptember 30, |        |      | For the Nine Months EndedSeptember 30, |       
|                                                    |  | 2004                                    |        | 2003 |                                        |        | 2004 |  |   | 2003    |  
|Interest income:                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Interest and fees on loans                          |  | $                                       | 29,116 |      | $                                      | 28,752 |      |  | $ | 83,080  |   |  | $ | 85,676  |  
|Interest and dividends on investment securities:    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Taxable                                             |  |                                         | 5,284  |      |                                        | 5,102  |      |  |   | 15,639  |   |  |   | 16,458  |  
|Tax-exempt                                          |  |                                         | 494    |      |                                        | 571    |      |  |   | 1,511   |   |  |   | 1,754   |  
|Interest on cash equivalents                        |  |                                         | 78     |      |                                        | 151    |      |  |   | 121     |   |  |   | 348     |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Total interest income                               |  |                                         | 34,972 |      |                                        | 34,576 |      |  |   | 100,351 |   |  |   | 104,236 |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Interest expense:                                   |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Deposits                                            |  |                                         | 7,267  |      |                                        | 7,021  |      |  |   | 20,209  |   |  |   | 22,101  |  
|Short-term borrowings                               |  |                                         | 520    |      |                                        | 433    |      |  |   | 1,541   |   |  |   | 1,695   |  
|Notes payable and FHLB advances                     |  |                                         | 1,097  |      |                                        | 1,148  |      |  |   | 3,269   |   |  |   | 3,472   |  
|Junior subordinated debentures                      |  |                                         | 1,749  |      |                                        | 1,254  |      |  |   | 4,398   |   |  |   | 3,763   |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Total interest expense                              |  |                                         | 10,633 |      |                                        | 9,856  |      |  |   | 29,417  |   |  |   | 31,031  |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Net interest income                                 |  |                                         | 24,339 |      |                                        | 24,720 |      |  |   | 70,934  |   |  |   | 73,205  |  
|Provision for loan losses                           |  |                                         | 2,750  |      |                                        | 2,700  |      |  |   | 8,250   |   |  |   | 6,533   |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Net interest income after provision for loan losses |  |                                         | 21,589 |      |                                        | 22,020 |      |  |   | 62,684  |   |  |   | 66,672  |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Noninterest income:                                 |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Service charges                                     |  |                                         | 2,736  |      |                                        | 3,129  |      |  |   | 8,367   |   |  |   | 9,412   |  
|Trust and investment management fees                |  |                                         | 1,322  |      |                                        | 1,319  |      |  |   | 3,893   |   |  |   | 3,502   |  
|Gain on sale of investment securities, net          |  |                                         | 345    |      |                                        |       |      |  |   | 345     |   |  |   |        |  
|Other noninterest income                            |  |                                         | 222    |      |                                        | 142    |      |  |   | 999     |   |  |   | 1,188   |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Total noninterest income                            |  |                                         | 4,625  |      |                                        | 4,590  |      |  |   | 13,604  |   |  |   | 14,102  |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Noninterest expense:                                |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Salaries and employee benefits                      |  |                                         | 8,834  |      |                                        | 10,205 |      |  |   | 29,159  |   |  |   | 31,642  |  
|Occupancy of premises                               |  |                                         | 1,817  |      |                                        | 1,912  |      |  |   | 5,678   |   |  |   | 5,268   |  
|Furniture and equipment                             |  |                                         | 943    |      |                                        | 895    |      |  |   | 2,997   |   |  |   | 2,467   |  
|Legal fees, net                                     |  |                                         | 423    |      |                                        | 569    |      |  |   | 1,426   |   |  |   | 292     |  
|Advertising and public relations                    |  |                                         | 104    |      |                                        | 484    |      |  |   | 1,271   |   |  |   | 2,566   |  
|Corporate insurance                                 |  |                                         | 631    |      |                                        | 782    |      |  |   | 1,903   |   |  |   | 2,343   |  
|Computer processing                                 |  |                                         | 517    |      |                                        | 494    |      |  |   | 1,429   |   |  |   | 1,507   |  
|Other noninterest expense                           |  |                                         | 3,041  |      |                                        | 3,664  |      |  |   | 9,646   |   |  |   | 10,593  |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Total noninterest expense                           |  |                                         | 16,310 |      |                                        | 19,005 |      |  |   | 53,509  |   |  |   | 56,678  |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Income before income taxes                          |  |                                         | 9,904  |      |                                        | 7,605  |      |  |   | 22,779  |   |  |   | 24,096  |  
|Income taxes                                        |  |                                         | 3,072  |      |                                        | 2,013  |      |  |   | 7,504   |   |  |   | 7,840   |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Net income                                          |  | $                                       | 6,832  |      | $                                      | 5,592  |      |  | $ | 15,275  |   |  | $ | 16,256  |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Preferred dividend requirements                     |  |                                         |       |      |                                        | (861   | )    |  |   | (1,875  | ) |  |   | (2,582  | )
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Net income applicable to common stockholders        |  | $                                       | 6,832  |      | $                                      | 4,731  |      |  | $ | 13,400  |   |  | $ | 13,674  |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  
|Basic earnings per common share                     |  | $                                       | 0.72   |      | $                                      | 0.50   |      |  | $ | 1.41    |   |  | $ | 1.45    |  
|Diluted earnings per common share                   |  |                                         | 0.71   |      |                                        | 0.50   |      |  |   | 1.40    |   |  |   | 1.44    |  
|                                                    |  |                                         |        |      |                                        |        |      |  |   |         |   |  |   |         |  



See accompanying notes
to consolidated financial statements



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%NoncumulativePerpetualPreferred Stock |         |   | Common Stock |   | Surplus |  |   | UnearnedCompensation -Stock Grants |   |  | Retained Earnings(Deficit) |        |   | Accumulated Other Comprehensive Income/(Loss) |   |         | Treasury Stock |  |   | Total  |  
|Balance at December 31, 2003                                                                    |  | $                                                | 38,250  |   |              | $ | 98      |  | $ | 143,918                            |   |  | $                          | (1,138 | ) |                                               | $ | (2,106  | )              |  | $ | 4,520  |   |  | $ | (7,057 | ) |  | $ | 176,485 |  
|Redemption of preferred stock                                                                   |  |                                                  | (38,250 | ) |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | (38,250 | )
|Issuance of stock grants                                                                        |  |                                                  |        |   |              |   |        |  |   | 150                                |   |  |                            | (150   | ) |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   |        |  
|Forfeiture of stock grants                                                                      |  |                                                  |        |   |              |   |        |  |   | (68                                | ) |  |                            | 19     |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | (49     | )
|Amortization of stock grants                                                                    |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            | 384    |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | 384     |  
|Exercise of stock options                                                                       |  |                                                  |        |   |              |   | 1       |  |   | 1,488                              |   |  |                            |       |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | 1,489   |  
|Tax benefit on stock options exercised and stock awards                                         |  |                                                  |        |   |              |   |        |  |   | 174                                |   |  |                            |       |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | 174     |  
|Comprehensive income:                                                                           |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                                                      |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   | 15,275  |                |  |   |       |   |  |   |       |   |  |   | 15,275  |  
|Change in unrealized gain on available-for-sale investment securities, net of income taxes      |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   |        |                |  |   | (2,627 | ) |  |   |       |   |  |   | (2,627  | )
|Change in unrealized loss from cash flow hedging instruments, net of income taxes               |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   |        |                |  |   | (82    | ) |  |   |       |   |  |   | (82     | )
|Changes in deferred gain from termination of cash flow hedging instruments, net of income taxes |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   |        |                |  |   | (129   | ) |  |   |       |   |  |   | (129    | )
|                                                                                                |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                      |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   | 12,437  |  
|                                                                                                |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Dividends:                                                                                      |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Preferred  $1.225 per share                                                                    |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   | (1,875  | )              |  |   |       |   |  |   |       |   |  |   | (1,875  | )
|Common  $0.18 per share                                                                        |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   | (1,715  | )              |  |   |       |   |  |   |       |   |  |   | (1,715  | )
|                                                                                                |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at September 30, 2004                                                                   |  | $                                                |        |   |              | $ | 99      |  | $ | 145,662                            |   |  | $                          | (885   | ) |                                               | $ | 9,579   |                |  | $ | 1,682  |   |  | $ | (7,057 | ) |  | $ | 149,080 |  
|                                                                                                |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2002                                                                    |  | $                                                | 38,250  |   |              | $ | 97      |  | $ | 142,008                            |   |  | $                          | (1,088 | ) |                                               | $ | (15,140 | )              |  | $ | 11,667 |   |  | $ | (7,057 | ) |  | $ | 168,737 |  
|Issuance of stock grants                                                                        |  |                                                  |        |   |              |   |        |  |   | 321                                |   |  |                            | (321   | ) |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   |        |  
|Forfeiture of stock grants                                                                      |  |                                                  |        |   |              |   |        |  |   | (129                               | ) |  |                            | 60     |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | (69     | )
|Amortization of stock grants                                                                    |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            | 363    |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | 363     |  
|Exercise of stock options                                                                       |  |                                                  |        |   |              |   | 1       |  |   | 984                                |   |  |                            |       |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | 985     |  
|Tax benefit on stock options exercised and stock awards                                         |  |                                                  |        |   |              |   |        |  |   | 73                                 |   |  |                            |       |   |                                               |   |        |                |  |   |       |   |  |   |       |   |  |   | 73      |  
|Comprehensive income:                                                                           |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                                                      |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   | 16,256  |                |  |   |       |   |  |   |       |   |  |   | 16,256  |  
|Change in unrealized gain on available-for-sale investment securities, net of income taxes      |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   |        |                |  |   | (6,039 | ) |  |   |       |   |  |   | (6,039  | )
|Changes in net unrealized gain from cash flow hedging instruments, net of income taxes          |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   |        |                |  |   | 1,966  |   |  |   |       |   |  |   | 1,966   |  
|                                                                                                |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                      |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   | 12,183  |  
|                                                                                                |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Dividends:                                                                                      |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Preferred  $1.6875 per share                                                                   |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   | (2,582  | )              |  |   |       |   |  |   |       |   |  |   | (2,582  | )
|Common  $0.18 per share                                                                        |  |                                                  |        |   |              |   |        |  |   |                                   |   |  |                            |       |   |                                               |   | (1,701  | )              |  |   |       |   |  |   |       |   |  |   | (1,701  | )
|                                                                                                |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  
|Balance at September 30, 2003                                                                   |  | $                                                | 38,250  |   |              | $ | 98      |  | $ | 143,257                            |   |  | $                          | (986   | ) |                                               | $ | (3,167  | )              |  | $ | 7,594  |   |  | $ | (7,057 | ) |  | $ | 177,989 |  
|                                                                                                |  |                                                  |         |   |              |   |         |  |   |                                    |   |  |                            |        |   |                                               |   |         |                |  |   |        |   |  |   |        |   |  |   |         |  



See accompanying notes
to consolidated financial statements



3



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##### Table of Contents



TAYLOR CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)



|                                                                                  |  |                                        |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | -------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | For the Nine Months EndedSeptember 30, |         
|                                                                                  |  | 2004                                   |          |   | 2003 |  
|Cash flows from operating activities:                                             |  |                                        |          |   |      |   |          |  
|Net income                                                                        |  | $                                      | 15,275   |   |      | $ | 16,256   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                        |          |   |      |   |          |  
|Amortization of premiums and discounts, net                                       |  |                                        | 1,202    |   |      |   | 647      |  
|Gain on sale available-for-sale securities, net                                   |  |                                        | (345     | ) |      |   |         |  
|Deferred loan fee amortization                                                    |  |                                        | (2,317   | ) |      |   | (1,560   | )
|Provision for loan losses                                                         |  |                                        | 8,250    |   |      |   | 6,533    |  
|Depreciation and amortization                                                     |  |                                        | 2,576    |   |      |   | 3,006    |  
|Deferred income taxes                                                             |  |                                        | (877     | ) |      |   | (3,020   | )
|(Gain) loss on sales of other real estate                                         |  |                                        | 10       |   |      |   | (79      | )
|Provision for other real estate                                                   |  |                                        | 71       |   |      |   |         |  
|Gain on sale of credit card loans                                                 |  |                                        |         |   |      |   | (140     | )
|Other, net                                                                        |  |                                        | 423      |   |      |   | (84      | )
|Changes in other assets and liabilities:                                          |  |                                        |          |   |      |   |          |  
|Accrued interest receivable                                                       |  |                                        | (2,136   | ) |      |   | (660     | )
|Other assets                                                                      |  |                                        | 1,019    |   |      |   | 1,727    |  
|Accrued interest, taxes and other liabilities                                     |  |                                        | 3,155    |   |      |   | 5,335    |  
|                                                                                  |  |                                        |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                        | 26,306   |   |      |   | 27,961   |  
|                                                                                  |  |                                        |          |   |      |   |          |  
|Cash flows from investing activities:                                             |  |                                        |          |   |      |   |          |  
|Purchases of available-for-sale securities                                        |  |                                        | (175,700 | ) |      |   | (212,117 | )
|Proceeds from principal payments and maturities of available-for-sale securities  |  |                                        | 51,622   |   |      |   | 205,412  |  
|Proceeds from principal payments and maturities of held-to-maturity securities    |  |                                        | 250      |   |      |   | 300      |  
|Proceeds from sale available-for-sale securities                                  |  |                                        | 53,298   |   |      |   |         |  
|Net increase in loans                                                             |  |                                        | (163,519 | ) |      |   | (18,256  | )
|Sale of credit card loans                                                         |  |                                        |         |   |      |   | 1,259    |  
|Investment in TAYC Capital Trust II                                               |  |                                        | (1,239   | ) |      |   |         |  
|Additions to premises, leasehold improvements and equipment                       |  |                                        | (1,080   | ) |      |   | (5,066   | )
|Proceeds from the sale of premises, leasehold improvements and equipment          |  |                                        | 2,099    |   |      |   |         |  
|Proceeds from sales of other real estate                                          |  |                                        | 121      |   |      |   | 1,069    |  
|                                                                                  |  |                                        |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                        | (234,148 | ) |      |   | (27,399  | )
|                                                                                  |  |                                        |          |   |      |   |          |  
|Cash flows from financing activities:                                             |  |                                        |          |   |      |   |          |  
|Net increase in deposits                                                          |  |                                        | 237,459  |   |      |   | 61,700   |  
|Net decrease in short-term borrowings                                             |  |                                        | (12,196  | ) |      |   | (16,715  | )
|Proceeds from notes payable and FHLB advances                                     |  |                                        |         |   |      |   | 15,000   |  
|Repayments of notes payable and FHLB advances                                     |  |                                        | (15,000  | ) |      |   | (15,000  | )
|Proceeds from issuance of junior subordinated debentures                          |  |                                        | 41,238   |   |      |   |         |  
|Redemption of preferred securities                                                |  |                                        | (38,250  | ) |      |   |         |  
|Trust preferred issuance costs                                                    |  |                                        | (390     | ) |      |   |         |  
|Proceeds from exercise of employee stock options                                  |  |                                        | 1,489    |   |      |   | 985      |  
|Dividends paid                                                                    |  |                                        | (3,585   | ) |      |   | (4,281   | )
|                                                                                  |  |                                        |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                                        | 210,765  |   |      |   | 41,689   |  
|                                                                                  |  |                                        |          |   |      |   |          |  
|Net increase in cash and cash equivalents                                         |  |                                        | 2,923    |   |      |   | 42,251   |  
|Cash and cash equivalents, beginning of period                                    |  |                                        | 88,504   |   |      |   | 92,909   |  
|                                                                                  |  |                                        |          |   |      |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                                      | 91,427   |   |      | $ | 135,160  |  
|                                                                                  |  |                                        |          |   |      |   |          |  



Consolidated Statements
of Cash Flows continued on next page

See accompanying notes to consolidated financial statements



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

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

(in thousands)



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



See accompanying notes
to consolidated financial statements



5



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##### Table of Contents



TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



1. Basis of Presentation:



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



Redemption of Series A Preferred Stock



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



New Accounting Pronouncements



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



6



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



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



2. Investment Securities:



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



|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|----------------------------------- |  | ------------------ | ------- | -------------------- | - | ---------------------- |  | - | ------------------- | - |  | - | -------
|                                    |  | September 30, 2004
|                                    |  | AmortizedCost      |         | GrossUnrealizedGains |   | GrossUnrealizedLosses  |  |   | EstimatedFair Value
|                                    |  | (in thousands)    
|Available-for-sale:                 |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|U.S. government agency securities   |  | $                  | 204,186 |                      | $ | 546                    |  | $ | (255                | ) |  | $ | 204,477
|Collateralized mortgage obligations |  |                    | 124,308 |                      |   | 303                    |  |   | (1,003              | ) |  |   | 123,608
|Mortgage-backed securities          |  |                    | 180,467 |                      |   | 1,000                  |  |   | (1,330              | ) |  |   | 180,137
|State and municipal obligations     |  |                    | 43,080  |                      |   | 2,357                  |  |   |                    |   |  |   | 45,437 
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Total available-for-sale            |  |                    | 552,041 |                      |   | 4,206                  |  |   | (2,588              | ) |  |   | 553,659
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Held-to-maturity:                   |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Other debt securities               |  |                    | 275     |                      |   |                       |  |   |                    |   |  |   | 275    
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Total held-to-maturity              |  |                    | 275     |                      |   |                       |  |   |                    |   |  |   | 275    
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Total                               |  | $                  | 552,316 |                      | $ | 4,206                  |  | $ | (2,588              | ) |  | $ | 553,934
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|                                    | 
|                                    |  | December 31, 2003 
|                                    |  | AmortizedCost      |         | GrossUnrealizedGains |   | Gross UnrealizedLosses |  |   | EstimatedFair Value
|                                    |  | (in thousands)    
|Available-for-sale:                 |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|U.S. government agency securities   |  | $                  | 176,888 |                      | $ | 3,355                  |  | $ |                    |   |  | $ | 180,243
|Collateralized mortgage obligations |  |                    | 116,053 |                      |   | 1,026                  |  |   | (779                | ) |  |   | 116,300
|Mortgage-backed securities          |  |                    | 143,259 |                      |   | 1,461                  |  |   | (1,648              | ) |  |   | 143,072
|State and municipal obligations     |  |                    | 45,918  |                      |   | 2,244                  |  |   |                    |   |  |   | 48,162 
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Total available-for-sale            |  |                    | 482,118 |                      |   | 8,086                  |  |   | (2,427              | ) |  |   | 487,777
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Held-to-maturity:                   |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Other debt securities               |  |                    | 525     |                      |   | 39                     |  |   |                    |   |  |   | 564    
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Total held-to-maturity              |  |                    | 525     |                      |   | 39                     |  |   |                    |   |  |   | 564    
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        
|Total                               |  | $                  | 482,643 |                      | $ | 8,125                  |  | $ | (2,427              | ) |  | $ | 488,341
|                                    |  |                    |         |                      |   |                        |  |   |                     |   |  |   |        



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



3. Loans:



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



|                                      |  |                |           |   |               |   |           |  
|------------------------------------- |  | -------------- | --------- | - | ------------- | - | --------- | -
|                                      |  | Sept. 30, 2004 |           |   | Dec. 31, 2003 |  
|                                      |  | (in thousands) |          
|Commercial and industrial             |  | $              | 603,406   |   |               | $ | 589,987   |  
|Commercial real estate secured        |  |                | 722,840   |   |               |   | 642,364   |  
|Real estate-construction              |  |                | 493,859   |   |               |   | 364,294   |  
|Residential real estate mortgages     |  |                | 63,796    |   |               |   | 86,710    |  
|Home equity loans and lines of credit |  |                | 217,635   |   |               |   | 253,006   |  
|Consumer                              |  |                | 19,559    |   |               |   | 24,636    |  
|Other loans                           |  |                | 964       |   |               |   | 1,330     |  
|                                      |  |                |           |   |               |   |           |  
|Gross loans                           |  |                | 2,122,059 |   |               |   | 1,962,327 |  
|Less: Unearned discount               |  |                | (218      | ) |               |   | (319      | )
|                                      |  |                |           |   |               |   |           |  
|Total loans                           |  |                | 2,121,841 |   |               |   | 1,962,008 |  
|Less: Allowance for loan losses       |  |                | (38,204   | ) |               |   | (34,356   | )
|                                      |  |                |           |   |               |   |           |  
|Loans, net                            |  | $              | 2,083,637 |   |               | $ | 1,927,652 |  
|                                      |  |                |           |   |               |   |           |  



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



4. Goodwill and Intangible Assets:



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



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



8



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



5. Interest-Bearing Deposits:



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



|                                            |  |                |           |               |   |          
|------------------------------------------- |  | -------------- | --------- | ------------- | - | ---------
|                                            |  | Sept. 30, 2004 |           | Dec. 31, 2003
|                                            |  | (in thousands)
|NOW accounts                                |  | $              | 122,923   |               | $ | 136,119  
|Savings accounts                            |  |                | 87,639    |               |   | 90,177   
|Money market deposits                       |  |                | 458,083   |               |   | 425,449  
|Time deposits:                              |  |                |           |               |   |          
|Certificates of deposit                     |  |                | 528,208   |               |   | 498,189  
|Out-of-local-market certificates of deposit |  |                | 101,583   |               |   | 76,475   
|Brokered certificates of deposit            |  |                | 405,696   |               |   | 285,689  
|Public time deposits                        |  |                | 64,382    |               |   | 55,793   
|                                            |  |                |           |               |   |          
|Total time deposits                         |  |                | 1,099,869 |               |   | 916,146  
|                                            |  |                |           |               |   |          
|Total                                       |  | $              | 1,768,514 |               | $ | 1,567,891
|                                            |  |                |           |               |   |          



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



6. Short-Term Borrowings:



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



|                                               |  |                |         |              |   |        
|---------------------------------------------- |  | -------------- | ------- | ------------ | - | -------
|                                               |  | Sept. 30,2004  |         | Dec. 31,2003
|                                               |  | (in thousands)
|Securities sold under agreements to repurchase |  | $              | 181,518 |              | $ | 169,890
|Federal funds purchased                        |  |                | 25,269  |              |   | 40,613 
|U.S. Treasury tax and loan note option         |  |                | 125     |              |   | 8,605  
|                                               |  |                |         |              |   |        
|Total                                          |  | $              | 206,912 |              | $ | 219,108
|                                               |  |                |         |              |   |        



9



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



7. Notes Payable and FHLB Advances:



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



|                                                                                                                                                                                                                                      |  |                |        |              |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ------------ | - | -------
|                                                                                                                                                                                                                                      |  | Sept. 30,2004  |        | Dec. 31,2003
|                                                                                                                                                                                                                                      |  | (in thousands)
|Taylor Capital Group, Inc.:                                                                                                                                                                                                           |  |                |        |              |   |        
|Subordinated Debt  interest, at the Companys election, at prime rate plus 2.50% or LIBOR plus 2.75%; interest rates at September
30, 2004 and December 31, 2003 were 4.52% and 3.92%, respectively; matures on November 27, 2009    |  | $              | 10,000 |              | $ | 10,000 
|Term Loan  interest, at the Companys election, at the prime rate or LIBOR plus 1.15%, with a minimum interest rate of 3.50%;
interest rate was 3.50% at both September 30, 2004 and December 31, 2003; matures on November 27, 2009 |  |                | 500    |              |   | 500    
|Revolving Credit Facility  $11.5 million maximum available; interest, at the Companys election, at the prime rate or LIBOR plus
1.15%, with a minimum interest rate of 3.50%; matures November 27, 2004                             |  |                |       |              |   |       
|                                                                                                                                                                                                                                      |  |                |        |              |   |        
|Total notes payable                                                                                                                                                                                                                   |  |                | 10,500 |              |   | 10,500 
|Cole Taylor Bank:                                                                                                                                                                                                                     |  |                |        |              |   |        
|FHLB advance  4.30%, due January 8, 2011, callable after January 8, 2002                                                                                                                                                             |  |                | 25,000 |              |   | 25,000 
|FHLB advance  4.55%, due January 8, 2011, callable after January 8, 2003                                                                                                                                                             |  |                | 25,000 |              |   | 25,000 
|FHLB advance  4.83%, due February 1, 2011, callable after January 8, 2004                                                                                                                                                            |  |                | 25,000 |              |   | 25,000 
|FHLB advance  3.94%, due November 23, 2004                                                                                                                                                                                           |  |                | 10,000 |              |   | 10,000 
|FHLB advance  1.50%, due January 29, 2004                                                                                                                                                                                            |  |                |       |              |   | 15,000 
|                                                                                                                                                                                                                                      |  |                |        |              |   |        
|Total FHLB advances                                                                                                                                                                                                                   |  |                | 85,000 |              |   | 100,000
|                                                                                                                                                                                                                                      |  |                |        |              |   |        
|Total notes payable and FHLB advances                                                                                                                                                                                                 |  | $              | 95,500 |              | $ | 110,500
|                                                                                                                                                                                                                                      |  |                |        |              |   |        



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



8. Junior Subordinated Debentures:



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



|                      |  |              |  |                                       |        |                                                 |   |             |  |                   |               |  |              
|--------------------- |  | ------------ |  | ------------------------------------- | ------ | ----------------------------------------------- | - | ----------- |  | ----------------- | ------------- |  | -------------
|Trust Name            |  | IssuanceDate |  | Amount ofJuniorSubordinatedDebentures |        | Amountof TrustPreferredSecuritiesIssued byTrust |   | Annual Rate |  |                   | Maturity Date
|TAYC Capital Trust I  |  | Oct. 2002    |  | $                                     | 46,400 |                                                 | $ | 45,000      |  | 9.75              | %             |  | Oct. 21, 2032
|TAYC Capital Trust II |  | June 2004    |  |                                       | 41,238 |                                                 |   | 40,000      |  | 3-mo LIBOR + 2.68 | %             |  | June 17, 2034
|                      |  |              |  |                                       |        |                                                 |   |             |  |                   |               |  |              
|                      |  |              |  | $                                     | 87,638 |                                                 | $ | 85,000      |  |                   |               |  |              
|                      |  |              |  |                                       |        |                                                 |   |             |  |                   |               |  |              



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



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



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



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



9. Other Comprehensive Income/(Loss):



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



|                                                                                                      |  |                 |        |   |           |   |        |           |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | --------- | - | ------ | --------- |  | - | ------ | -
|                                                                                                      |  | BeforeTaxAmount |        |   | TaxEffect |   |        | Net ofTax | 
|                                                                                                      |  | (in thousands)  |       
|For the Nine Months Ended September 30, 2004:                                                         |  |                 |        |   |           |   |        |           |  |   |        |  
|Unrealized gain/(loss) from securities:                                                               |  |                 |        |   |           |   |        |           |  |   |        |  
|Change in unrealized gain/(loss) on available-for-sale securities                                     |  | $               | (3,696 | ) |           | $ | 1,294  |           |  | $ | (2,402 | )
|Less: reclassification adjustment for gains included in net income                                    |  |                 | (345   | ) |           |   | 120    |           |  |   | (225   | )
|                                                                                                      |  |                 |        |   |           |   |        |           |  |   |        |  
|Change in unrealized gain/(loss) on available-for-sale securities, net of reclassification adjustment |  |                 | (4,041 | ) |           |   | 1,414  |           |  |   | (2,627 | )
|Net unrealized loss from cash flow hedging instruments                                                |  |                 | (126   | ) |           |   | 44     |           |  |   | (82    | )
|Change in deferred gain from termination of cash flow hedging instruments                             |  |                 | (199   | ) |           |   | 70     |           |  |   | (129   | )
|                                                                                                      |  |                 |        |   |           |   |        |           |  |   |        |  
|Other comprehensive loss                                                                              |  | $               | (4,366 | ) |           | $ | 1,528  |           |  | $ | (2,838 | )
|                                                                                                      |  |                 |        |   |           |   |        |           |  |   |        |  
|For the Nine Months Ended September 30, 2003:                                                         |  |                 |        |   |           |   |        |           |  |   |        |  
|Change in unrealized gain/(loss) on available-for-sale securities                                     |  | $               | (9,289 | ) |           | $ | 3,250  |           |  | $ | (6,039 | )
|Changes in net unrealized gain from cash flow hedging instruments                                     |  |                 | 3,025  |   |           |   | (1,059 | )         |  |   | 1,966  |  
|                                                                                                      |  |                 |        |   |           |   |        |           |  |   |        |  
|Other comprehensive loss                                                                              |  | $               | (6,264 | ) |           | $ | 2,191  |           |  | $ | (4,073 | )
|                                                                                                      |  |                 |        |   |           |   |        |           |  |   |        |  



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



10. Earnings per Share:



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



|                                                   |  |                                                    |           |      |                                        |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------------- |  | -------------------------------------------------- | --------- | ---- | -------------------------------------- | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                   |  | For the Three MonthsEnded September 30,            |           |      | For the Nine MonthsEnded September 30, |          
|                                                   |  | 2004                                               |           | 2003 |                                        |           | 2004 |  |   | 2003      |  
|                                                   |  | (in thousands, except share and per share amounts) |          
|Net income                                         |  | $                                                  | 6,832     |      | $                                      | 5,592     |      |  | $ | 15,275    |   |  | $ | 16,256    |  
|Less preferred dividend requirements               |  |                                                    |          |      |                                        | (861      | )    |  |   | (1,875    | ) |  |   | (2,582    | )
|                                                   |  |                                                    |           |      |                                        |           |      |  |   |           |   |  |   |           |  
|Net income available to common stockholders        |  | $                                                  | 6,832     |      | $                                      | 4,731     |      |  | $ | 13,400    |   |  | $ | 13,674    |  
|                                                   |  |                                                    |           |      |                                        |           |      |  |   |           |   |  |   |           |  
|Weighted average common shares outstanding         |  |                                                    | 9,554,121 |      |                                        | 9,454,466 |      |  |   | 9,515,317 |   |  |   | 9,442,362 |  
|Dilutive effect of stock options                   |  |                                                    | 65,419    |      |                                        | 90,922    |      |  |   | 85,143    |   |  |   | 63,876    |  
|                                                   |  |                                                    |           |      |                                        |           |      |  |   |           |   |  |   |           |  
|Diluted weighted average common shares outstanding |  |                                                    | 9,619,540 |      |                                        | 9,545,388 |      |  |   | 9,600,460 |   |  |   | 9,506,238 |  
|                                                   |  |                                                    |           |      |                                        |           |      |  |   |           |   |  |   |           |  
|Basic earnings per common share                    |  | $                                                  | 0.72      |      | $                                      | 0.50      |      |  | $ | 1.41      |   |  | $ | 1.45      |  
|Diluted earnings per common share                  |  |                                                    | 0.71      |      |                                        | 0.50      |      |  |   | 1.40      |   |  |   | 1.44      |  
|                                                   |  |                                                    |           |      |                                        |           |      |  |   |           |   |  |   |           |  



11.
Stock-based Compensation:



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



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TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



|                                                                                                                                          |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ----- | - | -------------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                          |  | For the Three MonthsEnded September 30, |       |   | For the Nine MonthsEnded September 30, |  
|(in thousand, except per share amounts)                                                                                                   |  | 2004                                    |       |   | 2003                                   |   |       | 2004 |  |   | 2003   |  
|Net income as reported                                                                                                                    |  | $                                       | 6,832 |   |                                        | $ | 5,592 |      |  | $ | 15,275 |   |  | $ | 16,256 |  
|Add: Stock-based compensation, net of tax, included in the determination of net income, as reported                                       |  |                                         | 77    |   |                                        |   | 30    |      |  |   | 201    |   |  |   | 178    |  
|Deduct: Stock-based compensation, net of tax, that would have been reported if the fair value based method had been applied to all
awards |  |                                         | (166  | ) |                                        |   | (142  | )    |  |   | (575   | ) |  |   | (585   | )
|                                                                                                                                          |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                                                                      |  | $                                       | 6,743 |   |                                        | $ | 5,480 |      |  | $ | 14,901 |   |  | $ | 15,849 |  
|Less preferred dividend requirements                                                                                                      |  |                                         |      |   |                                        |   | (861  | )    |  |   | (1,875 | ) |  |   | (2,582 | )
|                                                                                                                                          |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net income available to common stockholders                                                                                     |  | $                                       | 6,743 |   |                                        | $ | 4,619 |      |  | $ | 13,026 |   |  | $ | 13,267 |  
|                                                                                                                                          |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|Basic earnings per common share                                                                                                           |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                               |  | $                                       | 0.72  |   |                                        | $ | 0.50  |      |  | $ | 1.41   |   |  | $ | 1.45   |  
|Pro forma                                                                                                                                 |  |                                         | 0.71  |   |                                        |   | 0.49  |      |  |   | 1.37   |   |  |   | 1.40   |  
|Diluted earnings per common share                                                                                                         |  |                                         |       |   |                                        |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                               |  | $                                       | 0.71  |   |                                        | $ | 0.50  |      |  | $ | 1.40   |   |  | $ | 1.44   |  
|Pro forma                                                                                                                                 |  |                                         | 0.70  |   |                                        |   | 0.48  |      |  |   | 1.36   |   |  |   | 1.40   |  



12.
Derivative Financial Instruments:



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



|                              |  |                |         |   |               |   |        |       |  |   |         |  
|----------------------------- |  | -------------- | ------- | - | ------------- | - | ------ | ----- |  | - | ------- | -
|                              |  | FairValueHedge |         |   | CashFlowHedge |   |        | Total | 
|                              |  | (in thousands) |        
|Balance at December 31, 2003  |  | $              | 50,000  |   |               | $ |       |       |  | $ | 50,000  |  
|Additions                     |  |                | 130,000 |   |               |   | 50,000 |       |  |   | 180,000 |  
|Terminations/calls            |  |                | (25,000 | ) |               |   |       |       |  |   | (25,000 | )
|Maturities                    |  |                |        |   |               |   |       |       |  |   |        |  
|                              |  |                |         |   |               |   |        |       |  |   |         |  
|Balance at September 30, 2004 |  | $              | 155,000 |   |               | $ | 50,000 |       |  | $ | 205,000 |  
|                              |  |                |         |   |               |   |        |       |  |   |         |  
|Fair value at Sept. 30, 2004  |  | $              | (1,721  | ) |               | $ | (126   | )     |  | $ | (1,847  | )
|                              |  |                |         |   |               |   |        |       |  |   |         |  



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)



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



|                 |  |                                |             |                   |      |             |  |      |              |  |     |  |                                  
|---------------- |  | ------------------------------ | ----------- | ----------------- | ---- | ----------- |  | ---- | ------------ |  | --- |  | ---------------------------------
|                 |  | Notional Amount (in thousands) |             | Weighted Averages |      | Hedged Item
|                 |  |                                | ReceiveRate |                   |      | Pay Rate    |  |      | Life inYears | 
|Fair Value Hedge |  | $                              | 155,000     |                   | 3.28 | %           |  | 1.70 | %            |  | 5.7 |  | Brokered certificates of deposits
|Cash Flow Hedge  |  |                                | 50,000      |                   | 6.04 | %           |  | 4.75 | %            |  | 2.9 |  | Variable rate commercial loans   
|                 |  |                                |             |                   |      |             |  |      |              |  |     |  |                                  
|Total            |  | $                              | 205,000     |                   | 3.96 | %           |  | 2.44 | %            |  | 5.0 |  |                                  
|                 |  |                                |             |                   |      |             |  |      |              |  |     |  |                                  



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



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



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



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



OVERVIEW



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



Application of Critical Accounting Policies



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



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



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



Allowance for Loan Losses



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



Goodwill Impairment



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



Income Taxes



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



18



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



RESULTS OF OPERATIONS



Net Interest Income



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



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



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



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



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



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



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



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



19



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



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



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



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



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



20



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



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



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



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



21



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Tax Equivalent Adjustments to Yields and Margins



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



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



|                                               |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                               |  | For the Three MonthsEnded September 30, |        |   | For the Nine MonthsEnded September 30, |  
|                                               |  | 2004                                    |        |   | 2003                                   |   |        | 2004 |  |   | 2003   |  
|                                               |  | (in thousands)                          |       
|Net interest income as stated                  |  | $                                       | 24,339 |   |                                        | $ | 24,720 |      |  | $ | 70,934 |   |  | $ | 73,205 |  
|Tax equivalent adjustment-investments          |  |                                         | 268    |   |                                        |   | 312    |      |  |   | 821    |   |  |   | 959    |  
|Tax equivalent adjustment-loans                |  |                                         | 40     |   |                                        |   | 43     |      |  |   | 131    |   |  |   | 131    |  
|                                               |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|Tax equivalent net interest income             |  | $                                       | 24,647 |   |                                        | $ | 25,075 |      |  | $ | 71,886 |   |  | $ | 74,295 |  
|                                               |  |                                         |        |   |                                        |   |        |      |  |   |        |   |  |   |        |  
|                                               |  |                                         |        |  
|Yield on earning assets without tax adjustment |  |                                         | 5.25   | % |                                        |   | 5.56   | %    |  |   | 5.16   | % |  |   | 5.69   | %
|Yield on earning assets - tax equivalent       |  |                                         | 5.30   | % |                                        |   | 5.62   | %    |  |   | 5.21   | % |  |   | 5.75   | %
|Net interest margin without tax adjustment     |  |                                         | 3.65   | % |                                        |   | 3.98   | %    |  |   | 3.65   | % |  |   | 4.00   | %
|Net interest margin - tax equivalent           |  |                                         | 3.70   | % |                                        |   | 4.04   | %    |  |   | 3.70   | % |  |   | 4.06   | %
|Net interest spread - without tax adjustment   |  |                                         | 3.25   | % |                                        |   | 3.58   | %    |  |   | 3.26   | % |  |   | 3.59   | %
|Net interest spread - tax equivalent           |  |                                         | 3.30   | % |                                        |   | 3.64   | %    |  |   | 3.31   | % |  |   | 3.65   | %



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



22



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|------------------------------------------- |  | ---------------------------------------- | --------- | - | -------- | - | ---------------- |  | ---- | -------------- |  | - | --------- | - | ---------------- | - | ------ |  | ----- | -
|                                            |  | For the Three Months Ended September 30, |          
|                                            |  | 2004                                     |           |   | 2003     |  
|                                            |  | AVERAGEBALANCE                           |           |   | INTEREST |   | YIELD/RATE(%)(6) |  |      | AVERAGEBALANCE |  |   | INTEREST  |   | YIELD/RATE(%)(6) |  
|                                            |  | (dollars in thousands)                   |          
|INTEREST-EARNING ASSETS:                    |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Investment securities(1):                   |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Taxable                                     |  | $                                        | 529,510   |   |          | $ | 5,284            |  | 3.99 | %              |  | $ | 460,528   |   |                  | $ | 5,102  |  | 4.43  | %
|Tax-exempt (tax equivalent)(2)              |  |                                          | 43,146    |   |          |   | 762              |  | 7.07 |                |  |   | 48,892    |   |                  |   | 883    |  | 7.22  |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Total investment securities                 |  |                                          | 572,656   |   |          |   | 6,046            |  | 4.22 |                |  |   | 509,420   |   |                  |   | 5,985  |  | 4.70  |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Cash Equivalents                            |  |                                          | 21,844    |   |          |   | 78               |  | 1.40 |                |  |   | 62,522    |   |                  |   | 151    |  | 0.95  |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Loans(2) (3):                               |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Commercial and commercial real estate       |  |                                          | 1,748,526 |   |          |   | 24,804           |  | 5.55 |                |  |   | 1,487,213 |   |                  |   | 21,819 |  | 5.74  |  
|Residential real estate mortgages           |  |                                          | 66,582    |   |          |   | 874              |  | 5.25 |                |  |   | 101,349   |   |                  |   | 1,447  |  | 5.71  |  
|Home equity and consumer                    |  |                                          | 243,897   |   |          |   | 2,974            |  | 4.85 |                |  |   | 309,942   |   |                  |   | 3,806  |  | 4.87  |  
|Fees on loans                               |  |                                          |           |   |          |   | 504              |  |      |                |  |   |           |   |                  |   | 1,723  |  |       |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Net loans (tax equivalent)(2)               |  |                                          | 2,059,005 |   |          |   | 29,156           |  | 5.63 |                |  |   | 1,898,504 |   |                  |   | 28,795 |  | 6.02  |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Total interest-earning assets(2)            |  |                                          | 2,653,505 |   |          |   | 35,280           |  | 5.30 |                |  |   | 2,470,446 |   |                  |   | 34,931 |  | 5.62  |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Allowance for loan losses                   |  |                                          | (37,631   | ) |          |   |                  |  |      |                |  |   | (35,184   | ) |                  |   |        |  |       |  
|NON-EARNING ASSETS:                         |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Cash and due from banks                     |  |                                          | 59,518    |   |          |   |                  |  |      |                |  |   | 58,578    |   |                  |   |        |  |       |  
|Accrued interest and other assets           |  |                                          | 85,900    |   |          |   |                  |  |      |                |  |   | 95,178    |   |                  |   |        |  |       |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|TOTAL ASSETS                                |  | $                                        | 2,761,292 |   |          |   |                  |  |      |                |  | $ | 2,589,018 |   |                  |   |        |  |       |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|INTEREST-BEARING LIABILITIES:               |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Interest-bearing deposits:                  |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Interest-bearing demand deposits            |  | $                                        | 579,485   |   |          |   | 1,134            |  | 0.78 |                |  | $ | 559,607   |   |                  |   | 1,078  |  | 0.76  |  
|Savings deposits                            |  |                                          | 89,670    |   |          |   | 69               |  | 0.31 |                |  |   | 91,683    |   |                  |   | 83     |  | 0.36  |  
|Time deposits                               |  |                                          | 1,070,604 |   |          |   | 6,064            |  | 2.25 |                |  |   | 961,031   |   |                  |   | 5,860  |  | 2.42  |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Total interest-bearing deposits             |  |                                          | 1,739,759 |   |          |   | 7,267            |  | 1.66 |                |  |   | 1,612,321 |   |                  |   | 7,021  |  | 1.73  |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Short-term borrowings                       |  |                                          | 194,338   |   |          |   | 520              |  | 1.06 |                |  |   | 205,804   |   |                  |   | 433    |  | 0.83  |  
|Notes payable and FHLB advances             |  |                                          | 95,500    |   |          |   | 1,097            |  | 4.57 |                |  |   | 110,500   |   |                  |   | 1,148  |  | 4.06  |  
|Junior subordinated debentures              |  |                                          | 87,638    |   |          |   | 1,749            |  | 7.98 |                |  |   | 45,000    |   |                  |   | 1,254  |  | 11.15 |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Total interest-bearing liabilities          |  |                                          | 2,117,235 |   |          |   | 10,633           |  | 2.00 |                |  |   | 1,973,625 |   |                  |   | 9,856  |  | 1.98  |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|NONINTEREST-BEARING LIABILITIES:            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Noninterest-bearing deposits                |  |                                          | 452,202   |   |          |   |                  |  |      |                |  |   | 405,001   |   |                  |   |        |  |       |  
|Accrued interest and other liabilities      |  |                                          | 43,901    |   |          |   |                  |  |      |                |  |   | 38,950    |   |                  |   |        |  |       |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Total noninterest-bearing liabilities       |  |                                          | 496,103   |   |          |   |                  |  |      |                |  |   | 443,951   |   |                  |   |        |  |       |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|STOCKHOLDERS EQUITY                        |  |                                          | 147,954   |   |          |   |                  |  |      |                |  |   | 171,442   |   |                  |   |        |  |       |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY  |  | $                                        | 2,761,292 |   |          |   |                  |  |      |                |  | $ | 2,589,018 |   |                  |   |        |  |       |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Net interest income (tax equivalent)(2)     |  |                                          |           |   |          | $ | 24,647           |  |      |                |  |   |           |   |                  | $ | 25,075 |  |       |  
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Net interest spread (tax equivalent)(2) (4) |  |                                          |           |   |          |   |                  |  | 3.30 | %              |  |   |           |   |                  |   |        |  | 3.64  | %
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  
|Net interest margin (tax equivalent)(2) (5) |  |                                          |           |   |          |   |                  |  | 3.70 | %              |  |   |           |   |                  |   |        |  | 4.04  | %
|                                            |  |                                          |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |        |  |       |  

---

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



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



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



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



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



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



23



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|------------------------------------------- |  | --------------------------------------- | --------- | - | -------- | - | ---------------- |  | ---- | -------------- |  | - | --------- | - | ---------------- | - | ------- |  | ----- | -
|                                            |  | For the Nine Months Ended September 30, |          
|                                            |  | 2004                                    |           |   | 2003     |  
|                                            |  | AVERAGEBALANCE                          |           |   | INTEREST |   | YIELD/RATE(%)(6) |  |      | AVERAGEBALANCE |  |   | INTEREST  |   | YIELD/RATE(%)(6) |  
|                                            |  | (dollars in thousands)                  |          
|INTEREST-EARNING ASSETS:                    |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Investment securities(1):                   |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Taxable                                     |  | $                                       | 523,053   |   |          | $ | 15,639           |  | 3.99 | %              |  | $ | 457,927   |   |                  | $ | 16,458  |  | 4.79  | %
|Tax-exempt (tax equivalent)(2)              |  |                                         | 43,846    |   |          |   | 2,332            |  | 7.09 |                |  |   | 49,801    |   |                  |   | 2,713   |  | 7.26  |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Total investment securities                 |  |                                         | 566,899   |   |          |   | 17,971           |  | 4.23 |                |  |   | 507,728   |   |                  |   | 19,171  |  | 5.03  |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Cash Equivalents                            |  |                                         | 13,035    |   |          |   | 121              |  | 1.22 |                |  |   | 43,188    |   |                  |   | 348     |  | 1.06  |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Loans(2) (3):                               |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Commercial and commercial real estate       |  |                                         | 1,684,104 |   |          |   | 69,198           |  | 5.40 |                |  |   | 1,445,901 |   |                  |   | 64,416  |  | 5.87  |  
|Residential real estate mortgages           |  |                                         | 73,149    |   |          |   | 2,940            |  | 5.36 |                |  |   | 110,429   |   |                  |   | 5,015   |  | 6.05  |  
|Home equity and consumer                    |  |                                         | 258,489   |   |          |   | 9,423            |  | 4.87 |                |  |   | 340,349   |   |                  |   | 12,868  |  | 5.05  |  
|Fees on loans                               |  |                                         |           |   |          |   | 1,650            |  |      |                |  |   |           |   |                  |   | 3,508   |  |       |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Net loans (tax equivalent)(2)               |  |                                         | 2,015,742 |   |          |   | 83,211           |  | 5.51 |                |  |   | 1,896,679 |   |                  |   | 85,807  |  | 6.05  |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Total interest-earning assets(2)            |  |                                         | 2,595,676 |   |          |   | 101,303          |  | 5.21 |                |  |   | 2,447,595 |   |                  |   | 105,326 |  | 5.75  |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Allowance for loan losses                   |  |                                         | (36,093   | ) |          |   |                  |  |      |                |  |   | (35,353   | ) |                  |   |         |  |       |  
|NON-EARNING ASSETS:                         |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Cash and due from banks                     |  |                                         | 58,735    |   |          |   |                  |  |      |                |  |   | 59,417    |   |                  |   |         |  |       |  
|Accrued interest and other assets           |  |                                         | 89,648    |   |          |   |                  |  |      |                |  |   | 98,168    |   |                  |   |         |  |       |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|TOTAL ASSETS                                |  | $                                       | 2,707,966 |   |          |   |                  |  |      |                |  | $ | 2,569,827 |   |                  |   |         |  |       |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|INTEREST-BEARING LIABILITIES:               |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Interest-bearing deposits:                  |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Interest-bearing demand deposits            |  | $                                       | 564,900   |   |          |   | 2,997            |  | 0.71 |                |  | $ | 563,707   |   |                  |   | 3,653   |  | 0.87  |  
|Savings deposits                            |  |                                         | 90,789    |   |          |   | 213              |  | 0.31 |                |  |   | 91,023    |   |                  |   | 273     |  | 0.40  |  
|Time deposits                               |  |                                         | 1,025,173 |   |          |   | 16,999           |  | 2.21 |                |  |   | 939,685   |   |                  |   | 18,175  |  | 2.59  |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Total interest-bearing deposits             |  |                                         | 1,680,862 |   |          |   | 20,209           |  | 1.61 |                |  |   | 1,594,415 |   |                  |   | 22,101  |  | 1.85  |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Short-term borrowings                       |  |                                         | 223,177   |   |          |   | 1,541            |  | 0.92 |                |  |   | 224,675   |   |                  |   | 1,695   |  | 1.01  |  
|Notes payable and FHLB advances             |  |                                         | 97,033    |   |          |   | 3,269            |  | 4.43 |                |  |   | 114,342   |   |                  |   | 3,472   |  | 4.00  |  
|Junior subordinated debentures              |  |                                         | 62,353    |   |          |   | 4,398            |  | 9.40 |                |  |   | 45,000    |   |                  |   | 3,763   |  | 11.15 |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Total interest-bearing liabilities          |  |                                         | 2,063,425 |   |          |   | 29,417           |  | 1.90 |                |  |   | 1,978,432 |   |                  |   | 31,031  |  | 2.10  |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|NONINTEREST-BEARING LIABILITIES:            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Noninterest-bearing deposits                |  |                                         | 434,492   |   |          |   |                  |  |      |                |  |   | 382,542   |   |                  |   |         |  |       |  
|Accrued interest and other liabilities      |  |                                         | 41,907    |   |          |   |                  |  |      |                |  |   | 37,751    |   |                  |   |         |  |       |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Total noninterest-bearing liabilities       |  |                                         | 476,399   |   |          |   |                  |  |      |                |  |   | 420,293   |   |                  |   |         |  |       |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|STOCKHOLDERS EQUITY                        |  |                                         | 168,142   |   |          |   |                  |  |      |                |  |   | 171,102   |   |                  |   |         |  |       |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY  |  | $                                       | 2,707,966 |   |          |   |                  |  |      |                |  | $ | 2,569,827 |   |                  |   |         |  |       |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Net interest income (tax equivalent)(2)     |  |                                         |           |   |          | $ | 71,886           |  |      |                |  |   |           |   |                  | $ | 74,295  |  |       |  
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Net interest spread (tax equivalent)(2) (4) |  |                                         |           |   |          |   |                  |  | 3.31 | %              |  |   |           |   |                  |   |         |  | 3.65  | %
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  
|Net interest margin (tax equivalent)(2) (5) |  |                                         |           |   |          |   |                  |  | 3.70 | %              |  |   |           |   |                  |   |         |  | 4.06  | %
|                                            |  |                                         |           |   |          |   |                  |  |      |                |  |   |           |   |                  |   |         |  |       |  

---

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



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



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



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Noninterest Income



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



|                                                             |  |                                      |       |   |                                     |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------------------------ | ----- | - | ----------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                             |  | For Three Months Ended September 30, |       |   | For Nine Months Ended September 30, |  
|                                                             |  | 2004                                 |       |   | 2003                                |   |       | 2004 |  |   | 2003   |  
|                                                             |  | (in thousands)                       |      
|Service charges                                              |  | $                                    | 2,736 |   |                                     | $ | 3,129 |      |  | $ | 8,367  |   |  | $ | 9,412  |  
|Trust and investment management fees                         |  |                                      | 1,322 |   |                                     |   | 1,319 |      |  |   | 3,893  |   |  |   | 3,502  |  
|Gain on sale of investment securities, net                   |  |                                      | 345   |   |                                     |   |      |      |  |   | 345    |   |  |   |       |  
|Other noninterest income:                                    |  |                                      |       |   |                                     |   |       |      |  |   |        |   |  |   |        |  
|Standby letter of credit fees                                |  |                                      | 115   |   |                                     |   | 237   |      |  |   | 441    |   |  |   | 522    |  
|Non-customer ATM fees                                        |  |                                      | 106   |   |                                     |   | 151   |      |  |   | 358    |   |  |   | 465    |  
|Mortgage banking operations                                  |  |                                      | (111  | ) |                                     |   | (390  | )    |  |   | (85    | ) |  |   | (408   | )
|Gain (loss) on assets in employee deferred compensation plan |  |                                      | (20   | ) |                                     |   | 93    |      |  |   | 120    |   |  |   | 270    |  
|Loss from equity/partnership investments                     |  |                                      |      |   |                                     |   | (29   | )    |  |   | (227   | ) |  |   | (172   | )
|Income from unconsolidated subsidiaries                      |  |                                      | 48    |   |                                     |   |      |      |  |   | 118    |   |  |   |       |  
|Gain from sale of credit card portfolio                      |  |                                      |      |   |                                     |   |      |      |  |   |       |   |  |   | 140    |  
|Other                                                        |  |                                      | 84    |   |                                     |   | 80    |      |  |   | 274    |   |  |   | 371    |  
|                                                             |  |                                      |       |   |                                     |   |       |      |  |   |        |   |  |   |        |  
|Total noninterest income                                     |  | $                                    | 4,625 |   |                                     | $ | 4,590 |      |  | $ | 13,604 |   |  | $ | 14,102 |  
|                                                             |  |                                      |       |   |                                     |   |       |      |  |   |        |   |  |   |        |  



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



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



Noninterest Expense



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



|                                        |  |                                      |        |      |                                     |        |      |  |      |        |  |   |        |  
|--------------------------------------- |  | ------------------------------------ | ------ | ---- | ----------------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                        |  | For Three Months Ended September 30, |        |      | For Nine Months Ended September 30, |       
|                                        |  | 2004                                 |        | 2003 |                                     |        | 2004 |  | 2003 |       
|                                        |  | (in thousands)                       |       
|Salaries and employee benefits          |  | $                                    | 8,834  |      | $                                   | 10,205 |      |  | $    | 29,159 |  | $ | 31,642 |  
|Occupancy of premises                   |  |                                      | 1,817  |      |                                     | 1,912  |      |  |      | 5,678  |  |   | 5,268  |  
|Furniture and equipment                 |  |                                      | 943    |      |                                     | 895    |      |  |      | 2,997  |  |   | 2,467  |  
|Holding company legal fees, net         |  |                                      | 152    |      |                                     | 161    |      |  |      | 552    |  |   | (1,179 | )
|Bank legal fees, net                    |  |                                      | 271    |      |                                     | 408    |      |  |      | 874    |  |   | 1,471  |  
|Advertising and public relations        |  |                                      | 104    |      |                                     | 484    |      |  |      | 1,271  |  |   | 2,566  |  
|Corporate insurance                     |  |                                      | 631    |      |                                     | 782    |      |  |      | 1,903  |  |   | 2,343  |  
|Computer processing                     |  |                                      | 517    |      |                                     | 494    |      |  |      | 1,429  |  |   | 1,507  |  
|Consulting                              |  |                                      | 67     |      |                                     | 324    |      |  |      | 322    |  |   | 747    |  
|Other real estate and repossessed asset |  |                                      | 54     |      |                                     | (47    | )    |  |      | 206    |  |   | 89     |  
|Other noninterest expense               |  |                                      | 2,920  |      |                                     | 3,387  |      |  |      | 9,118  |  |   | 9,757  |  
|                                        |  |                                      |        |      |                                     |        |      |  |      |        |  |   |        |  
|Total noninterest expense               |  | $                                    | 16,310 |      | $                                   | 19,005 |      |  | $    | 53,509 |  | $ | 56,678 |  
|                                        |  |                                      |        |      |                                     |        |      |  |      |        |  |   |        |  



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



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



Income Taxes



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



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



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



Cash and Cash Equivalents



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



Interest-Earning Assets



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



Loan Quality and Nonperforming Assets



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



|                                                                         |  |                        |        |   |              |   |        |  
|------------------------------------------------------------------------ |  | ---------------------- | ------ | - | ------------ | - | ------ | -
|                                                                         |  | Sept. 30, 2004         |        |   | Dec. 31,2003 |  
|                                                                         |  | (dollars in thousands) |       
|Loans contractually past due 90 days or more but still accruing interest |  | $                      | 4,146  |   |              | $ | 4,728  |  
|Nonaccrual loans                                                         |  |                        | 18,596 |   |              |   | 18,056 |  
|                                                                         |  |                        |        |   |              |   |        |  
|Total nonperforming loans                                                |  |                        | 22,742 |   |              |   | 22,784 |  
|Other real estate owned                                                  |  |                        | 1,552  |   |              |   | 141    |  
|Other repossessed assets                                                 |  |                        | 11     |   |              |   | 23     |  
|                                                                         |  |                        |        |   |              |   |        |  
|Total nonperforming assets                                               |  | $                      | 24,305 |   |              | $ | 22,948 |  
|                                                                         |  |                        |        |   |              |   |        |  
|Nonperforming loans to total loans                                       |  |                        | 1.07   | % |              |   | 1.16   | %
|Nonperforming assets to total loans plus repossessed property            |  |                        | 1.14   | % |              |   | 1.17   | %
|Nonperforming assets to total assets                                     |  |                        | 0.86   | % |              |   | 0.88   | %
|Restructured loans not included in nonperforming assets                  |  | $                      |       |   |              | $ | 130    |  
|Impaired loans                                                           |  | $                      | 24,558 |   |              | $ | 24,347 |  



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



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



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



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



Allowance for Loan Losses



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



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



|                                                  |  |                                      |           |   |                                    |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------- |  | ------------------------------------ | --------- | - | ---------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                  |  | For Three Months Ended September 30, |           |   | For Nine Months EndedSeptember 30, |  
|                                                  |  | 2004                                 |           |   | 2003                               |   |           | 2004 |  |   | 2003      |  
|                                                  |  | (dollars in thousands)               |          
|Average total loans                               |  | $                                    | 2,059,005 |   |                                    | $ | 1,898,504 |      |  | $ | 2,015,742 |   |  | $ | 1,896,679 |  
|                                                  |  |                                      |           |   |                                    |   |           |      |  |   |           |   |  |   |           |  
|Total loans at end of period                      |  | $                                    | 2,121,841 |   |                                    | $ | 1,890,783 |      |  | $ | 2,121,841 |   |  | $ | 1,890,783 |  
|                                                  |  |                                      |           |   |                                    |   |           |      |  |   |           |   |  |   |           |  
|Allowance for loan losses:                        |  |                                      |           |   |                                    |   |           |      |  |   |           |   |  |   |           |  
|Allowance at beginning of period                  |  | $                                    | 36,929    |   |                                    | $ | 36,157    |      |  | $ | 34,356    |   |  | $ | 34,073    |  
|Total charge-offs                                 |  |                                      | (1,769    | ) |                                    |   | (4,740    | )    |  |   | (5,714    | ) |  |   | (6,882    | )
|Total recoveries                                  |  |                                      | 294       |   |                                    |   | 385       |      |  |   | 1,312     |   |  |   | 778       |  
|                                                  |  |                                      |           |   |                                    |   |           |      |  |   |           |   |  |   |           |  
|Net charge-offs                                   |  |                                      | (1,475    | ) |                                    |   | (4,355    | )    |  |   | (4,402    | ) |  |   | (6,104    | )
|Provision for loan losses                         |  |                                      | 2,750     |   |                                    |   | 2,700     |      |  |   | 8,250     |   |  |   | 6,533     |  
|                                                  |  |                                      |           |   |                                    |   |           |      |  |   |           |   |  |   |           |  
|Allowance at end of period                        |  | $                                    | 38,204    |   |                                    | $ | 34,502    |      |  | $ | 38,204    |   |  | $ | 34,502    |  
|                                                  |  |                                      |           |   |                                    |   |           |      |  |   |           |   |  |   |           |  
|Annualized net charge-offs to average total loans |  |                                      | 0.29      | % |                                    |   | 0.92      | %    |  |   | 0.29      | % |  |   | 0.43      | %
|Allowance to total loans at end of period         |  |                                      | 1.80      | % |                                    |   | 1.82      | %    |  |   | 1.80      | % |  |   | 1.82      | %
|Allowance to nonperforming loans                  |  |                                      | 167.99    | % |                                    |   | 179.43    | %    |  |   | 167.99    | % |  |   | 179.43    | %



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



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



Provision for Loan Losses



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



Non-earning Assets



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



Funding Liabilities



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



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



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



|                                            |  |                                             |           |                    |                                             |   |      |      |   |                |   |                    |  |       |      |  |      |  
|------------------------------------------- |  | ------------------------------------------- | --------- | ------------------ | ------------------------------------------- | - | ---- | ---- | - | -------------- | - | ------------------ |  | ----- | ---- |  | ---- | -
|                                            |  | For the Nine Months EndedSeptember 30, 2004 |           |                    | For the Nine Months EndedSeptember 30, 2003 |  
|                                            |  | AverageBalance                              |           | Percent OfDeposits |                                             |   | Rate |      |   | AverageBalance |   | Percent OfDeposits |  |       | Rate | 
|                                            |  | (dollars in thousands)                      |          
|Noninterest-bearing demand deposits         |  | $                                           | 434,492   |                    | 20.5                                        | % |      |     | % |                | $ | 382,542            |  | 19.4  | %    |  |     | %
|Interest-bearing demand deposits            |  |                                             | 564,900   |                    | 26.7                                        |   |      | 0.71 |   |                |   | 563,707            |  | 28.5  |      |  | 0.87 |  
|Savings deposits                            |  |                                             | 90,789    |                    | 4.3                                         |   |      | 0.31 |   |                |   | 91,023             |  | 4.6   |      |  | 0.40 |  
|Time deposits:                              |  |                                             |           |                    |                                             |   |      |      |   |                |   |                    |  |       |      |  |      |  
|Certificates of deposit                     |  |                                             | 508,412   |                    | 24.1                                        |   |      | 2.34 |   |                |   | 472,553            |  | 23.9  |      |  | 2.65 |  
|Out-of-local-market certificates of deposit |  |                                             | 91,758    |                    | 4.3                                         |   |      | 2.58 |   |                |   | 96,574             |  | 4.9   |      |  | 3.05 |  
|Brokered certificates of deposit            |  |                                             | 357,899   |                    | 16.9                                        |   |      | 2.08 |   |                |   | 297,397            |  | 15.0  |      |  | 2.57 |  
|Public Funds                                |  |                                             | 67,104    |                    | 3.2                                         |   |      | 1.47 |   |                |   | 73,161             |  | 3.7   |      |  | 1.59 |  
|                                            |  |                                             |           |                    |                                             |   |      |      |   |                |   |                    |  |       |      |  |      |  
|Total time deposits                         |  |                                             | 1,025,173 |                    | 48.5                                        |   |      | 2.21 |   |                |   | 939,685            |  | 47.5  |      |  | 2.59 |  
|                                            |  |                                             |           |                    |                                             |   |      |      |   |                |   |                    |  |       |      |  |      |  
|Total deposits                              |  | $                                           | 2,115,354 |                    | 100.0                                       | % |      |      |   |                | $ | 1,976,957          |  | 100.0 | %    |  |      |  
|                                            |  |                                             |           |                    |                                             |   |      |      |   |                |   |                    |  |       |      |  |      |  



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



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

|
|



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



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



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



CAPITAL RESOURCES



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



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



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



|                                         |  |                        |         |       |                              |   |        |                                                                |          |  |       |        |  |       |          |  |        |  
|---------------------------------------- |  | ---------------------- | ------- | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------- | -------- |  | ----- | ------ |  | ----- | -------- |  | ------ | -
|                                         |  | ACTUAL                 |         |       | FOR CAPITALADEQUACY PURPOSES |   |        | TO BE WELLCAPITALIZED UNDERPROMPT CORRECTIVE ACTION PROVISIONS |         
|                                         |  | AMOUNT                 |         | RATIO |                              |   | AMOUNT |                                                                | RATIO    |  |       | AMOUNT |  | RATIO |         
|                                         |  | (dollars in thousands) |        
|As of September 30, 2004:                |  |                        |         |      
|Total Capital (to Risk Weighted Assets)  |  |                        |         |       |                              |   |        |                                                                |          |  |       |        |  |       |          |  |        |  
|Taylor Capital Group, Inc.               |  | $                      | 246,477 |       | 10.10                        | % |        | >$                                                             | 195,215  |  | >8.00 | %      |  | >$    | 244,018  |  | >10.00 | %
|Cole Taylor Bank                         |  |                        | 253,034 |       | 10.37                        |   |        |                                                                | >195,113 |  | >8.00 |        |  |       | >243,891 |  | >10.00 |  
|Tier I Capital (to Risk Weighted Assets) |  |                        |         |       |                              |   |        |                                                                |          |  |       |        |  |       |          |  |        |  
|Taylor Capital Group, Inc.               |  |                        | 170,013 |       | 6.97                         |   |        |                                                                | >97,607  |  | >4.00 |        |  |       | >146,411 |  | >6.00  |  
|Cole Taylor Bank                         |  |                        | 222,452 |       | 9.12                         |   |        |                                                                | >97,556  |  | >4.00 |        |  |       | >146,335 |  | >6.00  |  
|Leverage (to average assets)             |  |                        |         |       |                              |   |        |                                                                |          |  |       |        |  |       |          |  |        |  
|Taylor Capital Group, Inc.               |  |                        | 170,013 |       | 6.21                         |   |        |                                                                | >109,497 |  | >4.00 |        |  |       | >136,872 |  | >5.00  |  
|Cole Taylor Bank                         |  |                        | 222,452 |       | 8.14                         |   |        |                                                                | >109,324 |  | >4.00 |        |  |       | >136,655 |  | >5.00  |  
|As of December 31, 2003:                 |  |                        |         |       |                              |   |        |                                                                |          |  |       |        |  |       |          |  |        |  
|Total Capital (to Risk Weighted Assets)  |  |                        |         |       |                              |   |        |                                                                |          |  |       |        |  |       |          |  |        |  
|Taylor Capital Group, Inc.               |  | $                      | 231,328 |       | 10.44                        | % |        | >$                                                             | 177,300  |  | >8.00 | %      |  | >$    | 221,625  |  | >10.00 | %
|Cole Taylor Bank                         |  |                        | 237,702 |       | 10.75                        |   |        |                                                                | >176,823 |  | >8.00 |        |  |       | >221,028 |  | >10.00 |  
|Tier I Capital (to Risk Weighted Assets) |  |                        |         |       |                              |   |        |                                                                |          |  |       |        |  |       |          |  |        |  
|Taylor Capital Group, Inc.               |  |                        | 193,543 |       | 8.73                         |   |        |                                                                | >88,650  |  | >4.00 |        |  |       | >132,975 |  | >6.00  |  
|Cole Taylor Bank                         |  |                        | 209,990 |       | 9.50                         |   |        |                                                                | >88,411  |  | >4.00 |        |  |       | >132,617 |  | >6.00  |  
|Leverage (to average assets)             |  |                        |         |       |                              |   |        |                                                                |          |  |       |        |  |       |          |  |        |  
|Taylor Capital Group, Inc.               |  |                        | 193,543 |       | 7.64                         |   |        |                                                                | >101,357 |  | >4.00 |        |  |       | >126,697 |  | >5.00  |  
|Cole Taylor Bank                         |  |                        | 209,990 |       | 8.31                         |   |        |                                                                | >101,130 |  | >4.00 |        |  |       | >126,413 |  | >5.00  |  



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



LIQUIDITY



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



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



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



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



Off-Balance Sheet Arrangements



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



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



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



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



LITIGATION



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



NEW ACCOUNTING PRONOUNCEMENTS



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



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



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##### Table of Contents

TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



QUARTERLY FINANCIAL INFORMATION



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



|                           |  |                                          |        |                    |   |                  |  |         |        |         |   |         |  |         |        |         |   |        |  |   |        |  |   |       
|-------------------------- |  | ---------------------------------------- | ------ | ------------------ | - | ---------------- |  | ------- | ------ | ------- | - | ------- |  | ------- | ------ | ------- | - | ------ |  | - | ------ |  | - | ------
|                           |  | 2004 Quarter Ended                       |        | 2003 Quarter Ended |   | 2002QuarterEnded
|                           |  | Sep. 30                                  |        | Jun. 30            |   | Mar. 31          |  | Dec. 31 |        | Sep. 30 |   | Jun. 30 |  | Mar. 31 |        | Dec. 31
|                           |  | (in thousands, except per share amounts)
|Interest income            |  | $                                        | 34,972 |                    | $ | 32,869           |  | $       | 32,510 |         | $ | 32,648  |  | $       | 34,576 |         | $ | 34,873 |  | $ | 34,787 |  | $ | 35,942
|Interest expense           |  |                                          | 10,633 |                    |   | 9,376            |  |         | 9,408  |         |   | 9,123   |  |         | 9,856  |         |   | 10,567 |  |   | 10,608 |  |   | 10,957
|                           |  |                                          |        |                    |   |                  |  |         |        |         |   |         |  |         |        |         |   |        |  |   |        |  |   |       
|Net interest income        |  |                                          | 24,339 |                    |   | 23,493           |  |         | 23,102 |         |   | 23,525  |  |         | 24,720 |         |   | 24,306 |  |   | 24,179 |  |   | 24,985
|Provision for loan losses  |  |                                          | 2,750  |                    |   | 2,750            |  |         | 2,750  |         |   | 2,700   |  |         | 2,700  |         |   | 1,533  |  |   | 2,300  |  |   | 2,475 
|Noninterest income         |  |                                          | 4,280  |                    |   | 4,304            |  |         | 4,675  |         |   | 4,939   |  |         | 4,590  |         |   | 4,977  |  |   | 4,535  |  |   | 4,526 
|Securities gains, net      |  |                                          | 345    |                    |   |                 |  |         |       |         |   |        |  |         |       |         |   |       |  |   |       |  |   |      
|Noninterest expense        |  |                                          | 16,310 |                    |   | 18,416           |  |         | 18,783 |         |   | 22,545  |  |         | 19,005 |         |   | 19,223 |  |   | 18,450 |  |   | 21,022
|                           |  |                                          |        |                    |   |                  |  |         |        |         |   |         |  |         |        |         |   |        |  |   |        |  |   |       
|Income before income taxes |  |                                          | 9,904  |                    |   | 6,631            |  |         | 6,244  |         |   | 3,219   |  |         | 7,605  |         |   | 8,527  |  |   | 7,964  |  |   | 6,014 
|Income taxes               |  |                                          | 3,072  |                    |   | 2,324            |  |         | 2,108  |         |   | 728     |  |         | 2,013  |         |   | 2,988  |  |   | 2,839  |  |   | 2,099 
|                           |  |                                          |        |                    |   |                  |  |         |        |         |   |         |  |         |        |         |   |        |  |   |        |  |   |       
|Net income                 |  | $                                        | 6,832  |                    | $ | 4,307            |  | $       | 4,136  |         | $ | 2,491   |  | $       | 5,592  |         | $ | 5,539  |  | $ | 5,125  |  | $ | 3,915 
|                           |  |                                          |        |                    |   |                  |  |         |        |         |   |         |  |         |        |         |   |        |  |   |        |  |   |       
|Earnings per share:        |  |                                          |        |                    |   |                  |  |         |        |         |   |         |  |         |        |         |   |        |  |   |        |  |   |       
|Basic                      |  | $                                        | 0.72   |                    | $ | 0.35             |  | $       | 0.35   |         | $ | 0.17    |  | $       | 0.50   |         | $ | 0.50   |  | $ | 0.45   |  | $ | 0.35  
|Diluted                    |  |                                          | 0.71   |                    |   | 0.34             |  |         | 0.34   |         |   | 0.17    |  |         | 0.50   |         |   | 0.49   |  |   | 0.45   |  |   | 0.35  
|                           |  |                                          |        |                    |   |                  |  |         |        |         |   |         |  |         |        |         |   |        |  |   |        |  |   |       



CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS



This quarterly report includes
forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects and opportunities. We have tried to identify these forward-looking statements by using words including may,
will, expect, anticipate, believe, intend, could and estimate and similar expressions. These forward-looking statements are based on information currently available
to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities in 2004 and beyond to differ materially from those expressed in, or implied by, these
forward-looking statements. These risks, uncertainties and other factors include, without limitation: the effect on our profitability if historically low interest rates continue or if interest rates fluctuate as well as the effect of any imbalances
in the interest rate sensitivities of our assets and liabilities; the possibility that our wholesale funding sources may prove insufficient to replace deposits at maturity and support our growth; the risk that our allowance for loan losses may prove
insufficient to absorb potential losses in our loan portfolio; possible volatility in loan charge-offs and recoveries between periods; the potential impact on the holding companys regulatory capital as a result of final standards on the
inclusion of trust preferred securities ; the effectiveness of our hedging transactions and their impact on our future results of operations; the risks associated with implementing our business strategy and managing our growth effectively; the risks
associated with our reliance on third party professionals who provide certain financial services to our customers; changes in general economic conditions, interest rates, deposit flows, loan demand, competition, legislation or



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TAYLOR CAPITAL GROUP, INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF
OPERATIONS (Continued)



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



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



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



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



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



|Item 4. | Controls and Procedures
|------- | -----------------------



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



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



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



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##### Table of Contents



TAYLOR CAPITAL GROUP, INC.



PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



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



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



None.



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



None.



|Item 5. | Other Information
|------- | -----------------



None.



|Item 6. | Exhibits
|------- | --------



We have filed the following exhibits with this quarterly report:



|               |  |                                                                                                                                                                                                                                     
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit                                                                                                                                                                                                                             
|               | 
|3.1            |  | Amended and Restated Certificate of Incorporation of Taylor Capital Group, Inc. (incorporated by reference from Exhibit 3.1 of the Amended Registration Statement on Form S-1 filed October 10,
2002 (Registration No. 333-89158)). 
|               | 
|3.2            |  | Amended and Restated By-laws of Taylor Capital Group, Inc. (incorporated by reference from Exhibit 3.2 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration
No. 333-89158)).                      
|               | 
|4.1            |  | Certificate representing the Series A 9% Noncumulative Perpetual Preferred Stock (incorporated by reference from Exhibit 4.2 of the Amended Registration Statement on Form S-1 filed October
10, 2002 (Registration No. 333-89158)).
|               | 
|4.2            |  | Certificate representing Taylor Capital Group, Inc. Common Stock (incorporated by reference from Exhibit 4.3 of the Amended Registration Statement on Form S-1 filed October 10, 2002
(Registration No. 333-89158)).                



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TAYLOR CAPITAL GROUP, INC.



|               |  |                                                                                                                                                                                                                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|4.3            |  | Indenture between Taylor Capital Group, Inc. and LaSalle Bank National Association, as trustee (incorporated by reference from Exhibit 4.4 of the Amended Registration Statement on Form S-1
filed October 10, 2002 (Registration No. 333-89158)).                                                                                                                           
|               | 
|4.4            |  | Junior Subordinated Debenture due 2032 (incorporated by reference from Exhibit 4.5 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No.
333-89158)).                                                                                                                                                                                   
|               | 
|4.5            |  | Certificate of Trust of TAYC Capital Trust I (incorporated by reference from Exhibit 4.6 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No.
333-89158)).                                                                                                                                                                             
|               | 
|4.6            |  | Amended and Restated Trust Agreement of TAYC Capital Trust I (incorporated by reference from Exhibit 4.8 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration
No. 333-89158)).                                                                                                                                                             
|               | 
|4.7            |  | Preferred Securities Guarantee Agreement (incorporated by reference from Exhibit 4.9 of the Amended Registration Statement on Form S-1 filed October 10, 2002 (Registration No.
333-89158)).                                                                                                                                                                                 
|               | 
|4.8            |  | Agreement as to Expenses and Liabilities by and between Taylor Capital Group, Inc. and TAYC Capital Trust I (incorporated by reference from Exhibit 4.10 of the Amended Registration Statement
on Form S-1 filed October 10, 2002 (Registration No. 333-89158)).                                                                                                             
|               | 
|4.9            |  | Certificate representing TAYC Capital Trust I Trust Preferred Security (incorporated by reference from Exhibit 4.11 of the Amended Registration Statement on Form S-1 filed October 10, 2002
(Registration No. 333-89158)).                                                                                                                                                  
|               | 
|4.12           |  | Certificate of Trust of TAYC Capital Trust II (incorporated by reference from Exhibit 4.12 of the Companys Quarterly Report on Form 10-Q for the quarter ending June 30,
2004).                                                                                                                                                                                             
|               | 
|4.13           |  | Amended and Restated Declaration of Trust by and among Wilmington Trust Company, as Delaware and Institutional Trustee, Taylor Capital Group, Inc., as Sponsor, Jeffrey W. Taylor, Bruce W.
Taylor and Robin Van Castle, as Administrators (incorporated by reference from Exhibit 4.13 of the Companys Quarterly Report on Form 10-Q for the quarter ending June 30, 2004).
|               | 
|4.14           |  | Indenture between Taylor Capital Group, Inc. and Wilmington Trust Company, as trustee (incorporated by reference from Exhibit 4.14 of the Companys Quarterly Report on Form 10-Q for the
quarter ending June 30, 2004).                                                                                                                                                     
|               | 
|4.15           |  | Guarantee Agreement by and between Taylor Capital Group, Inc. and Wilmington Trust Company (incorporated by reference from Exhibit 4.15 of the Companys Quarterly Report on Form 10-Q for
the quarter ending June 30, 2004).                                                                                                                                                



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TAYLOR CAPITAL GROUP, INC.



|              |  |                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                                                                              
|              | 
|4.16          |  | Certificate representing Floating Rate Capital Securities of TAYC Capital Trust II (incorporated by reference from Exhibit 4.16 of the Companys Quarterly Report on Form 10-Q for the
quarter ending June 30, 2004).
|              | 
|4.17          |  | Certificate representing Floating Rate Common Securities of TAYC Capital Trust II (incorporated by reference from Exhibit 4.17 of the Companys Quarterly Report on Form 10-Q for the
quarter ending June 30, 2004). 
|              | 
|4.18          |  | Floating Rate Junior Subordinated Deferrable Interest Debenture due 2034 (incorporated by reference from Exhibit 4.18 of the Companys Quarterly Report on Form 10-Q for the quarter
ending June 30, 2004).          
|              | 
|31.1          |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Security Exchange Act of 1934.                                                                                                         
|              | 
|31.2          |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Security Exchange Act of 1934.                                                                                                         
|              | 
|32.1          |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                   



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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: November 5, 2004 |  |  |  |                                             
|                       |  | 
|                       |  |  |  | /s/    BRUCE W. TAYLOR                      
|                       |  |  |  | Bruce W. Taylor                             
|                       |  |  |  | Interim Chief Financial Officer             
|                       |  |  |  | (Principal Financial and Accounting Officer)
|                       |  | 
|                       |  |  |  | /s/    JEFFREY W. TAYLOR                    
|                       |  |  |  | Jeffrey W. Taylor                           
|                       |  |  |  | Chairman and Chief Executive Officer        
|                       |  |  |  | (Principal Executive Officer)               



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